Will the good times continue?
Comments from UK Equity Income managers
The UK stock market comeback has boosted the performance of the UK Equity Income investment trust sector, which has returned 14% over the last year, an impressive 79% over the last five years and 105% over ten years.
“Today the UK equity market appears to be very undervalued relative to its long-run history…”
The average UK Equity Income investment trust has a yield of 4.1% and is now trading at a 3.5% discount in comparison to a 13.9% discount for the average investment trust. (source: theaic.co.uk / Morningstar as at 12/09/25. Average investment trust discount excludes 3i). But will the good times continue for the UK Equity Income sector?
The Association of Investment Companies (AIC) hosted a UK Equity Income webinar which featured Ian Lance, Manager of Temple Bar Investment Trust, Julian Cane, Manager of CT UK Capital & Income Investment Trust, and Thomas Moore, Manager of Aberdeen Equity Income Trust to discuss the outlook for UK Equity Income investment trusts and the greatest opportunities and challenges the sector faces.
Their comments are collated below alongside comments from other investment trust managers in the UK Equity Income sector.
Ian Lance, Manager of Temple Bar Investment Trust, said: “We believe that valuation is the best guide to future returns, with low valuation usually preceding a period of above average returns. Today the UK equity market appears to be very undervalued relative to its long-run history and other equity markets and within the UK, the dispersion in valuation between value and growth is also close to its widest point for fifty years. Both factors suggest that the trust can continue to enjoy strong returns.”
Anthony Lynch, Portfolio Manager of JPMorgan Claverhouse Investment Trust, said: “The backdrop for the UK is mixed but improving. Inflation has eased, interest rates have come down, and households are in better shape than a year ago. At the same time, UK shares are still trading at a discount to overseas markets, which gives investors a margin of safety. That combination of stronger foundations and better value compared to global peers suggests there’s still good reason to be optimistic.”
“In my view the valuation discount on offer is what is leading to the heightened takeover activity that we’re seeing, often at eye-catching premiums (the most recent being the Spectris bid by private equity).”
Laura Foll, Co-Portfolio Manager of Lowland Investment Company and Law Debenture Corporation, said: “The valuation discount of the UK equity market remains, despite recent better performance. Importantly this valuation discount extends across the majority of sectors in the UK market and therefore cannot be easily attributed to a different market composition in the UK (with a lower weighting in the technology sector, for example).
“In my view the valuation discount on offer is what is leading to the heightened takeover activity that we’re seeing, often at eye-catching premiums (the most recent being the Spectris bid by private equity). It is ultimately valuation levels that we come back to in thinking about whether the market looks an attractive investment, not short-term fluctuations in, for example, the UK economy which are difficult to predict.”
Where are you currently finding the best opportunities?
Anthony Lynch, Portfolio Manager of JPMorgan Claverhouse Investment Trust, said: “At the moment, we’re finding particularly good value in UK mid cap stocks which combine premium yields, strong growth potential, and often lower valuations than large caps. Companies like XPS Pensions and Cranswick reflect this shift. Holding a mix of high yielders and names with higher earnings growth potential creates a powerful income and growth engine and helps to underpin Claverhouse’s own income progression.”
Julian Cane, Manager of CT UK Capital & Income Investment Trust, said: “We believe there are very interesting investment opportunities outside of the very largest companies in the UK. Historically, over long periods, the mid and small cap indices have performed more strongly than the largest companies, and partly to reflect that, mid and small cap indices have generally traded at a valuation premium to the FTSE 100.
“In a noticeable anomaly, that is not currently the situation as mid and small cap indices are trading at a valuation discount to the FTSE 100. While, of course, there are no guarantees and no predictions on timing, we are firmly of the belief that this anomaly will reverse and the greater long-term growth prospects of medium- and small-sized companies will again come to be better appreciated.”
Ian Lance, Manager of Temple Bar Investment Trust, said: “We are finding the greatest undervaluation in sectors such as financials, consumer discretionary, communications and energy.”
“We believe there are very interesting investment opportunities outside of the very largest companies in the UK.”
Thomas Moore, Manager of Aberdeen Equity Income Trust, said: “We see high dividend yield as a particularly compelling area of opportunity. We believe many investors have wrongly dismissed high-yield stocks as value traps, but the data tells a different story. In the year to date (to 31 August), high dividend yield has significantly outperformed.
“When we divide the market into five equally weighted baskets by dividend yield, a clear pattern emerges. The two highest-yielding baskets, with an average yield of 7.1% and 4.7%, have generated total returns of 26.1% and 23.2% respectively. In contrast, the three lower-yielding baskets, averaging 2.1%, have returned only 8.7% on average.
“This performance shift reflects a broader market realisation: the era of ultra-low rates is over. Higher rates have devastating implications for the discounted cash flow valuations of growth stocks, prompting investors to reallocate towards value stocks that are intrinsically cheap in the here and now, in many cases offering dividend yields above 6%. As these unloved stocks attract renewed interest, their share prices are rising, leading to yield compression.
