Aberdeen Diversified Income and Growth Trust PLC (ADIG)

[bailey56]

I've been looking at this IT with a view to buy, and wondered what people think. It has just been rebranded and morphed from BlackRock Income Strategies Trust. I understand that before that it was known as British Assets. The dividend is due to be cut by 20% as a result of a change in investment approach after the re-organisation is complete, but even after that it would yield over 5% on current price. It's currently on an 8% discount.

I'm relatively new to Investment Trusts, and am looking at IT trusts for income. I like this one for its global multi-asset approach. It includes assets and sectors not part of my mainly FTSE100 high-yield portfolio. I'd welcome the thoughts of those who have more knowledge of this IT, or who have others to suggest. I already have Henderson Diverse, Scottish American and Henderson Far East.

Thanks

bailey

[forrado]

Back at the start of April WhichInvestmentTrusts did a detailed analysis on this renamed trust following the merger of the former British Assets Trust and the Aberdeen UK Tracker Trust – which is still available to read at …

https://whichinvestmenttrust.com/investment-trust-analyst-second-time-lucky-as-aberdeen-has-a-go/

The analyst expressed two big concerns (which I share). 1: Was that the trust’s to be adopted flexi-investment approach was unproven. 2: Even after a 20% cutting of the British Assets dividend reducing the then yield from 6% to 4.8%. The need for Aberdeen Diversified Income & Growth to continue shouldering British Assets £60m 6.25% coupon debenture debt until maturity come September 2031 could make defence of the dividend a challenge.

[bailey56]

Thank you forrado - that really helped explain what was going on. It seems pretty tough out there at the moment to find IT's with a long record of paying a reliable 5% dividend.

bailey

[Julian]

Thank you forrado - that really helped explain what was going on. It seems pretty tough out there at the moment to find IT's with a long record of paying a reliable 5% dividend.

bailey

It depends on how you define long. If you take long to be a multi-decade record such as the one for City of London (CTY) then I'm struggling to even get to 4% yield at the moment.

- Julian

[forrado]

Baily56:
Thank you for letting me know that you found the linked article useful, always happy to be of assistance.

Julian:
Indeed; it’s a struggle at the moment for equity income investors to find +4% yields from amongst the likes of the AIC championed list of so-called ‘Dividend Heroes’ ITs – of which City of London is a leading example. Like some commentators, I’m fearful that investors on the search for income are being tempted higher up the yield risk curve unaware of the hidden dangers represented by high yielders without a track record behind them. Not for the first time, it could all end in tears.

[toofast2live]

Merchants trust has a high dividend that has grown for many years. Increases, however, are often lower than RPI and capital performance is nothing special.

But if a 5% and growing income is a "must" then it's worth a gander.

[bailey56]

Thanks toofast2live - unfortunately Merchants duplicates many of my existing holdings, and I'd prefer to have something that didn't. European Assets is another one I'm looking at with a similar yield, although the dividend varies from year to year according to the NAV.

bailey

[forrado]

European Assets is another one I'm looking at with a similar yield, although the dividend varies from year to year according to the NAV.

Was interested to see that you are looking at European Assets (EAT), a trust I hold in a SIPP (and have profitably added to) over the course of near six years. However, EAT is very much an IT that needs understanding.

To give some background; F&C launched EAT back in 1972 and the trust jogged along quite happily until 2001 when F&C decided to do something radical. The decision was taken to adopt a capital distribution policy because, unlike in the UK, the majority of European companies were then notoriously reluctant to want to distribute surplus cash to shareholders in the form of dividends. A state of affairs that has since improved thanks to the pressure of institutions on Euro publicly quoted companies.

At the time such a move could not be undertaken by a UK registered trust due to the differing tax treatments of income and capital distributions to shareholders. Since then the UK tax law has been amended to accommodate such ITs wishing to pay dividends out of both income and capital – but, back in 2001 this was not the case. F&C looked around and decided that registering EAT in the Netherlands would best suit the trust’s to be adopted capital distribution policy where currently the trust maintains a primary listing, quoted in Euros, on the Amsterdam Stock Exchange. Here in the UK EAT is also listed on the LSE where it is quoted in Sterling.

The decision was also taken to shift the focus away from the established larger European companies to the mid-to-smaller quoted enterprises. The reasoning being that potentially faster growing companies would be better suited to EAT’s strategy of slicing off capital than that of their bigger and less dynamic equivalents.The problem for both F&C and EAT from the outset was they really didn’t have a management team in place that were comfortable operating such an investment style in the universe of European (ex UK) mid-to-smaller companies. That was until 2010 and the arrival of the up-and-coming Sam Cosh from the BNP Paribas Group who immediately began recruiting his own hand-picked team from amongst his group of contemporaries.

To bring things up-to-date; on the F&C website is a video-cast of the most recent EAT AGM held in London during April for the financial period ending 31 December 2016 during which manager Sam Cosh speaks at length …

http://www.fandc.com/uk/private-investors/investment-trusts/european-assets-trust/latest-videos/

Obviously, it’s up to individual investors to consider the suitability of European Assets when viewed as an income producing asset. Such points to think about being …
• The changing relationship value of Sterling and the Euro. For example; while the amount of annual capital distribution is set at 6% of the NAV as of 31 December each year. Such an amount is declared in Euros for distribution to shareholders in three equal amounts throughout the course of the following year. Therefore, each distribution amount made to EAT’s UK shareholders is subject to the prevailing Sterling exchange rate and will vary accordingly.
• The dual unpredictability of what the NAV will be at the end of each calendar year in terms of that of previous calendar year periods and how it translates when converted to Sterling terms.

While I would contend that EAT does possibly have a place for an investor seeking income, I would argue that such a place be of subservient importance in the bigger scheme of things. Any holding of say 8% or more would make me uncomfortable and could well be asking for trouble at some later date. Unfortunately, for the new potential EAT investor, as things presently stand the share price has enjoyed a substantial re-rating in Sterling terms since Brexit, up 40% from a low-point of 915p.

[bailey56]

Thank you again forrado for the interesting information on the background to EAT . I had seen Sam Cosh's talk on the F&C website and noted that 2016 had not been a good year. Obviously things have improved, and as you say they are not in bargain territory.
I have around 30 shares, so this would only constitute around 3% of the portfolio. I shall probably hold off making a decision for a while in the hope that the price drops a little - or other candidates may surface. Thanks again.
bailey