Dunedin Income Growth has a rich history going back 145 years. It was the first trust to be launched out of Scotland and started life investing in the emerging market of the United States.
Today, the fund, recently the subject of an informative book by investment trust expert John Newlands, is much changed.
Originally managed out of Dundee, it is now run by the giant investment company Aberdeen Standard from London. Its investment focus has also changed with an emphasis on the UK rather than the US stock market.
In recent years the fund has struggled to shine against most of its UK peers and its benchmark, the FTSE All-Share Index. Expensive borrowings have constrained performance.
Also, its concentration on high yielding FTSE 100 stocks has meant poor relative returns compared with UK funds employing more flexible investment mandates embracing exposure to smaller and medium sized companies. Yet the managers believe there is light at the end of the tunnel.
Under the stewardship of Ben Ritchie and Louise Kernohan – and with a little pressure from the board – the trust is in change mode. Next year, a big chunk of borrowings with annual interest charges at 8 per cent will be paid off, removing a performance inhibitor.
More importantly, the trust’s portfolio is being gently overhauled with Ritchie and Kernohan using their respective expertise in Europe and the UK to find more growth-orientated investments outside the FTSE 100.
The result is a string of new investments. In Europe, they include Italian hearing aid specialist Amplifon and Swiss- based Tecan, a company specialising in the development of automated laboratory instruments. In the UK, stakes have been taken in online takeaway operator Just Eat, farm animal semen provider Genus and animal pharmaceutical specialist Dechra. To make space for these new holdings, stakes in income- friendly stocks GlaxoSmithKline, HSBC and Total have been sold down.
Ritchie says that short term, the trust’s income generation will be curbed as a result of the shift away from mega cap stocks recognised for delivering attractive dividends. But longer term, the portfolio’s rebalancing towards companies with lower dividend yields – but with the potential to grow annual income rapidly – will reap attractive rewards for shareholders. Currently, the trust’s yield at 4.9 per cent is among the highest of its rival UK equity income trusts.
Team: The Dunedin Income Growth fund’s Louise Kernohan and Ben Ritchie
There should be no adverse impact on the income the trust is able to pay out by way of quarterly dividends to shareholders – with the board keen to maintain a growing annual income. This is because the fund has nearly a year’s income squirreled away in reserve which can be drawn upon to top up dividend payments.
Ritchie says: ‘There is a shift taking place in the way we deliver capital and income growth. It means our exposure to small and medium-sized stocks is 30 per cent where three to four years ago it was 10 per cent. It is also resulting in a portfolio that looks increasingly different to the constituents of the index – the FTSE All-Share – we aim to beat.’
He believes the cementing together of the Aberdeen and Standard Life investment teams, following last year’s merger, is a positive for the trust.
Copies of Newlands’ history of Dunedin Income Growth are available by emailing firstname.lastname@example.org