“A good example is Imperial Brands, which currently yields 5.1%, down from 10% in 2023. These dividends represent only half of Imperial’s annual £2.5bn cash returns – the other half is coming back to shareholders in the form of a buyback. Furthermore, Imperial is growing its dividend and proving truly resilient in a challenging macro backdrop, unlike more heavily owned sectors such as beverages or luxury goods.
“Imperial is not alone. We see similar potential in financials, notably Ashmore (9.5% dividend yield), Sabre Insurance (9.8%) and OneSavings Bank (6.5%).”
Laura Foll, Co-Portfolio Manager of Lowland Investment Company and Law Debenture Corporation, said: “Small and medium-sized companies have significantly lagged the FTSE 100 in recent years, often leaving what we view as sensibly managed, market leading businesses trading at substantial valuation discounts to history. It is often (although not exclusively) in this area that we are currently finding opportunities, and we’re fortunate that we have a mandate to invest across all areas of the UK equity market.”
“We see high dividend yield as a particularly compelling area of opportunity.”
How do you use the investment trust structure to provide consistent dividends?
Laura Foll, Co-Portfolio Manager of Lowland Investment Company and Law Debenture Corporation, said: “The investment trust structure is very well suited for income funds – trusts have the ability to retain a small portion of earnings in reserves, creating the potential for a smoothed, ideally predictable dividend for investors that would be difficult to replicate in an open-ended structure.”
Julian Cane, Manager of CT UK Capital & Income Investment Trust (CTUK), said: “Investment trusts have a couple of key advantages that can help them generate attractive and stable levels of dividend growth. First, investment trusts do not need to distribute all the net income earned in any one year, but can retain up to 15%. This allows a reserve to be built over time. Over the last ten years, CTUK has added to its revenue reserves in six years, and drawn down from these reserves in three years.
“Secondly, investment trusts are able to borrow money to invest. If the return on the extra capital invested is greater than the cost of the borrowing, then that enhances returns for shareholders, which in turn is evidenced in higher levels of capital and income growth.”
“Trusts like JPMorgan Claverhouse can use revenue reserves to keep paying or even growing dividends when the underlying companies they hold cut theirs.”
Anthony Lynch, Portfolio Manager of JPMorgan Claverhouse Investment Trust, said: “Trusts like JPMorgan Claverhouse can use revenue reserves to keep paying or even growing dividends when the underlying companies they hold cut theirs. In strong years, we have been able to put aside and save some of the income the portfolio has received, and in leaner years we can draw on that pot to maintain payouts. It’s this ability to smooth income over time that has allowed JPMorgan Claverhouse to raise its dividend for 52 years in a row, even when markets were volatile or dividends were under pressure.”
Ian Lance, Manager of Temple Bar Investment Trust, said: “In recent years, companies have been altering the nature of their distributions to shareholders. Increasingly, they have been looking to provide investors with a return via share buybacks either alongside or instead of dividends. Unlike dividends, which are recognised as revenue in the trust’s accounts, and which underpin the dividends the trust pays, buybacks by portfolio companies have not contributed to the distributions paid to the trust’s shareholders. In order to address this distributional shift in the behaviour of portfolio companies, the trust decided to amend its dividend policy to enhance the dividend it pays by paying an additional 3.0p per share per annum (0.75p per share per quarter) using its capital reserves, thereby adding the equivalent of about 1.0% of current net assets to the total annual dividend. This revised dividend policy saw the recent quarterly dividends declared by the trust of 3.0p per share rise to 3.75p per share, representing an annualised dividend yield of about 5.0%, based on the share price at the time this decision was taken.”
What are the risks facing the UK and your trust’s portfolio?
“The anti-growth and anti-business policies of the current government are unlikely to be helpful for economic growth or in attracting inward investment to the UK. ”
Ian Lance, Manager of Temple Bar Investment Trust, said: “The anti-growth and anti-business policies of the current government are unlikely to be helpful for economic growth or in attracting inward investment to the UK. In addition, bond yields may continue to rise if the Treasury refuses to tackle the budget deficit by reducing spending, and more tax increases are unlikely to achieve this since they will very likely put further downward pressure on the economy which will result in lower tax revenues. That said, it is always important to remember the stock market and the economy are not the same thing as well as noting that many of the businesses owned by the trust are global in nature and therefore have limited exposure to the UK economy.”
Anthony Lynch, Portfolio Manager of JPMorgan Claverhouse Investment Trust, said: “A key risk lies in global uncertainties, from geopolitical tensions to shifts in trade or currency markets, which can affect UK-listed companies regardless of where they earn their money. With around 70% of FTSE All-Share earnings coming from overseas, global shocks can feed through quickly, whether it’s weaker demand in Asia or market volatility in the US.”
Laura Foll, Co-Portfolio Manager of Lowland Investment Company and Law Debenture Corporation, said: “In the next few months, sentiment towards the UK could fluctuate dependent on, for example, views on the Budget and whether this could dent business and consumer confidence. We are ultimately investing in individual companies that are working to provide an excellent product (or service) – there will be ‘self-help’ levers they can pull to continue growing market share and generating cash even if end markets were to be challenging.”
