Fund Profile

Dunedin Income Growth 02 August 2024

Disclaimer

This is a non-independent marketing communication commissioned by abrdn. 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.

Overview
DIG offers several differentiating features which help it stand out in a competitive peer group…
Overview

The managers of Dunedin Income Growth (DIG) employ a balanced approach, focussing on quality companies that meet their sustainable and responsible investment criteria, and those they deem best placed to deliver both attractive total returns and real income growth over the long term. This strategy has proven successful over the years, demonstrated by DIG’s dividend track record and long-term Performance profile.

Despite some current market uncertainties, particularly regarding geopolitical tensions and the timing of rate cuts, the managers believe UK equity valuations remain attractive. They argue that an improving economic backdrop combined with low starting valuations could be a powerful source of returns moving forward (see Portfolio). They’ve found opportunities across the market, resulting in a number of new positions being initiated into the portfolio, including large-cap names like National Grid and Convatec, and mid-cap opportunities such as Genuit Group, a plastic piping company.

The managers also focus on generating sustainable, long-term Dividend growth that can withstand market stress, rather than simply chasing the highest yields. To achieve this, the managers emphasise income resilience through market cycles and diversification of their underlying income streams. The result is a portfolio comprised of UK-based companies with global exposure, whereby they can generate significant portions of their revenue internationally, as well as exposure to overseas investments for diversification. Additionally, the managers employ a modest option-writing programme, expected to contribute 5-10% of the income generated, affording them headroom to invest in the more non-traditional areas, including smaller companies, which may offer lower starting yields but stronger dividend and capital growth prospects.

Currently, DIG trades at a 10.5% Discount, much wider than its five-year average and the sector’s 3.6% average.

DIG has been awarded a Kepler Growth rating for 2024.

Kepler View

One of the most appealing aspects of DIG’s portfolio is its attractive Dividend profile, particularly the emphasis the managers place on providing a steadily growing, yet resilient income. Ben Ritchie and Rebecca Maclean employ various strategies to ensure income sources are diverse, so in times of market stress, DIG’s income generation capabilities have the potential to hold up better than the market.

Beyond targeting quality UK companies, moulded within their sustainable framework, the managers allocate a portion of the portfolio to overseas businesses, enhancing their income stream diversity. Additionally, they leverage an option-writing programme, which affords them the flexibility to fish further down the market-cap scale for differentiated opportunities of dividend growth. This approach has earned DIG a place on the AIC's next generation of dividend heroes list, having increased its dividend for 13 consecutive years.

Whilst DIG has demonstrated good long-term performance, we think it’s important to acknowledge that its strategy may lead to periods of underperformance, as seen in the past 12 months, due to its allocation to mid-cap companies and underweight to cyclical financials and commodity sectors (see Performance). However, we think DIG’s portfolio is well-positioned to capture returns should the economic backdrop improve and particularly if investor sentiment towards UK equities strengthens.

DIG’s double-digit Discount, which is much wider than its five-year average, may also appeal to investors seeking differentiated exposure to the UK market, as well as a growing and resilient income. If sentiment returns and DIG’s performance picks up, then we see potential for the discount to narrow back towards its long-term average, boosting shareholder returns.

Bull

  • Highly differentiated approach, with a focus on sustainability, to both the peer group and index
  • Well-diversified list of UK businesses that also derive revenues overseas
  • Use of option writing gives managers greater flexibility to invest across the market cap spectrum

Bear

  • Gearing can magnify gains on the upside but also losses on the downside
  • Exposure to mid-cap companies may bring more sensitivity to the UK economy
  • Balanced investment approach may lag a style-driven market
Continue to Portfolio
2024 Kepler Growth Rated Fund

This trust has been awarded a rating by Kepler Trust Intelligence for growth... Find out more

Fund History

02 Aug 2024 Fund Analysis
DIG offers several differentiating features which help it stand out in a competitive peer group…
26 Jan 2024 Fund Analysis
DIG outperformed the index over 2023 and continues to differentiate itself from peers…
17 Jan 2024 Top of the Pops
We reveal the winners of our investment trust ratings for 2024…
13 Dec 2023 In-come all ye faithful
Equity income could be a beneficiary of the higher interest environment, with trusts a good way to capture it…
16 Jun 2023 Fund Analysis
DIG offers several differentiating features which help it stand out in a competitive peer group…
26 May 2023 Finding the best UK stocks for income, with Dunedin Manager Rebecca Maclean - Podcast: Trust Issues #16
We talk valuations, European stocks, options writing and UK M&A...
01 Feb 2023 Go your own way
Our analysis shows that investment trusts offer better diversification for those seeking income from equities...
20 Oct 2022 Fund Analysis
DIG offers a differentiated approach to income investing...
27 Apr 2022 Fund Analysis
DIG is the only UK Equity Income trust with an explicit sustainable investing mandate…
18 Aug 2021 Fund Analysis
DIG’s shareholders recently voted to incorporate ESG into the trust’s investment objectives…
11 Aug 2021 In at the deep end
Does seeking out wider-than-usual discounts help investors systematically outperform in the UK trust space?
03 Mar 2021 Strength in depth
UK Equity Income trusts have done a heroic job of maintaining their dividends through the pandemic...
03 Mar 2021 Fund Analysis
DIG offers a high yield backed by large revenue reserves…
29 Jul 2020 To be, or not to be (geared), that is the question
Gearing is part of the toolkit that trusts use to outperform OEICs. But how is it best implemented?...
20 Jul 2020 Fund Analysis
Seeking to grow income, and with substantial revenue reserves, DIG invests primarily in UK companies...
01 Jul 2020 Oh the humanity...
We consider two strategies to cope with markets which, boosted by massive government support, may be witnessing the start of a ‘melt-up’ which may be followed swiftly by a melt-down...
15 Apr 2020 Hold fast
Investment trusts' revenue reserves could make them a vital stronghold for investors facing UK dividend cuts of as much as 47%....
16 Jan 2020 Fund Analysis
Seeking to grow income, and with substantial revenue reserves, DIG invests primarily in UK companies...
17 Jul 2019 Ready for action
In the second part of our active management series, we assess the most active managers across the major closed-ended equity sectors…
07 May 2019 Fund Analysis
Run by Ben Ritchie and Louise Kernohan, Dunedin Income Growth is a turnaround story starting to bear fruit...
01 Oct 2018 Fund Analysis
A UK-focused equity trust, which aims to generate a growing income while achieving capital growth in excess of the FTSE All Share...
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