Like Scottish American, the previous investment trust profiled in this series, Dunedin Income Growth was launched in the 1870s and was originally called The Scottish American Investment Trust – with current manager Ben Ritchie admitting “names were at a premium at that time”.
However, he said this is where a lot of the similarities end, as although the current Scottish American Investment Trust’s story is one of consistent compounding, Dunedin Income Growth’s is more one of “opportunity and turnaround”.
Scottish American, or SAINTS, is one of the AIC’s Dividend Heroes – the trusts that have increased their dividend for at least 20 years in a row. It has raised its distribution to shareholders in each of the past 38 years and last cut it in 1938.
Dunedin Income Growth, meanwhile, has focused more on delivering a high headline yield, which currently stands at 4.66 per cent, compared with 3.02 per cent from SAINTS. However, Ritchie said the drawback to this strategy was laid bare in the financial crisis.
“We grew our dividend quite aggressively, putting it up 10 per cent at the beginning of 2008 which, with the benefit of hindsight, wasn’t necessarily the best idea,” he explained.
The trust then spent the next two years effectively trying to secure the existing yield, which meant focusing more towards higher yielding companies and selling out of a lot of small- and mid-caps. Ritchie admitted that strategically, this was a big mistake and left the trust exposed on a relative performance basis against its peers.
“While we managed to do OK against the benchmark, against everyone else in the equity income space it proved to be a pretty challenging period of time. That’s really the background to that,” he added.
When Ritchie moved from deputy to lead manager of the trust in 2016, he told the board it needed to change its strategy to remain competitive and to have a relevant future, pointing out that a high yield that isn’t growing isn’t attractive to anybody.
Since then the manager has started to tilt the portfolio back to what he considers to be a healthy balance, moving away from higher yielding, low-growth businesses and focusing more on “compounding long-term growth opportunities”.
“That really brings me back to the investment objective, which is to achieve growth of income and capital and I think that if you lose sight of one of those at any one time, you are going to end up at some point with a problem,” he continued.
“If you focus too much on generating income today, you are going to end up at a point where you ultimately can’t sustain your dividends over the long term, while if you focus too much on growth, you simply can’t pay the dividends, so it’s getting that balance right in the marketplace.
“As the board continually tells me, we want to reduce the yield on the trust, not by cutting the dividends, but by growing the capital base of the trust and that is ultimately what we’re trying to do.”
Ritchie said that while performance hasn’t been spectacular over the last couple of years, Dunedin has been “inching its way back” in other aspects. Its balance sheet is much stronger and it has been able to top up revenue reserves, which now stand at just under a 0.9x annual dividend yield.
It has also refinanced an expensive legacy debenture due to roll off in 2019, which is costing the trust “a couple of million pounds a year” in terms of interest costs.
“That is currently just under 8 per cent, taken out when people’s expectations of long-term returns were somewhat different when that was put in place,” he said.
In terms of his outlook, Ritchie said that a focus on capital preservation and resilience of income is likely to prove more relevant in the years ahead, following a prolonged bull market.
“We continue to seek diversification of income, retain a strong balance sheet with modest equity gearing and substantial revenue reserves and are continuing to focus our capital investment towards companies with greater sustainable growth prospects,” he added.
Data from FE Analytics shows Dunedin Income Growth has made 93.39 per cent over the past decade, compared with 102.25 per cent from its IT UK Equity Income sector and 96.61 per cent from the FTSE All Share benchmark.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust has ongoing charges of 0.63 per cent and is 15 per cent geared. It is on a discount of 9.3 per cent compared with 9.96 and 9.13 per cent from its one- and three-year averages.
Someone who put £10,000 into the trust a decade ago would have received £5,231.58 in income alone over this time.
The other two articles in this series profiled the Scottish American and Foreign & Colonial investment trusts.