An update from investment manager Iain Pyle
In this podcast Iain discusses recent portfolio adjustments, his thoughts on the UK equities market and the importance of quality stocks.
Recorded on Thursday 9th July 2020.
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Interviewer: Welcome to the latest in our Aberdeen Standard Investment Trusts podcast series where we catch up with our investment trust managers to discuss how the COVID-19 outbreak is impacting their portfolios. Today we welcome Iain Pyle, manager of the Shires Income Trust. Hi, Iain. Now, let's start with looking at markets. You know, they've recovered a lot of their capital value, but there's still plenty of uncertainty on the income side. What are you seeing among the companies in your portfolio?
Iain Pyle: Yes, good morning Cherry. I think companies everywhere still face a huge amount of uncertainty and that's inevitable after such a big crisis-like event as COVID-19 . But I think we are at the point where generally the uncertainty is starting to reduce rather than increase, and most companies are able to look through to the other side of the crisis. So there will obviously be lots of debate and variation about how quickly companies recover, but generally they’re starting to look through to next year and things being more normal than they are right now. Obviously, that varies hugely by sector, so there are still sectors where a lot is very unclear particularly travel and leisure, and the banking sector for example, where you really need to wait and see how the economy reacts to the end of government support to get a view on the outlook, even into 2021. From an income point of view for the companies in the portfolio, generally we try and hold companies that have pretty resilient income characteristics. So they have good balance sheets and they have cash flows which should be resilient despite a short fall in consumer activity. In most cases, we're seeing confidence improving on the outlook and on dividends at the moment. So obviously there's a large number of companies that have cut dividend payments this year, but they're starting to think about how they bring them back next year as activity picks up.
Interviewer: Okay, and did you shift the portfolio in response to the crisis at all? I mean, either selling sectors where the outlook had profoundly changed, or buying up opportunities where the price had fallen?
Iain Pyle: Yes, I mean, it's a slightly difficult crisis because everything happen so quickly to really move the portfolio and take advantage of valuation opportunities. And particularly with an income perspective, where we've seen share prices really fall dramatically often that’s been accompanied by dividend cuts or a marked change in the output of businesses. So we haven't done a lot of trying to pick up companies that have really been punished in terms of share price. What we have tried to do is just shift the portfolio slightly to make the income more resilient because at a time when so many companies are facing curtailed cash flows and having to spend dividends, we want to make sure that the income for the portfolio to the end shareholders is protect as much as possible. So the kind of things we've been doing have been adding to larger stocks with broad based international earnings that don't face balance sheet difficulties or regulatory pressure to cut dividends. So that would be the likes of things like BHP, British American Tobacco, AstraZeneca, GlaxoSmithKline. They’re all stocks where our analysts are fundamentally positive and where cash flows should be pretty resilient and they’ll continue to pay healthy dividends. We've also added to a few high yielding UK names like Direct Line Insurance for example, which is not massively affected by the crisis. And on the other side, I guess the way we funded that trade has been in two ways. Firstly, we've sold some names where dividend prospects have been deeply reduced like HSBC where there's a regulatory block on paying dividends for this year. And then we've also sold down some of the more growthy names in the portfolio that have done very well over the past year, but where yields are low. So that would be the likes of Abcam or LSE, which have been really good performers, but right now valuation doesn't look as compelling as some other things and they don't have the same income as the stocks we’re adding to. So it's really just a shift to make income a bit more resilient and maintain a high level of dividends for shareholders.
Interviewer: Okay, and looking at the portfolio today, are there any sort of major positions you'd highlight - sort of either over or underweights and key themes?
