A global outlook podcast
In this podcast we are joined by abrdn's economist Luke Bartholomew as well as Ben Ritchie, co-manager of Dunedin Income Growth Investment Trust, Bruce Stout, manager of Murray International Trust, and James Thom, manager of Aberdeen New Dawn Investment Trust.
Luke gives his thoughts on the extraordinary twelve months we've just witnessed, while our respective investment managers engage in some crystal ball gazing on what we might expect in 2021.
Recorded on 23 November 2020.
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Interviewer: Hello. Welcome to the latest in the abrdn Investment Trusts podcast series that we have for our panel today, our economist Luke Bartholomew will be giving his thoughts on the extraordinary 12 months we've just witnessed, while fund managers, Ben Ritchie, Bruce Stout and James Thom will be doing some crystal ball gazing on what we can expect in 2021. Welcome everybody. And now, Luke, turning to you first, nobody needs reminding that it's been a very unusual year. And I wonder if you can talk us through some of the highlights and low lights?
Luke: Sure. I think you're right, that it's been what to say at the very least unusual year. It's one of those years where all the cliches that we use often in this industry, extraordinary historical unprecedented for one. Absolutely true and on the nose. And in that context, I don't think it is too difficult to think of some lowlights; the absolutely astonishing collapse in economic activity that we saw in the first half of the year 25% or so contraction. In the UK, for example, one has to go back hundreds of years of economic history to find something comparable. And of course, you know, that economic costs really significantly understates the true welfare costs ,not just the public health consequences, and the tragic loss of life, but also the shutting down of opportunities for so many people. The fact that people weren't able to go out and live their normal lives, the huge increase in unemployment that we saw in the US less so in the UK, and the rest of Europe as different policies were put in place. But yeah, I think the economic costs were just absolutely astronomical. And really, as I say, I mean, truly are cliche inducing. So I mean, I think there are some positives, and if not positive, then at least things to give one some hope. First of all, how well policymakers came together in late March, early April, when it looked like not only were we facing a public health crisis, but also perhaps the financial market crisis, monetary and fiscal policymakers were able to largely avert that. And on the whole they have put in place policies that have supported cash flow and income through this extraordinary business. Now, no doubt there will be some long term consequences from that, but they have certainly diminished some of the short term costs that we might have faced. And then the most obvious highlight, I suppose, is the good news that we've had on the vaccine evidence, that if enough capital and human engineering, it is deployed in one direction, and we are capable of quite extraordinary things. And it looks like as we speak today, that there is light at the end of the tunnel as it comes to the vaccine. And I think perhaps that does speak positively, for our ability to solve user problems as well.
Interviewer: And with potential normality ahead, do you still think that the pandemic will permanently change some aspects of the global economy?
Luke: Yes, I are expecting the economy to end up being permanently smaller than it otherwise would have been. So there is some permanent loss of economic activity. And I don't think that's too difficult to understand in terms of the psychological scarring, which leads to reduced savings, reduced investment in various bits of sort of stranded capital that have come out from this crisis that are no longer quite as economically viable as though as they once were, the fact that a whole bunch of investment streams are probably not going to go ahead over the last year in a way that they otherwise would have done weighing on future growth. The scarring to the labor market that we might see from the periods of unemployment and inactivity. But beyond that, I think it's also possible to see other structural changes as well. It's hard to believe that we would have gone through this, and it won't have changes in some fundamental ways. The most obvious, I guess, is working from home, I suspect we'll be doing a fair bit more of that in the future. Perhaps our travel patterns will change, perhaps where we live and why we live in those places. Those will also change as well, particularly if we do end up working from home much more. And I guess the great imponderable from all of this is to what extent the capacity that we’ve shown to make great sacrifices when necessary , to have extraordinary innovation for the state to mobilise resources, whether that speaks to our capacity to deal with problems, like climate change, and what it might mean about how we go about tackling that in the future.
Interviewer: Yeah, and what about a final verdict on the health of the global economy today? Are you reasonably optimistic looking into 2021?
Luke: So I think right now, the way we frame it is, second wave versus the vaccine for the short term outlook is once again, looking pretty dark. I think the UK and Europe are only now only going to avoid a technical recession of two quarters of negative growth, it looks like key for this year is going to be a quite large contraction. And then next year, we're only expecting a very modest growth. But after that, I think for the second half of next year, we could find ourselves growing quite robustly. One of the things that we learned this summer is that when lockdown restrictions are lifted, in the short term, you get a pretty large boost from growth. And as lockdown measures get wound down in the second half of next year, the vaccine allows us to return to some kind of quote, unquote, normality, that is a period where we could see quite rapid growth and potentially a return to something like the old normal, but I suppose one final cautionary thought to end on is let's remember what that normal is that we're going back to it was already a world of pretty disappointing, sluggish growth, a world of quite low inflation with central bankers and other policymakers struggling to get the targets consistent inflation, and a world of very, very low interest rates. And to the extent to which we are going back to, quote unquote, normal. I think that is the normal we are going back to.
