Honed trust thrives on boost in activity

Fund Strategy - 18 Jun 2012 | By Gary Jackson

The former Edinburgh US Tracker trust shed more than 350 stocks and invested in fixed income securities after moving from a passive to active management style.

Established in 1902, the trust tracked the performance of the American large-cap market by replicating the constituents and weightings of the S&P 500 index. In line with this, the portfolio owned 502 holdings with nothing outside America or the equity markets.

But this changed when shareholders approved a new investment policy and name for the £214.7m trust at a general meeting on May 29. The North American Income trust, as it was renamed, takes an active management approach with a focus on dividend income.

Aberdeen Asset Management continues to run the trust. However, the portfolio is run by Paul Atkinson, the head of North American equities, and his Philadelphia-based team rather than David McCraw, the head of specialist equity. (IT continues below)

Atkinson says the change in policy aims to capitalise on the “significant scope” for American companies to grow their dividend payouts and downplays the opinion that the country’s dividend culture lags other regions.

Dividend payouts in America are below 2007 levels, despite the mountain of cash on corporate balance sheets. American businesses are only paying 30% of their retained earnings as dividends but the cash on their balance sheets is at a 50-year high.

 

“The corporate backdrop is supportive of dividend yields going higher,” Atkinson says. “Companies realise the marketplace for their equity is broadened if they can show dividend yields that are attractive on a global basis.”

Positioning to capture this through active management, the equity portion of the portfolio has been cut from the full S&P 500 to just 40 companies. The trust’s top holdings include Verizon, a telecoms carrier, Intel, a chip maker, and Johnson & Johnson, a pharmaceutical firm.

A notable exclusion from this list is Apple, the technology giant. When the fund was a tracker, Apple was its largest weighting at 4.3% - but since the portfolio is free from the constraints of the S&P 500, it has nothing in the stock.

“That’s not to say Apple is a bad company - it’s a great company,” Atkinson explains. “When holding Apple, you’re betting on its ability to sell more and more iPads and handsets at an ever faster rate. But the environment is much more competitive than it ever has been.”

 

The manager contrasts this with Verizon, which he says is benefiting from strong cashflow in both its wireless and wire-line operations. In addition, the company’s cashflow requirements are likely to decline, supporting the potential for dividend growth by leaving the firm with excess funds.

“Something like Verizon benefits from lots of Apple handsets being sold as Apple is carried on the Verizon network,” he adds.

As well as holding equities, the new investment policy allows the trust to hold up to 20% of its assets in fixed income. About 15% is held in corporate bonds from names such as HSBC Finance Corp, Blackstone Holdings, Nationwide Mutual and Cincinnati Bell to provide additional sources of diversified income.

Furthermore, the trust can look to Canada for opportunities. Just over 5% of the portfolio is allocated to the country, with Telus, a telecoms company, in the top 10.

The change in policy has won the backing of analysts such as Winterflood Investment Trusts, which has retained its recommendation on the trust.

Simon Elliott, the head of research at Winterflood, says an equity income investment approach should prove “advantageous” in this environment. Meanwhile the fund’s discount to net asset value of 6% looks attractive at a time when two other new investment trusts with similar mandates are being marketed.

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