The Dunedin Income Growth investment trust is moving to a total return target under new lead manager Ben Ritchie’s watch.
Having outperformed in 2016 thanks to the trust’s bias to large-cap companies with overseas operations – which were boosted by the drop in sterling following the Brexit vote – Ritchie says the trust now has the flexibility to focus more on capital growth by investing in lower-yielding, faster growing businesses.
“We have had the opportunity to engage in discussion with the board on future strategies, and focus more on capital growth,” Ritchie says.
“Our dividend income has gone up significantly as result of the decline in sterling and we have enjoyed a windfall as a result.
“We have the flexibility to not be tied to high-yielding businesses that don’t have growth characteristics. The trust has 0.8x one year’s dividend in reserve, so we have some flexibility in having to cover the dividend from earned income. Our focus is on moving the trust to a total return mandate, rather than the main attraction being high yield.”
Ritchie, who was promoted to lead manager of the £371m trust in September, having been co-manager for six years, says this has enabled him to focus more on small and mid caps.
The trust’s exposure to small and mid caps has doubled over the past three years, rising from 12 per cent at the end of 2013 to a weighting of about 24 per cent today. Ritchie says there is “no reason” this couldn’t increase to 40 per cent in the next 18 to 24 months. This year Ritchie bought into UK life insurance company Chesnara (1.25 per cent), a UK life insurance company that consolidates closed life companies. The firm recently bought Legal & General’s Dutch business and Ritchie says it “has good potential for growth” with a yield of 6 per cent.
The investment strategy of the trust is to pay sensible prices for high quality companies. It is benchmark agnostic and aims to strike the balance between focusing on meaningful positions and being sufficiently diversified. As such, positions tend to be between 1 and 5 per cent. “We are long term bottom up stockpickers; we take a five-to 10 year view on companies and screen by company visits. We never invest in a company unless we have met the management team. Once we have invested, we meet with the company twice a year. We do a lot of due diligence.”
The trust typically has between 40 and 60 holdings, with the current number in the high 40s. There is scope to invest overseas and Ritchie is using 13 per cent of the 20 per cent limit at the moment.
Ritchie says: “There are interesting opportunities overseas. Traditionally we focus on diversifying the big income sectors with overseas exposure. For example, we have 3.5 per cent in Total.”
He also uses the overseas contingent to invest in businesses not available in the UK, such as Spanish software firm Amadeus, which is used in the airline industry.
“Amadeus has a strong recurring business model and its customers are tied in to long-term contracts. It has very high margins, good returns and high cash flow. It is a high quality business and it can grow its dividend over the long run. We currently hold 0.5 per cent, and we would like to build this up.”
Over one year the trust has returned 24.3 per cent against the 13.5 per cent average of the UK Equity Income sector, according to FE data. The dividend yield is 4.6 per cent today, Ritchie says, “close to a 20 per cent premium to the FTSE All Share”, with income paid out on a quarterly basis.