Interviewer: Okay, that's great. Thank you, Luke. If we could turn to you now, Bruce, and ask the same question. How optimistic Are you looking out over the next 12 months?
Bruce: Well it's always difficult to predict, isn't it? and optimism is not something I think that familiar to the average Scottish psyche. So I'll try and be realistic rather than optimistic with what we've got in front of us. And, I mean, undoubtedly, this has been an extraordinary period. I can't remember one in living memory, who has life and livelihoods and health and wealth, were all threatened at the same time. I suspects as we've heard before, that, for many nations and individuals, life will be a bit awkward, and we have changed, I guess. And for investors, that means an unfamiliar landscape, I suppose relative to the past, which may ultimately unfold. However, I think, as always, it be very presumptuous to extrapolate the events and investment teams of this year, because it was so unusual, as some sort of new normal because for many the new normal, is less about choice, just simply a reality. So I think as the world returns to something like it was before, then, I suppose we are quite optimistic, because we've seen such a gulf between a narrow number of stocks and themes that have performed this year, and particularly in e-commerce and technology. But on the other side of that, people totally ignoring things like oil and gas and commodities, and transport, tourism, etc. As if we're never going to need those again, really all sorts of cyclical assets and you can add to that Emerging markets and Asia as well. So there's a huge still a huge valuation gap between a small number of businesses that have done well and a large number of good quality companies that have lagged, and that valuation gap looks quite interesting for next year.
Interviewer: And so while the pandemic has reshaped the prospect for individual industries, you think that might have been overdone, a bit, that actually it is not it's not going to be as profound a change as markets have, have presumed?
Bruce: Yes I mean, we've gone and been very, very active this year. And looking at all the businesses that we own. When I see all the businesses, it's a concentrated portfolio, Murray International is only 50 companies, but we wanted to look at them, again, with a sort of fresh pair of eyes in light of what's been happening to see if things have really changed, because, I mean, there's a lot of talk about spare capacity out there. But a lot of the spare capacity may be obsolete capacity. Now, we don't know in which case, and some companies that do have good production services may be in a very advantageous position to raise prices and rebuild the balance sheets to ensure for, for some businesses like long haul travel, and the impact that it has on jet engines, or high street retailing, maybe the whole cash versus cashless society has changed. But for a lot of other businesses, they will go back to some semblance of normality, because they add essential services and commodities for people in their lives. So it's towards those types of growth companies that we're looking at the moment because I think that's where the best opportunities are, particularly we see in Asia and emerging markets, because if there's one thing that that looks as if it's going to evolve from this, there's going to be a legacy of huge public sector debt, particularly in the developed world. And that has to be paid off over a long period of time, which will have implications for taxation on both the individual level and the corporate level, and just a general constraint on growth. Whereas, particularly in Asia, in the developing world, we don't have the same fiscal imbalances, there's much more flexibility to still have fiscal policy. And there will be such a legacy as far as we can see. So that is a change, but it's a positive change for those areas.
Interviewer: And you mentioned a couple there, but I wonder if you could just talk a bit about the key themes running through the portfolio as we move next year?
Bruce: There are one or two key themes. I think the issue that that we've had this year is a real concentration of markets, particularly in technology and e-commerce. And, as markets have got narrower and narrower, there has been less focus on diversification and that that is one of the themes of Murray International we have over 25 different countries and about 60 different businesses. So it is a very diversified International Trust, that gives us a broad exposure for capital growth and for income growth. But also, the other main theme is that we are mainly focused on Asia and the Emerging Markets world with over 50% of the portfolio in Asia and the Emerging Markets world because that's where we feel going forward the best relative growth opportunities are. So the next five to 10 years at least, plus also remember that there will be a big legacy from the pandemic this year in terms of huge public sector debt that's been racked up in the developed world. And it has to be paid for, I guess, in higher taxes, both for individuals and for corporations at some point. So there is a drag for growth prospects in the developed world that just isn't there in Asia and emerging markets to the same extent. So that tailwind should be beneficial as well, as we go forward.
Interviewer: Great. Okay. Thank you, Bruce. And, James, coming to you, though, as Bruce mentioned, that Asia appear to have emerged stronger from the pandemic. I wonder if you could give your verdict on Asia's response and the economic recovery, you've seen since?
