Shareholders in investment trust Lowland have seen the value of their holdings rise strongly in the past year on the back of a more buoyant UK stock market.
Yet the managers believe there is more to come if the recovery in equity prices extends to the domestically focused companies that feature prominently in its portfolio.
Laura Foll, joint manager of the £350million fund alongside James Henderson, says the trust’s recent performance – a 26 per cent return over the past year – has been driven primarily by some of the holdings it has in FTSE 100 listed companies.
For example, the likes of Aviva (up 31 per cent) and Barclays (up 58 per cent). Stocks that are part of the FTSE100 Index account for more than 40 per cent of the trust’s portfolio.
Yet the smaller companies it holds have yet to be rerated.
‘Some of the foundations are in place for such a rerating,’ says Foll.
‘From a valuation point of view, the UK stock market stands at a 20 per cent discount to other overseas markets.
‘That suggests UK equities are still cheap, especially smaller and medium sized companies. Also, we are seeing signs that the UK economy is performing better than the market thought it would. OK, it’s not stellar growth and GDP [Gross Domestic Product] is likely to increase by no more than one per cent this year.
‘But this is good news for the small and medium sized businesses we own that generate most of their revenues here in the UK. A stronger economy means improved business revenues.’
The trust is diversely invested, comprising stakes in 118 businesses. The number of positions has increased this year, primarily as a result of companies it held being taken over and the managers then using the proceeds to build small stakes in a number of new businesses.
‘We don’t take a two per cent holding in a company straightaway,’ says Foll.
‘We take our time building a position. We’re careful.’ Recent portfolio additions include engineering company Dowlais that spilt out of FTSE 100 firm Melrose Industries – and packaging company Macfarlane.
‘It’s not a glamorous company,’ adds Foll.
‘But Macfarlane is well managed, focused on the UK market, and its shares have yet to be rerated. They look cheap.’
A recent key portfolio change was a switch out of Rolls-Royce Holdings after a strong rally in its price which began early last year.
‘It was a relative value call,’ says Henderson.
‘There are a lot of good similar companies in the smaller and mid-market space whose shares have yet to participate in the market upturn. They are potentially exciting.’ Among them are TT Electronics and Senior plc.
Lowland’s ace up its sleeve is an attractive dividend which has risen in absolute terms for 14 consecutive years – and has never been cut since the trust was launched in 1963.
‘It’s a focus for us and the trust’s board,’ says Foll.
The payments, distributed quarterly, are equivalent to an annual income of 4.8 per cent.
In the financial year to date, it has paid two dividends of 1.6p a share, compared to equivalent payments in the previous year of 1.525p.
The managers work for global investment house Janus Henderson and also jointly run investment trust Law Debenture.
The trust’s annual charges are competitive at 0.6 per cent. Its stock market identification code is BNXGHS2 and market ticker LWI.
Other trusts with a UK equity income focus include Edinburgh, Merchants and Temple Bar.
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