Dunedin Income Growth Investment Trust : Six coronations and counting for Dunedin Income Growth Investment Trust

The era of King Charles officially began on 6^th May, making him the seventh monarch that has reigned since Dunedin Income Growth Investment Trust (DIGIT) was founded in 1873. While the ambitions of the portfolio remain the same as in the time of Queen Victoria - to invest in good companies, and benefit from the long-term growth of their revenues, profits, cash flow and dividends - the execution is a little different.

In those days, DIGIT invested in North American railroad bonds, the major structural growth theme of the time. Today, we see three major themes for the Carolean era; the first and most immediate is inflation. We are experiencing the highest inflation in a generation, which has been a real challenge for companies to manage. It has raised questions about affordability, about supply chains and forced companies to manage costs effectively. Inflationary pressures are shifting from raw materials and energy towards labour and we have sought to make sure the companies in our portfolio have robust pricing power, allowing them to pass on higher costs and protect margins

Another key theme is climate change and the energy transition - an issue close to King Charles's heart. This is a high priority for governments, as they seek to address challenges around energy security while meeting emissions goals. Vast investment is required to upgrade energy infrastructure and build renewable energy supply. DIGIT holdings SSE and Total Energies have a vital role to play in addressing that theme.

A third theme is productivity improvement. Companies that provide innovative solutions to help businesses become more efficient, through digitisation, or better use of data, are likely to be in high demand. We would highlight companies such as Oxford Instruments, which provides a range of technologies, including semiconductors and quantum computers.

The recent corporate earnings round painted a surprisingly encouraging picture. Rising costs have challenged businesses as well as consumers, and there had been fears that this would dent profit margins and depress earnings. This hasn't happened, at least for the time being, with companies managing inflationary pressures better than expected. Companies have passed on rising costs to their customers successfully, preserving and even expanding profit margins.

That said, as time goes on, and end customers come under greater pressure, this pricing power may ebb. It could become more difficult to put up prices as customers adapt their behaviour to match their shrinking wallets. Some companies are seeing declining volume growth, even if they are maintaining profit margins. We suspect this may become more pronounced, separating the most robust companies from their weaker peers.

The pricing lever has been less important during periods of relatively low inflation, but it is now a key part of a company's armoury. If volumes start to fall, there will be diseconomies of scale, and companies need to recognise the problem. While the bounce in inflation hasn't been nearly as damaging for the corporate sector as might have been expected, there is nuance.

Consumer cyclical companies haven't been a happy hunting ground for investment managers over the past year. Spending has come under pressure from higher interest rates and rising household bills for food and energy, leaving consumers with less disposable income. However, Games Workshop shows why investors shouldn't necessarily judge a book by its cover.

It specialises in tabletop miniatures, selling to gaming fans. It has a committed base of engaged and passionate users, which provides a strong moat for the business. It has significant intellectual property and has shown itself capable of consistent innovation. It demonstrates how companies with a strong position in a niche market can transcend a weaker sector.

The group is looking to expand in North America and Asia, which creates potential new pathways of growth for the business. The company has announced a new deal with Amazon, to bring its sci-fi Warhammer universe to screens around the globe. This provides a really interesting opportunity to create value for the business and raise brand awareness.

It has been a buoyant period for dividends in the UK market. UK dividends saw underlying growth of 16.5% in 2022. It was boosted by a strong performance from the mining sector, but almost every sector in the UK market has seen a double digit growth in payouts. The yield still looks attractive across the UK market, at around 3.7% for 2023.

However, this rapid growth rate is likely to slow over the next 12 months. Link is currently predicting anaemic growth of 1.7% in UK dividends for 2023 as a whole. This has various causes: the mining sector has seen a bumper two years on the back of higher commodity prices that is unlikely to be repeated. A number of special dividends were paid last year and may not recur. Equally, there are headwinds from rising costs and a weaker global economy, even if China's reopening may compensate to some extent.

Against this backdrop, achieving dividend growth for the portfolio will require a focus on corporate balance sheets and cash flow, finding those companies that are generating surplus capital, investing appropriately and then passing the remainder onto shareholders.

There are always swings and roundabouts in dividend payouts. Dividend distributions tend to be late cycle and backward-looking, made on the back of results several months past. However, we always take a temperature check on the dividend prospects for our portfolio companies and those prospects remain encouraging.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company's assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company's shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.
• There is no guarantee that the market price of the Company's shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company's shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Issued by abrdnFund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdnInvestments Limited, registered in Scotland (No. 108419), 10 Queen's Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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