Iain Pyle: So we always try and keep the portfolio sides pretty balanced. The reason being we want that resilience of income and we want to maintain a balance between income and growth in the portfolio. So we tend not to have big factor or sector skews in the portfolio. The one overriding bias we have is to own higher quality stocks. So generally things with higher return on capital, good competitive positions and strong balance sheets. And that hasn't really changed - that's a continuous skew for the portfolio. And you can see that in the factor exposure we have. So generally the portfolio is overweight quality and growth factors and slightly underweight value factors, with the exception of dividend yield. By sector at the moment, I guess we’re slightly biased as you'd expect from an income portfolio. Slightly overweight energy, telecoms, utilities and financials. But in all those sectors, we tend to have that quality bias. So for example, in something like energy, we're overweight effective, but we are doing that through companies that don't have much commodity risk in them. Conversely, we are underweight sectors where there's more limited income, like consumer staples and also industrials, where you have a high degree of cyclicality but you don't really get the yield benefits. When we think about what themes we're looking for at the moment, I think it hasn't really changed since the end of last year to be honest. Those themes should really be ability to deliver growth independent of the macro outlook, defensive income – so strong, resilient cash flows and keeping our eyes open for valuation opportunities so when there is stocks out there with high yields where we actually think this is a chance to buy a quality company and get some yield compression over time - they’re the two things we're looking for.
Interviewer: The trust has an exposure to preference shares to produce the yield . What happened to that part of the portfolio?
Iain Pyle: Yes, so the preference share portfolio makes up between 25% and 30% of the portfolio at any one time. The aim of it is always to deliver a pretty stable capital position, but a high level of income and kind of do the heavy lifting on the income for the portfolio. And what we found through the virus period if you like, it's done its job really. So the preference share portfolio has gone down slightly in value - I think over the five months to end of May it was down by 5%. But that compares to the index down 16%. So it's obviously being defensive as you would hope. And at the same time, where we've seen 45% of companies cut their ordinary dividends in the FTSE, we haven't seen any impact on the dividend payments in the preference shares because they sit above equity in the capital stack and they should continue to pay. So it’s been a really nice position for Shire delivering defensive capital and continuing to pay a really high level of incomes. So it's certainly been helpful through this period.
Interviewer: Okay. You mentioned earlier that you were looking for companies with kind of international dividend streams. You can also invest in companies that are listed outside the UK, I think a small portion of the trust, have you been using that flexibility at all?
Iain Pyle: So we've been using it a little bit. At the moment, we've got five positions that are not UK listed. Obviously, the whole portfolio, even the UK listed names tend to be very internationally exposed in terms of where they earn their money. But that ability to invest in markets outside of the UK gives us a little bit more flexibility. I think it's something we'll probably try and use more going forward, because that challenge of finding income means having that flexibility becomes more useful now than it has been in the past. A good example recently would be we switched some Shell into Total, in the oil majors, and there's a clear steer there to go from one to the other where Shell has cut its dividends. Total are confident of maintaining their dividend, and there's quite a significant yield gap between the two. That ability to invest overseas just allows us to switch from one to the other and take advantage of that yield gap.
Interviewer: Okay, and what about looking at markets more generally. Do you think that market prices today reflect the risks, or does that very much depend on individual sectors?
Iain Pyle: I think it always depends on individual sectors. Generally, markets are really quick to look through the crisis and we've seen that happen really quickly. Valuations are already looking through to 2021 earnings and thinking what is something worth once it recovers from the impact of the virus. So in a sense it’s been remarkably quick, remarkably surprising how quickly the market has come back. And valuation multiples now are above pre-crisis levels. So I think the market is - we may have come through that easy part of the recovery, if you like, and I think the market is maybe not quite pricing in the level of uncertainty we still have as we come out of this downturn. Obviously, that varies hugely by stocks and sector. And I think there's certainly areas where the market is too cautious, and that's where we as active managers can try and add some value.
Interviewer: And what about the gap between the UK and other markets? I mean the UK was looking very cheap, then there was a bit of a bounce. Is it back to looking quite cheap again relative to other markets?
Iain Pyle: Yes, so the UK continues to trade at a pretty meaningful discount for the developed markets, both in terms of earnings multiples and the dividends yield that it generates. To some degree that is justified because it's overweight to lower multiple sectors like energy, mining, telcos which are great for income, but they don't have the same growth potential of tech or healthcare, which in some other markets are more overweight. And at the moment in an environment where you have low interest rates, then that favours the more growthy companies. So it’s natural the UK should trade at a bit of a discount right now. Like I said, that makes it great for income investors, because you're earning a decent yield on it. And even if you do set to adjust the makeup of the index, then UK does still look cheap compared to other markets. So it's a reasonably attractive place to put money right now.
