Dunedin Income Growth

DIG’s shareholders recently voted to incorporate ESG into the trust’s investment objectives…

Add to watchlist Request a meeting Download View key data

This is a non-independent marketing communication commissioned by Aberdeen Standard Investments. 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

Dunedin Income Growth Investment Trust (DIG) recently continued its strategic evolution after shareholders voted to formally incorporate ESG principles into the trust’s investment objectives. This follows an evolution in recent years towards a greater focus on dividend growth at the expense of initial yield. DIG remains invested primarily in UK equities, looking for dividend and capital growth.

Supported by substantial revenue reserves, the managers have migrated DIG’s portfolio to a greater emphasis on income growth, as discussed under Dividend. DIG currently yields c. 4.1% and has now grown its dividend in 37 of the last 41 financial years (and has maintained it in the other four years). Driven in part by the strong emphasis on quality characteristics and financial strength in the stock selection process, DIG’s revenue generation proved significantly more resilient than the wider market to the challenges posed by the economic environment in 2020.

The resilience of many of the underlying companies to the wider macroeconomic environment in 2020 helped DIG to outperform over the calendar year. This followed a trend of strong relative returns in recent years, though the post-vaccine outperformance of value and cyclical stocks posed some headwinds to relative performance at the start of 2021, as discussed under Performance.

Whilst ESG factors had historically been incorporated into the stock analysis process as part of the team’s assessment of quality (see Portfolio), at the most recent AGM it was agreed to formally incorporate ESG policies into the investment objectives. As we discuss under ESG, this has seen the application of several rules around portfolio construction going forward, and has also seen the team exit certain positions to meet the new criteria.

DIG’s discount has narrowed notably in recent months to its current level of 1.5%.

Kepler View

DIG is positioned and managed with a view to offering ‘core’ UK equity income exposure, and we would suggest that the portfolio output matches these criteria. Income investors will doubtless find the consistent track record of dividend growth and ability to support future dividends from revenue reserves reassuring, and we think that an ongoing recovery in market-wide dividends is likely to be reflected in DIG’s revenue account. The benefit of hindsight proves the shift away from an absolute focus on maximising yields to have been prescient, as elevated payout ratios in many FTSE 100 companies could not be sustained in 2020 whilst DIG’s revenue generation remained reasonably robust.

Some investors will find the incorporation of ESG into DIG’s investment objectives attractive, and this could potentially serve to widen the shareholder base and help maintain the newly narrower discount level. It is worth noting that many of the areas from which DIG is now excluded or to which it only has restricted exposure are typically high distributing, as seen by the disproportionate impact on revenues from the stocks exited (16% of income from 8% of the portfolio). However, the managers are confident that they can reinvest this capital while maintaining the yield. In our view the re-rating higher in many of these stocks would likely have seen the trust’s value-aware managers reduce these positions in any event.

bull bear
Returns have been strong in recent years
Writing of call options could prove a relative headwind if UK market moves rapidly higher
Substantial revenue reserves in place to support the dividend
Gearing can exacerbate downside, as well as amplify upside
Structural incorporation of ESG will appeal to some investors Rate of dividend growth, as with the market, likely to be muted in the near term
Thomas McMahon
Thomas is a senior investment trust analyst and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.

Fund History

Disclaimer

This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.

Kepler Partners is not authorised to make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such restrictions.

The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.

This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.  

Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm’s internal rules. A copy of the firm’s Conflict of Interest policy is available on request.

PLEASE SEE ALSO OUR TERMS AND CONDITIONS

Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority (FRN 480590), registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.



Welcome to Kepler Trust Intelligence

Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority.
Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
Kepler Trust Intelligence is authorised in the UK by the Financial Conduct Authority. To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
How will this information be used? Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase.
Our Website uses Cookies Cookies are small text files held on your computer. They allow us to give you the best browsing experience possible and mean we can understand how you use our site. Some cookies have already been set. You can delete and block cookies, but parts of our site won’t work without them. By using our website you accept our use of cookies. For further information please refer to the Kepler Privacy Notice.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.