A trust with hidden depths

Seneca Global Income & Growth (SIGT) is a broadly diversified multi-asset investment trust which, in the manager's words, pursues a ‘redefined approach to value investing’. As the evidence of a shift in favour of value stocks continues to mount – after a strong rally for value in the latter part of 2020 – the focus for many is likely to be on the potential for rising share prices among value stocks if that rally continues.

Capital growth is only one side of the coin, however. SIGT aims to achieve total returns of at least CPI +6% p.a. net of costs over a typical investment cycle, and offers a yield of around 4% - which is comparable with the UK and Global Equity Income sectors.

Given the diverse multi-asset approach that SIGT employs, and the diversification this means it is able to offer investors as a source of income, this attractive yield is in our view worth much closer attention at a time when traditional sources of income for UK investors – who are in many cases overexposed to UK equity income – face a challenging outlook…

A drought for some, a deluge for others...

According to research from GraniteShares, close to 500 companies listed on the London Stock Exchange had cancelled, cut, or suspended dividend payments in 2020 by the end of November. This was across every market cap with none of the FTSE indices showing immunity; with 51 FTSE 100 companies, 115 FTSE 250 companies, and 149 AIM-listed companies reporting impairments to distributions. In comparison to the three previous years, 2020 UK dividend payments hit record lows, leaving income reliant investors in a vulnerable position.

The weakness of dividends in some equity companies underlines the benefits of a more diverse approach to generating income and in our view SIGT sits well against that backdrop. Currently SIGT yields 4% and has been able to grow its dividend at a rate of 3.5%, maintaining the dividend levels in the first two interim payments in the current financial year (2021). The income has been generated across a diverse mix of asset classes, with areas like specialist assets and fixed income supporting the weaker-than-usual contribution from equities.

Within the specialist assets class, companies like RM Secured Direct Lending (RMDL) and AEW UK REIT (AEWU) have maintained high levels of income despite the difficult market and economic conditions. RMDL focuses on complex smaller short duration loans which sit outside the lending criteria of larger banks and has demonstrated underlying portfolio resilience through high interest rates and low LTVs, while maintaining their dividend over the year. Since the vaccination announcements, the company has seen a growing NAV and a shrinking discount, whilst yielding 7.5% at the current share price. AEWU, a property investment trust, on the other hand has sat in a difficult sector during the pandemic but, according to the managers at SIGT, has handled the challenges well. The underlying assets have seen strong rent collection during 2020 and limited rent reductions. AEWU is run by a highly active manager who looks to develop assets and sell them following a strong uplift in valuations. Despite the pandemic, this has continued throughout 2020 and has supported the current yield of 10%.

Both RMDL and AEWU are good examples of SIGT’s value focussed stock selection process in action. SIGT’s managers were able to identify that market concerns over the sustainability of both the headline dividend and the underlying income generation in these holdings, was likely overly negative considering the long-term outlook. As news flow turned increasingly positive for these assets, the market has sharply readjusted its expectations.

Whilst AEWU, for example, undoubtedly retains some sensitivity to the broader macroeconomic picture in terms of its ability to generate income, other holdings in the specialist assets portfolio, such as Hipgnosis Songs (SONG) have displayed little NAV sensitivity to ongoing economic developments. The income streams they generate have proven highly resilient.

As well as using income from the underlying companies to pay dividends to shareholders, the structural advantages that investment trusts have mean the board are able to utilise their revenue reserves; money which is effectively put aside when the pickings are rich to support dividends during leaner years, something which open-ended funds cannot legally do. The most recent full year dividend of the trust was covered 0.6x by revenue reserves at the last interim review, though there have been subsequent distributions (and income receipts). The board also has the ability to utilise SIGT’s special reserve and realised capital reserve to support the level of dividend distributions if necessary, and has voiced their intention at the very least maintaining the current level of dividend.

The board of SIGT run a strict discount policy, and currently SIGT is trading at a discount of 2.7%, although the trust has previously traded at a premium. Although longer term performance has been subdued in the face of a challenging market for value investors, the performance of the trust over the past six months, to 18/01/2021, has been strong relative to the benchmark (as discussed in more detail here), and also in comparison to both the FTSE All-Share and MSCI ACWI indices. We note that this has also been achieved with lower volatility than the FTSE All-Share.

Given the dependable and competitive yield of the trust, the diversified nature of the assets behind that income, the growing view among investors that value may finally be coming back into fashion, and the potential for continued NAV growth should that trend continue, this is an interesting time for investors in SIGT.

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