Interviewer: Okay, do you see any further worries over the income side or is most of the bad news in the market now?
Iain Pyle: That’s a good question. I really do think most of the bad news is out there. I think companies have acted pretty quickly to protect balance sheets and to cut dividends. And regulators have given a pretty clear message in, certainly the financial sectors, that they want to prioritise balance sheet strength over dividend payments this year. So I think most of the cuts are out there. There's probably a few companies where we’ve still got to see the dividend cuts come. I think BP would be one in our portfolio that stands out where I think we'd expect to see a dividend cut in the second half of this year. That's something that is in the prices, were expected by the markets. I don't think it will come as a surprise, but generally, most of the dividend cuts have come through. And if anything, as we move through into next year, hopefully we'll see dividends return rather than go back.
Interviewer: And what about the risk management side? I think that obviously that's always been a focus for you and good governance and things like that. But have you tweaked anything about the way you manage risk in response to the crisis?
Iain Pyle: I think the natural bias of the portfolio towards higher quality companies with strong cash flows remains as ever, and that is a great way to control your risk - by buying good companies. The most important thing for us right now is to stay active and to try and engage with our companies as much as we can. So continue to have plenty of calls with management and make sure we understand how the current situation is impacting their businesses. I think when we have those conversations, the things we're focusing on more than we would have done in the past have been the balance sheet, the credit metric, and the cash flow at the moment, and the ability of companies to manage through this crisis and continue to maintain a solid balance sheet and hopefully pay income.
Interviewer: And finally, this has obviously been a bit of a roller coaster for investors. I mean, what reassurance would you give for investors in the Trust at what’s been quite a difficult time?
Iain Pyle: Yes, it certainly has been a roller coaster hasn’t it. I think it must be the sharpest decline in equity valuations and probably one of the quickest recoveries that any of us can remember in markets. What I would say right now is generally the worst is behind us and the economic outlook is improving as we see virus cases decline. It's not going to be a straight line up from here by any means. We can see the risk of second waves. We can see very worrying trends in the US and Brazil and some other countries, for example. But if we look forwards and take a medium to long term view, which is what we try and do in Shires, then we're entering a period where you've got a huge amount of government stimulus and economic support. You've got the potential to see progress on vaccines to put the major risk to the market behind us in the next 12 months. And generally, companies are looking forward and being pretty optimistic. So I think we are - we're not going back to where we were in March, is how I feel it is. And in terms of the portfolio, we remain pretty confident on continuing to pay a very healthy dividend, provided the recovery continues. And that focus on quality companies means we've got things in the portfolio that will continue to grow and deliver for the long term. So I think it's still very attractive, but obviously the income that the Trust is generating is - remains very attractive right now.
Interviewer: Okay, great. Thank you Iain for those insights today and thank you to our listeners for tuning in. You can find out more about the Trust at www.shiresincome.co.uk and please do look out for future episodes.
This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for information purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments of products mentioned herein, and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen Standard Investments. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections are estimates and provide no guarantee of future results.
Investing for income
In this podcast Iain Pyle, manager of Shires Income, joins Fran Radano, manager of the North American Income Trust and Ben Ritchie, co-manager of Dunedin Income Growth Investment Trust. The environment for income-seekers was already tough, thanks to more than a decade of low rates. However, policymakers' response to the coronavirus has seen rates pushed lower still, at a time when a number of high profile companies have been forced to cut their dividends. Today we're discussing the challenges for those seeking an income from their investments.
Recorded on Tuesday 14th April 2020.
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Interviewer: Hello and welcome to the latest in our podcast series, where we look at how Aberdeen Standard Investment Trust managers are handling the current upheaval in markets. Today we’re discussing the challenges for income seekers in this climate. The environment for income seekers was already tough, thanks to more than a decade of low rates. However, policymakers’ response to the Coronavirus have seen rates pushed lower still, at a time when a number of high profile companies have been forced to cut their dividends. With me to discuss where that leaves those who need an income from their investments are Iain Pyle, Manager of Shires Income. Fran Radano, Manager of the North American Income Trust and Ben Ritchie Co-Manager of the Dunedin Income & Growth Investment Trust. Welcome everyone. Can I start with you, Iain, can you give us your thoughts on the cuts to dividends you're seeing? Has there been any patterns to the type of companies that have cut their payouts to fit as they come under pressure from governments, as in the case of the banks, or is it simply a case of not having enough cash? What are you seeing?
