This week I am focusing on investment trusts in the UK Equity Income sector.
Since 2009, when the Bank of England cut base rates to 0.5%, income-producing asset classes have proved hugely popular with investors seeking a yield. The UK Equity Income sector, for example, has enjoyed share price appreciation of 210% over the past five years to date, outstripping the increase in the value of their underlying assets (NAV) by 8 percentage points. Consequently, the sector has become more expensive and had until recently been trading at a premium to NAV on average.
Following some share price weakness, though, the sector is now trading at an average discount to NAV of approximately 2%. Given that interest rates and inflation remain depressed, there does not seem an obvious reason for this. Indeed, Bank of England governor Mark Carney warned just last week that inflation in the UK could temporarily turn negative in the spring because of falling oil prices. He expects prices to rebound around the turn of the year but added that interest rates may be cut further if low inflation persisted.
So does recent weakness in the UK Equity Income sector spell opportunity? Possibly, but whilst UK Equity Income funds share a common goal, the processes implemented by their respective managers vary widely and have differing degrees of risk. It is therefore important that investors understand what they are buying as well as taking into consideration the price premia relative to the wider sector and the fund’s own history.