Tom Tuite Dalton: The top three trusts for income

The BP dividend suspension and share price fall have highlighted the advantage of income diversification. The investment company sector has much to offer in terms of funds offering income diversified by sector, geography, market cap and asset class, and ought to attract significant investor interest as a result.

In the current environment, Murray International** is our preferred equity income investment choice, offering an attractive one-stop shop for global equity income exposure. It invests in companies not on the basis of headline yield, but on the company’s perceived ability to grow earnings over time. It also invests in corporate and government bonds but currently sees greater value in equities.

Murray International’s track record suggests its managers are accomplished in generating sustainable long-term income and capital growth for shareholders. We view Murray International as an ‘all terrain’ fund and expect it to prove resilient in most  market  conditions as it has done since Bruce Stout took the helm in 2004.

Other large-cap porfolio holdings among the 65-stock portfolio include Souza Cruz, Aeropuertos de Sureste, Vale, Casino, Guichard and Perrachon. The fact that these companies are generally not well known in the UK and US is seen as an advantage as there are generally fewer investors trying to buy the shares, making them more attractive in terms of valuation.

Aberdeen undertakes its own rigorous analysis of its investee companies and does not rely on external broker research. Murray International shares currently offer a yield of 3.4% and trade on a premium to net asset value (NAV), reflecting the strong track record, income growth potential and well deserved reputation of the manager.

The UK Smaller Companies sector is expected by many to become a feeding ground for US companies looking to gain a foothold in Europe so M&A activity is expected to increase as overseas companies take advantage of the weak pound and cheap valuations.

Aberforth Smaller Companies (managed by Aberforth Partners) and Dunedin Smaller Companies (managed
by Ed Beale at Aberdeen Asset Management) both offer attractive dividend yields of 3.6% and 4.3% respectively.

Year-to-date there has been one deal completed, seven offers made and four approaches announced among constituents in the Hoare Govett Small Cap index. Of these 12, Aberforth has had exposure to half of them.

So out of favour have small-cap funds become that some are now offering similar yields to funds in the income growth sector with, in our view, equal if not superior scope to grow underlying earnings.

Both funds have already seen takeover interest in a number of their holdings in recent months. They report having received formal bids or approaches for holdings that include Care UK, Rensburg Sheppards, Forth Ports and Chloride Group.

Finally, both funds trade on wide discounts to NAV, reflecting the fact that temporarily at least, UK small-cap shares remain out of vogue. Aberforth Smaller is the larger of the two funds, having a market cap of £504 million. However, Dunedin Smaller has posted stronger performance in recent years.

**Oriel is the house broker for Murray International

Tom Tuite Dalton is a fund analyst at Oriel Securities.