Dunedin Income Growth Investment Trust: Update from the managers

Listen to the latest episode of the abrdn Investment Trusts podcast with Ben Ritchie and Rebecca Maclean, co-managers of Dunedin Income Growth Investment Trust. Ben and Rebecca discuss whether the new government can really deliver a decade of national renewal and who might be the winners if it does. 

Capital at risk. 

For more information: www.dunedinincomegrowth.co.uk 

Transcript

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Podcast from abrdn Investment Trusts.

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Hello and welcome to today's podcast on the Dunedin Income Growth Investment Trust. I'm Cherry Reynard and with me today are the trust managers Ben Richie and Rebecca Maclean. So welcome everyone. today we're going to be taking a look at whether the new government can really deliver a decade of national renewal and who might be the winners if it does.

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but first, Ben, I want to take a brief look across the pond at the US presidential race, which has obviously been capturing the headlines this week. are there any implications for your portfolio as you see it? Well, thanks very much. I mean, clearly, it's a it's a dynamic, situation in the US. you know, a week ago, I think markets had decided that Trump, was going to win.

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and he was not just going to win the presidency, but he was going to win the Senate. and the House of Representatives, he would do whatever he wanted to do as a result, come the weekend. And Joe Biden withdrawing from the race, suddenly things are a little different again. But I think it does have some quite important implications for, the UK economy and I think for the global economy, perhaps unusually so.

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so if you think back to the Biden Trump race in 2020, certainly there was a view that Joe Biden would spend more money, that there was going to be further stimulus if he became president, and that that may have some, inflationary impacts, potentially consequences for the higher bond yields. but it certainly wasn't as stark.

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as the prospects. I think that we, that we sort of see today and I think Trump overall, you see, a sort of pro America set of policies. And again, I think it's important to stress that we don't really know exactly what, a Trump presidency would do, actually. But I think people speculating about what his advisers have said or people close to him have said, you know, those things have all will come into play.

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And so I think when we sort of think back about it, you've really got, the potential for tariffs, which get a lot of focus that's likely to be, inflationary in the United States, and potentially, significantly negative, for the economies of large parts of the, of the rest of the world. So that's one element, that comes into play.

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It depends where they set. But now they're talking about 10% of all goods coming into United States. 60%. on Chinese imports. So those are going to be one off inflationary lift in the US now. And academics will debate whether that's truly inflationary or whether you can look through it. But it's likely to certainly put the Federal Reserve on the back foot.

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That's going to have a crimping effect on demand. It's going to have a negative impact on the growth and export economies. Europe and China in particular. So that's going to be something that those places are going to have to manage, and that it's probably likely that you'll see retaliation, which will also potentially increase price levels in other markets in Europe and China.

00:03:11:18 - 00:03:43:00

So you've got that tariff piece. Inflation piece. The other side then is is really looking at consequences on foreign policy, where you're probably likely to see significant pressure on US allies to spend more money on defense. And that could again, be, a meaningful brake on growth. You know, the multiplier effect of spending money on defense isn't particularly high in if European and economies and maybe even the UK, forced to spend more money on defense and that's, that's money that that probably won't have such a positive effect on the rest of the, on the rest of the economy.

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And then on the other side of that, you think go to maybe a more pro American policies, which would principally come about the extension of various tax cuts when they expire, potentially lower corporate tax rates. and then I think the thing that excites, sort of pro Trump business supporters is the prospect of significant levels of deregulation in the US and that, I guess, over time, would be seen to be positively in America and potentially further tax cuts funded by the tariffs that he's going to put in place.

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But it's a very mixed picture. And certainly I think the prospect of a Trump presidency and its impact on global stability and the global economy is probably, you know, quite negative. that'll said, yeah, since Biden is step down from the race, I think the prospects of a clean sweep of Trump have receded somewhat. So that is quite important.

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And while Trump can do what he wants to some degree in terms of foreign policy and tariffs, which fall on that, in terms of extending tax cuts and various other domestic piece of legislation, you know, having more control and influence over, the House of Congress is is important in that. So overall, you know, I think a Trump presidency is probably something to be viewed with, with trepidation, perhaps not so much in the UK as in, continental Europe, but still something that's unlikely to be, I think, particularly positive for us.

