Dunedin Income Growth 07 May 2019
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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Dunedin Income Growth. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Dunedin Income Growth (DIG) sits in the UK Equity Income sector, aiming to grow capital and income in excess of the FTSE All Share. The trust is unique within the AIC sector due to its large exposure to European stocks, helping the managers to diversify their distributions and take advantage of their extensive knowledge of the Pan-European space.
The trust is run by Ben Ritchie and Louise Kernohan at Aberdeen Standard, who have been implementing a change in strategy since 2016. The portfolio has been shifting towards stocks with more attractive growth characteristics, whilst maintaining the dividend at a high level throughout – the current yield is 4.6%, compared to a sector average of 3.8%.
This has necessarily been a long process as the managers slowly wind down positions in stocks with high current dividends but fewer prospects of growing them. The result is a portfolio with a considerably greater bias to the small and mid-cap end of the market, but with the same tilt to quality characteristics.
The turnaround has started to bear fruit: over 2018 the trust outperformed both the FTSE All Share, its benchmark, and the peer group. This has continued into 2019, and over the first four months of the year the trust has delivered just under 15%, beating both the peer group and the benchmark. This has also begun to be reflected in the discount and, after starting April trading at a discount of around 10%, the trust is now trading at close to 5%.
Alongside this, the trust has grown its dividend at a rate of 2.4% per annum over the past five years, considerably more than the rate of inflation. Dividends are paid out quarterly, and having not seen in the interim pay-out amount change since 2013, 2018 saw a large uptick in order to make the distribution of income more balanced.
In April of 2019, the trust’s expensive debenture, which was taken out in 1997 at rates which then appeared favourable, expires. This will dramatically decrease the headline gearing for the trust.
Dunedin Income Growth is a turnaround story with multiple catalysts to narrow the discount which we believe have not yet been absorbed by the market.
Ben and Louise have successfully implemented the complicated strategy of shifting the portfolio into higher dividend growth names without compromising on the headline yield, and the improving returns in part reflect this shift. We also believe that the current market environment is far more favourable for a cautious, valuation sensitive and high-quality approach of the sort that this trust, inherited from Aberdeen, implements. Many Aberdeen trusts have suffered since 2015 as their style has been out of favour, but in last year’s choppy markets the same style became a tailwind.
Alongside these two reasons to expect a change in sentiment, in April 2019 the expensive debenture matures. This will reduce the headline gearing and allow the disposal of the bond portfolio which was taken out to neutralise the long-term debt, thereby simplifying the portfolio and how it is seen by investors.
| Bull |
Bear |
| Change in strategy has started to turn performance around, relative to benchmark and peers |
Could be difficult to maintain the income if some of the holdings, like Vodafone, cut their dividends |
| Expensive debenture has matured |
|
| Attractive yield relative to the sector, and a strong long-term track record for increasing dividends |
Fund History
