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JPMorgan Claverhouse Investment Trust plc has grown its dividend for 51 consecutive years—a record for UK equity investment trusts.
Investors seeking to capture the healthy yield of the UK equity market may want to take a closer look at the JPMorgan Claverhouse Investment Trust plc. Claverhouse’s yield is currently about 5% and the trust has achieved consecutive dividend growth for over half a century.
How to grow dividends over time
While UK equities, on average, offer a relatively high yield, Claverhouse’s investment strategy focuses on growing dividends over time. Recently, the trust has increased its focus on long-term dividend growth potential via an update to the investment process that was introduced with the addition of two portfolio managers. Anthony Lynch and Katen Patel have joined Callum Abbot, already a co-manager on Claverhouse for the last six years.
The portfolio managers seek a mix of companies that have high dividends currently and those with greater potential to grow dividends over time, characterising investments into three types:
- High growth: These companies typically have dividend yields under 2% but strong potential for growth over time. The trust’s position in 3i Group, a private equity company, had a 3% yield when it was first added to the portfolio but the dividend yield on the original investment would now be in the double digits.
- Quality compounders: The target dividend yield for these companies, which typically have solid earnings growth and good dividends, is2 %-4%. A good example is 4imprint, a capital-light digital marketing business.
- High yield: These stocks tend to have a dividend yield that exceeds 4%. Stocks with high dividend yields can be tempting for a strategy focused on income. However, if the dividend yield is high because the stock price is low, the portfolio managers are sure to investigate if that may signal an issue at the company. Hollywood Bowl, a 10-pin bowling operator, is one of the high-yielding stocks in the portfolio.
In addition to investing in stocks that pay relatively high dividends or can grow them, the investment trust structure also aids consistent dividend growth. Claverhouse can use reserves from years when the trust earns a high level of income to supplement the dividend in weaker years.
What’s attractive now
The portfolio’s greatest active exposure is in the investment banking & brokerage sector. Much of this overweight position vs. the benchmark is related to 3i, a private equity company that invests in high-growth businesses. One of 3i’s main investments is actually related to the consumer retail sector: Action Retail is a European discount retailer that has grown earnings at a 30% compound annual growth rate. The trust has held 3i since 2016 and it is now the single largest holding. Intermediate Capital Group is another high-growth private equity company held in the portfolio.
Claverhouse also has a relatively large overweight to the oil & gas sector, where the portfolio managers have found companies with attractive high yields, consistent share buybacks and good capital discipline. Shell is one of the largest positions in the portfolio.
A healthy and improving UK consumer supports Claverhouse’s exposure to home builders, which the portfolio managers believe are at the bottom of the cycle and offer attractive yields, and select retailers and leisure companies, such as Jet2.
Despite a more positive view on the property sector, exposure to real estate investment trust (REITs) remains limited because the portfolio managers don’t find the underlying assets to be attractive. Many are heavily regulated, such as water utilities.
The biggest sector underweight is industrial metals & mining, given many of the companies’ reliance on China’s economy, which remains weak, and less capital discipline across the industry.
The outlook for UK stocks is improving
The UK stock market has looked inexpensive for the past several years. Indeed, UK stocks would get a boost just from rerating towards US equity valuations. The big question has been: What’s the catalyst? The UK economy and politics, and outflows from UK equities, have been a drag on performance but they may all be starting to turn.
Inflation is clearly normalising and the UK consumer has accumulated excess savings through meaningful real wage growth. If consumer spending follows a similar path as in the US, then increasing UK consumption could boost economic growth.
The more stable political environment in the UK is an important first step towards regaining investor confidence. In addition, some of the Labour government’s policies are targeting housing growth, addressing a key economic issue.
These factors are starting to contribute to inflows into UK equities from retail investors, reversing several years of outflows. The trend back towards UK equities may have a longer-term tailwind as pension schemes convert to defined contribution plans where individual investors are likely to allocate more to growth assets like equities and away from Gilts. Even declining institutional allocations to UK equities may have finally bottomed in the low single digits and could eventually increase.
Regardless of the environment, Claverhouse’s portfolio managers will remain focused on growing the trust’s dividend for a 52nd consecutive year.
