Income Investment Trusts - are these the times they (relatively...) shine?

[Darka]

Thanks Dod, fully understand. Does anyone know how I can check the dividend reserve in place at MRCH?

RVF

https://www.theaic.co.uk/companydata/0P00000VUI

About half way down the page.

[Darka]

Answer - 0.91 years. Almost 11 months?

Cheers.

Yes, pretty much exactly 11 months

.9 * (1 year) = 328.717979 days / 30 (avg. days in month) = approx 10.9 months

[Itsallaguess]

Does anyone know how I can check the dividend reserve in place at MRCH?

https://www.theaic.co.uk/companydata/0P00000VUI

About half way down the page.

I've now only just realised that I can add the additional 'Reserve Cover' figure for these income-Investment Trusts to my AIC data-tables, so I'll make sure I do that for future releases.

Cheers,

Itsallaguess

[Darka]

I've now only just realised that I can add the additional 'Reserve Cover' figure for these income-Investment Trusts to my AIC data-tables, so I'll make sure I do that for future releases.

Cheers,

Itsallaguess

That would be very useful, thank you.

[tikunetih]

otherwise they are just like the rest of us, dependent on dividends from their investments and most have a Revenue Reserve to make up for any shortfall if they choose to use it. In the short term at least, I think most ITs will probably want at least to maintain their dividend, making up any shortfall from their Revenue Reserve if they can afford it.

Although I'm replying here to Dod's post, this post isn't aimed at him but just to make a general point.

It's simply to ensure people understand that these ITs rarely if ever have a great big bucket of cash set aside labelled "Revenue Reserves" waiting for moments like this.

Most "equity income ITs" hold very little actual cash. Instead, these reserves are really just an accounting convention such that they form part of the underlying portfolio of stocks. (For example, according to the last annual report, CTY held nil cash at its last year end (30 June 2019). Plus it had gearing of 7.9% funded by bank loans and debentures, which it must pay interest and coupons on)

Therefore, if an equity income IT wishes to pay out a dividend that's in excess of the income stream it itself receives from the underlying stocks that it owns, then, bar a modest contribution from any cash to hand if any indeed exists (note as above, CTY has nil cash + debt to service) it must fund that difference by selling stocks; if markets are down then it will by necessity be selling stocks low. This is just like any other investor seeking to draw more than their portfolio's natural yield provides.

I'm sure most are very well aware of this but maybe someone wasn't.

[Itsallaguess]

Most "equity income ITs" hold very little actual cash. Instead, these reserves are really just an accounting convention such that they form part of the underlying portfolio of stocks. (For example, according to the last annual report, CTY held nil cash at its last year end (30 June 2019). Plus it had gearing of 7.9% funded by bank loans and debentures, which it must pay interest and coupons on)

Therefore, if an equity income IT wishes to pay out a dividend that's in excess of the income stream it itself receives from the underlying stocks that it owns, then, bar a modest contribution from any cash to hand if any indeed exists (note as above, CTY has nil cash + debt to service) it must fund that difference by selling stocks; if markets are down then it will by necessity be selling stocks low. This is just like any other investor seeking to draw more than their portfolio's natural yield provides.

That's a good point, well made.

I wonder if, under these sorts of market conditions, we can allow a rough rule of thumb that might suggest that if we assume that these income-collectives won't see a complete collapse of dividend-income from every one of their underlying holdings, then any shortfall from an 'original' (pre-slump) reserve figure (from having to raise funds in a falling market..) might perhaps be balanced out by those residual dividend-payers being held by them..

That does seem a rough and ready assumption, I will concede, but if we take a market-drop of 30% as an example, and therefore suggest that any pre-slump 'reserve' time-line might also then have 'dropped' by 30% given the assumed lower underlying prices of the 'reserve holdings', then if we might also be able to assume that 30% of the underlying dividends might still get paid, then that might balance out into an overall position of the original reserve time-scale still being largely 'valid' and perhaps maintainable too..

Some assumptions, yes, but your point about potentially selling those 'reserves' into a falling market should, I think, be tempered somewhat by the point of hopefully not having to fund a 100% dividend shortfall at the same time...

