In an exuberant year for stock markets across the world, income investors have had both good yields and excellent levels of capital growth at their disposal. The dip after Donald Trump’s so-called “liberation day” in April turned out to be just a temporary hiccup, although the true impact of tariffs will become clearer in the next few months and years.
Our expert income trust portfolios, put together by IpsoFacto Investor chief executive David Liddell and QuotedData head of investment company research James Carthew, showcase how investment trusts are especially suited to creating a reliable income portfolio that does not neglect long-term growth.
Both portfolios fared very well this year: in the 12 months to 30 September, Carthew’s selections achieved a total share price total return of 12.9 per cent with a 6.4 per cent yield, while Liddell’s returned 13.8 per cent and yielded 6.2 per cent.
Over the same period, global equities as measured by the MSCI All Country World index returned 16.5 per cent. In a nutshell, both portfolios only gave up a small amount of returns in exchange for their income streams.
Despite conventional wisdom, over the past year the equity rally has extended to a range of markets and areas, rather than exclusively focusing on US tech stocks and artificial intelligence as was largely the case in 2024. Our experts’ portfolios benefited from this partial shift, and performance was also helped by discounts tightening across the investment trust universe.
Rising markets tend to mean lower yields, but income investors still have plenty of opportunities to buy discounted investment trusts offering attractive levels of income. For next year, Carthew has mostly decided to stick to his guns, while Liddell has opted for a more significant overhaul of the portfolio, as he takes profits from some of his best performers.
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How James Carthew’s portfolio fared
Carthew’s portfolio is heavily skewed towards alternative assets, with infrastructure accounting for 30 per cent of the total and property for another 7.5 per cent. The rest is mostly equities, with a domestic bias and some dedicated Asia exposure.
Of the 11 investment trusts in the portfolio, seven saw double-digit returns over the period, and only two were in negative territory. The standout performer was UK equity play Temple Bar (TMPL), which Liddell also owns.
Its value approach paid off this year as UK equities rebounded, and the trust moved from a 6.8 per cent discount on 30 September 2024 to trading just above its net asset value (NAV) one year later. Earlier this year, Temple Bar decided to pay a portion of its dividend out of capital, to reflect the fact that UK companies have been returning money to shareholders through buybacks; as a result it now technically has a somewhat ‘enhanced’ dividend policy.
Carthew’s portfolio is also exposed to domestic equity via Henderson High Income (HHI) and Law Debenture (LWDB), both of which performed strongly. The first has some allocation to fixed income (10.9 per cent as of 30 June), but mostly invests in UK stocks; the top holdings are British American Tobacco (BATS), HSBC (HSBA) and Imperial Brands (IMB).
Law Debenture generates a chunk of its income from its professional services business, which accounts for about a fifth of the trust, giving the manager the flexibility to pick lower-yielding stocks with higher growth potential.
The biggest holding in the portfolio, Murray International (MYI), also outperformed, confirming “you can get reasonable returns without having to blindly follow the Magnificent Seven”, Carthew says. He continues to back the trust’s diversified approach at a time of high market concentration.
It was another eventful year for M&A activity in the investment trust sector, and the portfolio was not completely immune. Invesco Asia merged with Asia Dragon Trust in early 2025, to create the £900mn Invesco Asia Dragon (IAD). Carthew is sticking with the merged entity for this year’s portfolio, in the hope that global investors continue to look east as part of a partial pivot away from the US. But he has resisted the temptation to up this position, he says, to avoid making the portfolio too racy for its income goal.
The rest of the portfolio came through unscathed, although Carthew notes that it still includes a couple of potential M&A candidates, namely AEW UK Reit (AEWU) and NextEnergy Solar (NESF).
The former now has one of the tightest discounts in the property sector, which should reduce its chances of being taken over. But several property trusts have disappeared this year, and AEW could still get swept out by the tide. “It would really be a shame if it did get targeted, but it is possible,” Carthew says.
NextEnergy Solar was the portfolio’s worst performer, but it still fared better than some of its peers; sector giant Greencoat UK Wind (UKW) was down 15.5 per cent over the same period. Carthew is sticking with NextEnergy, on the basis that the yield on offer is attractive (14.4 per cent as at 6 November), that solar assets are performing better than wind assets, and that asset sales within the portfolio or corporate action could act as a catalyst and give the share price a boost.
Carthew’s changes
Carthew only opts for one change to his portfolio, the sale of battery storage play Gore Street Energy Storage (GSF). The trust has not one but two activist investors on its shareholder register (RM Funds and Saba) and has just overhauled its board. The battery storage sector has had to contend with various revenue challenges, and while overall performance may well improve in future, Gore Street has cut its dividend, which makes it unsuitable for the income portfolio.
As a replacement for the Gore Street exposure, there are two new entries for the portfolio: BioPharma Credit (BPCR) and Cordiant Digital Infrastructure (CORD), with a 5 per cent allocation to each.
The first is a somewhat niche play investing in the debt of life sciences companies. “It offers a high headline yield plus a strong track record of paying special dividends on top of that,” says Carthew. The trust was yielding 7.7 per cent and trading on a 9.1 per cent discount as of 6 November. Carthew does not expect to see much capital growth from the trust, but he does hope the discount will narrow.
