Dunedin Income Growth 16 June 2023

Dunedin Income Growth Investment Trust (LON:DIG) turns 150 years old this year. When it first launched, the investment focus was the United States, which was an emerging market at the time. Nowadays, managers Ben Ritchie and Rebecca Maclean primarily focus on the UK and aim to generate a combination of capital returns and growing income, all within a sustainable framework (see ESG).

The managers will have a highly concentrated portfolio of just 30 to 50 holdings. Within this, they will look for a blend of income and growth opportunities to provide investors with an attractive total return. They also employ an option-writing strategy to support a sustainable growing Dividend. The managers can invest up to 25% in overseas markets, allowing them to invest in unique companies not found in the UK, which can also help diversify the portfolio and the income stream. All these features serve to differentiate the trust from the index and peer group (see Portfolio).

The trust’s quality bias has helped to deliver good outperformance over the past five years (see Performance). This had begun to narrow as the market swung towards value companies later in the period, but a good start to 2023 has seen outperformance once more. Turmoil in the banking sector, which the managers are underweight, the quality bias and several bids on their holdings have contributed to this. Looking forward, the managers believe the quality bias should be supportive in the event of market uncertainty. Factors that are likely to be impacted by a downturn, such as the oil price, are not factors that are likely to drive the portfolio. The managers believe they have better visibility of their companies’ prospects, which provides them with reassurance.

We believe DIG has a number of key standout features that help differentiate the trust from its competitive peer group. It is highly concentrated, focussed on a blend of income and growth, has a resilient income profile and incorporates sustainability throughout the stock selection process. All these factors should help to deliver attractive total returns for investors.

The recently expanded overseas element can also help the trust stand out, as this offers investors access to some unique exposures that are not often found in the UK (see Portfolio). As such, the trust offers a portfolio that is likely to be very different to the peer group. We believe this provides the potential for the managers to deliver outperformance over both the index and the sector. Whilst not a guarantee of future returns, this has occurred over the long term. The managers have been suffering from headwinds in the past 18 months, but recent Performance offers potential signs of having come through this challenging period.

More recently, sustainability may have slipped from the focus of the broad market, but the pressure from investors and rule makers seems to be only growing. We believe this puts the trust in a good place for the long term as a result of its explicit focus on ESG, as well as helping to further differentiate the trust.