An update from our co-managers, Georgina Cooper and Ben Ritchie
In this podcast we are joined by Ben Ritchie and Georgina Cooper, co-managers of Dunedin Income Growth Investment Trust. They give their thoughts on UK markets in the post restart environment, and discuss how the Trust has evolved over the past six months.
Recorded on 11 October 2021.
Discrete performance (%)
Total return; NAV to NAV, net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: Aberdeen Asset Managers Limited, Lipper and Morningstar. Past performance is not a guide to future results.
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Cherry Reynard: Hello and welcome to the latest abrdn Investment Trust podcast. I'm Cherry Reynard. Today I'm talking to Ben Ritchie and Georgina Cooper, managers on the Dunedin Income Growth Trust. We'll be discussing UK markets in the post restart environment, and how they're positioned in the Trust today. Welcome, Ben, welcome, Georgina.
Ben, I wonder if we can start with an update on the Trust over the last six months.
Ben Ritchie: Thanks, Cherry. It's been a pretty eventful six months, I think overall for the Trust, both in terms of how markets have developed, how the Trust has developed. And I think importantly, how the Trust has evolved its strategy through this period as well. And it might be worth starting with, with the last point first, which is that I think the most important thing really for the longer-term positioning of the Trust is that we achieved approval to adopt sustainable and responsible investment principles as part of our investment objective from shareholders during the first part of the year. And I think that's an important action in terms of positioning the Trust for the longer term, it certainly puts us, we believe in a better position to deliver risk adjusted returns over the longer term. And we think it does differentiate the Trust in what is a competitive field as well. So, we think those things are quite important.
In terms of the portfolio itself, we think we've done an okay job during the first part of this year. And I think you always need to see these things in context. So, we have lagged the wider market a little bit. But I think you need to look back and see that, you know, we managed to prove to be very resilient during 2020. And that built on a good year, in 2019. And a number of years, we've delivered it consistently solid investment performance. And I think having been very resilient during what were some pretty choppy and volatile times, I think keeping up more or less with what have been strong markets during the first part of this year, is a, is a reasonable outcome, although we are always striving to do better than that.
And in terms of the portfolio underlying, it's really been a focus on continuing to execute our strategy, which is to focus the portfolio down, concentrate our capital into our best ideas, and look to maintain that balance of income today, and growth of both income and capital over the medium to longer term. It's a fine balance, it's a difficult, I think, thing to be able to get that mix, right. But we've continued to focus on delivering that during the first part of this year. And I think overall, the portfolio today is in pretty good shape, a resilient portfolio capable of managing through some tricky times if they happen to come through, and also of participating, if we are going to see more buoyant markets ahead. And I think that's really, I think the important thing to take away from here going forward is very much an ambition of trying to position ourselves to be quite well balanced. We don't want to be overly positioned for any one outcome, partly because we believe that the range of outcomes that sits in front of us is fairly, is fairly finely balanced at this point.
Cherry: Okay, thanks, Ben. Georgina, I wonder if we could turn to you to talk a little bit about what's been happening with dividends over the past six months?
Georgina Copper: Yeah, sure. Well, I mean, I think it's fair to say that the pitch has been much, much healthier than what we saw last year. And, you know, by and large, we've definitely seen a good recovery in dividends, both, as we've seen sort of businesses learn to deal a little bit better with the disruptions from COVID. But also, just generally the visibility that that companies have on the on their outlook, it has certainly improved.
And, you know, I'd say now, I think all companies within our portfolio have restored a dividend of some sort. And actually, quite a few have probably distributed additional capital as they sort of recovered from income that they held back last year. And yeah, actually, I think if we look at our sort of forecast into next year, I think it's about 80% of our portfolio that we now think will increase their dividend to pre pandemic levels. So yeah, the picture is certainly looking a lot rosier than it did last year. And I think it probably is worth noting, though, that you'll probably recall that our income performance last year was pretty robust, much more resilient than what we saw from both the market and a lot of our peers. So, whilst we're sort of confident that the income generation that will have this year will be strong, it probably will lag the market a little bit, but continue to be very supportive of our of our dividend policy.
Cherry: Okay, thanks, Georgina. And, Ben, where are you finding long term dividend growth potential. I know that's a, that's a real priority for the trust.