Iain: I think we're definitely seeing almost uniquely challenging time for income investing. The cuts we’ve seen so far in the UK are probably unprecedented in their extent, and their breadth in terms of speed this has happened. We’d usually have some period into a cycle where the cash flow is weakening and income cuts coming, and that hasn't been the case for now. When you ask about patterns, I think one interesting thing is we really haven't seen a particular pattern in the UK, regarding cut dividends, it’s been really broad based. Obviously you've seen those companies that are exposed to sectors impacted by the virus where cash flows are weak, and where they need to cut their travel exposed companies, for example, but there's a lot of companies out there which aren't directly exposed, but where the level of uncertainty means they see it as prudent to retain cash on the balance sheet and suspend the dividend for the time being. It's definitely the weaker companies but also stronger companies as well that are cutting dividends. As you say, you've also seen companies come under regulatory pressure, like the banks and insurers to suspend dividend. It really has been pretty broad based across the market.
Interviewer: Fran, what have you seen in the US?
Fran: Yeah, in the US it’s actually been a bit different. For the US markets, the mix of returns of cash to shareholders is typically part share repurchase and part dividend payments. For many companies, it's often shared purchases is a bigger proportion of that mix. What we've seen is given that backdrop, we've seen many companies suspend share repurchase at the outset here, but only selected companies at this point have really suspended a cut to dividend. To be sure we expect more announcements during the earnings season, which really just starts today. Over the next couple of months we'll look for clues on sort of the depth and duration of the virus as a means to retest our dividend assumptions on a stock by stock basis. Then as you know, the core importance could be the political pressure of those companies paying dividends at the same time they are furloughing employees which obviously has interesting ramifications, especially in a class divided society.
Interviewer: Yeah, yep. Finally, over to you, Ben.
Ben: Well personally from a UK perspective and very, the same experience that Iain, has talked about that from a Shires angle. I think with our, sort of the 20% of the portfolio of DIGIT being in European equities, that's probably also been a market that's been affected more by political intervention than necessarily by the sort of economics being faced by companies. There has been -- with prevalence of short term working arrangements, there has been generous short term subsidies for companies from governments, and there has been more political pressures for corporates that are taking those to not pay dividends. We've seen that across quite a lot of companies there in Europe. I think net at the end of the day, the amount of income that's been lost from European corporates is probably trending in a similar percentage level of that which we've seen from the UK, but it's perhaps been driven more by politics than by economics at this point.
Interviewer: Okay, Ben what is the sort of mood music amongst the companies that you're talking to? Are they still trying to assess the impact on their business and therefore, perhaps not making definitive predictions about their dividend cuts? I mean are you're still seeing more cuts likely to be announced?
Ben: Yes I think from a -- sort of from a European perspective, you're certainly seeing this is the sort of dividend declaration time of year. Generally companies are announcing their dividends with their full year results and they're being confirmed at the AGM season, and we're right in the middle of that at the moment. Companies are doing one of three things, broadly speaking, they are continuing to go ahead and pay those dividends. They are cancelling them completely, or they're deferring the opportunity to make a decision later into the year. We're seeing a range of those of choices being made. I think at the end of the day, most companies at this point are looking to hold some cash where they can do, and where they're looking to try and insulate their business from the challenges which they're facing. But clearly, there's a wide range of corporate experience out there. There's a very small number of companies that are benefiting from the current environment. There are some whose businesses largely unchanged. Then there's a big continuum of corporates who are under a range of pressure, and we've got companies out there who've got no revenues at all this current time and a burning significant massive cash flow. Along that continuum, you're having a range of decisions being made, but I think companies, where they can, and as politically acceptable are still looking to make those dividend distributions.
Interviewer: Okay, and Fran are you seeing a similar picture?