James: Yes, I'd largely agree with Bruce, although it does feel a little premature, perhaps delivering a verdict at this stage, because it's still, you know, we're still very much in the midst of the pandemic, and, and working our way through it. But having said that, I think, absolutely, Asia has done in general a commendable job, I think in the way in which they responded to the pandemic and managed their way through it. So much so now that we have several countries out here that will post positive GDP growth this year. So despite the very large hit to GDP in the first quarter, and first half of the year, given the their ability to contain the virus, we're now seeing economic activity recover quite quickly. And in particular, in China, the big economy here, but also Taiwan, Vietnam, I think are all due to deliver positive growth this year, which is quite a stark contrast to much of the rest of the world, and I think is a testament to the really very rapid and focused response that these countries had to containing the pandemic, locking down the borders, implementing an effective track and trace capability and obviously supporting economies with the stimulus when needed. So I think, overall, it is looking certainly relative to the rest of the world, pretty encouraging. Here, obviously, there remains the risk of second or even third wave. And we are continuing to see that and it's by no means a panacea. There are several countries here that are still battling through that that's the first wave, India stands out in particular, as a country that has seen very significant numbers of cases. But even there, fortunately, we're now seeing case numbers peak, and hopefully, it will continue to trend down those play that kind of second wave risk does remain.
Interviewer: Okay, and how are you positioning the Aberdeen New Dawn Investment Trust for the year ahead?
James: Well, the focus as ever remains on quality companies. So whilst growth is recovering, it is still pretty turbulent and an uncertain environment out there. So it feels prudent still to be invested in market leading companies with strong balance sheets and experienced management teams. So that's very much the focus overall. Having said that, we continue to think about the structural kind of growth themes and stories out here. And despite all the doom and gloom, I think there remain many of these kind of structural growth trends here in in Asia as Bruce was alluding to. So you have continued rising wealth levels and urbanisation and all of that is thriving demands, basic products and services, as it has for decades already. And I think that will continue but there are a lot of other kind of newer, faster moving trends, where Asia is playing a kind of key role. So the tech sector is one and we've got in Aberdeen New Dawn a substantial waiting. They're both in the kind of hardware side of the sector. So semiconductors, for example, where we're seeing multiple new drivers emerging for demand there, whether it's continued demand for high powered computing, data centres, cloud services, 5G, artificial intelligence, I mean, it really is a whole range of new drivers there. So I think that remains an attractive long term story. We're continuing to see substantial innovation in the internet sector. And with many of the Asian companies leading the way there, I think there's plenty going on there and COVID, as it has for much of the rest of the world has been a catalyst for that sector. We continue to see that transition from offline to online. But then I think also, you know, in the green economy, there's plenty going on here in Asia, whether it's the shift to electric vehicles, or to renewable energy. And many of the countries here are coming up with quite ambitious targets. So I think that's providing interesting investment opportunities for a slightly longer term investment horizon.
Interviewer: And what extent would you say that the pandemic has fundamentally reshaped the outlook for Asian companies? Or do you believe like Bruce that this has gone too far, at times that people have been assuming a new normal? And perhaps it's not going to be that different after all?
James: Yes, it's so difficult really to have a clear view, at this point in time, in my personal opinion on working from home, my feeling is that we shouldn't yet be writing the obituary of office space and commercial real estate just yet. And I suspect tourism and travel will eventually rebound, though, admittedly, it may not get back to pre-COVID levels. But I think, that aside, certainly there are changes happening, as a consequence of this we have talked about the internet companies already and that has been a catalyst to moving consumption online. I think that that's very real and is permanent. We've got a number of IT services companies in that part of the world, and they're seeing their corporate clients, increasing their efforts to digitise processes and shift things to the cloud. And companies themselves, I think, are increasingly doing this, you know, we see it across the region, in an effort to, I guess, they've been forced to go to digital ways of working, but have found in many cases, that's a relatively effective way of working and cost efficient, were working. So it's been quite big cost reductions happening as a consequence of this. So I think there are, you know, a number of changes that, arguably could be positive for Asian companies. And we'll have to see how permanent those proved to be. But I think many of them will be structural.
Interviewer: Great. Okay. Thank you, James. Ben, let's turn to you now The Dunedin Income Growth Investment Trust invests across both the UK and Europe, perhaps Europe, can you see a better year ahead the stock markets in the region? And if so, you know, any particular hotspots, either regionally or sectorally?
