JPMorgan Claverhouse (LSE:JCH) investment trust recently achieved its 50th consecutive year of dividend increases. In this interview with interactive investor’s collectives editor Kyle Caldwell, fund manager William Meadon explains how sustainable the dividend is going forwards, and points out that despite the macro doom and gloom there’s plenty of value opportunities in the UK equity market. Meadon picks out four sectors and share examples of where he sees “real opportunity to make significant returns over the medium term”.
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, who is 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, JPMorgan Claverhouse recently announced its 50th consecutive year of dividend increases, and over the past year it's grown its dividend by 8.2%. So, what were the key drivers behind delivering that dividend growth?
William Meadon: Callum Abbot [the co-manager] and I, and the board, are delighted to have announced that 50th consecutive dividend increase. It’s the longest record of consecutive dividend increases of any investment trust invested wholly in UK equities, which Claverhouse is. And that’s been delivered through this barbell approach of holding the very best value stocks and the very best growth stocks, and that combination has provided good capital returns and good income returns in a very consistent manner.
And in periods where dividends haven’t been so plentiful in the UK market, for example, some five years ago, there’s [been] some very significant dividend cuts in the UK market, investment trusts, one of the great beauties of them, is that they can smooth their dividend payments, they can draw on reserves that have been accrued in more plentiful times, and those are paid out in more difficult times.
And so, it’s that combination, that barbell approach, the best value stocks, the best growth stocks combined with, when things are tough, drawing on those reserves that have been tucked away in the good times, and that’s enabled us to increase the dividend for 50 consecutive years. And when you look back, the returns for those investors who have been invested for that 50-year period have been ahead of the UK market, ahead of inflation and delivered in that very smooth manner, which we think is an attractive trait.
Kyle Caldwell: And the 8.2% dividend growth year-on-year, was that all from the underlying investments, or did you dip into the reserves as well?
William Meadon: There have been times when we've dipped into reserves, after the financial crisis of 2008-09, most companies took the opportunity to cut dividends to protect their balance sheet. And yes, Claverhouse like many investment trusts then drew on those reserves that [were] tucked away in more plentiful times. So, our shareholders didn't suffer the dividend cuts that they would have done if they been in an open-ended, say, index fund. And that is one of the real beauties of investment trusts for income shareholders. They can, the way Claverhouse has, deliver that very steady income stream to shareholders, which we know is important to them. So, last year we again paid a covered dividend, we added to reserves, so all the income that we paid out to shareholders, came from the underlying investments, and we still had some left over to tuck into reserves, which gives Callum and I and the board a great degree of confidence that we're not going to stop at 50. We can keep those dividend increases going.
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Kyle Caldwell: That's my next question. I was going to ask how sustainable the dividend is going forward? So, in other words, how healthy are those dividend reserves?
William Meadon: Well, it isn't a guaranteed income product and we, obviously in these particularly uncertain times, can't guarantee anything. But I think the risk/reward for shareholders is about as good as it gets, when you have an investment trust which is invested in a lot of high-yielding shares, [and it] has these reserves which make up some 80-90% of a whole year's dividend. So we've got substantial resources we can draw on should things get more difficult, and we think that gives us a really high degree of confidence, without a guaranteed stamp on it, that we can keep those dividend increases going for the foreseeable future.
Kyle Caldwell: In terms of the macro backdrop, there's a lot of negativity at the moment towards the UK. The economy looks like it's going to be entering a recession, interest rates are on the rise, inflation is at high levels. Does this make you more wary of investing in UK consumer-facing businesses?
William Meadon: Well, there's two things I'd say to that, Kyle. First, the UK economy is not the UK stock market. If you look at the FTSE 100 stocks where Claverhouse is predominantly invested, some 70% of their turnover comes from overseas. So, it's an accident of history that BP (LSE:BP.) or Shell (LSE:SHEL) or AstraZeneca (LSE:AZN) is called a UK company. These are global companies. And, the UK stock market is arguably the cheapest developed stock market in the world at the moment. It's paying the highest yield, it's on one of the lowest price-to-earnings (P/Es). And that combination, therefore, of those two means that you're getting global exposure on the cheap. And we think that's really attractive for investors.
