Interactive Investor

The high-yielding shares powering this income heavyweight

30th March 2023 14:43

by Kyle Caldwell from interactive investor

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JPMorgan Claverhouse (LSE:JCH) is part of the eight-strong investment trust club that have consistently raised their dividends for 50 years or more. Fund manager William Meadon tells interactive investor’s collectives editor Kyle Caldwell how the trust’s approach of owning both growth and value stocks strikes an appropriate style balance, and names the high-yielding shares and sectors the trust focuses on to deliver market-beating income (4.8% at the time of the recording in early February). Meadon also explains why the “era of get-rich-quick is over”, and why he is adopting a more cautious stance than usual until the “investment skies clear a bit more”.

Kyle Caldwell, collectives editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio I have with me William Meadon, fund manager of the JPMorgan Claverhouse investment trust. William, thanks for your time today.

William Meadon, fund manager of the JPMorgan Claverhouse: Pleasure.

Kyle Caldwell: So, the trust invests in UK dividend-paying companies. What are the key attributes that you look for in a business?

William Meadon: Well, Claverhouse is a 60-80 stock portfolio of our best ideas invested wholly in quoted UK equities, and to help us deliver our aim of increasing both capital and income, we employ something called a barbell approach, which is employing both value stocks and growth stocks in the portfolio because both are outperforming strategies, and they tend to move to different beats. When one does well, the other does badly. So, we’ve got two outperformance strategies in the portfolio, which gives you an inbuilt risk control, and that’s what has helped Claverhouse deliver both growth in capital and income over the last 50 years.

Kyle Caldwell: Are there any particular sectors or themes that you’re focusing on at the moment?

William Meadon: The trading environment certainly post-invasion of Ukraine 12 months ago is clearly very tough. I think we’re in a new world. It’s what Chancellor Scholz in Germany called a Zeitenwende, a turning point, and that’s for the real world, and there are consequences of that for the investment world. We’re going to have to live, I think, with higher inflation, higher interest rates. I think the era of get-rich-quick is over. If you look at the performance of the Nasdaq over the last 12 months, or cryptocurrency or profitless tech, investors have lost a lot of money there. And I think we are now in an era where you want to be invested in good quality companies, which are steady and reliable in their dividends or in their production or delivery of profits and dividends, and it’s going to be a long slog, but I think if investors can stretch their time horizon, perhaps be more patient than has been necessary over the last 10 years, I think investors can still get to the point they want to get to, to meet their investment wishes.

Kyle Caldwell: In terms of the trust’s biggest holdings, eight of your top 10 positions are also top 10 holdings in the FTSE All-Share Index, so how does the trust differentiate itself from that index? And do you publish an active share percentage?

William Meadon: Well, the active share at the moment is about 40%, which is towards the lower end of the range. We have a range of about 40-60%. And the reason it’s quite low at the moment, Kyle, is because the outlook is pretty uncertain. There are a lot of clouds on the investment horizon, and Callum Abbott, my co-manager at Claverhouse, and I are waiting for those investment skies to clear a bit more.

There’s some encouraging signs, but, as a fund manager, it’s really important to know what you don’t know, and that list of what we and other fund managers don’t know at the moment [includes] how’s the war in Ukraine going to evolve? Is it going to be over soon or not? What’s going to happen to the level of inflation? What’s going to happen to the level of interest rates? There are some big uncertainties out there, and I think it’s important to recognise that and only increase the active share in the portfolio, which we will do, when those skies start to clear.

And so the consequence of this much tougher trading environment and this new investment backdrop is that Claverhouse is really focused on the strongest, the best-quality companies and most of those are to be found in the FTSE 100. So, we are overweight in pharmaceutical stocks, we’re overweight in the bank stocks, which look very strong at the moment, much stronger balance sheets than they’ve had for some 15 years. The mining sector and the oil sector also look very attractive and have very good tailwinds with them at the moment, so Claverhouse is some 90% invested in FTSE 100 stocks as opposed to 80% for the index. But, we are flexible as and when we think it’s right to change that percentage, we have the discretion and the flexibility to do so.

Kyle Caldwell: The trust’s dividend yield is 4.8%, which is higher than most of your rivals. How do you achieve that high level of dividend yield and also ensure that there’s capital growth in the portfolio?