Ben: Given everything that's happened in 2020, looking at the pan European index it is actually not too bad to be down mid single digit percentage. I think, given everything that's happened is a reasonable results. The UK has been a little bit weaker than that, overall. But I think given the ginormous economic impact that we saw earlier in the year from COVID, I think to have ended up with that outcome is reasonably okay. I think looking into next year, as Luke was sort of painting the picture, really, there's a combination of sort of near term economic weakness, which is likely to feed into some pressure on companies. But then you've got a combination of expected rebound, as we move into the second half of the year, perhaps into the second quarter. And then you've got the the rollout of of the vaccines, which I guess should support further growth. And I think that's the sort of environment where we would probably expect that investors will look through the near term weakness and look out to perhaps the more optimistic picture for economic growth, and certainly when you look at what consensus is expecting from an earnings perspective, then, you are probably looking for somewhere between 35 and 45% earnings growth next year, you know, that's probably likely to be supportive for the outlook for equities as well. Although, when you think about this year, we saw that 38% decline in Europe, and a bit more in the UK. And markets have not taken that too terribly overall. So we'll have to see that imbalance. But I think certainly, next year, looks like it might be a little bit better. But I think following on from what Bruce was saying, it's always hard to say how these things will develop really at the market level.
Interviewer: And I mean, the region has had valuations on it’s side. Is that still the case, are the valuations still pretty competitive compared with its global peers?
Ben: Yeah, I mean, I think they are. But I would always caution against reading too much into that. I mean, I think, you know, Europe as a market has been cheap for most of the last 20 years. So I'm not sure that's the new thing. And it's also generally been a bit of a disappointing place for investors at a global level, you know, the UK has been on a fairly significant discount to most other markets since Brexit, and again, that hasn't necessarily helped its performance. So I think it'll really comes back down to what we think companies can deliver, in terms of earnings and cash growth. And also the starting prices which we're paying for those businesses, so we still see plenty of opportunities at the company level across Europe and the UK. But we wouldn't be making a big play of the fact that the overall markets and necessarily cheaper than other ones in the world, because I also think when you actually look at details, there is some reasonable reasons why the UK might be cheaper, they have nothing to do with Brexit, but have a lot to do with big chunks of the index being in sectors, which traditionally always have relatively low valuation like banks or oil companies or mining, when you look at them on a PE basis. So you know, I think, optimistic at the company level, but we would be cautious a little bit on using valuation as the primary reason to be enthusiastic about those markets.
Interviewer: Okay, and how are you positioning the Dunedin Income Growth Trust for the year ahead?
Ben: So see, one of the things we've really focused on over the last couple of years is not putting all of our eggs in one particular outcome basket. So to go back to 2019, one of the things that we did there, as we approached the deadlines around Brexit deals, was not really having any great insight into how that would play out was just to make sure that we were quite balanced in terms of our positioning, to make sure that we had good domestic UK exposure, which is prosper in the case of a deal, but also have some good overseas companies, which continue to generate good returns, if we were to see a reasonable outcome. And I think we've tried to take that kind of approach where if we don't know, then why take in a big bets, either way. And I think that's much the same, really, as we look out into 2021. And we look at that, for the last few weeks, we've had the US presidential elections, we've had the development of vaccines, through both of those quite big events we managed to keep relative pace with what's been going on in the market, despite having proven to be pretty resilient for most of this year. So we see that as a sort of some degree of a good outturn in terms of positioning. And I think if we look into the year ahead, we want to be both resilient in tough market conditions, if we do see sentiment turned down for whatever reason, or the economy, not deliver what people expect. But equally, you know, we want to be able to participate in any available growth opportunities that might be there. So, you know, perhaps the segment where we might lag the most would be if we really do see the very, very distressed companies in the market perform incredibly strongly in 2021, that probably won't be particularly helpful for us. But otherwise, I think we feel pretty good about our outlook. And we put an interesting portfolio with a range of different companies operating in different economies, different geographies, different economic drivers. And I think that overall leaves us feeling quite confident that we're well positioned with a good bunch of companies, you know, almost regardless of what comes out of some sort of macro-economic or strategic political perspective.
Interviewer: Great. Okay. Thank you, Ben. And thank you everyone for those insights today. And thank you to our listeners for tuning in. And let's hope for a less eventful 2021. You can find out more about the full range of abrdn Investment Trusts www.invtrusts.co.uk and please do look out for future podcasts.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer investment recommendation or solicitation to deal in any of the investments of products mentioned herein does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of abrdn. The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates and provide no guarantee of future results.
An update from our co-managers, Georgina Cooper and Ben Ritchie
An update from our co-managers, Georgina Cooper and Ben Ritchie
In this podcast we are introduced to new co-manager of the Trust, Georgina Cooper. Georgina and her fellow co-manager Ben Ritchie explain how they will work together to build on the momentum of the last few years as well as looking at recent portfolio changes and discussing their thoughts about what the future might hold.
