Keiron Root highlights the virtues of investment companies in difficult times

Another three months have passed since our last What Investment Trust and the prospects for stock market investors haven’t got any brighter. Indeed, the frantic slashing of interest rates and the arrival of ‘quantitative easing’ seems to have had precious little effect on market sentiment so far.

Of course, it takes time for these macroeconomic measures to take effect and, as more than one seasoned commentator has pointed out, they are, in most cases, as effective as the average flu treatment – they sooth the symptoms of the infection but actually do very little to effect a ‘cure’. That only comes with time as the body’s natural defences deal with the marauding virus.

Dealing with the symptoms
So it is with our current economic malaise. Ultimately, it will take time for the effects of the credit boom and resulting credit squeeze to work their way through the system. Governments and central banks can take action to help the process along, but they have to accept that it will take a while for the market to regain its equilibrium.

The trouble is that nobody knows how long that period of time will be. And, in the meantime, investors do not know what to do with their money. With interest rates at an all-time low, there is little attraction in keeping it in cash, other than a degree of security, which, in itself, has been undermined by some high-profile banking collapses.

The problem is particularly acute for those investors seeking income from their portfolios and, invariably, not wishing to take risks with their capital in order to get it. Traditionally, the way to seek a rising level of income was to invest in a portfolio of high-yielding equities, such as those held by an income-orientated investment trust.

However, with several formerly high-yielding stocks, notably those in the financial sector, cutting their dividends, or suspending them altogether, investors will be understandably concerned that the risks of equity income portfolios now outweigh the rewards.

Dividends holding up
This is, however, a false assumption. Not all companies have cut their dividends and, partly as a result of the dramatic falls in interest rates, the UK stock market is still yielding significantly more than cash. What’s more, investors holding the shares of income-generating investment companies have the added security of the reserves these funds have built up, sometimes over many decades, which can be used to underpin current dividend payouts.

The fact that some of these funds have been paying steadily increasing dividends for 30 or 40 years is testimony to the resilience of the investment trust. For closed-ended investment companies not only offer a broad spread of investments but, because of their structure, can take a long-term view of their investment strategies and the level of dividends they pay.

It is a point frequently made, but worth repeating, that closed-ended funds are not subject to the same pressures as open-ended vehicles to dispose of their most liquid assets  when times are tough.

Of course, when there is a surfeit of sellers of their shares and a dearth of buyers their discounts may increase, which can bring another set of problems, but by and large, the managers of investment company portfolios can set a long-term course and stick to it, even when markets are at their most depressed.

And that quality should mean that their portfolios are in a much healthier position when the recovery finally arrives.