Dunedin Income Growth 27 April 2022

Dunedin Income Growth Investment Trust (DIG) is a trust within the UK Equity Income sector that has undergone significant evolution over recent years. The objective to grow income and capital from a portfolio of mainly UK listed companies was supplemented in June 2021 with the requirement for trust holdings to meet the board’s sustainable and responsible investing criteria, making DIG the only trust amongst its peers with an explicit ESG mandate (the criteria are laid out in detail in the ESG section).

The inclusion of sustainability criteria has doubled down the focus on quality-growth that has been in place since 2016, with the lead manager Ben Ritchie pivoting DIG away from a more conventional UK equity income strategy (depending on high yielding but lower growth companies such as high street banks and oil majors) towards buying companies with better long term prospects. As discussed in Portfolio, this has resulted in a meaningful tilt towards mid and small cap companies versus the trust’s benchmark. The focus on quality also dovetails with a high conviction approach to portfolio construction, DIG being one of the most concentrated trusts in the sector.

Despite the greater focus on dividend growth rather than maximising yield, DIG currently yields c. 4.3%, a substantial premium over the FTSE All-Share Index yield of 3.2%. As noted in the Dividend section, DIG’s pay-out has now grown in 38 of the last 42 financial years (and been maintained in the other four years).

The recent inflationary rally in commodity prices has been a short term headwind to relative performance for DIG, however, the Discount remains near par. The combination of the focus on quality growth, good yield, the explicit commitment to responsible investing, and low cost (DIG’s OCF is 0.59%) appears to have a strong appeal.

Some might consider the UK Equity Income sector to be somewhat staid. In our opinion, DIG is a trust that might change this view, bringing an innovative and fresh approach to the sector. This is most obvious with the pioneering adoption of ESG investing. However, the high conviction, highly concentrated investment portfolio is also breaking the mould: as at 28/02/2022, DIG held 38 stocks compared to the sector average of 67 holdings. The high active share, quality-growth and mid and small-cap tilted portfolio all point to DIG trying to deliver significantly more to its investors than just a dependable yield (which it certainly has).

DIG’s highly concentrated strategy raises the relative risk, but this is moderated by a cautious approach to Gearing, a preference for stocks with defensive characteristics and portfolio construction that dampens down unnecessary stylistic risks. Although DIG’s relative performance will likely suffer in the short run if low-scoring ESG stocks rally (as has happened recently with the inflationary rally in commodity prices and the subsequent outperformance of miners), for investors with a longer-term time horizon and the belief that higher-quality companies will re-establish their market leadership, the combination of an attractive current yield, capital growth potential, long track record of dividend growth, ESG awareness and cost-effectiveness could make DIG appealing.