Rebecca Maclean and Ben Ritchie
In general, the numbers aren’t large enough to move the needle in terms of economic growth, but they do illustrate a certain propensity to spend. This is encouraging, suggesting that people are still willing to spend on the right goods and services. This is particularly true for the services sector, where pent-up demand following the pandemic has seen consumers splashing out on experiences and travel. This has given a notable boost to the airline sector, for example.
Nevertheless, while this looks like a good opportunity to reexamine the leisure sector, we have reservations. The airline sector, for example, tends to be highly competitive, with low barriers to entry; it is cyclical and with thin margins. We are searching for companies that deliver resilient dividends through the cycle and the airline sector has historically struggled to provide that.
When it comes to the consumer discretionary sector, we are looking for companies with niche exposure, a strong competitive position and the ability to weather variations in consumer spending and confidence. These are companies such as Games Workshop, Pets at Home or Moonpig. Our hope is that these will be structural winners, and able to grow through the economic cycle.
‘WE ARE SEARCHING FOR COMPANIES THAT DELIVER RESILIENT DIVIDENDS THROUGH THE CYCLE’
NATIONAL GRID AND THE ENERGY TRANSITION
National Grid may not seem like an obvious holding for Dunedin Income Growth Investment Trust. Utilities are not our natural hunting ground, and we have just 4.2% of the portfolio in the sector. Yet the owner of the UK’s electricity and natural gas transmission networks has a crucial role to play in the country’s move to renewable energy sources. We have recently reappraised the ESG case around the company and that has allowed us to reinvest.
Around half of National Grid’s capital is in the UK and half in the US. The UK portion is largely invested in electrification, both in distribution and transmission. It is the transmission element that offers the more interesting growth opportunity, where capital investment could make a meaningful difference to the business’s level of revenue and profits. In the US, around half is exposed to electrification. That is a more complex business, but it is linked to many of the same trends.
It is a regulated business, so returns are shared with its end customers and capped over time. However, it has a good track record of delivering steady returns and dividends for investors and its revenues are inflation-linked. It may not be exciting, but it is playing a unique role in the energy transition and has a range of valuable assets.
THE ESG MANDATE IN PRACTICE
The Trust has had a sustainable investment approach since 2021, but we are always looking at ways to improve and evolve. The parameters of sustainable investing shift over time – regulations change, assessment frameworks become more sophisticated and more information becomes available.
Recently, for example, we have been in discussions with the UK regulator over the Sustainability Disclosure Requirements, the UK’s flagship policy to drive corporate disclosure on sustainability metrics. Our approach is to screen out the companies facing the highest ESG risks identified based on their business practices, ESG performance and controversies, but to also look for companies that are sustainability leaders and improvers – the leaders of tomorrow.
Again, these change all the time, as companies improve their reporting and disclosure, increase their receptiveness to engagement, or change their business models. At abrdn, we aim to increase our understanding of the various environmental, social and governance risks and opportunities all the time, with new tools and approaches to assess company performance.
We have seen particular progress on net zero commitments, with a wealth of companies developing their initiatives.
More companies are certifying their progress against the independent Science-Based Targets Initiative (which defines and promotes best practice in science-based target setting). There are now a number of leading companies setting the standard.
Our role is to hold these companies to account on those targets. We have been developing a framework to assess the credibility of their targets and take a view on the probability that a company is able to decarbonise as it says. Our framework will look at the ambition of the original targets, their performance against them, and the strength of their strategy.
We aim to select the leaders and exclude those facing the highest risks.
OVERSEAS COMPANIES OFFER DIVERSIFICATION
Dunedin Income Growth Investment Trust has always held a small percentage of its assets in non-UK listed companies, believing it gives us more flexibility in our investment strategy. It can help open up new sectors, draw in new sources of growth and help diversify the portfolio. Overall, it enables us to create a richer and more diverse set of assets.
We recently increased the percentage we can invest in overseas companies by 5%. We have operated at the upper end of the Trust’s limits for some time and decided that having an extra 5% would be useful. For the time being, we haven’t increased the amount we invest, but want to be able to consider a broader range of assets, particularly as we move into the dividend season.
In the Trust’s history, its overseas exposure has made a material difference to overall returns, contributing both income and capital growth. For us, it is about continuing to look where around the margins we can continue to make the trust better in a marketplace that is ever changing.
Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.
DUNEDIN INCOME GROWTH INVESTMENT MANAGER UPDATE – REBECCA MACLEAN
Dunedin Income Growth Investment Trust held an online presentation on 3rd May 2023. This event took the form of a short introduction from the Chairman, David Barron, followed by a more detailed presentation from co-managers Ben Ritchie and Rebecca Maclean.
There was also an opportunity to ask questions on the annual report. A recording of the event is now available to watch on demand below. Watch on demand here >
Risk factors you should consider prior to investing:
• 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 results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Other important information:
Issued by abrdn Investments Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.
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