Ben: I think the opportunities for us are as broad as they have been, for a very long time, and I think one of the great strengths of abrdn's equity capability is its fundamental research and the breadth of that. And we're able to generate ideas from across the market cap spectrum in the UK, and also to source ideas from our European team as well. And that gives us a really broad range of options to look at. So, I think if anything, the competition for capital in the portfolio is as high as it has been, I think at any time in the last four or five years, which I think overall is good news.
And in terms of sort of specific areas, I think it's a combination of I would say, recovery, and then also continuity. So, there are some companies in the continuity camp that have continued to deliver very solid consistent results throughout this time period. So, think about a business like Croda, that makes a speciality additives for a wide range of industries, it's a high margin, relatively high growth business, Croda has, has sort of sailed through the volatility of the last couple of years, and continues to do very well and is moving its dividends ahead at a nice rate in line with its earnings.
On the other hand, we've got companies which have cut dividends, or didn't pay dividends in 2020, and who've come back to the dividend paying list, and in some cases, come back with a vengeance. So, you know, we've seen companies like close brothers, who reported results this morning, very strong results this morning, again, opting not to pay a dividend during the first part of 2020, but actually, now again, really looking to move dividends ahead at a nice pace.
And we could say something similar around someone like Marshall's the building materials company, again, you know, a business which opted not to pay a dividend during part of 2020, but where business is actually performing extremely strongly into 2021. And we're seeing a very, you know, good catch up in terms of their, in terms of their distribution. So, from the Trust perspective, you know, having sort of, I think, navigated the challenges of, of 2020 pretty well, we're benefiting both from some rebound in companies that sort of paid a bit less last year, and also, from solid continuity of delivery from our from our core holdings. And I think on Georgina’s point, we're not going to see the kind of dividend growth in 2021 that some of our peer trust will do. But equally, we only saw around a 10% hit to income last year, and across the board, you know, there were some very significant hits. So, we see it more as in just continuing to deliver what we've been doing over recent years. And as I say, I think there's a good range of opportunities, both for income and capital across the board at the moment, which is, which is interesting.
Cherry: Great, and Georgina, Ben mentioned, the incorporation of ESG metrics, earlier. I wonder if you can talk about the extent to which that's changed the portfolio, whether it's, you know, seen you exit certain positions or, or move into new ones.
Georgina: So, I mean, there were certainly a handful of names that we mentioned, when we were pitching the idea of this new screen that would no longer meet some of our negative criteria.
So, some of the criteria included, no longer investing in tobacco, no longer investing in companies that had exposure to thermal coal, and a lot of our screens around those that have high carbon intensity. So, there was a handful of names within our portfolio that no longer fit that criteria, including, say British American Tobacco being an obvious one and BHP Billington and National Grid for the carbon intensity of their generation assets in the US. But it was a fairly small number of names that we had to actually exit from that those criteria. They were however, quite high yielding names. So, we were conscious of trying to replace that yield. And we did that partially through adding some of our existing high conviction names that did have a decent yield including, Scottish and Southern energy, Diageo.
But as Ben mentioned, you know, we have that option to invest overseas. So, we utilised some of our exposure there to invest in some new interesting names, for example, finished bank Nordea and commercial vehicle manufacturer Volvo.
And then aside from that, you know, we had a conscious mind of keeping balance within the portfolio, but there were a few sort of obvious changes that we felt would work so we exited something like Countryside which has had good relative performance but still isn't paying a dividend and chose to replace that with Persimmon, which still gives us that nice exposure to the housing market but Persimmon does have a much more attractive dividend policy, which is well underpinned by its strong cash generation and robust balance sheets, so gave us that ability to keep that income piece strong without really disrupting the overall composition of the portfolio.
So overall, when I sort of think about what does the portfolio look like, now, with these changes, I think there has been a slight increase in financials, which has offset the sort of obvious reduction we've seen in some of the more commodity driven stocks. And we have, as I said, also taken advantage of that ability to invest overseas. And so that's probably come up slightly in terms of the percentage that we have in our European holdings. But overall, I do think, you know, we've kept a really good balance within the portfolio. And actually, if anything, I'd say the outlook on dividend security is now probably stronger with these new holdings than those that we've exited.
