Lowland 10 July 2019
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.
The managers of Lowland Investment Company (LON:LWI), James Henderson and Laura Foll, run a diversified portfolio of mainly UK companies, spread across a wide range of sectors. The duo are very much stock pickers and pay very little regard to the benchmark.
The team spends a large amount of time meeting and researching companies across the market capitalisation spectrum, and has a clear preference for what it views as 'quality' companies that have a unique or niche position in their market, which gives them pricing power. James doesn’t necessarily look for all of his companies to provide a high income at the time he invests – he has a clear philosophy to 'grow the capital, [in order to] to grow the income'.
In recent times the managers' style approach has been out of favour, causing the trust to underperform the benchmark in three of the past four years. Much of this has been due to the trust’s tilt to smaller companies, as they have been hit particularly hard since the referendum vote in 2016. The value tilt to the strategy has also not been helpful. With this said, the trust has long been characterised by periods of outperformance and underperformance and the trust's long-term performance figures are exceptional and over the past ten years the trust has delivered NAV returns of 306.7%. In comparison, the FTSE All Share has returned 166.8%, and the IA UK Equity Income and the AIC UK Equity Income sector have returned 159.1% and 223.9% respectively. The trust sits in our Income shortlist of preferred trusts.
LWI yields 4.3%, considerably above the weighted average for the UK Equity Income investment trust peer group (3.9%). Over the past five years, the dividend has been grown at a compound rate of 9.7%, and the most recent full year dividend was almost in line with this, increasing revenue earnings and total dividends by 10.3% and 8.9% respectively.
The past three years have seen the trust predominantly trade on a discount between -4% and -10%. Currently the discount sits at 8%, and this is close to 3% wider than the trusts one-year average of 5.2%. Relative to peers this is reasonably wide, and the AIC UK Equity Income sector has a weighted average discount of 4.9%.
Lowland is an unusual trust relative to UK Equity Income peers, principally due to not having a pure income focus. Instead, the trust is an interesting option for investors looking for both capital appreciation and a dependable source of income, which is why we include it in our shortlist of preferred trusts for income investing.
As one would expect, the trust has struggled relative to peers and this is largely due to the large exposure to small and mid-cap companies. However, the trust has long been characterised by periods of outperformance and underperformance.
Smaller companies have added substantial value to the portfolio over the long-term and we believe they will again in the future. Currently, trading on a discount of over 6%, this moment in time could bring an attractive entry point into the trust.
|Proven long-term track record.
|The trust has struggled in recent times relative to peers and the benchmark
|Strong dividend growth rate
|Continued uncertainty in the UK, could mean there is still some pain before things get better
|The portfolio rarely ever resembles its benchmark.
|Discount offers an attractive entry point to the trust.