William Meadon: Well, Callum and I spend a lot of our time together with our team of analysts looking at the dividend-paying ability of companies, and that’s a function of their balance sheet and their cash flow and the barriers to entry and how much the underlying company is growing, so there’s a number of factors, but roughly half the portfolio is in high dividend yield-paying stocks.

We don’t have to have all the portfolio in those, we have half roughly in growth stocks, that barbell approach that I mentioned. But one of the beauties, or one of the real advantages of investment trusts for income investors, is that you don’t have to pay out all the income that you earn in any one year. So, when dividends are plentiful, dividends can be tucked away in reserves to be paid out at times when income is less plentiful, and that’s precisely what the Claverhouse board have done over the years. And so, even when dividends aren’t as plentiful as perhaps they are at the moment, we have the ability to dip into those reserves and give a much smoother income profile to our shareholders. And in fact, it’s been so successful that we’ve just announced our 50th consecutive dividend increase with our December year-end figures.

Kyle Caldwell: And could you run through a couple of stocks that have among the highest yields in the portfolio?

William Meadon: Yes. So, a lot of the income of Claverhouse is made up, for example, in the bank sector. NatWest Group (LSE:NWG), the old Royal Bank of Scotland, has spent the last 12 to 13 years since the great financial crisis of 2008 repairing its balance sheet. In 2008, NatWest had a 4% tier one, that’s the percentage of its balance sheet in cash resources and that is now some 15% or 16%. So that gives us great confidence that NatWest can pay a good dividend.

The oil sector is clearly, with the oil price quite high at the moment, [providing us with] an embarras de richesses in the balance sheet, and you saw with BP (LSE:BP.)'s dividend, which announced a couple of weeks ago, [that it] beat all expectations. Glencore (LSE:GLEN), the miner of many materials, including copper which goes into EV vehicles, has announced significant share buybacks and significant dividend increases. So, it's the mining sector, the bank sector, the pharmaceutical sector, the tobacco sector, all these those sectors between them make up about 50% of the income of Claverhouse, and the prospects for all those companies within those sectors looks pretty good to us.

Kyle Caldwell: And how often do you make changes to the portfolio? I was wondering if you could talk us through what the most recent changes have been? And I appreciate that the trust, as you mentioned earlier, [is] predominantly FTSE 100, but have the mid- and small-cap parts of the markets been tempting you given that there has been a big sell-off over the past year?

William Meadon: Well, the place to be in the UK market in the last 10 years undoubtedly was mid-cap companies, that was the place to get a lot of added value. They were growing much faster than many FTSE companies and a lot of managers, including ourselves, got a lot of very good returns from those mid-cap companies. But as I say, I think the events of 12 months ago, the invasion of Ukraine on 24 February 2022, changed that materially, and I think the value now is in those FTSE 100 companies, which is where the portfolio's some 90% positioned. Callum and I are naturally long-term investors and like to have as little turnover in the portfolio as possible, so we made some significant changes when Russia invaded Ukraine 12 months ago and since then we haven't made many changes at all.

We're happy with our positions in those strong blue-chip equities, many of which are sitting on significant discounts. AstraZeneca (LSE:AZN) sits on a significant discount to its peer group in the US. BP sits on a 40% discount to Exxon Mobil Corp (NYSE:XOM) in the States, so there are some material valuation opportunities in those big blue-chip shares because the UK market until recently has been largely ignored by investors because they've seen better opportunities elsewhere. But I think that turning point of 12 months ago has changed that.

Kyle Caldwell: And could you run through what some of those significant changes were a year ago? Was it a case of buying new companies, or was it topping up exposure to existing holdings?

William Meadon: It was really topping up a lot of our existing holdings. We just saw greater attractions in the mining stocks, the oil stocks, the pharmaceuticals stocks such as AstraZeneca. And we increased the gearing slightly because you had that big sell-off on Ukraine, and Callum and I saw that as an opportunity to gear the portfolio, i.e. borrow money. We have borrowing facilities at the bank where we can, when we see good opportunities, use some of that money to invest. So, the trust currently is about 7% or 8% geared and we've used those borrowings to top up those blue-chip shares that I mentioned to you.

Kyle Caldwell: William, thank you for coming into the studio.

William Meadon My pleasure, I enjoyed it.

Kyle Caldwell: That's all we have time for, for today. You can check out the rest of our Insider Interviews on our YouTubechannel where you can like and subscribe. Hopefully see you next time.

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