Dunedin Income Growth 03 March 2021

Dunedin Income Growth Investment Trust (DIG) aims to grow capital and income primarily from investments in UK equities, aiming to outperform the benchmark FTSE All-Share Index. In recent years DIG’s investment strategy has shifted towards a greater focus on dividend growth at the expense of some initial yield.

This has proven useful in recent months given the parlous backdrop for UK equity income generation. As discussed under Dividend, the strong emphasis placed upon financial strength in stock analysis has meant that, even when holdings were suffering operational headwinds, underlying management teams have often been able to maintain payouts. We understand that DIG’s revenue generation has therefore suffered milder impairments than the market, though it has also been supported by the writing of covered call options (as discussed under Portfolio).

The strategy shift has also ensured that the managers have not had to focus solely on identifying companies where dividends are high or growing but have also been able to introduce companies where they believe there to be attractive long-term total return characteristics. As discussed under Performance, over the previous five years DIG has delivered the second strongest share price returns in its peer group.

DIG has a historic yield of c. 4.3% (as at 15/02/2021) and seems to us likely to at least maintain dividends this financial year, with healthy reserves to draw on if needed. Despite this, the trust trades at a Discount of c. 4.3%, wider than the sector average.

ESG is embedded into the investment process, and as an output the trust scores well on quantitative measures of ESG compliance.

DIG’s managers view it as a core UK equity income product, and we think many of the characteristics displayed lend themselves favourably to such a designation. An attractive historic yield reflects a level of dividends that look to us like they can at the very least be maintained in the near term, with resilient portfolio income and ample revenue reserve cover. The shift in strategy looks to have further supported the long-term sustainability of a progressive dividend policy, whilst affording the managers greater opportunity to incorporate their ‘best ideas’ for total returns, even when these do not necessarily offer any immediate dividend yield.

The managers use risk analytics to try and ensure that stock-specific factors remain the dominant driver of active risk, as opposed to style or market cap factors, which we think will be welcomed by many investors in this market environment, and we think likely accounts for the lack of strong ‘personality’ in DIG’s relative returns. There has been no set market or macroeconomic backdrop that we think has demonstrated outsized influence on relative returns. Going forward, investors can perhaps therefore focus more on DIG’s own characteristics than concerning themselves with the potential impact of events outwith the managers’ control.