Cheers,

Itsallaguess

[TUK020]

otherwise they are just like the rest of us, dependent on dividends from their investments and most have a Revenue Reserve to make up for any shortfall if they choose to use it. In the short term at least, I think most ITs will probably want at least to maintain their dividend, making up any shortfall from their Revenue Reserve if they can afford it.

Although I'm replying here to Dod's post, this post isn't aimed at him but just to make a general point.

It's simply to ensure people understand that these ITs rarely if ever have a great big bucket of cash set aside labelled "Revenue Reserves" waiting for moments like this.

Most "equity income ITs" hold very little actual cash. Instead, these reserves are really just an accounting convention such that they form part of the underlying portfolio of stocks. (For example, according to the last annual report, CTY held nil cash at its last year end (30 June 2019). Plus it had gearing of 7.9% funded by bank loans and debentures, which it must pay interest and coupons on)

Therefore, if an equity income IT wishes to pay out a dividend that's in excess of the income stream it itself receives from the underlying stocks that it owns, then, bar a modest contribution from any cash to hand if any indeed exists (note as above, CTY has nil cash + debt to service) it must fund that difference by selling stocks; if markets are down then it will by necessity be selling stocks low. This is just like any other investor seeking to draw more than their portfolio's natural yield provides.

I'm sure most are very well aware of this but maybe someone wasn't.

If they perceived stock prices as temporarily depressed, would they not take on additional borrowings to fund any divi shortfall, rather than sell at low prices?

[Dod101]

Although I'm replying here to Dod's post, this post isn't aimed at him but just to make a general point.

It's simply to ensure people understand that these ITs rarely if ever have a great big bucket of cash set aside labelled "Revenue Reserves" waiting for moments like this.

Most "equity income ITs" hold very little actual cash. Instead, these reserves are really just an accounting convention such that they form part of the underlying portfolio of stocks. (For example, according to the last annual report, CTY held nil cash at its last year end (30 June 2019). Plus it had gearing of 7.9% funded by bank loans and debentures, which it must pay interest and coupons on)

Therefore, if an equity income IT wishes to pay out a dividend that's in excess of the income stream it itself receives from the underlying stocks that it owns, then, bar a modest contribution from any cash to hand if any indeed exists (note as above, CTY has nil cash + debt to service) it must fund that difference by selling stocks; if markets are down then it will by necessity be selling stocks low. This is just like any other investor seeking to draw more than their portfolio's natural yield provides.

I'm sure most are very well aware of this but maybe someone wasn't.

Of course that is true but so what? The Revenue Reserves are much more than an accounting convention. A Merger Reserve is more of an accounting convention, meaning very little and forming part of the capital of the trust and of its non distributable reserves but Revenue Reserves can be distributed and that it seems to me is a very significant difference. No trust is likely to leave these reserves as a pot of cash, earning nothing and so it is usually invested as part of the total investments of the trust. Trusts though will have cash coming in and out all the time, through sales and purchases and of course dividends. if they decide to use some of the Revenue Reserve to supplement the dividend, they will be unlikely to embark on a big asset sale to access the cash. They will simply retain the necessary cash in the business rather than reinvest it. I do not think that holders of ITs which use some of their Revenue Reserve need have any concerns as the cash will be available without making much noticeable difference to the trust or its assets, certainly in the case of the larger trusts. Frankly I think the point raised is a non issue. It is a bit like 'market noise' in normal conditions in the stock market.

Dod

[kempiejon]

Therefore, if an equity income IT wishes to pay out a dividend that's in excess of the income stream it itself receives from the underlying stocks that it owns, then, bar a modest contribution from any cash to hand if any indeed exists (note as above, CTY has nil cash + debt to service) it must fund that difference by selling stocks; if markets are down then it will by necessity be selling stocks low. This is just like any other investor seeking to draw more than their portfolio's natural yield provides.

Thanks for the reminder tikunetih, So the idea of ITs having an income reserve is a bit of a fallacy? The cash is actually invested into the underlying holdings? As investors we're potentially giving up some of the natural yield that the IT holds back to smooth out lower income years but to release that reserve the IT is potentially selling into a depressed market and so the underlying value of the IT would fall. If that holds, at an individual level, our income might be safer holding shares directly,benefiting from a higher yield in good times and keeping a cash pot. With the trade off of course that means we're less than fully invested which the IT is.