Recorded on Monday 28th September 2020
Discrete performance (%)
A Including current year revenue. 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.
Interviewer: Welcome to the latest in our abrdn Investment Trusts podcast series where we catch up with our investment trust managers to look at how Covid-19 is impacting their portfolios. Today, we welcome Ben Ritchie and Louise Kernohan, co-managers of the Dunedin Income Growth Investment Trust (DIGIT). Welcome.
Can we start by looking at the stock market landscape today? There's obviously been a meaningful rally from the very lows seen last month, but which areas have proved particularly resilient and which still look vulnerable? Ben, I'll put that to you first.
Ben Ritchie: Thanks very much Cherry. I think when we look at it overall, it's really quite a complex picture and the environment is as challenging today as it has been probably at any point in my career when we look at what's going on in terms of evolution of markets. I think the important things to remember are that whenever something terrible happens for the economy, whether it's going back to the financial crisis or whether it’s the effect of the virus today, is the future is always uncertain and we don't know what's going to happen and we have to work on the basis of the information which we have available to us. I think when we look at the portfolio today, we feel very well positioned and we think we're in companies that have, generally speaking, got pretty good prospects even if the near term is tough. Where companies are facing more pressure on earnings, they’ve generally got very strong balance sheets, good cash flows or good cash balance sheets which are supporting their businesses through this tough time. And then we've also got a reasonable percentage of the portfolio which is continuing to trade, not completely without effect, but continuing to trade relatively robustly. When we put that all together, we have had less exposure to some of the areas that have been hit pretty hard. I think that that makes us feel that we're reasonably positioned going forward and the areas that have been hit hard, funnily enough have not been that surprising really. I mean, be it areas like travel and leisure, aerospace and defense, the banking sector, which I guess is always going to end up picking up some of the credit tab for the issues that we face, and then oil and gas which has been weak on the back of the challenges there. All in all we’re relatively light in all of those areas and we’re overweight to areas where the prospects look a little rosier, and we've been positioned like that for quite a while. I think when we put that all together, it's tough but we’re cautiously optimistic really about the prospects of the portfolio from here.
Interviewer: And Louise, would you add anything to that?
Louise Kernohan: Yes, just to add, as Ben says, it's a very complex landscape and we've seen quite a wide dispersion of performances between sectors. So you'll have some sectors that have performed very robustly throughout this period so far. So key examples there would be the pharmaceutical sector, which is being held up by being defensive - people still need their medicines. And it's actually those characteristics which are the reasons why it's attractive for us to invest in with DIGIT, and we indeed have an overweight position to healthcare, so that's been a positive. You've seen some sectors where they saw a really sharp decline in March, but then we've seen a subsequent sharp recovery and that is actually perhaps not unfair. For example, the construction and house building industry, we have Countryside Properties, which is an industry where there's a structural supply demand and balance and the government will be keen for that to resume as soon as safely possible and that is possible for those industries to resume in some way, shape, or form.
So there are positives on the horizon there. And then you've seen some industries which suffered badly throughout and haven't seen a recovery where there's just more longer term structural issues at play. So as Ben said, good examples are airlines, aerospace industry, and tour operators, where the outlook is just much more opaque at the moment and challenging. And also banks and oil, which has the structural challenges where again, it's because of these reasons to start with as to why we are underweight those industries. So it's been a tough period, but thankfully for DIGIT, we have been well positioned coming into it.
Interviewer: Okay, and Ben, individual sectors aside, do you think that the measures taken by governments and central banks have largely brought the systemic threats under control?
Ben Ritchie: I think there's a couple of pieces to this really, which is I think first of all, you've got to look at the financial plumbing and it was pretty clear in the first half of March that that was starting to creak and that you were seeing a failure of trust between counterparties within the financial system, be that investment banks, retail banks, hedge funds, asset managers, insurance companies. That whole circle was starting to stop. And when that does happen, we know that the impact of that is extremely bad. But the good thing I think about that element of it is that the central banks and policy makers have had relatively recent experience of how to manage that, both in the financial crisis, and in the Eurozone crisis and they have acted very-very quickly and very-very aggressively to provide effectively cash to actors within that area to support that. So I think that sort of systemic crisis caused by collapsing of natural system, which I think certainly looked like a possibility a couple of months ago, has been taken off the table. I think that's good news. I think the bigger challenge though if we think about it in a wider context is if this is a sort of Lehman Brothers and main street type situation, how the policy makers set about addressing those challenges because that's a lot more complex. You know, you're not just dealing with a couple of hundred financial institutions, you're dealing with literally millions and millions and millions of small businesses and millions of consumers. That's quite tough. So I think from the positive side, I think that the financial system is being insulated and I suspect that policy makers and central banks can make sure that that doesn’t recur through the deployment of their cash flows. I think the bigger challenges are now coming on to how do we manage unemployment, how do we keep the real economy alive during a period of time when activity levels are going to be very, very depressed and that is just perhaps a more complex and more challenging prospect for governments and policy makers globally, particularly I would say in Europe and the U.S.
