BAT’s cover drive for dividends

Fund Strategy - 4 Jun 2012 | By Beth Brearley

When F&C’s Phil Doel took over the management of the £460m British Assets Trust (BAT) eight months ago it was immediately apparent what his target would be – to rebuild the trust’s dividend cover.

Doel took over as trust manager from Julie Dent at the end of last September and, noting the trust’s dividend had not increased since September 2009, he set about making changes to reinstate the dividend cover, which is the measure of the extent to which a company’s dividend is matched or exceeded by profits.

“With the big cuts in dividends we saw post-financial crisis, the trust’s dividend cover fell,” Doel says.

“British Assets has been paying elements of the dividend from its reserves – it was £1m short last year. The plan is to get the dividend covered by the end of the trust’s year on September 30. (Investment trusts continues below)

“This is the first step before we look to increase the dividend, and we are on track to do that. While we would like to be progressive, we can’t be at the moment.”

The biggest move Doel made to get the trust’s dividend cover back on track was to change the target of the trust’s global portfolio to high yield.

There are five sub-strategies within BAT: UK core (56%) run by Doel; UK satellite (14%) run by Peter Lees; emerging markets (5%) run by Jeff Chowdhry; global equities (15%) run by Erik Rubingh; and corporate bonds (10%) run by Ian Robinson.

The global portfolio is a systematic equities mandate and previously targeted its index yield. However, Doel increased this to a target of 2% more than the FTSE All- World in terms of income, which he says has led to a big step up in yield.

The second change Doel made was to reduce the emerging markets sub-strategy from 7% to 5%, although this was increased to 7% again in January before being trimmed to 6% on the back of strong performance.

“These two changes have increased the yield by 40 basis points, with the trust currently yielding 5%,” Doel says.

The trust, which uses a composite FTSE All-Share and FTSE World (ex UK) benchmark, had a net asset value total return of 15.9% compared with the 15.5% benchmark in the six months to March 31.

Doel says the first six months were “steady rather than exceptional”.

He attributes the marginal gains to the emerging markets portfolio, which benefited from strong stock selection, and the UK satellite strategy, which Doel says performed well as a result of the market rising 1.5%.

Gearing also helped performance in the first six months, Doel says. There is £60m in 30-year bonds issued on the trust, which mature in 2031, as well as an “overdraft facility”, which means the trust is 106% equity geared to the market.

Combined with the bonds issued, which are offset by the corporate bonds held within the trust, this gives the trust a total gearing of almost 120%.

Although gearing has detracted from performance more recently, Doel says he may be looking for opportunities to increase the gearing over the next few months, depending on how the situation in Europe unfolds.

’With the big cuts in dividends we saw post-financial crisis, the trust’s dividend cover fell’

“We can have an overdraft of up to £60m, but we can’t go above 125% of total gearing without the board’s approval,” he says.

On a mid-term view, Doel is optimistic on the outlook for economic growth in America and he and Lees have been increasing the trust’s exposure to British companies with exposure to the US, such as Regus and BBA.

“The US represents 20% of the UK equity market in weighted revenues and our portfolios are overweight that metric by 4-5%.

“This reflects our opinion that the US is doing incrementally better,” Doel says.

The trust is underweight banks in the UK strategies. It has 1% in the core portfolio and 4% in the satellite mandate but Doel says they are looking for opportunities to increase this.

“We see the potential for significant valuation upside if there is clarity on the outcome in Europe,” Doel says.

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