Trusts are shelling out record dividends to investors, as interest grows in alternative ways of investing outside of stocks and shares.
Amid recent turbulence in global stock markets that saw the US market (the S&P500 index) lose more than a fifth of its value in just six months, investors are seeking new ways of investing their cash, new data suggests.
The typical investor portfolio usually includes mainly stock investments, with the rest of money tied up in bonds that carry a fixed rate of interest, translating into a steady return for investors.
The standard medium-risk approach for an independent investor used to involve betting 60% of your capital in stocks and 40% in bonds, according to investment bank Arbuthnot Latham.
However, that may be changing, as data from the bank shows investors in today’s market are increasingly looking to diversify their investment portfolios through alternatives, comprising anything that does not constitute stocks, bonds, cash or real estate.
According to investment bank Arbuthnot, internet searches for so-called “alternatives” investments surged 88% this year. The investment bank said last week that it had registered 35,000 internet searches among potential retail investors for different types of ‘alternative investments’ for the year to date.
The data suggests retail investors are exploring alternative forms of investment such as private equity and ethical investments, if Google, Bing and other search engine data can be a guide of trends.
A more diversified approach to market turbulence is paying off for investors who are willing to put their money in trusts.
Pay-outs from investment trusts are at an all-time high, according to information provider Link Group’s Investment Trust Dividend Monitor, which analysed dividends paid out in the year to March.
“Investment companies are able to hold back some of the income they receive from their portfolios and use these reserves to maintain dividends when times are tougher,” said Richard Stone, chief executive of the Association of Investment Companies.
“This helps explain why there are seven investment companies that have increased their dividends each year for 50 years or more, and 17 in total that have increased their dividends every year for over 20 years – known as the dividend heroes.”
Dividends from investment trusts are now nine times larger than they were in 2010, according to Link Group.
These trusts returned £5.5 billion in the form of dividends to shareholders between April 2021 and March 2022, a 15.4% increase on the equivalent period a year earlier.
The rapid rise in pay-outs to trust shareholders was mainly driven by increased returns among venture capital trusts and other vehicles that invest in alternative assets, according to the study.
Pay-outs from trusts that invest in alternatives rose by a quarter to £3.65bn, and the amount VCTs handed to investors shot up by nearly two-thirds.
The amount paid out by trusts that invest in listed shares was meanwhile flat at £1.85 billion, and the information provider expects pay-outs from equity investment trust to rise 4% by the end of March 2023.
Property was the largest dividend-paying sector in the alternatives segment, Link Group said, amid UK house prices that continue to rise unabated.
According to the Halifax index, house prices rose for the eleventh consecutive month in May, with a 1% increase suggesting that annual growth may be beginning to slow.
Arbuthnot’s data suggests that ethical investing has taken a front seat amid the current volatile climate, while real estate stocks may not be at the forefront of investors’ minds.
Searches for real estate investments fell by more than a fifth, 23.36%, this year, Arbuthnot said.
However, the hunt for ethical investments is now on, as retail investors seeking environmental, social and governance related investments rose by a third this year, according to Arbuthnot Latham.
The bank's data showed a 32.6% increase in internet searches for ‘ethical investment’ for the year to date (compared to the equivalent January to June period last year), suggesting investors are increasingly conscious to put their money away in non-contentious and ethical investments.
The rise in the number of potential investors exploring ethical ways of investing could be a response to the maelstroms faced by listed companies such as electric vehicle maker Tesla Inc (NASDAQ:TSLA), which was kicked out of the S&P’s ESG index earlier this year following allegations of racism at its California plant.
Private equity was another popular area of enquiry for potential retail investors, with searches for the asset class rising by 14.75%, as firms attempt to spend an almost 2 trillion-dollar war chest of capital collected from institutional investors.
This type of equity investment is not typically widely available to many retail investors, with the exception of high net-worth individuals, but with online asset management platforms increasingly available to independent investors, that balance is shifting.
After a couple of years of lower travel overheads due to the Covid-19 pandemic, and with interest rates now rising, which could in turn increase savings put away during lockdowns, Arbuthnot said searches for ‘family investments’ grew by 4.26%.
In its view, people are seeking to make financially “sound” decisions and stretch their pounds a little further while struggling to meet the rising price of everyday goods.
“A great way to do so is to take a look into your investments or if you are not yet investing look at where you can start to,” the bank said.