Perpetual Income and Growth Investment Trust plc: the millennial trust
Article | 15 May 2017
Launched in 1996, Perpetual Income and Growth Investment Trust plc has seen shifting consumer trends, demographic change and globalisation shape the last 21 years in equity markets, a period forging a new millennial mind-set.
Audio cassettes and floppy discs were staple items in the nation’s 1996 shopping basket, a world away from the smartphones and music streaming subscriptions of today’s list of goods and services. First compiled in 1996, the list of representative goods and services which underpin the Consumer Price Index has changed markedly over the past 21 years. Soya milk, bicycle helmets and craft-distilled gin were among the new additions in 2017, a distinctly millennial mutation in the UK consumer’s evolution.
Shifts in consumer trends overlay the wider, macroeconomic and societal shifts which have played out over the period; in 1996, the UK average house price was £70,000, a litre of fuel cost 60p and the Bank of England interest rate was 5.94%. The recent macroeconomic environment provides a very different backdrop to the market and the society it serves. Since the financial crisis, ultra-low interest rates have forced a response from central banks via quantitative easing, UK house prices have soared to an April 2016 peak average of £284,000, while the UK’s average life expectancy has risen from 77 to 80.5 years.
In combination, these structural shifts have altered the outlook for the next generation, challenging UK companies and investors to anticipate and exploit momentum behind new trends, discoveries and modes of living. Companies held in the Perpetual Income and Growth Investment Trust plc (PIGIT) have changed over time, but portfolio manager Mark Barnett has remained steadfast in his objectives, namely to provide shareholders with growth in capital and income by investing in companies he believes will deliver a sustainable and growing dividend. Over the past 21-years, the PIGIT portfolio has delivered a total return (Net Asset Value) of 810.3% against a total return of 335.5% from the FTSE All-Share index.
|Standardised rolling 12-month performance % growth|
|31.03.12 31.03.13||31.03.13 31.03.14||31.03.14 31.03.15||31.03.15 31.03.16||31.03.16 31.03.17|
|Ordinary share price||25.0||21.1||10.1||-2.9||4.2|
|Net Asset value||28.8||19.4||10.6||0.2||9.3|
Past performance is not a guide to future returns. Ordinary share price performance figures have been calculated using daily closing prices with dividends reinvested. NAV performance figures have been calculated using daily NAV with dividends reinvested. The NAV used includes current period revenue and values debt at fair. The FTSE All-Share Index performance shown is total return. All performance figures are in sterling as at 31 March 2017 except where otherwise stated. Standardised past performance figures are updated on a quarterly basis. Source: Morningstar.
The trust has had a significant weighting in the consumer goods sector for many years, composed of holdings in tobacco companies. This area of the market has been proactive in its response to both shifting consumer trends and an increasingly hostile regulatory environment. Advertising restrictions, smoking bans and stigma may have meant the end-game for a less resilient sector, but through consolidation, price hikes and the introduction of new technologies, the sector continues to deliver both earnings and dividend growth to shareholders.
Despite declining sales volumes in major developed markets, the industry has continued to push through above-inflation price increases, especially in the US. Scope for volume growth in the emerging markets – where holding British American Tobacco generates around three-quarters of its revenues and two-thirds of profits - is also helping to offset declining developed market volumes, while the rapidly expanding e-cigarette market has provided the sector with a new arena for innovation. First imported into Europe and the US in 2006, e-cigarettes have emerged through newly-established production and distribution networks and now comprise a wide range of products and devices. In the US, e-cigarettes are now the most commonly used tobacco product among young adults aged 18-24, surpassing conventional cigarettes in 2014.
Consolidation in the past two years has helped to reinforce barriers to entry across the industry. The US$25bn merger of two of the top three US tobacco companies, Reynolds American and Lorillard in 2015, has provided scope for major synergies and proved significantly earnings enhancing for Reynolds American.
The recently agreed merger of British American Tobacco (BAT) and Reynolds American is a logical conclusion to the already close relationship between the two groups (via BAT’s long standing 42% stake). BAT’s Brazilian chief executive Nicandro Durante has also announced ambitious plans to expand the combined entities’ “next generation” product offering; the business has already launched e-cigarette and vaping products in 12 markets, with plans to double this in both 2017 and 2018. Mark is confident that the enlarged group is even better placed to exploit profit opportunities in the US and emerging markets and to seize the initiative in new generation products and non-combustibles.
“I continue to focus on companies that we believe will be able to continue to grow earnings and dividends, even in a more challenging economic environment” Mark Barnett, Portfolio Manager and Head of UK Equities
The coming of age
Demographic change has been a major driver of 21st century innovation and consolidation for UK-listed companies in the pharmaceutical sector. Ageing populations have provided a fundamental support to increasing volumes and new drug discovery – a key driver of top line growth. The percentage of the total population aged 60 and over is predicted to rise from 24.2% at present to over 29% in 2035. Across the developed world, the number of people aged 60 or over had overtaken the number of 12 to 24-year-olds in the late 1990s, a trend expected to emerge across developing countries by 2045. Ageing populations consume more prescription medications, supporting volumes across the sector, but consumption trends have also driven an increase among younger cohorts over time.
Portfolio holding AstraZeneca has been at the forefront of drug development over the past 20 years, bringing a series of ‘blockbuster’ – generating annual sales of at least US$1bn – drugs to market. Among these has been acid reflux treatment Nexium, approved in March 2000, cholesterol inhibiter Crestor, approved in December 1996 and anti-psychotic Seroquel, which gained regulatory approval in September 1997.