Fran: Yeah, we're largely seeing similar picture. We'll hear from these companies in the next couple of weeks from their Q1 earnings call, and at that point we will probably get some dividend cut announcements. Especially as Ben mentioned, those companies that -- revenues have essentially gone to zero. Those companies may have the balance sheet, they may have gone down the revolver, but at this point, they'll probably either suspend or cut their dividends. Especially what you'll see is -- and the market’s already done this to some extent, but companies with weaker balance sheets or who need a strong economy that in order to sustain their financial wherewithal. Those companies are obviously the most vulnerable to something like this. We haven't seen too much on the proactive front knowing that earnings season was right around the corner, but surely we will see that in the next couple of weeks.
Interviewer: Okay. Iain, markets are often very unforgiving of dividend cuts and tend to punish companies in terms of share price falls? Have you seen markets be a little more tolerant? Is it actually a dividend cut actually seen as a prudent thing to do in this environment?
Iain: I think that’s right. I think investors are pretty understanding at the moment, especially if we assume that this is going to be a very sharp recession, but hopefully a reasonably short one. Then I think the tendency is to say that company should be prudent, should hold cash, and then look to resume dividends when it's the right time to do so, when they have more certainty over their outlook. I think where we do see companies get punished by the market for cutting dividends is where the dividend is really quite essential to the investment case. Where maybe there's limited growth, and investors particularly own these stocks for dividends. For example, the banks probably were an example that where actually the prime reasons to hold them was capital return, and the dividend suspended shares made it up quite substantially.
Interviewer: Okay, and have you had to, again, this is for you Iain, have you had to reshape the portfolio at all in light of that?
Iain: No, we haven’t really reshaped the portfolio as such. I think the aim for Shires is to deliver a balance of capital and income over time and we tend to be quite long term. Right now, if you were to reshape the portfolio, you would probably want to look to buy things where valuations look more attractive, and that probably means things that have underperformed in the last couple of months. The issue I think from an income perspective is that those tend to be the companies that have cut the dividend and can't guarantee you an attractive income in the next year or so. We’ve been more adding to things where we see the dividend being resilient, so the miners, some tobacco, some telecoms, just to try and support income over the next year.
Interviewer: Okay, and Fran, have you been identifying opportunities amid this market collapse? I mean, my understanding is that it’s been fairly indiscriminate, so have you seen things kind of bubble to the surface?
Fran: I think in the beginning when things were more volatile and visibility was very low, we did actually pick off a couple companies that were on our watch list that had been sold off indiscriminately as you know the word you use. We were able to do that -- we had two additions on that front, companies that are very high quality companies that always traded at high valuations and they came down to something that makes sense to us. They both had decent visibility, so we were able to do that in that sort of mid March high volatility time period. Since then we've had days where the market is up 6%, 7%, 8% market, days when the market is down 6%, 7%, 8%. Typically, what we have done on the margin is lightened up a little bit on those heavy up days. Conversely we’ve tend to add it a little bit on some of these red days where selling just appeared to be very broad based. We thought that we have some opportunities to sort of just top up positions, nothing extreme but maybe 25 or 50 basis point opportunities across a handful of higher quality names in the portfolio.
Interviewer: Ben, Have you seen some companies -- because some companies have obviously moved to very -- as a result of falling share prices, the yield now looks very high. Have you seen some opportunities for that where dividends look reasonably safe?
Ben: I think, as Iain and Fran have been saying, I think it’s sort of been a balance from our side. I think if anything, markets have moved so fast on the way down and the situation is evolving so quickly that I think it was hard to necessarily intervene as much as you might have liked to, or when you look back you look at some of the prices that were there just three or four weeks ago and think well, actually, some of those things really were looking pretty cheap. I’d love to tell you that we piled in and bought a lot at that point, but we didn't really. We did draw down a little bit of our gearing, so we added about £4 million of borrowings in the middle of March and a bit, as Iain was saying, we sort of targeted similar types of companies with that money, so putting cash to work in businesses where we had a high degree of confidence in the dividend. Then in the last week or so we've added to a couple of names which would more fit into the sort of more of the growth rather than the income camp that we think are on reasonably attractive valuations. We haven’t bought them at the lows but they are 25% cheaper than they were just eight weeks ago, and so we think now is a reasonable time to make additions. But we’re typically adding to businesses which we would -- nothing is completely atypical, but where we see them as being defensive growth type options, and I think that reflects the degree of caution on the market environment still.