Interviewer: Louise, I know it's very early days, but I wonder if any of the feedback that you're getting from companies gives any sort of insight or clues into those longer term prospects for companies?
Louise Kernohan: Yes, I mean, when it comes to speaking to the companies and talking about trading trends, the company management really don't know much or any better than any of the rest of us really. I think all of us are feeling our way through here and it can be interesting to hear comparisons to previous downturns, for example, the financial crisis, which can be interesting. So it might be the case that demand slumped for six months, but snapped back quickly before so there's reason to think that it might do it again, but really, because this downturn is so different, being more high street footfall related than being a financial crisis, those comparisons aren't always even going to be valid. So on the trading front, there's not really a huge amount that management can give us insight on. But what there has been a lot focus on, talking to management, has been the factors that they can control. So the primary focus there has first and foremost been on the safety of staff and companies are doing the best that they can to operate the best they can under the current conditions. So with staff either working at home or working on site with strict social distancing. Another focus is on cost, so many of the companies are using the furlough scheme – that scheme is seeing substantial take-up. We’ve seen dividend cuts, and conversations moving onto liquidity. For example, how long can a company operate at this low level of activity without coming into liquidity problems? We're finding that most companies are actually doing a really good job with this. Survivability isn't an issue for the vast, vast majority of companies, and really the question has sort of moved on to now to how can companies operate in a prolonged period of social distancing. And thinking about the fact that social distancing wasn't even a concept for any of us even a few months ago and now whole businesses are having to adapt to that. How do you adapt to a world where say, your demand might be half of what it was previously because of social distancing, but your cost base might not be that flexible. So that's the sort of thing that we're talking to companies about and there's just a wide variety of answers to that. Some companies are more straightforward, others are much more complex and so really sort of taking it on a case by case basis.
Interviewer: You have made some changes to the portfolio over this period, I believe, including raising gearing to reinvest in certain areas. I wonder if you could talk a little about the changes you've made Ben?
Ben Ritchie: Yes, so we acted as markets were performing pretty aggressively during mid-March to raise some additional debt to invest. It wasn’t a huge amount, four million pounds, but it was sort of indicative of the fact that we did see some reasonable opportunities developing to put money to work. And the kind of companies we were buying were businesses which we thought still have pretty solid dividend pending prospects, but where the valuations looked more attractive. Things like SSE, Coca-Cola Hellenic, a Coca-Cola bottling company, but primarily operating in Europe, and Rio Tinto - all businesses which we felt would be solid companies which were then trading perhaps 25% to 30% cheaper than they had done. The timing as ever on that wasn’t perfect as markets continued to go down a little bit more over the course of the rest of March. But we've added again to things like Coca-Cola and SSE a second time and in recent times we've actually been looking to add to some new things as well. So we've taken advantage of a very significant decline in the share price of Intermediate Capital Group, which is an alternative asset manager to be able to build a small position there. We've done the same with Hannover Rueck taking advantage of our overseas capability to buy what we think is one of the world's best reinsurance companies at a pretty reasonable price at a time when the reinsurance markets look like they are poised for growth. We've also bought a stake effectively in the Chinese company Tencent through a Dutch listed company called Prosus, which owns a very large stake in Tencent and trades at a big discount to the value of its assets. So we've been quite active in terms of looking to add things to the portfolio during this period of time. Especially by our standards - we tend to take a fairly long term view, but there have been a few opportunities that are being thrown up by events.
Interviewer: Okay, Louise, how are you making the distinction between companies that are in temporary trouble and those where the outlook has fundamentally changed? Have you exited any positions on that basis?
