With an average yield of 4%, performing marginally ahead of its open-ended counterpart, and currently trading on an average discount of 2.9%, the unloved AIC UK Equity Income sector is now looking an attractive option for income investors.
The political backdrop since the EU referendum in 2016 has been a key contributing factor to investors shifting away from UK-focused equity funds.
In 2016, open-ended UK funds saw outflows of £4.9bn, followed by £2.6bn in 2017 and £4.8bn in the 11 months to 30 November 2018, according to the Investment Association. Net outflows from the IA's UK Equity Income sector were £1.1bn in both 2017 and 2018.
This sentiment was also reflected on the closed-ended side, as the AIC UK Equity Income sector saw its average discount swing to 5.1%, having been as narrow as 1.2% just six months earlier.
Are these the best 'all-rounder' UK funds for income investors?
Meanwhile, last year the sector saw its worst performance in a decade, with the average share price down 8.9%, according to FE.
However, the trusts outperformed the IA's UK Equity Income sector average, which was down 10.5% over 2018. The closed-ended sector was also ahead in the previous year, returning an average of 14%, versus an average return of 11.3% from OEICs.
Year-to-date, both sectors have returned 3.5% in share price terms, but an average discount of 2.9% for investment companies points to a more attractive entry point as shareholders can pay below the net asset value of underlying holdings.
Discounts have also been steadily narrowing since 2016, with some trusts close to their tightest levels in months.
This includes Murray Income, which is trading on a discount
of 4% compared to a range between 3% and 10% in the last six months.
Iain Scouller, analyst at Stifel said: "Murray Income stands out for its good relative performance over the past 12 months with its NAV down 9% versus an 11% decline in the FTSE 100 index (in total return terms) to 28 January."
Investment trusts and the quest for retirement income
Shauna Bevan, director and head of investment advisory at RiverPeak Wealth, added an even better opportunity might be found through trusts that have some gearing.
This includes James Henderson and Laura Foll's Lowland Investment Company, which is 14% geared and 18% for Simon Gergel's Merchants Investment Trust.
Bevan said: "If you believe there is going to be a Brexit bounce then on the face of it, investment trusts trading at a discount with some leverage do offer an opportunity if you are the kind of investor who wants to play that game. I am not though."
