Why this dividend hero is a one-stop shop for global equities

Bankers Trust manager Alex Crooke sits down with ii’s Lee Wild to discuss how he manages his global equity investment trust. He talks about how he picks shares, why the trust balances both growth and income shares, and goes into depth about its 57-year record of raising dividends.

Crooke also reveals why – at 160 companies – the trust is a good “one-stop shop” for equity investors.

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Lee Wild, head of equity strategy, interactive investor: Hello. With me today I have Alex Crooke, portfolio manager at Bankers Ord (LSE:BNKR) Investment Trust. Good morning, Alex. 

Alex Crooke, portfolio manager at Bankers Investment Trust: Hello.

Lee Wild: First of all, can you explain what the investment trust objective is and how it invests? 

Alex Crooke: Yes, Bankers Investment Trust launched in 1888, so it’s a very long-standing trust and it was originally designed to bring world markets, international markets, to smaller investors, and essentially that’s what we’re still doing. So we’re [offering] access to global equity markets, so you’re investing in shares of companies listed all over the world and the objective is to outperform global benchmarks, but also to deliver a dividend that grows in real terms, so it beats inflation over the long term. 

Lee Wild: OK. So income and growth is the objective but the yield is only just ahead of the MSCI World Index. Is it fair to say that growth is the dominant objective? 

Alex Crooke: I think one has to be honest, yes. These days growth stocks, as it were, have been sort of in vogue for a decade now, and have delivered the best performance. There’s some fantastic companies out there with really dominant market positions. So, yes, I think primarily we’re looking for growth through the investments we own, but we’re also looking for the income that they generate, and I think the twin objectives are really important and over the test of time [they] have delivered a very consistent return.

What we look for are companies that yield probably between (apart from a few zero yields) one and around 3.5%. We’re not looking at high-yield stocks and that gives a yield on the portfolio of roughly 2.5%, which is a reasonable premium to global markets, which yield about 1.5%. But  [we are] trying to look for companies that generate strong cash flow and feel that those are the best companies, best managed and the best positioned to grow in the future because that cash flow can fund, obviously, our dividends, which we pass through to shareholders, but it also allows that company to invest in acquisitions, to invest in capital expenditure, or to deleverage by paying down debt, and the equity becomes more valuable. So, I think it’s the right way of looking for interesting opportunities.

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Lee Wild: The trust has dividend hero status. Does this all come from dividends or do you dip into capital as well? Is a rising dividend very important? 

Alex Crooke: Yes. So, as you say, 57 years now of consecutive annual dividend growth since 1966 is a very long time. You don’t get that by paying predominantly out of capital. You have to really look to cover your dividend over the medium term. So, in some years, yes, we might favour a lower-yielding market or we might favour a certain proportion of stocks which are lower yielding. But over the medium term, yes, you’ve got to cover your dividend with your underlying core cash flow and so if we look at 2023, we did that. We had slightly more cash coming in than the dividend we paid out. This year, who knows, but it is broadly covered.

Lee Wild: Let’s talk about the discount. Why has it been widening and does the current 13.5% discount look attractive?

Alex Crooke: We’ve seen discounts across the board. All investment trusts have widened in the last, probably, 12 months. I think it’s probably safe to say that there are three key reasons. One is the most obvious one, there are more sellers than buyers. That’s what makes the market and I think investors perceive a little bit more risk out there. Over the last 12 months there’s been plenty of worries about a recession, interest rates have risen, and therefore economic activity broadly has slowed.

The stock markets kept going up but more investors are probably more worried than positive about markets. And therefore we’ve seen that sellers’ cash yields a lot more. So, if you’re selling and raising cash, you can now get 5% or so in various accounts. So that’s also competition.

Finally, there’s been the hot market in certain technology sectors and maybe that’s dragging a bit of net investment into those spaces. I think what we see over time though, we saw it in 2000, 2001 post the tech boom, and 2009 post the financial crisis, [is that] at times of worry, discounts widen. When people get a bit more confident, they come back in again, as there are more buyers than sellers, again these are fixed share, trusts, as it were. 

Lee Wild: The portfolio holds nearly 200 stocks. Does that make it a one-stop shop for global equities? 

Alex Crooke: That’s exactly what we’re trying to provide, a diverse portfolio. I think the way to think about it is we’ve got six regional sleeves, as it were, regional allocations. Each one is managed by a specialist who predominantly sits in their region, say managed out of Tokyo, managed out of Singapore for Asia, and a US [manager] for the US portfolio. They’re picking about 20 to 25 stocks. So, we get to that 160 number. So, quite concentrated [with] 25 stocks. The whole of Asia or the whole of Japan is a reasonably concentrated portfolio, but what we like is that they’re specialists, and they know their markets really intimately. 

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Lee Wild: As you say, you outsource the stock picking to internal managers, but you take a view on asset allocation. So, what sectors or geographies do you like at the moment and why? 

Alex Crooke: If we start with sectors, technology’s been an amazing growth driver now for a number of years and certainly the last six to 12 months has been all about artificial intelligence (AI). One of the sectors within technology, which has been doing very well, and which we think will continue strongly, is semiconductors. This theme comes about through some technological advances - the chips are getting ever smaller and ever more powerful. There’s another phase of development coming through in new chip manufacturing, but there’s also the aspect of re-shoring key technology.

The most advanced chips are made in Taiwan, certainly the super-sophisticated chips, and a lot of countries, America, Europe, Japan and China, all want to have this speciality manufacturing onshore. We’re seeing a really strong capital expenditure programme coming in, supported by governments and led by some of the key players. We’ve got five or six companies in the portfolio in the theme of semiconductor hardware and growth.

I think other areas we really like include retail banking. As interest rates have risen, we’ve seen bank profitability rise. We don’t see a bad debt cycle, so we really like that sector.

Finally, general insurance is a niche area. As the cost of capital, and the cost of bonds has risen, we’ve seen capital come out of that sector and therefore pricing has improved. So again, there’s opportunities there. 

Lee Wild: In terms of geographies, are there any that stick out, any hot geographies at the moment? 

Alex Crooke: Japan. It’s been pretty unloved for two or three decades. The high of the market was 1989, but we’ve just literally gone over that point. It’s been a long, long recovery, shall we say. But a lot of work was done by President Shinzo Abe 10 years ago, trying to reform the economy, to really improve productivity, and the returns of companies.

We’re seeing that come through now in terms of independence of boards, [they are] really testing management to ask, are these cross-holdings right? Should we be concentrating on our core business, and not expanding in other areas? We’re seeing all those benefits coming through. We’re seeing gently rising inflation and rising wages, so even though the economy has issues with demographics, a low birth rate, for example, the equity market looks good value. And we’re seeing very strong returns coming through. 

Lee Wild: Alex Crooke, portfolio manager at Bankers Investment Trust, thanks very much for joining me today. Thank you.