Investment Trusts Offer Growth and Income by Diversifying Beyond Traditional Assets
Specialized investment trusts are demonstrating that growth and income are not mutually exclusive, even in asset classes typically known for one or the other.
The investment trust structure is enabling a growing number of funds to offer investors both capital growth and attractive income streams, even from asset classes not traditionally associated with dividends. This flexibility allows these trusts to combine dual goals, with some holding back income in good years to supplement payouts during leaner times, and others employing enhanced dividend policies that use a small portion of investment profits to help meet income targets.
Investing in Biotechnology for Growth and Income
The International Biotechnology Trust (IBT) exemplifies this strategy by investing in the biotech industry, an area primarily focused on growth due to companies developing new drugs and treatments. While biotech investments carry higher risk with potentially volatile returns, IBT's managers have navigated this by employing a risk-conscious approach. Over the past five years, the trust's net asset value (NAV) has increased by approximately 86%, outperforming its benchmark, the Nasdaq Biotechnology Index. IBT uses these capital gains to pay a predetermined income of 4% of its NAV annually, offering investors exposure to the growth potential of biotech alongside a steady income stream.
Small Companies with Significant Dividend Potential
Montanaro UK Smaller Companies (MTU) offers a different approach, providing an attractive yield of around 6% despite focusing on smaller UK companies, an area historically less known for dividends. While smaller companies typically reinvest profits for growth, recent resilient performance and lower valuations in the UK market have led to elevated income generation. MTU utilizes an enhanced dividend strategy to supplement its income, allowing investors to potentially benefit from the recovery in UK small caps while receiving a substantial income.
US Market Exposure with Income Generation
BlackRock American Income (BRAI) targets the US market, often sought for growth but less known for a strong dividend culture compared to other regions. The trust's managers focus on value stocks, which typically trade at depressed valuations and offer higher yields. This strategy, adopted in April 2025, has led to returns exceeding the S&P 500 Index. BRAI also features an enhanced dividend policy, paying 1.5% of NAV quarterly, aiming for an annualised yield of around 6%. This provides exposure to the broader US economy beyond the dominant tech sector, with a diversified approach to income generation.
Building Reserves for Consistent Dividends
Murray International (MYI) takes a different route to providing growth and income, leveraging the investment trust structure's ability to retain income. The trust has built reserves equivalent to over a year's worth of dividends, ensuring consistent payouts even in periods of lower income generation. MYI has achieved 21 consecutive years of dividend growth, with a current yield of approximately 3.6%, more than double that of wider global markets. In addition to its income track record, the trust has delivered strong capital growth, with a five-year NAV total return of 90%, surpassing the global market average.
Private Equity with a Dividend Focus
CT Private Equity (CTPE) invests in private European companies before they go public, offering a distinct return profile from publicly traded assets. While private equity is not typically associated with income, CTPE has maintained a dividend for 14 consecutive years, the longest streak among private equity trusts. The trust follows a policy of paying out the equivalent of 4% of its NAV annually, with adjustments to ensure the dividend does not decrease year-on-year. This approach yields over 6%, demonstrating that income can be generated even from asset classes focused on early-stage companies.
These examples highlight how the investment trust model can be used to deliver both growth and income, often by accessing asset classes or employing strategies that differ from traditional income-focused investments. This can offer investors diversification benefits and potentially enhance long-term portfolio returns.