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on the other hand, the prospect of that actually happening a little less today, than it was a week ago. So it's a it's a fascinating situation. It's certainly something to to keep an eye on. And it's likely to have some significant consequences for both the geopolitics and the global economy. I think that we don't fully understand exactly what what those are going to be, but I think it's certainly going to be, interesting and volatile.

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Right. If, if Donald Trump, does become president and interesting in a sort of inverted commas kind of way. Yeah, absolutely. It feels like there's been some huge, announcement kind of every day for the past couple of weeks. and let's turn back to the UK now and talk about this idea of kind of national renewal, which has been a very sort of important part of, of the incoming government's mantra.

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do you think that the new government will be able to get growth started, and if so, will there be any investment opportunities that flow from that? Yes. Good question. I think we're still quite early in terms of understanding the priorities of the new labor government in the UK, but the King's Speech earlier this month was helpful, and being able to get some indications of, of policy priorities, and I think there's three that pull out which are at the forefront and meaningful for when we think about the long term, growth opportunities in the UK.

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So the first is energy transition. And, there are a number of policies announced relating to this, given a recognition of the need to address the sort of aging energy, infrastructure we have new UK the question of energy independence, how are we going to transition to, lower carbon energy mix? And so in terms of the policies we we heard about Great British Energy, which aims to accelerate investment in renewable energy, and in particular highlighting offshore wind.

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and there was also a commitment to clean energy transition, with a recognition of the, of the need to be reducing or managing the bills for consumers. So I think there's quite a strong support from the new government around added transition and managing energy security. And in terms of what that means for companies in our portfolio, the trust owns positions in SSE and National Grid, and both of which are exposed to UK and should benefit from investments in transmission and distribution, but also in renewable energy.

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And I think anything sort of should support the companies as they look to deliver earnings and dividend growth over the medium term. so that's the first thing will be energy transition. and then the second is around planning reform. And there's been a real, bottleneck that we've seen in planning in the UK. And the new government has promised to unblock some of these.

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The restrictions that have been in place, particularly around housing. So one of the bills was a planning and infrastructure bill that was announced. And so this is focusing on critical infrastructure in the UK and streamlining the planning process, which would be helpful for companies which play into that theme. and again, it's something which we have a positive view on and playing throughout the portfolio, whether it's from the housebuilder that we own, which is Taylor Wimpey, but also companies which are critical in the supply chain of, of housing and infrastructure companies such as Marshalls Unit and Morgan Sindall.

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So, yeah, we certainly see that as being supportive for that as, as a priority for the government. And then finally, I'd point to innovation. So I mean, this is certainly been a concern has been like the level of productivity gains which have been made in the UK and innovation and Research and development technology. These are going to be some of the tools which are going to hopefully help the UK economy become more productive.

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and we heard about a Digital Information and Smart Data bill, which is looking to harness data to drive growth and also supporting scientific research. so these are absolutely crucial. The UK's got a very strong talent pool for for innovation and research and development in the UK. and I think that should be supported by a new government.

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so in terms of our portfolio, there are a number of companies which are aligned to this theme Oxford Instruments, relaxed soft caps, which are role playing into that sort of structural growth for data and analytics. and you know, I think sort of taking them together. So those three themes, new government seems supportive of them. But these are long term structural factors which should drive growth, for companies which are not linked to the macro cycle.

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So it's it's aligned. So our investing approach in terms of looking for high quality companies which are going to deliver resilient income through the cycle. Okay. Thanks, Rebecca. I mean, one other thing that's sort of been galvanizing markets more recently is the growth in merger and acquisition activity. I wondered if you could talk a bit about how you approach that when one of your companies is bid for or, or there's some other kind of corporate activity, but what factors are you weighing up when you're looking at those?

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You were certainly seeing a pickup in M&A in the UK. So the value of deals that have been done year to date is almost double that this time last year. and the valuations that we've seen for UK companies being bid for is higher than the traditional premiums of sort of 20, 30%. and I think this speaks to what we've been saying for a while now, which is that the UK market is out of favor and is trading, you can find good quality, resilient companies trading at attractive valuations.

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so this is an opportunity which is also being seen by, other players. And so private equity and industrial players, and they're looking to take advantage, of the discounted valuations of some UK companies. So M&A has picked up, in terms of our own portfolio that the trust hasn't had bids by recently in the portfolio. So we had Decker last year.

