Claverhouse positioning

Written by Jennifer Hill

June, 2021

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Claverhouse positioned for a ‘good year for specials’

A stronger-than-expected rebound in economic growth could herald a strong year for special dividends and share buybacks – something that JPMorgan Claverhouse Investment Trust is well positioned for. 

Callum Abbot and Will Meadon, managers of the UK equity income trust, are playing the reflation trade by adding to cyclical areas of the stock market – domestic banks, miners and housebuilders. 

The Bank of England has pencilled in economic growth of 7.25% this year and 5.75% next as Covid-19 restrictions ease and consumers spend some of the extra £180 billion they have saved. 

‘It could be a good year for specials,’ said Abbot. ‘Companies want flexibility instead of promising [normal] dividends.’ 

Special dividends typically provide a strong kicker to the trust’s income – over £1 million in 2019 and even £365,000 in 2020 despite the pounding dividends received last year. 

Second special 

Rio Tinto, the world’s second largest metals and mining group behind BHP, unveiled a surprise special dividend in February after a sustained rally in iron-ore prices drove a 22% rise in annual profits. Abbot believes they are well positioned pay a second special dividend this year. Another special dividend at Rio would come on top of an already attractive 11% prospective dividend yield. 

Infrastructure spending, continued strong demand from China and the green agenda promise to provide strong impetus to commodity prices, copper being an essential component of electrification of the global economy and steel being a key ingredient to building most infrastructure.  

‘Miners have learned the lessons of the last [commodity] crash and are much more capital disciplined,’ said Abbot. ‘Commodity prices are well underpinned and even at much lower prices these companies generate vast sums of cash. 

‘We’ve been adding to positions where we see good income and strong trading. We were significantly overweight miners already but have taken it up a gear because of the dividend outlook.’ 

The managers have added to Rio Tinto and BHP in the past twelve months, the last purchase being BHP at a 6% yield in February. 

In April, they trimmed British American Tobacco amid regulatory headwinds and bought gold miner Polymetal at a 7.3% yield. 

‘That’s pretty attractive for a gold miner,’ said Abbot. ‘It has exposure to Kazakhstan and Russia, which is why it trades at a discount to other gold miners, but it’s been consistent in terms of operational delivery.’ 

Share buybacks 

Barclays bank and oil giant BP recently announced share buybacks to the tune of £700 million and £500 million, respectively. Share buybacks are good news for shareholders because profits are divided between fewer owners. This also increases shareholders claims on dividend distributions.  

The managers increased exposure to both last November – Barclays at a 3.2% yield and BP at a 6.1% yield. 

At the same time, they added to Shell at a 4% yield. ‘BP has achieved its debt target and Shell is nearly there. They may want to deleverage a bit more but at some stage we’ll see material buybacks that will significantly reduce their share count,’ said Abbot. 

In financials, they added to NatWest at a 4.8% yield in November. In February, they topped up insurer Legal & General at a 6.5% yield, in March they increased exposure to asset manager M&G at a 9.5% yield and in April, they added to their position in Lloyds Bank at a 4.1% yield. 

‘UK banks are trading at discounts to European peers and their own history, so there’s a value opportunity here,’ said Abbot. ‘Economic growth and rising interest rates should translate nicely into higher earnings, better profitability and capital returns through dividends and buybacks.’ 

In housebuilders, the managers upped exposure to Persimmon at a 7.5% yield in March. It operates in the ‘sweet spot’ of affordable regional housing and has £1.2 billion cash on its balance sheet – around 10% of its market capitalisation. 

Its new chief executive, Dean Finch, has been doing a ‘really good job’ of ironing out issues with build quality since he took the reins in September 2020, Abbot added. 

Smooth story 

Underlying income of Claverhouse held up much better than the wider UK stock market last year with a 20% decline versus a 44% rout. Despite the fall in income, plentiful revenue reserves – the most substantial of any trust in the UK equity income sector – saw shareholders in the trust enjoy their 48th annual dividend increase. 

Excluding special dividends, the managers expect to generate a ‘decent’ uplift in their underlying income this year, having revised their forecast from flat. 

The outlook for capital growth looks good, too. At the trust’s 2021 annual general meeting, Meadon highlighted the UK as being a key beneficiary of the reflation trade given its high weightings to value sectors like energy, materials, industrials and financials (see chart). 

‘The UK market is better placed for a reflation value rally than other market,’ he said. ‘That’s going to bring it back onto the radar of many international investors who have hitherto been neglecting it.’ 

It remains the best developed market for income but Abbot recognises that dividends from UK Plc have had a ‘material haircut’. ‘It will take till the middle of the decade for income to recover to pre-pandemic levels, this is a huge headwind for investors reliant on income. The benefits of the investment trust vehicle and its ability to smooth the income profile is going to be a multiyear story and can help those investors that need income,’ he added. 

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