Move into Lowland while it's on a discount

IC TIP RATING

Tip style: INCOME

Risk rating: HIGH

Timescale: LONG TERM

Such an opportunity has emerged in IC Top 100 Fund Lowland Investment Company (LWI), run by highly regarded manager James Henderson.

Read our recent interview with him

This investment trust has generated very good returns over the years and as a result has traded at a premium to net asset value (NAV) for much of the last two years. However, after several years of outperformance, over the year to date Lowland has underperformed its benchmark, the FTSE All Share, and the Association of Investment Companies UK Equity Income sector average. This has caused the trust's premium, which has sometimes been higher than 7 per cent, to fall to a discount of more than 8 per cent - one of the widest levels in more than two years.

The main reason for the underperformance has been Lowland's allocation to UK small and mid-cap companies which account for around 68 per cent of the portfolio and had a tough 2014. "However, this trust should re-rate when we see some better performance from small and mid-caps," says Iain Scouller, head of the investment funds team at broker Oriel Securities.

Longer-term numbers are much stronger with the trust beating both the FTSE All Share and its sector average over five years. This pattern is not untypical for the trust: it is fairly volatile and in good years can make returns well in excess of the benchmark, but falls sharply when things are not so good.

"Lowland has one of the strongest long-term performance records in the UK Equity Income sector," comment analysts at Winterflood. "However, there are periods when its manager's investment approach underperforms. But Lowland remains well positioned to outperform over the longer-term, though is one of the higher risk funds in its peer group. The significant overweight position in industrials means that it will not perform in line with its benchmark."

Lowland's largest sector allocation is industrials and though these were slightly weaker over the trust's last financial year ended 30 September 2014, manager James Henderson says: "If the recent fall in the oil price is sustained, it will lead to higher global economic growth and therefore will positively impact our industrial holdings such as Senior (SNR), GKN (GKN) and Rolls-Royce (RR.). It will also have a positive effect on discretionary income, which will benefit holdings exposed to consumer spending such as Greencore (GNC) and Park Group (PKG)."

Lowland has a yield of just under 3 per cent which is lower than a number of other equity income investment trusts, but Mr Henderson says "the strong cash generation of many companies in the portfolio should underpin future good dividend growth".

The trust paid 37p in dividends during its last financial year, up 8.8 per cent on 34p the year before. Over the past 10 years Lowland's dividend has grown from 18p to 37p per share, though its capital has grown quicker than income.

Lowland also has a very reasonable ongoing charge of 0.88 per cent even when you add in its performance fee.

So with strong long-term performance, a highly regarded manager and a relatively wide discount to NAV, now may be a good moment to get into Lowland Investment Company. Buy.

Source: Morningstar & *Henderson

Performance

Source: Morningstar, as at 2 February 2015

Top 10 holdings, as at 31 December 2014

Sector breakdown