00:11:54:05 - 00:12:14:17

and yeah, this is a concentrated portfolio of companies. And so sort of yeah fewer hits there. But I mean, I think we still think there are a number of companies in the portfolio which could, which could be bid for in terms of our approach to dealing with M&A. We would look at the terms of of the proposed deal.

00:12:14:19 - 00:12:52:17

in terms of the structure, you know, is it cash, is it in shares? how do we feel about about that structure? look at the valuation compared to what we think the fair value of the businesses, not on a near-term basis, but, you know, on our investing time horizon, which is 3 to 5 years. and if we think that the valuation and the proposed bid is not in line with, creating shareholder value and is undervaluing a business, then we will feed that back to the boards of companies in order to sort of encourage, conversation where it's more aligned to what what we think is the fair value of a business

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is. And so that's something that we'll do. typically between the companies that are behind closed doors, rather than making it public when we, when we're doing that. But sometimes will be public as well. if we have a disagreement, it's all about making sure that we get the best, shareholder returns. If there is a deal. Now, Ben, it's just we I don't know whether I'm being, overly optimistic here, but, sir, should we read anything into the canal, please?

00:13:19:23 - 00:13:53:14

Listing in the UK? that's the spin out of Vivendi, the French media conglomerate. I mean, does it suggest a better time for UK capital markets that international businesses want to list here? Well, I think the answer is sort of yes or no really with this one. So I guess, you know, Vivendi is basically splitting itself into three pieces, having, spun out its interest in UMG, Universal Music Group, a couple of years ago.

00:13:53:16 - 00:14:15:15

it is listing some of its assets in France. It's listing some of its assets in Amsterdam, and its listing cannot loose in London. The important thing to remember here, is it is effectively giving shares to existing shareholders in Canal Plus and listing them on the market. So it doesn't need new investors to come in to buy, cannot do shares, which makes the the mechanism somewhat easier.

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It's not dependent on, sentiment in the market being positive to get an IPO away. It's essentially, you know, if you own shares in Vivendi on a certain date, you have shares in Canal Place in London, you'll have shares in, the publishing business in France, and you'll have shares in Havas in Amsterdam when that deal comes through.

00:14:37:02 - 00:15:06:12

So I think that's sort of something to bear in mind, but I think it is positive that, that they've decided to list, in London. I think that reflects that the sort of international aspects of, Canal, please. It's got a significant amount of business in Africa and other markets there. The UK, within Europe has tended to be a market where, emerging market assets list, whether it's things from from Bharti Airtel or in the mining sector, and in other markets within the financial space.

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And it has been quite, a, quite a number of those type of listings. And so I think that provides comparators. It provides a market to which international investors have made perhaps be more willing to put put money to work as well. So I think overall, I think it reflects, you know, some of the positive attributes of the UK market in its history and area of focus.

00:15:25:24 - 00:15:40:17

I'm not sure. I'd say it's sort of a a big turning of the page, but equally, you know, they could have decided to list it somewhere else. So I think overall it's up. You know, it's a nice positive to see that happening. but I mean, I wouldn't get too excited about it. It's a slightly special situation.

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Okay. Right. Interesting. now, Rebecca, another area in the headlines this week has been mortgage rates, with some of the five year fixed term mortgages dipping below 4% for first time. Who wins from that? Is it kind of consumers? Is it the housing market? talk me through that. Well, yeah. The number of elements to I think the, mortgage rates coming off is helpful, certainly for the housing market.

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But I mean, I think what we need to see for a material recovery in volumes is not only mortgage rates coming down and because that will improve affordability, but also, having more stability around mortgage rates as well. So I think that that's probably more important to, in terms of allowing, people who are looking to buy houses to have like confidence that that mortgage rate is, is stable and isn't going to change material on the near term.

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so, yeah, I think it's helpful, but, you know, it's not enough at the moment to see a material uptick in, in housing. that said, you know, we think that we're still in a downturn for the housing market in the UK. And as mentioned previously, when we were discussing planning reforms, it's a part of the market which we are positive on and we are playing that recovery in a couple of names in the, in the trust.

00:17:07:05 - 00:17:38:19

So I think that should be helpful. But I think more broadly, I mean, the consumer, the consumer does feel in a better place in terms of consumer confidence and discretionary income. But it it remains challenging out there. And we're seeing quite mixed results from companies, who have been reporting. So I think it is not all, you know, everyone sort of out there, they're spending I think, there are areas where the consumer is happy to spend, but in others less happy.

