The top-performing income trust looking to double its assets


Launched in 1999, the Chelverton Small Companies Dividend trust has returned 851 per cent compared to the UK equity income sector average of 218 per cent. This ranks it first in its peer group over that timeframe according to FE data, but it has not fared so well in attracting assets.

With £56m in assets under management, this is a bone of contention for lead manager David Horner.

Horner says: “This is what hacks me off. We don’t make the best performance tables because of our size but we beat all of the equity income funds.

“At £100m people put their money into a fund. Our dream scenario is to take it to £100m. For the first 17 years of running the company I was under the misapprehension that if you build it, people will come. But you have got to tell people about it.

“It would be brilliant to raise 30 or 40 million ordinary shares by January. But we will only issue shares at a premium. There is no capital dilution and no shares dilution.”


The fund, which is currently on a discount of 1.3 per cent, launched as a split capital investment trust; one of around 130 much-maligned vehicles that were caught up in a scandal in 2000 when many such trusts geared up irresponsibly and consequently lost investors money to the tune of around £700m.

However, Horner says: “We were one of the good guys”.

By 2012 Horner says zero dividend preference shares – a method of gearing whereby the trust issues shares to investors on the promise of a fixed level of capital growth by a set date – had rehabilitated themselves. The trust issued a zero in 2012 that expires in January 2018, equivalent to 4 per cent of the trust.

“There is so much demand for zeros, we will put more in,” Horner says. In January 2018 we will offer a rollover option into new zeros.”

What’s in a name?

Horner admits the trust’s name may be misleading for potential investors.

“Everyone thinks it is a growth fund because it has small companies in the title, but it is absolutely an income fund. Unlike every other income trust, we don’t invest in the FTSE 100. If companies are promoted to the FTSE 100 we have to sell them.

“We invest in the bottom 10 per cent of the stockmarket. Over the long run the best parts of the market are smaller companies and value. We have taken dividend stocks as a proxy for value.”

The trust has a historic yield of 4.3 per cent and pays a quarterly dividend that aims to beat inflation over the medium to long term.

Horner says the trust has the highest dividend cover among its peers in the UK equity income trust sector at 1.73x compared to the 0.85x of the sector average, while also boasting the least crossover in terms of holdings among its peers. The trust has a crossover of 6.9 per cent compared to the 25.8 per cent sector average, according to Chelverton.

He says: “We have our dividends planned to 2024, and I know I can do that.”

Small but mighty

Chelverton’s ethos is the mid and small-cap income areas of the UK market are overlooked by both brokers and fellow small and mid-cap managers, with the former not incentivised to research the “dull but worthy” companies the trust invests in and fellow managers focusing on the growth aspects.

Around 80 per cent of the fund is invested in companies with a market cap of sub £500m while overall there are 72 holdings in the trust for diversification purposes (with a minimum of 50) and no single company is allowed to provide more than 5 per cent of the trust’s income. The top 10 positions account for 21 per cent of the portfolio.

Holdings in the trust fall into three buckets. There are the companies that yield around 7-8 per cent where investors are effectively being paid to wait for a turnaround story; companies that sit in an unpopular sector but that still offer a dividend or 4-5 per cent; and the dependable companies, also yielding 4-5 per cent, which are reasonable value and likely to double in value over five years. If a company’s yield drops below 2 per cent, it is sold.

Horner says: “We only need six to eight new ideas a year. We hold companies for four to five years and our annual turnover is 20-25 per cent. Often we buy companies from growth managers and then two years later sell them back again.”

Brexit is last year’s news

Horner is sanguine on the outlook for the UK, with the bulk of the trust – 73 per cent – invested in the UK where he says smaller companies are brushing off Brexit concerns.

“When we knew there was going to be a referendum we asked companies how they thought they would be affected, and over 90 per cent said it wouldn’t make a difference. This calendar year they are saying it’s last year’s news.

“If the UK grows at 2 per cent then the average company is fine.”

Horner’s main issue at the moment is funding the positions he wants to bring into the trust; he says he could have up to around 85 holdings.

“My problem is I only have £11,615 cash in the fund and there is loads I want to buy. I run the portfolio very tightly, so there is generally no cash. Cash is yielding 0.1 per cent whereas I can buy shares yielding 7 per cent. But my objective is to be fully invested all the time.”

Over five years the trust has returned 237 per cent compared to the 80 per cent UK equity income sector average, according to FE data.