Cherry: Okay, thanks. And Ben, I wonder if you could talk a bit more about those overseas holdings. So, to what extent are you using that ability to invest outside the UK at the moment? And, and are there any - apart but apart from the ones Georgina just mentioned - are there any notable holdings amongst those overseas positions?
Yeah, so we sort of really kind of find sort of three angles to our overseas exposure. So I think the first one is, you know, able to diversify high yielding sectors, or give us access to high yielding companies which can allow us to broaden out our income generation so that's, that's an important area and Georgina has touched on a couple of companies, Nordea and Volvo, where, you know, those have been quite deliberate investments to seek out good quality, higher yielding opportunities in the European context.
Then we're also really looking to see can we find exposure to sectors or segments which we can't find in the UK and I think certainly, some of our more growth orientated investments overseas, you know, generally focusing a little bit more on the on the technology side, which is where perhaps, you know, it's a bit more challenging to find interesting ideas within the UK market.
And then the other angle is thinking around companies that are just frankly, you know, fantastic businesses which we want to own and this gives us the opportunity to be able to do that. So perhaps something like Novo Nordisk the Danish insulin, diabetes, pharmaceutical focus company, it's a world class business, fantastic long term opportunities, it's a great company to have in the portfolio. And perhaps in terms of some of the sort of technology type things we need. We've got companies like Edenred, which is a French payments company, companies like Ubisoft, which is a computer games, manufacturer, those sorts of things as well.
So, I think it allows us to round out the portfolio and help to give us a better balance. And I think that's, that's quite important, really, because, you know, we're targeting to have a high active share near the active share portfolios over 80% today, which is a pretty good level for any UK fund, particularly income one, it also allows us to be able to expand our positioning in the sort of mid cap, mid side part of the market, which again, where we see, you know, opportunities as well. And again, I think it's important for us to keep that balance of, of exposures and not be too weighted to the outcome of any one sort of particular scenario as well, particularly at this point. So that I think is quite helpful in terms of what we get from our from our overseas holdings
Cherry: Thanks. And Georgina, is, is the concentration of UK dividends still a problem? I mean, presumably the offshore holdings help with that a little bit. But are there other things you're doing in the portfolio to stop that being an issue?
Georgina: Yeah, I mean, I definitely think you have seen a bit of concentration in dividends, certainly this year, as Ben mentioned, you've seen a lot of names sort of catch up on the dividend payments and, and that's probably seen concentration in some names that, in particular, have given those large specials. So Rio Tinto, for example, this year was, I think, a large contributor to income for a lot of funds within the income space.
But I think going forward that should start to normalise. And actually, if I look at sort of our top 10 holdings, and the income that they generate for the portfolio, its probably not actually that dissimilar to what we've seen in previous years. I think that might be a digit specific thing in the sense that, as you probably recall, over the last five years, we've been moving away from our reliance on those high yielders with low-income growth. So, we have that balanced sort of focus on generating both income and income growth for the future as well as capital growth.
So, I think the fact that we aren't reliant on those high yielders probably serves us well, in a market where you are seeing some concentration that amongst those high yielders. You know, I think the fact that we have that full waterfront coverage of the FTSE 350 really does help, because it gives us the ability to really search out those best ideas in the market that can get that balance. And I think it also, you know, it gives us good exposure to some of those mid cap names, which over the longer term, I think will be key to maintaining that diversification of dividends, because they may today not be the high yielders that we see within the market, but I think they're the ones that have the real potential to grow the dividend over time and to be sort of the real high yield as of the of the future.
Cherry: Ben, is there any sense that UK dividends have kind of built back better, so you know, improve dividend cover improve their payout ratios?
Ben: I think a number of companies have taken the opportunity during the last 18 months to sort of reassess their dividend payment capacity and what it means for their business. And I think it had been, I think, a problem for the market. But in the past, I think investors have become quite dependent on the dividends from a number of large UK corporates and insisted on those dividends being delivered, I think, to the detriment of the businesses on an underlying basis - not allowing them to fully invest perhaps in the capital opportunities or the M&A opportunities that might have been available to them and I think that's a slightly problematic situation
This may well perhaps give the opportunity for that to change somewhat, and companies might be able to better balance their investment opportunities going forward. And I think having a broader range of companies to be able to choose from, I think will give you know investors about the freedom to allow businesses to recalibrate their dividend policies.
