Invesco Income Growth 26 August 2020

Invesco Income Growth Trust (IVI) aims to generate quarterly income, and capital growth superior to that generated by the wider UK stock market. Managed by Ciaran Mallon, IVI also aims to ensure both capital and dividends grow in real (i.e. inflation-adjusted) terms.

The manager views and constructs IVI very much as a ‘core’ UK equity-income product, and accordingly seeks to avoid significant stylistic or macroeconomic tilts. As we discuss under Portfolio, he instead seeks to ensure that stock-specific risks are the primary driver of relative performance. Overall Ciaran has a preference for non-cyclical companies with low levels of debt, which has served him well in weak economic periods in the past.

As we discuss under Dividend, IVI presently yields c. 4.9%, slightly above the peer-group average. With 23 consecutive years of dividend increases behind it, the trust is an AIC ‘dividend hero’, and the most recent FY 2020 dividend represented an increase of c. 3.5% on the FY 2019 dividend. IVI retains reasonably robust revenue reserves to assist the manager in continuing to grow this distribution in the future.

IVI faces a continuation vote in September 2020. Whilst the board recommends that shareholders vote in favour of continuation, the board believed it appropriate to offer shareholders the vote in light of IVI’s persistent discount. As we discuss under Discount, this presently amounts to c. 12% as at 13/08/2020. Buybacks have not been employed in recent years.

The board of IVI is itself undergoing a process of renewal, with a plan to gradually replace existing members.

IVI is constructed with the aim of serving as a core UK equity-income product, and with healthy revenue reserves available to support the dividend it appears well placed to continue to provide growing distributions after 23 years of consecutive increases. On this basis, the current yield of c. 4.9% could appear attractive in a yield-starved world. IVI should not be understood as an attempt to maximise relative or absolute upside, but instead as a vehicle which targets long-term compounding of both income and capital returns.

Although the manager has a preference for seeking to ensure his portfolio is differentiated from the market – primarily by stock-specific considerations, as opposed to style or sector allocations – we think this could be difficult to achieve in such an unusual market and economic environment. In the round, we think that falling markets and/or rising disinflation or deflation risks would likely be a tailwind to relative returns, if not to absolute returns, at this time. Ciaran’s focus on non-cyclical companies and cautious approach to company balance sheets has historically led IVI to do relatively well in weak economic periods.

With an upcoming continuation vote resulting from the persistent discount, there appears to be an increasing determination from the board to address this issue for shareholders, but there has been no attempt to remedy this through buybacks as yet.