Lowland, Perpetual Income & Growth, JP Morgan Claverhouse and Standard Life Equity Income have the best records among investment trusts for growing dividends over the past 10 years, according to Kepler Trust Intelligence’s William Heathcoat Amory.
“Whilst dividend growth for global equity income trusts has been far more impressive than that of the UK equity income sector, we believe that a large part of the superior dividend growth can be explained by currency – in fact most of the growth in global equity income dividends has been the consequence of currency effect,” said Heathcoat Amory. “Without this, dividend growth might have been similar.”
However, there are four UK trusts that stand out in particular in terms of dividend growth over the past 10 years: Lowland, Perpetual Income & Growth, JPMorgan Claverhouse and Standard Life Equity Income. As the below table shows, only one global income trust has beat them: Murray International.
Source: Kepler Partners
“All of them have materially added to reserves at the same time as increasing the dividends they have paid,” said the Kepler Partners co-founder.
Below, Heathcoat Amory takes a closer look at the four UK income trusts.
Lowland Investment Company
The first trust on the list and the one with the strongest level of dividend growth over the past 10 years is Lowland Investment Company, which has been overseen by James Henderson since 1990 with Laura Foll joining in 2016.
“Since James Henderson took the helm, the philosophy has been to ‘grow the capital to grow the income’ and this stock picking approach, along with the all-cap mandate, has meant the portfolio rarely ever resembles any benchmark,” said Heathcoat Amory.
The managers invest up and down the market capitalisation scale and it differs from other trusts in that income is less of a focus.
“With the bias towards mid- to small-cap stocks, the trust underperformed the market in 2016; however, the past two years have seen smaller companies rebound and the trust has performed broadly in line with the benchmark,” added Heathcoat Amory.
Over the past decade, the £418.8m trust has delivered a total return of 205.87 per cent compared with a 125.28 per cent gain for the average IT UK Equity Income sector trusts and a 110.49 per cent gain for the FTSE All Share index.
Performance of trust vs sector & benchmark over 10yrs
Source: FE Analytics
Over 10 years, a £1,000 initial investment would have generated £482.64 in income.
Lowland Investment Company is currently trading at a discount of 7 per cent to net asset value (NAV), is 13 per cent geared, has a yield of 3.4 per cent and has ongoing charges (with a performance fee) of 0.69 per cent, according to the Association of Investment Companies (AIC).
Perpetual Income & Growth Trust
Second on the list of top UK dividend growers over 10 years is the Perpetual Income & Growth Trust, run by FE Alpha Manager Mark Barnett and deputy manager Martin Walker.
Veteran manager Barnett has been involved with the fund since 1999, with Heathcoat Amory noting that the manager’s conservative style has seen the trust perform well during periods when momentum has been weak or negative.
Unlike its sister fund – the Edinburgh Investment Trust – it is able to invest in small and unquoted companies, allowing Barnett to invest in companies that have the potential to grow dividends “exponentially”.
“Despite the manager’s formidable reputation, the trust has been on the back foot in the last two years and a weak patch of performance has seen the it slip out to a significant discount of around 12 per cent, which potentially makes this an interesting time to look at the trust, which yields 3.8 per cent,” said Heathcoat Amory.
The £847.5m trust has indeed struggled over the past two years, returning just 5.62 per cent compared with the FTSE All Share’s gain of 32.79 per cent. It has a much stronger pedigree over 10 years, however, delivering a total return of 151.24 per cent.
Based on an initial investment of £1,000, Perpetual Income & Growth Trust would have delivered an income of £567.72 over 10 years.
The trust is currently trading at a discount of 11.6 per cent to NAV, is 12 per cent geared, has a yield of 3.9 per cent and has ongoing charges of 0.70 per cent.
JP Morgan Claverhouse
Also making the list is JP Morgan Claverhouse, which is managed by William Meadon and Callum Abbott.
The £423.9m trust targets income-generating companies with a focus on those providing consistent and growing dividends.
Following a strategy review in 2012, Meadon and Abbott pursue a high conviction approach – running winners and keeping stocks as they become more expensive, so long as earnings growth continues.
“Last year saw the trust raise the dividend for the 45th successive year, up 13 per cent over the previous year, and means that the trust is part of the of AIC ‘dividend heroes’ selection,” said the Kepler partner.
Performance of trust vs sector & benchmark over 10yrs
Source: FE Analytics
Over 10 years the trust has delivered a total return of 149.12 per cent, as the above chart shows. It would have delivered an income of £440.60 on a £1,000 investment made a decade ago.
JP Morgan Claverhouse is currently trading at a discount of 2.5 per cent to NAV, is 12 per cent geared, has a yield of 3.6 per cent and has ongoing charges of 0.79 per cent.
Standard Life Equity Income
Last up is Standard Life Equity Income, which Kepler’s Heathcoat Amory highlights for having grown its dividend as well as “transforming revenue reserve cover”.
Manager Thomas Moore, who took over the trust in November 2011, looks for companies with strong and durable cashflows that can support consistently growing dividends. Moore also invests across the market cap spectrum and has a significant holding in small-cap stocks.
“Recent months have seen the fund perform less well in an uncertain UK political environment; however, if the negative implications of Brexit have been overstated, the trust’s tilt toward smaller domestically focused companies could provide a more positive impetus” noted Heathcoat Amory.
Since Moore took over the trust it has returned 143.60 per cent compared with a gain of 110.71 per cent for the average IT UK Equity Income trust and a 90.07 per cent return for the FTSE All Share benchmark.
Standard Life Equity Income is currently trading at a discount of 1.2 per cent to NAV, is 12 per cent geared, has a yield of 3.8 per cent and has ongoing charges of 0.88 per cent.