[richfool]

My understanding is that the dividend reserves held back by Investment Trusts are held in the form of reserves, which are usually things that can quickly and easily converted to cash, rather than cash itself, and thus if the income of a trust proves to be insufficient to support a dividend, it can dip into those reserves rather than sell investments.

[Charlottesquare]

otherwise they are just like the rest of us, dependent on dividends from their investments and most have a Revenue Reserve to make up for any shortfall if they choose to use it. In the short term at least, I think most ITs will probably want at least to maintain their dividend, making up any shortfall from their Revenue Reserve if they can afford it.

Although I'm replying here to Dod's post, this post isn't aimed at him but just to make a general point.

It's simply to ensure people understand that these ITs rarely if ever have a great big bucket of cash set aside labelled "Revenue Reserves" waiting for moments like this.

Most "equity income ITs" hold very little actual cash. Instead, these reserves are really just an accounting convention such that they form part of the underlying portfolio of stocks. (For example, according to the last annual report, CTY held nil cash at its last year end (30 June 2019). Plus it had gearing of 7.9% funded by bank loans and debentures, which it must pay interest and coupons on)

Therefore, if an equity income IT wishes to pay out a dividend that's in excess of the income stream it itself receives from the underlying stocks that it owns, then, bar a modest contribution from any cash to hand if any indeed exists (note as above, CTY has nil cash + debt to service) it must fund that difference by selling stocks; if markets are down then it will by necessity be selling stocks low. This is just like any other investor seeking to draw more than their portfolio's natural yield provides.

I'm sure most are very well aware of this but maybe someone wasn't.

To be fair to City , it may not have cash but it does have a £120 million overdraft facility (see note 14 to accounts) of which at June 2019 about £8m was in use, so there is a fair chance in their case they do not need to make sales but can use the headroom of the facility. This does presume that re valuation of secured assets they have not, due to recent volatility, breached any banking covenmants, however I expect they might need to say if they had.

https://www.fundslibrary.co.uk/FundsLib ... MLxaWN&r=1

[kempiejon]

My understanding is that the dividend reserves held back by Investment Trusts are held in the form of reserves, which are usually things that can quickly and easily converted to cash, rather than cash itself, and thus if the income of a trust proves to be insufficient to support a dividend, it can dip into those reserves rather than sell investments.

Of course shares can usually be quickly and conveniently converted into cash but if the IT held less volatile or cash like instruments, then that's a better level of safety for times like these when the market is markedly down. I also like the idea of being able to access other funds like an overdraft facility rather than being a forced seller if the price is right to borrow and provided the equities do recover.

Seems like there's a few more questions about whether these are the times ITs shine.

[richfool]

Noting that we are talking about Investment Trusts and how they work, on a High Yield Strategies board (!?), rather than on the "Investment Trusts" board, there is an article here about the wisdom of investing in IT's in order to preserve income:

Investors should ditch funds to preserve income as dividends plummet 30pc

Swapping from funds to investment trusts could save money, boost returns and secure income

https://www.telegraph.co.uk/investing/s ... s-plummet/

Another interesting article here, which gives figures (in months) for the main UK G&I Investment Trust dividend reserves:

https://www.moneyobserver.com/news/uk-e ... -dividends

And another useful one, from the Investor's Chronicle:

https://www.investorschronicle.co.uk/fu ... d-drought/

[Itsallaguess]

Noting that we are talking about Investment Trusts and how they work, on a High Yield Strategies board (!?), rather than on the "Investment Trusts" board..

And also 'noting' that we are talking about the potential benefits of income-reserves of income-related-Investment Trusts as PART of a High Yield Strategy...

I would also please 'note' that you are quite free to start a thread wherever you want, to discuss whatever else you want, about whatever other (non-income-related) Investment Trusts that you want to discuss, anywhere else that you feel would be more appropriate....

Regards,

Itsallaguess

[bluedonkey]

I think the way to think about the revenue reserves of the ITs is as akin to the HYP safety margin rather cash set aside.