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So but inflation coming down and mortgage rates coming down will be helpful from a discretionary perspective that, you know, I think our approach would be to not try and call near-term consumer health, but instead, when we're investing in consumer companies to look to companies which have got strong niche positions, which, will allow the companies to navigate different economic environment so that companies like games Workshop in the portfolio.

00:18:10:13 - 00:18:34:11

Also Pets at Home, you know, these companies would have got strong franchises and a brand, you know, for for Games Workshop, it's it's got a very loyal hobbyist customer base. And then for Pets at Home, there are some structural themes around pet ownership and, and spending on pets. But also the company's got a veterinary business, but we should continue to deliver a good level of growth.

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And so, that would be our approach. I think it is quite hard to, to judge and, and take a sort of a broader view on the consumer. So instead look for strong companies within the sector. Okay. Great. Thanks, Rebecca. And then, just finally, Ben, I wonder if you could go into a bit more detail on one of the trust's holdings.

00:18:56:19 - 00:19:20:08

so I was thinking Chisinau this week. So can you talk me through that one? But it's an interesting holdings, something we've had in the funds for, for, for a long time. So that just is essentially a consolidator of closed, life books. It started out about 20 years ago, listing on the UK market. it was pretty small back at the time.

00:19:20:10 - 00:19:47:11

Its main attribute really had been that it had sort of a high and and growing dividend paid to be returned. The cash flows that came off the of the insurance assets, which it had, and over time it has acquired more UK based players like books. but it's also expanded internationally. So it bought a business in Scandinavia and Sweden, and more recently it's bought businesses in, in Holland.

00:19:47:13 - 00:20:14:05

those businesses abroad both closed ended business but also, open ended assets which have given them the ability to, to grow, new sales and to sort of, I guess, effectively keep the asset base growing. and at the same time, they've continued to do further smaller deals, in the UK as well. So it's a company that operates in the same sort of spaces, I guess Phoenix, let's say, like some of these other bigger companies.

00:20:14:07 - 00:20:36:18

but Phoenix operating much more towards the smaller end. that's still looking to take advantage of some of the similar trends. You know, the attractions of that kind of business are really that it has the life policies have been a very long duration on them. they're going to have those assets for a long time generating basically fees for, for, for, for managing those assets.

00:20:36:20 - 00:20:58:04

and the fees as they come off the book, they can be returned to investors in the form of dividends. And, as the book shrinks to some degree, it also potentially gives the opportunity to release the capital, the regulatory capital, to supports, some of these businesses. And then there are also various other benefits that can be enhanced from merging various, blocks of business together over time as well.

00:20:58:04 - 00:21:20:16

So, yeah, essentially you've got this very stable, set of cash flows that disappear out over the next sort of 15, 20 years. and ultimately seeing a good portion of that being returned back to us in the form of dividends. So, you know, just now it has a sort of a 10% dividend yield. it has a very long history over the last 20 years or so, growing that of 2 to 3% a year.

00:21:20:16 - 00:21:42:04

It's done that, very consistently, either through organic growth, through, you know, organic expansion. it's got a new a newish, CEO in, in Steve Murray who, is coming a few years ago, and has certainly brought, I think, a greater degree of energy, focus on both internal improvements, but also looking to do, more acquisitions within the business.

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And I think all in all, you know, it for the portfolio. It provides, helpful, relatively stable, high yielding assets. In some ways, it's a sort of a high yield bond, but but also one that that is inflation linked, which we think is quite attractive. And so, you know, the role that it plays in the portfolio is within the, the sense of assets, which we would say, well, they're not the highest quality businesses.

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but it does provide a very high and stable and resilient dividend yield, which is, you know, maintained and grown through a number of ups and downs in global and UK markets over the last two decades. and this is a sort of a nice little, a nice little ballast force in the fund. So something quite different, something playing quite a helpful role both in generating a high level of income, but also doing it in a way that is relatively stable and also helping to grow ahead of inflation as well.

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Brilliant. Okay, we'll wrap up there. So many thanks, Rebecca and Ben, for all those insights today. thank you so much for tuning in. As always, you can find out more about the trust at Income Growth. Co.Uk. Until next time.

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