Buying more when it hurts for later gains

In fact, name any unloved main market stock affected by the oil and commodities slump, or facing serious concerns over the sustainability of its payouts, and chances are Mr Henderson is piling in.

The self-effacing manager is increasing his exposure to Anglo American and Glencore as well as Royal Dutch Shell (RDSB), and he still likes Rolls Royce Holdings (RR.) which faces serious questions over the sustainability of its payouts and is taking a beating in the market.

But there is method to the madness, says the contrarian stock picker. "On those rare days when you wish you weren't in the office, we are buying more," he says mildly, "And when it really hurts, and you really don't want to do it, buy a few more."

If that sounds painful, it is. The trust's performance has been hammered since the start of the year, falling dramatically behind its index and sector. Its shares are now down 14.22 per cent in the year to date compared to just under 6 per cent for the FTSE All-Share and just over 6 per cent for the Association of Investment Trusts (AIC) UK Equity income sector. By 22 January it was the worst performing UK-focused investment trust this year and its shares, which usually trade on a chunky premium, had widened to a discount of 5 per cent. Since then the share price has recovered and it trades close to par.

Mr Henderson takes the view that income is driven by capital growth rather than high yields and over five years the trust has returned 60 per cent compared with just 25 per cent for the FTSE All-Share while paying increased dividends.

"It is quite unusual for an income fund to be adding to a company where we know there is no dividend," acknowledges deputy manager Laura Foll, in reference to the Glencore and Anglo decisions. "But we are tilting the portfolio at the margin areas we think are more out of favour and better value.

"We have much more certainty this year in terms of the income coming from smaller and medium-sized companies than we have from the FTSE, which is a bit unusual."

The trust is equally split between small, mid and large-cap stocks and Mr Henderson is adamant that "at the moment we're getting the better dividend growth from small and medium companies rather than large ones."

Ms Foll adds: "Normally it's much easier to predict FTSE dividends but there are quite a few companies which haven't cut yet which we have strong concerns over. GlaxoSmithKline (GSK), for example, is distributing over 100 per cent of its earnings this year: is that sustainable for a very long-term industry like pharma where you do need to invest in the research and development?

"Rolls Royce has also put its dividend under review and I think we can guess what that means."

With an apologetic laugh Mr Henderson says: "Rolls-Royce is one of the shares I've been getting the most stick about and Laura has been very patient with me because I've been buying it at falling prices."

The price fell from over £12 in 2014 to just 534p last week and Lowland has 1.2 per cent of its assets in it.

"But it is a world leader along with GE in engines," says Mr Henderson, referring to the auto manufacturer's Trent 1000 engine, used in the Boeing 787 plane, "and you can see the visibility of orders a long way out."

Almost all of Lowland's contrarian position can be summed up in one sector: industrials. Though maligned by much of the market, Lowland has a third of its assets in this sector which is its most overweight sector by far - 18 per cent overweight compared with the FTSE All-Share.

However Lowland's managers argue that "the sell-off was too broad" and industrials cover a range of sectors with much better potential than "fashionable" areas like house building. The trust recently sold down its position in Bellway (BWY), which had been trading at around 2,680p due to concerns over valuations in the sector.

But if investors are nervous about the impact of dividend cuts to the portfolio they needn't be. "This is an advert for the investment trust structure," says Mr Henderson. "We have got a large revenue reserve so we can buy things yielding zero and keep growing the dividend."

Last year the trust put aside £1.47m into its revenue reserves due to a slew of special dividends which accounted for 13.6 per cent of total earnings and enabled an increased dividend of 41p, compared with 37p for the 2014 financial year. Mr Henderson says the trust has just over half a year's payment in reserve.

Lowland's managers are aware that they don't always get it right. "How long have you got?" is their response when asked about the least successful investment. And Mr Henderson is quick to say he "hasn't a clue" as to where the oil price will recover to.

But he is optimistic: "Things are rarely as good as you're told and rarely as bad," he says.

So in the short term he will grit his teeth and keep taking the pain.

Lowland Investment company cumulative share price return (%)

Source: FE Analytics, as at 27.01.16