Dunedin Income Growth (DIG) is watering down its sustainability agenda to enable it to invest in arms companies, nuclear energy providers and miners after a further year of underperformance by the £354m Aberdeen-managed UK equity income trust.
Annual results show fund managers Ben Ritchie and Rebecca Maclean generated what chair Howard Williams said was a “solid” underlying investment return of 8.2% in the year to 31 January despite it badly lagging the 21.1% advance in the FTSE All-Share index.
Shareholders did slightly better than this with a total return, including ramped-up dividends, of 13.8%.
This followed a narrowing in the discount, or gap, between the share price and the net asset value of the trust’s investments from 11.6% to 7.5%. This improvement likely reflects increased demand from income investors following the board’s move to an enhanced 6% dividend which led to a 34.5% increase in the quarterly payout last year.
A final dividend of 7.4p will lift the total distribution to 19.1p per share with the board aiming to progressively increase the annual pay-out in future years, funded by income and capital gains on investments.
The discount has subsequently risen to 9.6%, three times greater than the average in the UK Equity Income trust sector, and slightly wider than DIG’s one-year average of 8.1%. That leaves the shares with a total return of 25% over five years that compares poorly to the All Share’s 71% and the peer group average of 49.4%.
Williams said that while it was “disappointing” to see the trust underperform, the benchmark had been driven to record highs by banking, aerospace and mining stocks which did not fit in with the managers’ quality growth and sustainable investment agendas.
He said the managers were fully committed to their quality growth stance given that such stocks were now trading on “highly attractive valuations” which could pave the way for a rapid rebound in performance.
However, following a review of their negative screening criteria the board had given the managers greater flexibility “to invest in aerospace and defence, permit investment in nuclear energy and modify restrictions around investment in natural resource companies.”
This “evolutionary” change could, for example, have enabled DIG to hold Rolls-Royce as its shares nearly doubled in the past year after reinstating its dividend as part of a dramatic turnaround under chief executive Tufan Erginbilgic.
As a result, the proportion of UK-listed companies excluded from DIG’s portfolio will fall from 23% to around 13%.
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