Louise Kernohan: So that is really the key question for any investor right now - making that distinction between companies where this is a transient problem and where actually this is a longer term issue which fundamentally changes the value of the business. So ever since the start of this crisis, Ben and I have been fully focusing on that and thinking about the businesses. Not just about which ones will survive, I mean that is obviously key, but it's not just that, it’s about also which ones will not only survive, but which will come out in a stronger position. While none of us can predict the future, you can choose winning businesses within an industry that have structural advantages, good financial firepower, which leaves the business in the best possible position. So I mean, an example here would be Rightmove where clearly the UK housing market isn't moving at the moment. Rightmove’s customers, being the estate agents, are in an extremely challenging place, which is naturally going to affect Rightmove and it's easy to paint a bad near term scenario for them because their competitors are offering free services to their customers trying to steal what little business there is out there. But what’s important for Rightmove in terms of thinking about has the outlook fundamentally changed longer term? Well, the reality is that Rightmove’s network remains far, far superior to any of its peers. So, they can try and charge cheaper, but at the end of the day Rightmove’s customers want the website that has the most property on, and the most viewers and they’re head and shoulders above the rest. Very little can threaten that and they have a very strong balance sheet which allows them to not just be able to survive, but to be able to invest in their business and proposition through this period where competitors can't, and so that they come out stronger again. And you know, I don't think any of us are in any doubt that the housing market will start moving again at some point in the future. I don’t know how much or how soon, but people will still need to move houses. So, that's kind of how we've been thinking about focusing on the long term in that respect.
Interviewer: Okay. I wonder if we could also look at the income side. Louise, a lot of companies have been cutting dividends, and while I recognise the type of companies in which you invest may be more insulated from that, how are you managing that in the portfolio? Are you having to take the decision on, where a company has cut, whether you hold or whether you sell out?
Louise Kernohan: I think it's fair to say that this level of dividend cuts hasn't been in anybody's scenario planning. So I think the last time that I checked there were 41 companies in the FTSE-100 that have cut or suspended, and 96 in the FTSE-250. So this is - you know, unprecedented I think is an overused word at the moment, but I mean, it's the right word. So yes, it goes without saying that this is not an easy scenario. A positive for our situation is that our focus on high quality businesses, with, as we’ve spoken about, strong business models, resilient earnings, strong cash flows, strong balance sheets, has led us to start this in a strong position and we estimate that the level of income cuts for us is around 15% to 20%, which would be, I mean, it's moving around quite a lot, but it's less than half of the broader market. So, by not owning the UK banks, by only having minimal exposure to oil has been really helpful during this period. We also entered the year with almost a year's worth of dividend in reserve. So, we're in a strong position on that front. We've always generated some additional income, up to 10% from option writing and that will be helpful this year too. Also to remember that given our strategy that we've been implementing for the past few years of actively choosing to sell higher yielding companies such as the oil majors, which have high yields but low growth prospects, to reinvest in lower yielding companies with higher growth prospects - as part of that process we were planning to run with an uncovered dividend this year anyway. So, whilst the situation isn’t one of anybody's choosing, we started it in a very strong position, so sitting here today we're feeling that we're in a strong position. In terms of what we're not going to do - we're not going to start chasing yield. So, we're not knee jerk selling out of companies that have cut the dividend if we still believe in the long term prospects of that business, and we're not investing in companies that are still paying the dividend at the detriment to investing in the high quality standards that we always do.
Interviewer: Okay. Looking a bit longer term then, it seems clear that the economic growth will be harder to come by as we recover from the virus. You mentioned healthcare earlier, do you think it will be a case of finding pockets of structural growth?
Ben Ritchie: Yes, it's quite interesting actually, Louise and I were chatting the other day, and looking through the portfolio and we actually have more opportunities to deploy money than we have things that we want to sell at the moment. So, I think it’s a good, good position to be in. And we skipped through the portfolio and there wasn't really anything we wanted to sell which is always helpful. You need something to sell to be able to buy, but I think that focusing in on those opportunities is a positive for us at the moment and I think that's absolutely the case. I mean, healthcare is an obvious one in some ways, and we’re operating in an environment where a) that's a relatively stable business and b), there's likely to be more investment in it going forward, but actually when you look at our healthcare exposure, it is more sophisticated than just owning the big pharmaceutical companies. Louise in her other role as the pharmaceutical analyst on the UK team has made a great call on being very enthusiastic about Astra(Zeneca) and Glaxo(SmithKline) for much, much longer than the last few months. Over the last couple of years they've been really good investments for this particular portfolio, but we've also been able to benefit from exposure to companies like Genus, which helps with the production of food through its expertise in production of the sort of reproducing, reproduction capabilities for pigs and for cows. Things like Dechra, which again, is a veterinary science business. Something like Abcam, which is all about antibody production, owning things like Novo Nordisk, again taking advantage of our ability to invest overseas. So we do have that big healthcare exposure, but it's not just big pharma, it's also little businesses as well. And when we look across the picture, we see some interesting opportunities in a number of different end markets to be able to grow. But I think the point is, is that you do have to be very selective. You do have to be niche, but actually there are those potential opportunities out there and I think we are looking at a world going forward from this, and it may be a bit different with a sort of three to five year view, but I'm pretty sure in the near term the environment is going to look a lot like the environment which we've been in. Which is low growth, low inflation, low interest rates. And that is going to create an environment, which as you eluded to earlier, where growth is probably going to be at even more of a premium than it was before. And I think when we look across the portfolio we see good opportunities in a range of areas and also quite a diverse range of different earnings drivers as well, from insurance to clothes, life books through to emerging market asset managers through to branded consumer goods and on to specialty chemicals. You know, we see lots of little areas, but there probably isn’t a big unifying theme behind all of that. It's just lots of little, lots of little areas which we're looking to try and take advantage of, and it's that combination of lots of stock picks all put together that ultimately builds quite an attractive portfolio overall.
