Power up your portfolio
Ian Cowie examines which investment trusts might benefit from Labour’s policies
Labour’s landslide General Election victory was no shock for the stock market and the price of many bonds, shares and sterling actually increased on the day when the result was announced. Looking forward, our new government’s politics will have profound economic effects, creating potential risks as well as rewards for savers and investors.
While the past is not necessarily a guide to the future, ISA and pension plan holders can draw comfort from long-term stock market returns under Labour governments in the past. But recent history also has a warning about the risks of short-term speculation and the insidious effects of inflation.
“While the past is not necessarily a guide to the future, ISA and pension plan holders can draw comfort from long-term stock market returns under Labour governments in the past.”
For example, figures from the AIC using Morningstar data report that £1,000 invested in 1987 in the average investment trust would have grown into a remarkable £25,152 by the time Sir Keir Starmer became Prime Minister. Better still, the Bank of England calculates that to preserve the real value or purchasing power of that £1,000 over the same period, it only needed to grow to just over £2,800.
This demonstrates how long-term investment trust shareholders benefited from economic growth over several decades but returns were less impressive for short-term shareholders. Those who invested in the average investment trust but only during Labour governments, while disinvesting during Conservative administrations, saw their £1,000 rise to £2,485. Meanwhile, those who did the reverse, investing under the Tories but not under Labour, saw the same original sum rise to £6,813.
Bear in mind that, during this 37-year period – the longest for which we have continuous investment trust data – Labour was only in power between 1997 and 2010. However, similar multi-decade analysis by the Centre for Policy Studies, a think-tank, also found that inflation eroded real returns under all governments but especially Labour ones.
Today, that’s a real risk for savers in bank and building society deposits, where interest rates often fail to match inflation. More positively for income-seekers, no fewer than 20 investment trusts have earned ‘dividend hero’ status by increasing their distributions to shareholders every year for at least 20 consecutive years – and half of them have done so for half a century or more.
Investors seeking capital growth as well as income should consider opportunities created by Labour’s main economic initiatives. For example, our new government aims to reduce pollution by increasing renewable energy, so that Britain’s electricity grid attains ‘net zero’ carbon emissions by 2030.
“Investors seeking capital growth as well as income should consider opportunities created by Labour’s main economic initiatives.”
This should boost demand for solar and wind power, as well as other renewables such as biomass, hydrogen and hydropower. Professionally managed exposure to these specialist industries is provided by 21 investment trusts in the AIC Renewable Energy Infrastructure sector. These trusts are typically yielding just under 8% dividend income, rising by an annualised average of 5.9% over the last five years and usually remain priced 21% below their net asset value (NAV).
Specific examples in my ‘forever fund’ include the self-descriptive Greencoat UK Wind (stock market ticker: UKW), which is yielding 7.1% dividend income, rising by 8.2% per annum and remains priced at a 12% discount to its NAV. I also own shares in Ecofin Global Utilities and Infrastructure (EGL), which yields 4.5% income, rising by 4% and priced 10% below NAV.
Elsewhere, Labour has pledged to spend more on the National Health Service (NHS). Now that Britain’s economy is only the sixth largest in the world, a bigger budget for the NHS is unlikely to make a major impact on global Biotechnology & Healthcare investment trusts, such as my shares in Worldwide Healthcare (WWH).
However, extra capital for the NHS might ‘move the dial’ in more specialist sectors – such as Property – UK Healthcare, where real estate investment trusts (REITs) include Impact Healthcare (IHR) and Target Healthcare (THRL). They currently yield 7.9% and 7% respectively, with the former trust priced 24% below its NAV while the latter trades at a 28% discount.
Similarly, Labour’s plans to create more homes by easing planning restrictions should boost house builders, which were among the biggest risers on the London Stock Exchange when the General Election result was announced. Professionally managed exposure to builders can be obtained via investment trusts in the UK All Companies, UK Equity Income and UK Smaller Companies sectors, which are trading at average discounts of 10%, 5% and 10% respectively.
“Whichever shares you buy, consider placing them beyond the grasp of the taxman in an ISA or a pension.”
Whichever shares you buy, consider placing them beyond the grasp of the taxman in an ISA or a pension. That way, whatever happens to our new government and the stock market, investors shouldn’t need to worry about any unpleasant surprises from HM Revenue & Customs.
