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Perpetual Income & Growth: a defensive bargain?

James Carthew, former investment manager at UK Advance Trust, gives his verdict on the Perpetual Income & Growth investment trust.

 
Perpetual Income & Growth: a defensive bargain?

As the fun and games continue in the eurozone, investors looking for safe havens in the investment trust sector often face the difficult decision of whether to pay a premium for defensively positioned funds.

Capital Gearing , which I wrote about a couple of weeks ago, is already back on an 11% premium, making it one of the best performing investment companies over the past month.

I raised some money from my portfolio by selling Jupiter Special Situations (index trackers drove up the price of this stock after it went into the All-Share Index at the start of June). Casting around for a new home for some of the proceeds, I alighted on Perpetual Income & Growth .

A buying window?

Managed by Mark Barnett (pictured) since July 1999, this fund has built up an impressive track record, but often trades on a premium. Right now the shares are at asset value, however, so I took advantage and bought some.

Compared with funds stuffed full of index-linked bonds or holdings in gold bullion, a UK equity income and growth fund might not sound that defensive. Barnett has long recognised, however, that the UK is in the doldrums, and is likely to remain so for some time, and has positioned his portfolio accordingly.

With a market cap of around £550 million, Perpetual Income & Growth (Pigit) is just over half the size of its stablemate, Edinburgh Investment Trust, which is managed by Neil Woodford. It trades on a 4% yield (dividends are paid quarterly) against Edinburgh’s 4.6% yield but, for now at least, it looks much cheaper – trading at asset value rather than a 6% premium for the larger trust.

Woodford versus Barnett

Edinburgh, under Woodford’s stewardship, has a slightly better long-term track record but, so far in 2012, Pigit is ahead in net asset value (NAV) performance – up by 3.4% versus 2% for Edinburgh and 1.7% for the UK market. It has half the number of holdings compared with Edinburgh (61 versus 124), but the portfolio is less concentrated, with the top 10 accounting for around half the fund, while in Edinburgh’s case it represents almost three-quarters.

The biggest difference between the two is that Barnett has more than a quarter of the fund invested in FTSE Mid 250 stocks, whereas for Edinburgh they are just 10% of the portfolio.

The objective of the fund is to provide capital growth and real growth of dividends. Over the past 10 years, dividends have more than doubled, rising from 5p in the year to 31 March 2003 to 10.4p in the last accounting year, while the NAV is up by 130%.

Barnett takes a long-term view and consequently the portfolio turnover is low. He is no index hugger. The fund has some big bets relative to the UK market – a big overweight to consumer goods (actually a much bigger overweight in tobacco stocks), and overweights to pharmaceuticals, industrials, telecoms and utilities offset by low to no exposure to miners, oil, banks and IT companies.

Eurozone woes

The debt problems of Western economies are rightly preoccupying investors. The lack of decisive action by governments and central banks is prolonging the situation. While some may take comfort in the bias to pro-bailout parties in the Greek election, it seems to me that this will just prolong the agony for the country’s economy.

There is a long way to go to get ourselves back on an even keel. Against this backdrop, Barnett reckons companies that exhibit earnings reliability, financial strength, sustainable growing dividends and geographic diversification will be favoured by investors and this is what is driving his stock selection decisions.

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1 comment so far. Why not have your say?

bruce anderson

Jul 03, 2012 at 18:30

Barnett also manages Keystone Investment Trust, I have held this for several years, currently on a 8% discount and pays nearly 4% yield..................

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