Fund Profile

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Disclosure – Non-substantive Research

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour. 

Overview
Chelverton UK Dividend Trust (SDV) is an income-generating smaller companies UK trust...
Overview

Chelverton UK Dividend Trust (SDV) is first and foremost an income fund offering quarterly dividends in excess of inflation over the medium to long term. The company also aims to provide investors with the opportunity for capital growth after providing a return that is sufficient to repay the zero-dividend preference (ZDP) shares.

At the helm of the portfolio are lead manager David Horner and co-manager David Taylor, who look for companies with a prospective dividend yield of at least 4% and sit outside the FTSE 100. The team specialises in the mid and small-cap income space and, according to Morningstar, have 70% of the portfolio in micro-cap stocks and a further 27.6% in small caps. The average company size in the portfolio sits at just £191m.

The trust currently yields 5.3%, considerably more than the weighted average in the UK Equity Income sector, which yields 3.9%. From this financial year (2020), dividends will be paid equally across quarterly interim payments, and the board anticipates paying a total of 9.6p for the current year. At the current share price, this equates to a yield of 5.5%. The board has also announced that once the trust’s revenue reserves are equal to double the historic dividend, the company will stop adding to reserves and distribute all further income as special dividends. As at of the end of financial year 2019, the trust had revenue reserves of 19.19p per share, 199% of the expected financial year 2020 annual dividend.

Alongside generating strong income, long-term performance figures for the trust have been exceptional. Over a ten-year period, the trust has delivered 375% in NAV total returns, considerably more than the MSCI UK Small Cap sector, at 256.5%, the AIC UK Equity Income sector, at 205.8%, and the IA UK Equity Income sector, at 149.3%. With this said, returns have been rocky over the medium and short term. Much of this is due to the trust being highly geared through ZDPs, which has meant that the corrections in 2016 and 2018 hit the trust particularly hard. Since the start of the year, the trust has generated a NAV total return of 5.7%, trailing the benchmark and peer group by some margin, which returned 16.8% and 14.6% respectively.

Currently the trust trades on a discount of 14.3% compared to the UK Equity Income sector weighted average of 4.6%

Kepler View

As an income fund, the trust offers investors an extremely attractive yield. Currently sitting at 5.3%, this is much higher than the weighted average in the UK Equity Income sector’s yield of 3.9%. However, the most interesting feature, at least for us, is the diversified nature of the income relative to peers. As we mentioned in our recent article, ‘Income but not how you know it’, the majority of the UK Equity Income trusts are highly concentrated in a few big names. Just eight companies make up more than the 50% of the yield of the FTSE 100, according to Bloomberg figures, and the likes of Shell, BP and GlaxoSmithKline feature 17, 14 and ten times in the top five holdings across the 24 trusts in the UK Equity Income sector. This is particularly worrying when one considers that many of the largest yielders in the index have an uncertain future, and there are question marks over the sustainability of their dividends. As such, Chelverton has the capacity to offer an interesting way of diversifying one’s sources of income and resolving the problem of concentration in the UK Equity Income sector. In the case of this trust, this can be done without sacrificing the level of income and at an extremely attractive discount of almost 16%.

bull bear
Strong long-term track record
High charges
Offers diversified income through small and mid-cap companies
Poor recent performance
Historically and relatively wide discount
Risky due to high levels of gearing
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