Cordiant invests in digital infrastructure assets, mostly in Europe – a combination of fibre, digital TV infrastructure and data centres. For a long time, the trust was penalised for operating in the same sector as the battered Digital 9, but Cordiant has clearly been managed much more prudently. As at 4 November, Cordiant’s shares were on a 25 per cent discount, and Carthew hopes this will narrow further.
“The manager has committed a substantial part of his own wealth to buying shares in the company,” he notes. “There is an outside chance of a bid for the whole company.”
These changes trim the portfolio’s overall allocation to infrastructure, from 30 per cent to 25 per cent. Despite mixed performance from the asset class, Carthew says he is “not yet” tempted to reduce the exposure further – he’s waiting for GCP Infrastructure (GCP) and NextEnergy Solar to re-rate, he says.
GCP is meant to be an infrastructure-focused debt play, but has some “equity-like” features because of the type of debt it holds and its position in the capital structure of its investments, Carthew explains. The trust is gradually moving towards safer assets, which should help it rebound at some point.
How David Liddell’s portfolio fared
By comparison, Liddell’s portfolio had a broader range of equity plays, including dedicated allocations to Japan and US income stocks. It also focused less on infrastructure, but had a little more exposure to debt assets.
All but two trusts in the portfolio were in positive territory over the year, with six achieving double-digit returns. The second top performer, after Temple Bar, was Invesco Global Equity Income (IGET).
Its discount closed entirely over the year, reducing the yield on offer; the trust was actually trading at a small premium at the time of writing. Its biggest position is private equity giant 3i Group (III), which has delivered impressive returns, more than quadrupling its share price in the past five years, but now sports an eye-watering 55.3 per cent premium.
Strong performers in Liddell’s portfolio also included North American Income (NAIT), Schroder Japan (SJG) and Abrdn Asian Income (AAIF).
TwentyFour Income (TFIF) too delivered a solid performance for a fixed income vehicle. Liddell has decided to stick with it, despite “a few concerns” about the fact that “the underlying assets are so difficult to analyse”.
“It has come through periods of high interest rates quite well so far,” he says. “Its main exposure is to Europe and Australia, not so much the US, so hopefully it’s not too exposed to a private credit crunch. But obviously, if that does happen, a lot of things will suffer.”
Dunedin Income Growth’s (DIG) performance was disappointing in the context of the UK market’s rally – the FTSE All Share returned 15.8 per cent in the year to 30 September – but Liddell is sticking with the trust’s quality approach. Dunedin has a focus on responsible investing, and like Temple Bar, earlier this year it announced the intention to pay dividends partly out of capital, to become more attractive to income investors.
The portfolio’s worst performer was The Renewables Infrastructure Group (TRIG). Liddell notes that the sector is under pressure due to energy contract changes announced by the government; however, shares are “so cheap” that even if the dividend is cut back, the yield will remain “decent”. TR Property (TRY) also struggled, but Liddell hopes it will benefit from upcoming interest rate cuts from the Bank of England going forward.
Liddell’s changes
Liddell notes that big market gains over the past three years have made it harder to put together an income portfolio, and opts for a fairly significant overhaul as he takes profits from some excellent performers – Temple Bar, Invesco Global Equity Income, North American Income and Schroder Japan.
The latter was a close call, Liddell admits, as on balance he still thinks Japan will perform well. But he argues that the recent rally was partly propelled by a weak yen helping exporters, particularly AI and electronic firms; if the yen strengthens, those same companies could come under pressure.
This year’s portfolio, Liddell says, targets a yield of between 5.5 per cent and 6 per cent and aims to stay as diversified as possible.
For his global equity exposure, he introduces Murray International, which Carthew also owns, and Scottish American (SAIN). The latter is managed by Baillie Gifford but has a very different strategy from the aggressive growth approach the fund house is known for; instead, it targets real-terms dividend growth from a diversified portfolio of global stocks. Its biggest holdings are Microsoft (US:MSFT), TSMC (TW:2330) and Apple (US:AAPL), but overall the trust only had 35.6 per cent of the portfolio in North American equities as at 30 September. At the time of writing, it was trading at a discount to NAV of 10.2 per cent.
For the UK equity sleeve of his portfolio, Liddell pairs Dunedin with Lowland (LYI), whose value tilt adds diversification. The trust is trading on a 10 per cent discount and should have the ability to grow its dividend, says Liddell.
He also introduces a dedicated UK small-cap allocation via JPMorgan UK Small Cap Growth & Income (JUGI), on the basis that the sector has been unloved for a long time. The trust’s shares have been flat in the past year, but its long-term track record is pretty impressive – in the decade to 6 November, it was the second best performer in the Association of Investment Companies’ UK smaller companies sector after Rockwood Strategic (RKW).
Finally, Liddell opts to increase his allocation to the infrastructure sector, bringing it to 20 per cent of the portfolio, at the expense of his debt exposure. He pairs The Renewables Infrastructure Group with the lower-risk HICL Infrastructure (HICL).
HICL is one of the two remaining “core” infrastructure investment trusts available to UK investors, offering exposure to a portfolio of government-backed infrastructure projects, for example in the utilities and transport sectors. As at 6 November, it promised an attractive yield of 7.2 per cent and looked undervalued at a 24.5 per cent discount. The trust has less potential for growth than some other infrastructure trusts, but should be a safe and reliable income play. In the event, HICL and TRIG then announced plans to merge as this article went to press.