But if you think about some of the larger companies during this period, you know, the big oil companies have all cut their dividends. You know, the mining companies have adopted variable payout ratios, Glaxo will be reducing its dividend this year, the banks were held back from paying dividends last year. So, amongst those bigger paying companies there've been, there've been some quite big reductions. And hopefully that gives those businesses a bit more opportunity to be more flexible and considered in terms of that distribution strategies going forward and better balance, Capex, internal investment, M&A, and shareholder returns.
Cherry: Okay, thanks. Now, if we could just sort of round off with a look at kind of risks and opportunities over the next kind of six months or so, Georgina, I'll give you the risk portion. So what are your greatest concerns over the next few months?
I mean, I definitely think it's sort of it's that piece around earnings outlook, you've already seen sort of a shift in the market caution around how sustainable the strong earnings recovery saw from the beginning of the year is into the second half of the year. And I think with that there's there is probably more pressure on earnings, as we've seen this significant rise in supply chain disruption and sentiment around inflation, in particular, sort of how long that piece lasts and the implications that it has on businesses and how long it affects that that earnings potential. You know, I don't think our companies are immune to that, they are certainly exposed to some of the logistic issues that we’ve seen - the labour shortages, some of the raw material cost inflation. But I mean, I think the fact that we do focus on those longer term quality names that generally have strong pricing power and flexibility within their business models, does help them mitigate those issues - so while not immune, I do think that it's perhaps less a risk than some other parts of the market where we, where we don't invest.
And so yeah, I think it's mainly just sort of, sort of how sustainable that that growth really is. But generally, I think that's sort of quite a short term outlook. And, and as you know, we are very sort of long term in our thinking. And I think we do remain confident that the holdings that we have, have strong structural growth drivers that over that, that medium term, should be able to continue to underpin our, underpin our strategy and you know, deliver that income and capital growth that we, that we expect to sort of keep in line with the strategy of this Trust.
Cherry: Great. Thanks. And Ben, just to you for some sort of concluding remarks on how you're seeing markets today and the outlook over the next six months or so.
Ben: Yeh, I think to echo Georgina's comments earlier, it's an interesting period, the headwinds are building up to some degree and I think, when we look at the portfolio, and we look at the companies in it, and I've used this word a lot, but I think it's important, we do think about this balance of the portfolio resilience, but also, participation on the upside. When we look at the company level, I think we're pretty happy, generally speaking, businesses are performing very well and we've just produced our sort of outlook for next year and broadly speaking, you know, as Georgina said earlier, our view of income security for 2021/22 looks as good as it ever has done.
But there are headwinds building, you know, we can think – as Georgina has talked about - inflationary cost pressures coming through, that's certainly an element, we're seeing a slowdown in China, and that will have ripple effects through the rest of the global economy. We're also getting to the point where government support is starting to be withdrawn. And in the UK, we'll see an end to furlough, but also potentially we've got tax increases coming in 2022. And at the same time, we're also annualising very strong growth numbers. So, the sort of functional numbers are starting to come into play. And at the same time, you've got policymakers thinking about how are they going to withdraw some of the extraordinary stimulus that's been provided during the crisis period, potentially talking about raising interest rates. And I think that was sort of captured a bit with Andrew Bailey talking the other evening, which is that raising interest rates won't increase the supply of semiconductor chips, I think they're aware that some of these supply challenges aren't necessarily going to be fixed by raising interest rates. And so it's an interesting balance, because we are at a point where perhaps, momentum is starting to slow, at the same time as policymakers are thinking about withdrawing stimulus - at a time when there are also a number of other challenges around supply chains, logistics, costs, and so forth that are out there. So, it's an interesting period. But I think to bring all that back, you know, while there may be some volatility around that, we still think that our portfolio is pretty well positioned, you know, kind of regardless of what happens, there are some scenarios where things were better for us, somewhere, it would be worse. But we think overall, we are setting ourselves up to deliver relatively resilient income growth over the medium to long term. And we feel pretty good about how we're positioned for that, although I think if we were thinking around the headwinds that our companies and the markets might face, there were a few more of them around today than they were six months ago.
Cherry: Great. Okay, thank you, Ben, thank you, Georgina, for your time today and those insights. You can find out more about the Trust at www.dunedinincomegrowth.co.uk and thank you all for tuning in.
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