Interviewer: Yeah, you mentioned the gearing there and investment trusts are seen as having certain benefits for income investing particularly in this type of environment. Obviously, there’s the gearing - is there anything else you'd mention? I’ll put that one to Ben first and then to the others.
Ben: Well, I think the big advantage for investment trust is the ability to smooth out their dividend distribution. Even if we're not necessarily earning enough revenues from income to pay the dividends in any one year because we can utilize historic reserves, which we can in any one year you can put, I think, 15% of your profits into reserves, and a number of these investment trusts are very old and as a result have large and substantial reserves, which have been built up over decades. That allows us to potentially smooth out the payment of dividends in years where we do not necessarily earn enough.
In a year like this where we don't know exactly where we are, but the market might have seen 40% or 50% of the income disappear in the UK, we'd hope that we will do a bit better than that. But that’s the sort of the market level of income that’s disappeared, so we have the ability to dip into our revenue reserves which are equal to just under one year's dividend to be able to help smooth out that distribution. I think that's probably the biggest advantage the trusts have. But the gearing, modest levels of gearing over time can help amplify good investment returns and help offset some of the costs. I think trusts tend to also generally be lower cost than their open ended equivalence, which again over time can make quite a big difference to return.
I suppose the other thing is having that independent board, and Fran and myself and Iain spend a lot of time working with the directors. They’re there to hold us to account to use the strategy for the trust, to make sure that that's clearly articulated to the market and shareholders and then to make sure that we have manager there are putting that in place. I think that's also another important thing that shareholders have in trusts is that you do have the independent directors working for you as well.
Interviewer: Iain, is there anything you’d add to that?
Iain: I certainly second Ben's point about the revenue reserve being truly beneficial in this environment and Shires have been in a similar position to DIGIT with around a year of reserves. That certainly gives us some flexibility on dividend distributions over the next year or so. I think the only other thing I'd add is the closed end structure really helps us in terms of managing the portfolio because we're not going to be hit with outflows in the short term during a period when the market is volatile and maybe illiquidity is not as high as it can be. Obviously that helps invest for the long term but it also helps us hold some more illiquid instruments. In Shires for example, we have 25% of the portfolio in preference shares which are quite illiquid, but they have the benefit of very high stable dividends and they should continue to pay dividends through this period. That's definitely something we can only really do in a closed end structure like an investment trust.
Interviewer: Investment trusts also have the flexibility to pay income from capital. I mean, to what extent do you use that flexibility and might you consider using it in this type of environment? Ben, I’ll put that to you.
Ben: That’s an area, I guess, people might slightly sort of tossing the rubicon of dividend investment trust. We have the ability to distribute from capital within DIGIT. We haven’t done that and we have substantial revenue reserves. But, I think the impact which we've seen on dividend, I think particularly if this situation moves from being a one off, let's not pay the dividends in order to preserve capital to perhaps something that's more sustained in terms of the impact on the economy, and actually if you look at cash enriching ability of companies and their ability to pay dividends, then I think it may well be something that perhaps comes on to the agenda.
From a personal perspective I'm relatively comfortable with the concept of paying out of capital and having a divide between ultimately what we provide as a trust for our investors in the form of income and then how we go on generating that. DIGIT traditionally has had a bit more of a total return capital growth type angle to it, which perhaps lends itself to being a bit more flexible in terms of how we source that income to distribute back to the investors. But that's not the view that is shared by all, for sure, across the sector.
Interviewer: Fran, do you have anything to add on the sort of structural elements of investment trusts?