Interviewer: Okay. Louise how comfortable are you with valuations in today's market? Do you think they fully reflect the problems out there?
Louise Kernohan: Well, the problem with valuations at the moment is that all the multiples require some estimate of earnings or cash flow. And so that number in the equation is obviously extremely uncertain at the moment. So that means that valuations are uncertain. So if we see a good recovery from here, so what people call the V-shape, then valuations are attractive right now. But on the contrary, if we're standing at the start of deep recession, then on the whole valuations will be expensive, and particularly considering the recent recovery. I think it's also fair to say that we entered at the start of this year with valuations on the whole not being particularly cheap. It's actually quite difficult to summarize on the whole, but I think what is fair to say is that given how volatile markets have been and still are, the markets clearly have a lot of inefficiencies at the moment. So there's a lot of opportunities. So the key is really to look on a stock by stock basis and try to find those companies that have been hit due to concerns, but in fact actually those concerns aren't valid. We have seen that already so far, for example companies like Coca-Cola Hellenic, the soft drink company. It's share price was hit along with some of the worst during March. But at the end of the day, it's a soft drink bottler across a range of geographies, and so whilst not immune because not many companies are, it should prove relatively resilient through this and so we topped it up and we have seen some recovery. And there's lots of examples where there are mis-pricings so that's really what we're trying to find. And as Ben said, there's a lot of opportunity at the moment. Where we really benefit as well is that Ben and I both work on large equity teams. So, we've got a 16 strong UK equity team with full coverage of the FTSE-350, doing a lot of individual analysis of companies, talking to management, doing lots of in depth work. And we’ve got the same size European team, doing the same for European stocks of which we hold a number in the trust. So, we have a really good position in terms of having a lot of resource focused on this and I'm sure there's going to be a lot more opportunities that arise through this situation for valuations.
Interviewer: Okay, and just finally, what reassurance would you give to investors in the Trust that they should hold on through this period of rather nasty volatility?
Ben Ritchie: Yes, a very good question to ask, that one. I think, as Louise said earlier, from an income perspective, we feel in good shape. Though you know, we’ve taken a very, very hefty hit, but it's been a lot less than the wider market. So we think from an income perspective that we're still, given our reserves and potentially the ability to distribute income from capital, from an income perspective we think we're in good shape. From a capital perspective, we don't see any companies in the portfolio that are showing any signs of distress at all and we actually think if anything, there’s a very, very significant percentage of the portfolio which is actually in a pretty good place and provided things recover to some degree, will actually do pretty well. And some of those companies may even do a lot better than that over the longer term. And I think that the point that Louise was making earlier, we both run unconstrained money as one of our key elements and so everything we're asking ourselves about every investment we make is do we think that this is a really attractive total return investment opportunity? That's the first point, and then we look at how much of that return is going to come from income and then we look at what the income requirements of the Trust are. I think that gives us a very different perspective. It's almost like looking down the pipe the other way from a lot of income managers - we start with well, what’s the yield and what's the dividend going to grow at, because ultimately at the end of the day the dividend is just the output of the business and we like to start with the business. I think that's a key thing as opposed to starting from the dividend end of things. If you do that, then generally speaking you're going to end up with a portfolio of really, really good businesses and that's ultimately what makes myself and Louise feel positive is the fact that we've got some really great businesses in the portfolio and their prospects are looking good. At the end of the day, I think as Louise was mentioning earlier, we think that the companies are being managed well and we are ultimately delegating control and management of the businesses to the management teams. You know, by and large we think they've been doing a pretty good job throughout this crisis and meeting the challenges well. And while we don't know how things are going to evolve, assuming, I think it’s fair to assume that over the coming months and perhaps years we will see a recovery of maybe slow but a steady recovery out of this, this trough, then you know, we think we're well placed to go well from here. You know, the performance over the last sort of three or four years since we've taken the helm of the Trust has been good. And if anything, this environment we think sort of suits our style and approach.
Interviewer: Great. Okay. Thank you so much Ben and Louise for those insights today. Thank you also to our listeners for tuning in. You can find out more about the trust at www.dunedinincomegrowth.co.uk and do look out for future episodes.
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