[Julian]

Keeping with CTY as an example do they declare anywhere what assets are used to hold the reserve?

I ask because if the majority of the revenue reserve is simply held as a firewalled(*) section of the main portfolio therefore effectively being made up of all the holdings in the portfolio in the same percentages as are declared for the main portfolio holdings then previous figures regarding how many months of reserve CTY (or other ITs holding their reserves in a similar manner) have now become meaningless because the reserves are specified in number of years(**) of dividends they could cover at, I assume, the level of the total dividends declared for the previous financial year i.e. ...

number-of-years-or-reserves = revenue-reserve-value / previous-year-dividends

No level of financial meltdown can rewrite history so that denominator stays constant but a fall in NAV would affect the numerator, potentially quite badly.

Now seems the time to really understand just what instruments are used by various income ITs for holding their revenue reserves and how they are performing.

- Julian

(*) "firewalled" as in "accounted for separately"

(**) or months, weeks or whatever - the units don't really matter.

[Bathonian]

Keeping with CTY as an example do they declare anywhere what assets are used to hold the reserve?

The reserves are not held separately from the rest of the assets. They are reinvested in the portfolio. One just has to look at the annual report of CTY to confirm this.

https://cdn.janushenderson.com/webdocs/ ... rt2019.pdf

The breakdown of assets is shown on page 13/14. The total here on p14 matches the total of the first two lines of the balance sheet on page 44. These are essentially the only assets shown on the balance sheet i.e. there is not a pile of cash, or gilts sitting somewhere else in which the reserves are invested. The reserves are just an accounting convention. A record of the dividends received but not paid if you like, but that cash is not treated any differently to cash raised from issuing new equity. It all goes into the portfolio.

I think the key here is that actually it seems likely that trusts will utilise the debt facilities available to them sustain the divi rather than sell assets at low prices. In a sense this introduces a safety mechanism whereby trusts are prompted to borrow when revenues fall and shares are lower, and pay that debt back when times are better i.e. when revenues are higher than dividend obligation to shareholders.

That in my view should not be overlooked as a material positive compared to an HYP where introducing a level of borrowing is a bit more tricky.

[tikunetih]

The reserves are just an accounting convention. A record of the dividends received but not paid if you like, but that cash is not treated any differently to cash raised from issuing new equity. It all goes into the portfolio.

I think the key here is that actually it seems likely that trusts will utilise the debt facilities available to them sustain the divi rather than sell assets at low prices. In a sense this introduces a safety mechanism whereby trusts are prompted to borrow when revenues fall and shares are lower, and pay that debt back when times are better i.e. when revenues are higher than dividend obligation to shareholders.

I think that's a decent assessment.

[Dod101]

I think Bathonian is pretty well right as well but I am a little puzzled that a consensus is emerging that ITs would normally use borrowing to cover dipping into the Revenue Reserve. Often they will be using the Revenue Reserve at a time of stress (such as now or the next few months because there is a lag in the effects of stress appearing in IT accounts) and that is not usually a good time to be increasing borrowings so if they did so I think it would mostly be very short term simply to cover the cash requirement. However, bear in mind that when they announce a dividend it is usually not payable for quite some time, often months. That would usually I think give them ample time to hold back some cash which would otherwise be reinvested and that is I think that would be the preferred route.

If it is only a few million pounds that is relatively small bear for most of the bigger trusts anyway and is more or less market noise.

Dod

[kempiejon]

Again using CTY which has a 5% yield and perhaps will only get income equivalent to 3% yield that means CTY needs to find/borrow sell 2% of its value this year, if the income doesn't recover next year or the following will they keep borrowing or selling value to cover that shortfall, or have to rebase the dividend. So for me to copy that model I'll run up my credit cards or overdraft for the next couple of years before selling holdings and finally cutting my withdrawls. So the attraction of an IT for their income reserve rather than my directly invested portfolio is imaginary and we're just paying fund managers because they're better investors. Which is fair enough and it does spread manager risk. But with CTY following the FTSE100 for the past few year it'd be cheaper to buy the index for what extra benefit?