Investors do not want to fund additional drugs where there are existing treatments and established pricing regimes, however, and it has therefore been crucial for companies to push ahead with research aimed at bringing new drugs to market. Major scientific developments, including the mapping of the human genome, a new generation of antibiotics and breakthroughs in cancer treatments, offer significant scope for new drug discovery. It took government-funded scientists US$3bn and 13 years to sequence the first human genome by 2003, but thanks to industrial-scale sequencing and advances in gene editing, it now costs around US$1,000 and takes just three days, opening up huge potential as an area for further innovation. Portfolio holding AstraZeneca is among those companies investing in the potential of genetic variations to unlock new medicines; in 2016 the company announced a 10-year project aiming to identify genetic mutations across a vast spectrum of diseases – the biggest commitment to date by a drug maker in this field. The company has been a major contributor to performance through the years and Mark remains confident in the outlook for the business.
Other successful investments in this area include long-term holdings Roche and BTG, which have an extensive calendar of drug trials over the next 12-18 months, . The outcome of these trials will determine the outlook for profits over the next decade. Looking ahead, share prices will continue to react to news flow on drug pipelines, but Mark is confident in these businesses’ diversification, discipline and balance sheet strength and, with a high degree of discretion over long-term costs, believes his holdings in the sector have the capability to deliver shareholders a long-term, sustainable dividend.
The financial sector, where the PIGIT portfolio has a diverse range of holdings, is another area to have benefited from demographic change. Mark holds a number of insurance businesses, particularly life insurance, as a way of exposing the portfolio to the retirement of the baby-boom generation, a significant demand area in both the UK and US markets. Insurance business Legal & General has been a major beneficiary of rising demand momentum from the UK’s ageing population and has built a market-leading position in the UK’s retirement market. Drawing on expertise in statistical analysis, demographics and actuarial modelling, L&G has developed a suite of insurance, pension and bulk annuity products to meet rising demand; the business currently serves five million individual insurance customers in the UK and has built an annuity portfolio of £54.4bn. As and when we enter an environment of rising bond yields, Mark expects a growing number of companies to take advantage of more favourable conditions for tackling their defined benefit pension obligations, just one factor which supports his view of the company’s long-term performance prospects.
Since the financial crisis, the challenges of an ageing population have been sharpened by low interest rates and muted real wage growth, forcing many people to work longer and become increasingly reliant on credit streams. Non-standard lender Provident Financial has been well positioned to meet the growing demand for credit to the 12m people in the UK who may not meet the requirements of traditional mainstream lenders. By building a market leading position in a niche area of the market - overlooked by many of the major banks, the company commands superior pricing power, allowing growth of profits and dividends. Since Mark first invested in 2008, the company has also made significant investment in the business, taken advantage of new technologies and access to big data, made inroads into online lending, and extended both product offering and customer reach - both organically and through acquisition.
A global remit
Trade, travel and communication networks have created an integrated, global economy over the past 21 years, with new companies challenging old ways of thinking in established markets. Millennial favourites Airbnb and Uber have overhauled the hospitality and taxi industries, empowering users with new freedom and flexibility at a reduced cost. Portfolio holding EasyJet was an early-mover in this arena, however, disrupting legacy international and regional aviation markets with its low-cost offering.
UK residents made 42.5m trips overseas and spent £16.2bn abroad in 1996, dwarfed by the 65.7m overseas visits and £39bn expenditure recorded in 2015. EasyJet has focused its strategy on developing leading positions in Europe’s top airports, tapping into the continent’s premier markets by GDP with an attractive customer proposition. Launched in 1995 with just two Boeing 737 aircraft on routes from London to Edinburgh and Glasgow, the group added its first international route to Amsterdam the following year. The group’s structure enables significant cost advantage relative to its legacy and charter competitors; aircraft have been reconfigured to enable a higher number of seats per flight, the group has honed a point-to-point network model to drive higher load factors and negotiated a fleet deal to reduce ownership and maintenance costs. By targeting both leisure and business travel on Europe’s most-travelled routes, the business has proven resilient to a series of threats to the aviation industry over the years - terrorism, strikes and Referendums among them.
Easyjet shares sold off sharply following the vote for Brexit in anticipation of weakened demand and concerns about the formation of a single European aviation market. The spate of terrorist attacks in Europe and Egypt in 2016 also brought significant disruption, challenging airlines across the region to gauge the impact at regional level. Increased use of data analytics, a focus on building route density and aircraft efficiencies have been key priorities for easyJet through the recent period and Mark believes the company has scope for significant organic growth; EasyJet serves 10.5m customers but more than 300m people live within an hour of one of its airports.
Increased travel networks, rising immigration levels and declining communication costs have also driven a rising trend for outsourcing of IT, catering and facilities management, creating increasingly global workforces. Portfolio holding Compass Group has been well placed to benefit from this trend, expanding rapidly over the past 20 years; admitted into the blue-chip FTSE 100 index in 1998, the contract food service and support provider now employs over 470,000 people in 50 countries and is the sixth-largest publicly traded employer in the world today. The business has participated in a string of mergers and acquisitions along the way, including the addition of security services provider VSG to the portfolio in 2010, alongside other food and support service businesses in Brazil, Canada, Denmark, France and India. Continued structural expansion of the outsourcing market, combined with strong exposure to improving US employment trends, should support organic growth.
Despite the wider changes across an increasingly challenging market environment, Mark’s investment philosophy, based on simple principles, remains unchanged. By focusing on identifying undervalued businesses which can be bought and held for the long term, Mark has invested in companies which have delivered dividend growth; since Mark took over management of the fund in 1999, the trust has delivered dividend increases over 17 consecutive years.
Past performance is not a guide to future returns. Source: Perpetual Income and Growth Investment Trust plc Annual Financial Reports.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase, hold or sell.
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Where Mark Barnett has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco Perpetual investment professionals.
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