The aim of the fund, launched in January 1963, is to achieve both capital and income growth by investing in UK companies, and it has a progressive dividend policy that has seen it raise its dividend in each of the last 40 years.
Co-manager William Meadon, who joined Sarah Emly on the trust in March 2012, notes: “The investment process and management of the fund was overhauled in March 2012, when it adopted its current more focused investment remit. New stock and sector tolerances were introduced, meaning the trust can be over or underweight any stock by up to 2 per cent versus the benchmark and any sector by up to 3 per cent.”
The investment process aims to identify stocks with the right mix of quality, value and momentum, according to Mr Meadon. He adds it is largely a bottom-up stockpicking investment process with the gearing of the trust determined by macroeconomic factors and valuations.
Ms Emly adds: “It takes a focused, but risk-controlled best ideas approach to stock selection, with 60-80 holdings (currently at the lower end of this range). The trust can also use FTSE futures to reduce gearing without having to sell underlying holdings.”
In March 2012, disappointing performance saw the board agree a revised investment approach with JPMorgan Asset Management that would see the portfolio “constructed in a more fundamentally driven way, expressing greater conviction for the individual stocks”.
Other changes saw the trust switch sectors from AIC UK Growth to AIC UK Growth & Income and cut the number of holdings from the previous levels of 100 or more.
Mr Meadon explains: “In particular, the number of stocks held was reduced and now stands towards the lower end of the range, at just over 60. We have subsequently introduced compelling new stock ideas and also sold stocks that have become less attractive, but overall our style is a low turnover one, giving the stocks we buy time to meet our expectations of them.”
The longer-term performance of the trust is ahead of both the benchmark and sector average for the five years to October 24. The share price total return of 139.88 per cent pushes slightly ahead of the FTSE All-Share index return of 120.03 per cent and the AIC UK Growth & Income sector average of 122.08 per cent.
Shorter term, however, performance has been equally strong at 39.95 per cent, outperforming the benchmark figure of 22.22 per cent and it remains ahead of the 32.46 per cent sector average, according to Morningstar data.
Ms Emly notes: “Since the change in investment approach, the trust has performed strongly. Outperformance was driven predominantly by stock selection as well as the decision to be geared into a rising equity market.”
In particular she notes in the year-to-date to September 30 2013, easyJet has been among the strongest performers in the portfolio, while it has also benefited from an overweight position in ITV and positions in some life insurers.
On the downside, overweight positions in some mining companies have detracted from performance as they suffered from falling commodity prices and fears over slowing economic growth in China. Looking ahead, Mr Meadon notes: “Subject to the US resolving its debt issues – and thus avoiding any risk of default – we remain positive on market levels. Monetary policy is likely to remain easy with authorities in both the US and UK making it clear that short interest rates are going to stay low for the foreseeable future. This should be supportive for equities, which have a reasonably attractive yield with the prospect of dividend growth. The trust therefore remains at the higher end of its gearing range.”
Having got through a tricky patch, this is clearly one to watch for investors wanting a steady and reliable income source.
EXPERT VIEW
Rob Morgan, pension and investment analyst, Charles Stanley Direct:
“This trust has slightly beaten market returns in the past few years but has used some gearing (presently 18 per cent, the limit being 20 per cent). Performance in the past year has been particularly good due to harnessing some recovery type stocks. Primarily the portfolio is in blue-chip firms with a bias to financials. A low management fee of 0.55 per cent is to be applauded, but less appealing is a performance related fee of 15 per cent of the outperformance of the FTSE All-Share index plus a hurdle of 0.5 per cent. However, this is capped at 0.4 per cent a year and any prior underperformance has to be made up before it can be taken. The trust stands at a small discount to net assets presently.”