And you're seeing that reflected in the UK stock market performance. It was the only major developed economy, for example, to give a positive return last year. It was only a small return, but compared to the S&P 500 index in the States, the Nasdaq, European stock markets were all down, many of them big double digits. The UK stock market gave a positive total return. To come to your point on consumer stocks, we see that the UK consumer is proving much more resilient than many forecasters would have expected. You're seeing quite good figures coming from retailers such as Next (LSE:NXT), where you have the excellent Lord Wolfson in charge, one of the best retailers in the world, I think. And that gives us a degree of confidence that shares at the current level in consumer stocks are very attractive because the actuality is coming in much better than expectations, and the ratings on these shares is very often at historic lows.
Kyle Caldwell: And among the big shares in the FTSE 100 that you own, are there any that you would use as an example that continue to perform well and be relatively immune to the performance of the UK economy?
William Meadon: What we try not to do [is] nap on any one individual stock. We like to think we've got enough humility to recognise that on any one stock, sector or theme we could be wrong. And so we always run a diversified portfolio. The range of stocks in the portfolio is quite a focused portfolio, but it ranges from 60 stocks to, at the upper end, 80 stocks, and currently we're at the lower end of that range. There are 63 stocks in the portfolio. But there's a wide range of stocks and sectors where we see real value because of this low rating that the UK stock market is on.
So, the oil sector, the mining sector, the pharmaceutical sector, retailers such as Next, such as Dunelm (LSE:DNLM), we find for the medium-term investor, obviously we like everybody else can't predict with any degree of accuracy what's going to happen in the short term. But for those patient investors who are prepared to take money away, we see real opportunity here to make significant returns over the medium term. And meanwhile, while you're waiting, you're getting this very healthy and steady dividend stream coming from the investment trust.
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Kyle Caldwell: For several years now, there's been a trend of investors going overseas for global income. What are your thoughts on that trend and how would you convince investors to back UK equity income right now?
William Meadon: Well, I think it makes sense for investors to spread their investments, to diversify. Diversification is probably the only free lunch in investment. But I think, because of this Zeitenwende, this change that's come, this turning point from Ukraine, the neglect that has been shown to the UK market since the Brexit vote of 2016, you've seen this big de-rating. That I think gives the real opportunity for investors to re-look at the UK stock market and see value in what are global companies, British American Tobacco (LSE:BATS), AstraZeneca, Glencore (LSE:GLEN).
These are really genuinely global companies but are sitting on significant discounts to their peer group overseas. And at a time when there's been money flowing out of UK equities [for] the past 10 years, I think it's time to reassess and you're starting to see that reflected in the UK stock market performance. It was one of the few markets to be up last year. It's significantly ahead of the S&P 500, the American index this year. So I think investors are quite rightly reassessing the prospects for the UK stock market and many of them are coming to the conclusion that there's real value on offer.
Kyle Caldwell: And finally, a question we ask all fund managers, do you have skin in the game?
William Meadon: Do I hold shares in Claverhouse? Yes, I do. Part of my remuneration at JPMorgan is given in Claverhouse shares. My wife holds Claverhouse shares, my children hold Claverhouse shares. So, I can assure investors that I have a symmetry of interest with them, that if Claverhouse does well, I'm happy like they are, and in more difficult times I feel the pain that they do.
But I'm very optimistic about the prospects for the trust over the medium term. And it really is important for investors to stretch their time horizon, and to start to reappropriate the old-fashioned virtues that have been rather neglected of patience, valuation, compound effect of reinvesting dividends. And I think, in this new era where things are going to be more difficult, I think one needs to be more patient and tuck a fund like Claverhouse away for the medium to long term.
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 YouTube channel, where you can like and subscribe. Hopefully, see you next time.
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