Dunedin Income Growth (DIG) sits in the UK Equity Income sector, aiming to grow capital and income in excess of the FTSE All Share. The trust is unique within the AIC sector due to its large exposure to European stocks, helping the managers to diversify their distributions and take advantage of their extensive knowledge of the Pan-European space.
The trust is run by Ben Ritchie and Louise Kernohan at Aberdeen Standard, who have been implementing a change in strategy since 2016. The portfolio has been shifting towards stocks with more attractive growth characteristics, whilst maintaining the dividend at a high level throughout – the current yield is 4.6%, compared to a sector average of 3.8%.
This has necessarily been a long process as the managers slowly wind down positions in stocks with high current dividends but fewer prospects of growing them. The result is a portfolio with a considerably greater bias to the small and mid-cap end of the market, but with the same tilt to quality characteristics.
The turnaround has started to bear fruit: over 2018 the trust outperformed both the FTSE All Share, its benchmark, and the peer group. This has continued into 2019, and over the first four months of the year the trust has delivered just under 15%, beating both the peer group and the benchmark. This has also begun to be reflected in the discount and, after starting April trading at a discount of around 10%, the trust is now trading at close to 5%.
Alongside this, the trust has grown its dividend at a rate of 2.4% per annum over the past five years, considerably more than the rate of inflation. Dividends are paid out quarterly, and having not seen in the interim pay-out amount change since 2013, 2018 saw a large uptick in order to make the distribution of income more balanced.
In April of 2019, the trust’s expensive debenture, which was taken out in 1997 at rates which then appeared favourable, expires. This will dramatically decrease the headline gearing for the trust.