QD view – Global voyage in search of income

Despite its volatility, 2022 favoured global equity income trusts – by Cherry Reynard

 
In recent years, funds in the sector had struggled to keep pace with their global sector equivalents, which could participate in the punchy rise and rise of the (non-dividend paying) technology sector. Last year, many income trusts managed to ride the value wave, even though few take a strictly value approach.
 

Murray International – closest to a ‘value’ approach

 
Murray International has been the stand-out performer over the year, outpacing its nearest rival by almost 4 percentage points, in share price total return terms[1]. With its focus on simple businesses with a strong asset base and cash generation, it was perhaps closest to the ‘value’ approach that was so in favour with investors over the year, and this served it well.

Bruce Stout, manager on the trust, says performance was drawn from a variety of holdings: it did well from its holding in Latin American equities, including Chilean Mining group SQM, Mexican airport operator Grupo Aeroportuario and mining group Vale. It also had holdings in BAT and Philip Morris, plus US pharma group Abbvie. It bought into many of these positions when they were unloved during the pandemic, rotating out of its holdings in emerging market debt, and reaped the benefits in 2022.

It managed to do this while also paying the second highest dividend in the sector (after the very small and very volatile British & American Investment trust). Stout says: “I have three performance indicators: to grow the NAV of the trust, to grow the dividend ahead of inflation, and also to make sure we fund the dividend from the portfolio. Dividend coverage is important.” Unlike many of the other trusts in the sector, it also seeks to pay an above average dividend rather than just prioritising dividend growth.

The trust has dipped into its reserves over the past two years to grow its payout to shareholders, but is now seeking to build those back up. This limited the dividend rise for shareholders this year. It also retains some holdings in fixed income – including 5% in emerging market and Asian debt – to boost the yield.
 

Scottish American – Laser focus on long-term dividend growth

 
Scottish American is at the other end of the spectrum with a laser focus on long-term growth in dividends. Sebastien Petit, investment specialist on the trust, says: “For us, this is much more important than short-term yield. The growth we’re looking for is long term, compound growth, which is sustainable over many years. If we do that, the total return should be very attractive.”

This puts the trust at the milder end of the Baillie Gifford growth style and that was helpful in 2022, limiting capital losses. Petit says: “The stocks we buy tend to be quality growth stocks that are trading at attractive valuations. That meant that last year we didn’t suffer as much from high growth stocks having a very difficult year. We didn’t own those.” Rather than stocks such as Tesla or Moderna that dominate the group’s growth trusts, SAINTS was holding Novo Nordisk, TSMC and Roche.

Nevertheless, the portfolio still has a growth flavour. The company’s most recent purchase was Cognex, a manufacturer of machine vision systems, such as sensors and barcode readers. In many ways, this is a typical holding for the company. It has a small upfront dividend (0.6%), but the managers are expecting significant growth in that dividend over time. Overall, the trust’s yield is currently the lowest in the sector at 2.7%, but shareholders haven’t seen a dividend reduction in 80 years.
 

JP Morgan Global Growth & Income – agnostic to a holding’s dividend level

 
The JP Morgan Global Growth & Income fund takes a different approach again. Manager Tim Woodhouse says: “In 2016, the board took the decision that the dividend would be at least 4% of the NAV at that time, paid out in four distributions over the next 12 months. It gives us an enormous amount of freedom because part of that is paid out of our capital reserves. It gives us the freedom to go wherever we want.”

He points out that Amazon is the largest position in the trust and does not pay a dividend. The trust also holds Microsoft, NXP Semiconductors and Mastercard. “A company’s dividend does not influence our thinking whatsoever. We look for the most compelling capital growth ideas for our shareholders and the yield is also very predictable. It gives us a balance of growth and income.”

The trust has a quality focus, but this doesn’t preclude it investing in some more ‘value’ areas. Woodhouse says he leant into the valuation rotation at the start of 2022 by listening to market signals. He says: “There was an egregious bubble in growth assets. Valuations were through the roof. We went through a process of selling high growth companies, and focusing on cash flow and valuation metrics. Typical value areas, by contrast, were trading on a significant discount. Often, the current cashflows, R&D spend or proprietary assets were not fully appreciated.”
 

Discounts in line with longer-term averages

 
All the major trusts in the sector are trading at or near their long-term discount level. Scottish American, for example, is trading at 2.2% against a 12-month average of 2%. Henderson International income, Scottish American, Murray International and JP Morgan Global Growth & Income, are all trading in a relatively narrow discount range.
 

A compelling case for each approach

 
Equally, each trust has a compelling case to suggest it is the right approach for the year ahead. Stout points out that an inflationary environment will favour those companies on compelling valuations with strong assets and cash flow. Petit is looking at what individual companies can achieve over 5-10 years rather than 1-2 years, believing that is a better way to exploit structural inefficiencies in markets. For Woodhouse, markets are likely to favour quality companies that can defend their margins and pass on higher input costs.

The reality is that all of these styles could make progress in the year ahead. None of the trusts are so firmly value or firmly growth that they can’t bend to different market conditions. They are all pure stockpickers and will go where they see value.

_{[1] https://quoteddata.com/sector/investment-companies/global/global-equity-income/}
 
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