Buy into strong growth and income with Lowland

Lowland Investment Company (LWI) has outperformed its benchmark, the FTSE All-Share, over one, three and five years, as well as the average UK equity income investment trust. However, over five years, net asset value (NAV) performance is not as far ahead of as many of its peers because it made massive losses in 2008. Despite this, its cumulative figures are good because in other individual calendar years it has outperformed strongly, and over the 10 years to the end of December 2012, its share price returned 223.6 per cent against 131.7 per cent for the FTSE All-Share.

Lowland aims to give shareholders a higher than average return with growth of both capital and income over the medium to long term. It invests in a broad spread of predominantly UK companies of differing sizes.

"We rate (the trust's manager) James Henderson highly and Lowland has a strong long-term performance record," commented analysts at Winterflood. "The significant overweight position in industrials means that the trust will not perform in line with the benchmark and the higher level of gearing (113 per cent net) makes this fund a relatively higher-risk, potentially higher-return investment. The fund is therefore potentially complementary to more mainstream UK equity income funds."

Lowland has nearly 29 per cent of its assets in industrials, where Mr Henderson believes competitive UK companies with excellent products are capturing global market share, and should continue to do so. The trust has a large exposure to small and mid caps, unlike a number of UK equity income funds, but exposure to this area can contribute to greater volatility as well as growth.

Mr Henderson grows the income by holding shares that grow their dividends strongly over time and reducing holdings when the dividend yield has fallen below that of alternative opportunities. However, he is now going to allow some of the more successful investments to become larger parts of the portfolio to achieve a better balance between controlling short-term volatility and strong long-term performance, examples being top two holdings Carclo (CAR) and Senior (SNR). "As both stocks have grown, so I have reduced our holdings, but by smaller amounts and over longer periods than I would have done in the past," he explained. "The UK economy is not helping struggling businesses, so it is a better strategy to have low levels of portfolio activity and stick with successful investments."

Lowland's yield of 2.76 per cent is not the highest in the UK Growth & Income sector. However, it has raised its dividends every year for the past 36 years, except for one when it maintained it, and it is moving to paying a quarterly rather than half-yearly dividend. Lowland has substantial revenue reserves, although at its latest annual meeting shareholders voted to allow it to draw on capital returns to pay dividends, although the trust says it has no immediate intention of doing this.

Lowland charges a performance fee, but even with this the ongoing charge is still reasonable at 0.87 per cent.

It currently trades at a discount to NAV of 1.96 per cent, tighter than its 12-month average discount of 4.15 per cent. However, this can move to a wider level of discount than this or a premium such as during certain periods last year. But with excellent long-term performance, if you can endure periods of intense volatility, Lowland is worth considering. Buy.

Source: Morningstar & *Henderson

Source: Morningstar as at 25 January 2013

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