Fran: Yeah, not much. North American Income Trust was converted from a tracker eight years ago. Our reserve, revenue reserves, we’ve actually built them up nicely around 10 or 11 months. We would use that as our first lever. I guess, in North America being a more of a growth in income market, the yield on our trust is historically based around the 3% range. It's typically been able to be covered by dividend payments and a bit of option income on the margin. Typically, we haven't even really thought of using capital. I think, to me, that seems like a bit of a slippery slope, if we become a forced reseller of stocks in order to pay a dividend, but of course, it can be managed during certain time periods. I think the way we think about it now is using the revenue reserves first to sustain dividend payments .
Interviewer: These trusts will use option writing to boost the income in normal times. Have you seen that affected by this environment? Iain, I'll put that to you.
Iain: We haven't written a lot of options in Shires over the last couple of months, but we are seeing what you might expect, which is option premiums being higher because of the volatility. But the offset to that is obviously when you are writing options, you've got to accept exposure to high volatility and be that much more comfortable to exercise the options if that happens, and be sure that if you are buying or selling stock at the exercise price, that is a trade you're happy to make.
Interviewer: Ben would you agree with that?
Ben: Yes, I think that's pretty much always been the approach, which is a fundamental approach that allows us to have the benefit of generating some additional income. But broadly speaking, doing things that we would have been fairly comfortable doing anyway. In this environment where volatility is relatively high, it also means the premiums are also high and can be quite attractive as well. It's that balance, I think it adds a nice source of relatively uncorrelated income to the trust. Over the years that Shires and DIGIT and other trust have been writing options I think it's been pretty helpful for them in terms of income generation.
Interviewer: Right, and just as a final point investors who’ve seen capital values bounce all over the place and they may be very nervous about income generation and particularly those who may be retired and rely on income. I wonder if I could ask all three of you just to give some reassurance about the markets as we find them. Fran, could I turn to you first on that?
Fran: Well, I clearly do not have a medical degree so I cannot comment on the depth, duration and the ability to get this disease twice. But, simply put, I mean, not only has the Federal Reserve used the myriad of schools, prevent the market from seizing up, but the federal government in the US has created an unprecedented number of programs in a very short time period for both individuals and corporate to sort of survive during this period. To be sure it is an election year after all, so you almost would expect as such. But the government has really pulled out all the tools available to them in a rather quick fashion. Sometimes they'll -- there had been headlines that there has been some snags rolling out some of these programs, but truly the depth and breadth of these fast stops-- they’re nothing short of exceptional.
Interviewer: Ben, same question to you.
Ben: From a trust perspective, I think one of the key things that I know the board and are very focused on from a Dunedin Income Growth perspective is meeting our income commitments to our investors. We’ve increased dividend modestly for the financial year that’s just gone. It’s our intention with our reserves with the ability to distribute capital to continue to look to grow our dividends in real term over the -- in real terms over the medium term, and that remains very much the case notwithstanding a tough investment environment that we see as we talked about earlier -- opportunity, as well as challenges and risks. I think that the investment trust structure is very well suited for meeting the income challenges which we're currently facing. While there can be no guarantee, I think we're in pretty good shape when it comes to looking to meet those income commitments to our shareholders.
Interviewer: Thank you. A final word from you Iain?
Iain: Yeah, I was looking for comfort I'd say the investment trusts are well set up to still deliver a very healthy level of income in the short term. I think the structure, the quality of the portfolios, and the presence of the revenue reserves makes them very resilient in the short term. As we start to look more medium and long term, then you need to see a more extended duration of dividend cuts which have really become an issue for income investing. Like Fran, I don't have a medical degree, but I think we're seeing a really unprecedented short term impact on the global economy and particularly developed market economies that we haven't seen for a long time. We’re already seeing that being met by an unprecedented response, both in terms of government supports, fiscal stimulus, and we will see medical progress and development of vaccines etc combat the cause of this particular shortfall of income and falling market values. Yes, we're going to see short term volatility. I would remain really hopeful that as we move one or two years out, actually, we'll look back on this as a relatively attractive opportunity for markets to move higher.
Interviewer: Okay, thank you, Iain, Fran and Ben for those insights, which we hope will provide some reassurance to investors in these difficult times. Thank you to our listeners for tuning in. You can find out more about the trust at www.shiresincome.co.uk, www.northamericanincome.co.uk, and www.dunedinincomegrowth.co.uk and please do look out for future episodes. Thank you.
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