This trust is a slightly odd animal in that it has two classes of share, an A share which pays dividends and a B share which makes capital distributions. In other respects the shares have identical rights; the point of the difference is that it may be more tax efficient for certain investors to receive distributions in the form of capital repayments (which are subject to capital gains tax rather than income tax) instead of a conventional dividend. The share can be traded in the form of a unit, which consists of three A shares and one B share. We hold the unit in our income portfolio.
| Investment Capital Trust as at 11.07.14 (per FT) | A share | B share | Implied unit | Actual unit |
| Price(p) | 96.5 | 98.5 | 388 | 372 |
| NAV (p) | 101.8 | 101.8 | 406 | 406 |
On the face of it, the unit looks good value at a price of 372p compared to its ‘underlying’ price of 388p. On the basis that there is no such thing as a free lunch, what is the catch?
Well it could be that there is a wide spread (the difference between the bid and offer price) on the unit, ie the units may be more illiquid than the underlying shares, but from the trading platforms we use this doesn’t seem to be the case. It must be true that it is difficult (expensive) to deconstruct the unit into the underlying shares, otherwise there would be a clear arbitrage (free lunch) opportunity, although It may be that the spread on the four underlying shares would take out much of the gain.
Perhaps it is simply the complication of owning a share which pays part dividend and part capital repayment from an administrative point of view, although this should not make any difference to investors if the units are held within an ISA or SIPP. Finally, it may be that some platform providers treat the capital repayment as a corporate event, and levy a charge for collecting the cash payment, making the unit relatively unattractive.
Nonetheless the unit is trading at a discount of 8.4% and a yield of 4.7%. This is pretty attractive relative to other trusts in the UK Equity and Bond and UK Equity Income sectors.
Performance
This is not a ‘shoot the lights out’ sort of trust but the performance is respectable, ahead of the All Share for the five years to 30.06.14. The unit has a NAV total return performance of 104.6% against 96.7% for the FTSE All Share. It has underperformed its sector peers, however.
The board has had an active share buy back policy, adding modestly to performance in the year to end March 2014, buying back 1.25m A shares at a discount and issuing 655k B shares at a premium.
Underlying portfolio
The portfolio is predominantly invested in UK equities (84.3%), with a small amount in cash (2.2%) but also has an element in corporate bonds (13.5%); we are not great fans of the latter but the trust which has a modest amount of borrowing or gearing (12.2% per the latest factsheet) should be able to generate a return by borrowing at 3.15% and investing at a higher yield. Note the existing borrowing is due to be repaid in September 2017. The Board has stated that currently they will not borrow more than 20% of gross assets.
The equity portfolio looks pretty standard, with many of the usual suspects. As at 30.06.14 the top ten equity and bond holdings were:
| Top Ten Equity Holdings | % |
| GlaxoSmithKline plc | 5.4 |
| Royal Dutch Shell Plc Class B | 5.1 |
| BP plc | 5.1 |
| HSBC Holdings plc | 5.1 |
| British American Tobacco plc | 5.0 |
| Rio Tinto plc | 3.2 |
| BT Group plc | 3.0 |
| AstraZeneca plc | 2.9 |
| BHP Billiton Plc | 2.8 |
| Vodafone Group plc | 2.6 |
| Total | 40.3 |
| Top Ten Bond Holdings | % |
| Paragon Group 7% 20/04/17 | 0.5 |
| UBS 6.375% 20/07/16 | 0.3 |
| Permanent Master ABS 15/07/42 | 0.3 |
| British Telecom 2.25% 14/02/19 | 0.3 |
| Abbey National Treasury Service FRN 16/02/15 | 0.2 |
| Southern Gas FRN 21/10/15 | 0.2 |
| Bupa Finance 7.5% 04/07/16 | 0.2 |
| Marstons FRN 15/07/20 | 0.2 |
| Yorkshire Building Society FRN 23/03/16 | 0.2 |
| Mitchells & Butler 1.05438% 15/12/28 | 0.2 |
| TOTAL | 2.6 |
| Important Characteristics | |
| Asset size | £147.6m |
| Borrowing | £18m |
| Ongoing charges | 1.06% |
| Additional cost of borrowing | 0.47% |
| Borrowing as % of assets | 12.2% |
| Distribution per unit | 17.48% |
| Quarterly payments | Aug, Nov, Feb, May |
Conclusion
As a trust for income investors to tuck away in an ISA or SIPP, we think that Investors Capital Trust Unit (ticker ICTU) offers attractive relative value at 372p on a discount of 8.4% and a yield of 4.7%.
This research has been produced by David Liddell, chief executive and major shareholder in IpsoFacto investor.com Limited which has approved this research. David may have equity holdings in any or all of the stocks listed.
The information contained in this research has been obtained from sources that IpsoFacto investor.com Limited believes to be reliable and accurate. However, it has not been independently verified and no representation or warranty, express or implied, is made as to the accuracy or completeness of any information obtained from third parties.