Bankers Investment Trust: dividends, bank shares and themes

A dividend hero, Bankers’ (LSE:BNKR) has been a star performer over the years. Find out what impact portfolio manager Alex Crooke thinks the US presidential election will have on share prices, investment themes to watch like a hawk, and when to buy bank shares.

Lee Wild, head of equity strategy at interactive investor:“Now, Alex, Bankers (LSE:BNKR) is one of the so-called dividend heroes; it’s raised [its] annual dividend every year since 1967. And clearly, it's a record you're proud of, but how difficult has it been to continue that record, especially in recent months with all the pressure on dividends that everybody's very well aware of?”

Alex Crook, portfolio manager at the Bankers Investment Trust:“Yeah, it's not easy for income-hunters. The challenge has been predominantly UK and areas of Europe, particularly financials, so we went into this with a very light exposure, certainly to financials, to banks, is only about 2% of the aggregate portfolio, and oil and gas and other sectors have seen some big dividend cuts, it’s about 1% . So, we've navigated in the sense of some of the sectors quite well, but we have hit a few stocks in our UK portfolio that have cut dividends on us, so we will see income lower than last year.

“But being an investment trust, we squirrel away some money in the good years.  o, for the last 10 years we've effectively put away about 7p per share in terms of excess income, and we would hope to draw down on that during this phase. So, we will use some reserves this year and maybe certainly next year, but I think we can see how we can navigate back towards a covered dividend and, therefore, keep this dividend growth going. And that, again, is one of the great attributes of investment trusts, that ability to put some money away in the good years and draw on it in the more difficult years to keep the consistent dividend growth going.”

Lee:“Now, the US presidential election is fast approaching. What impact do you expect the different potential outcomes will have on stock prices, and specifically [on] your portfolio as well?”

Alex:“I'm actually not expecting too much change. I think in past years you've had quite a difference between [in] economic policy between [the] Democrats and Republicans, but I'm struggling to see a lot of that in this current election. I think both will clearly want to prioritise jobs, you want to prioritise US jobs, and so a lot of the trends and themes we've had, Chinese trade wars, etc, are likely to continue, maybe not in quite the same fashion, but these trends again are set in terms of trying to bring employment back to US soil, I suppose. And so, I'm not seeing a huge amount of difference there.

“The key driver, economic growth and policy, has definitely been the Fed in the last 10 years, so again, it's more about who's in charge of the Federal Reserve Bank, and that's not going to change in the short term. So, I'm not seeing a huge difference, I think it's more around the edges of social policy, etc.”

Lee: “Sure. I mean, you've mentioned a couple of other themes. I was going to ask, are there any other short- or longer-term themes that you're watching closely at the moment or are investing in now? And I know you mentioned a bit about China and the Fed.”

Alex:“Yeah, maybe, two themes to think about. One is – and we are investing in this – the green economy and the sense that governments, in terms of trying to recover from the Covid crisis over the next three or four years, have clearly prioritised [such as] electrification, removing carbon from the economy and all sorts of areas like that. So, I think we can really work alongside that and help support businesses that are driving those trends.

“So, whether that's in [insulation in] homes. We have a Chinese company, Yutong Bus, which is the world's largest manufacturer of electric buses, which, again, should be changing transport systems. There's lots of ways I think we can work alongside businesses and benefit, as well [as] in terms of that greener economy. And then I think that the longer-term one, which is a big question for all of us, really, is about what the amount of quantitative easing - so, free money that central banks have been creating at very low interest rates or negative interest rates - what's that going to do to inflation trends in the future, because that really does drive both interest-rate policy, it drives bond yields, and it affects equity prices as well.

“Equities have historically benefited well when inflation is at that sort of 1% to 3% to 5% range. Any more inflation, it gets more problematic and low inflation is, [as] we've seen, the driver of growth stocks. So, again, if we see a bit more inflation, we might see it switch back towards value. Certainly, it makes financials a bit more attractive [as] investments, so that's another one we need to keep a very close eye on.”

Lee:“Sure. And what's the house view on inflation? And, as you say, it has implications for some of the financials as well. So, yeah, what do you think in-house?”

Alex:“It's very mixed, so it depends, as always, who you talk to. And, I think from the fixed-interest teams a little bit more view, they just can't see the growth, the demand, I suppose, for products to drive inflation. And I agree with that in this phase of the market while we're genuinely worrying about unemployment. As I mentioned earlier, when the furlough schemes ends, there could be another period of very slow or negative growth towards the end of this year and into [the] beginning of next year.

“But, my personal view is that we will see. We had a lot of capacity exiting when the market, whether that's in airfares. You know, we're seeing labour restrictions in terms of moving people around the world to pick food, say. So, I do think we're going to see here and there definitely some positive trends of rising inflation in certain goods and services. It just depends whether the demand side of the economy is picking up in the next couple of years if we get a vaccine and we see our economy lift out, I mean that’s the key differential.”

Lee: “Given the extreme rally, especially in US tech stocks, which have been incredibly popular among many sorts of investors, and any inflated valuations that many talk about at the moment, do you have any words of wisdom for investors in those areas? And also, where do you think investors should be looking now? Is it a continued [focus] still at the tech sector, or are there some other areas that you think are worth following?”

Alex:“Well, I think always remember lessons from 1998 and 1999 when we had a technology boom. Slightly different in that phase, it was more about the hope and expectation of new technologies and new businesses. This time around, these businesses, whether it's from the largest ones, the Apples (NASDAQ:AAPL) and Amazons (NASDAQ:AMZN) downwards, they’ve got genuine very strong revenue growth opportunities and they're producing profits and cashflow which is being reinvested back into their businesses, so they're different beasts.

“But we do see this in bubbles, that what happens is you get narrowing leadership, so it tends to drop peripheral stocks and keep driving hard the chosen few. So one lesson to keep looking at is [to] look at the fundamentals. You know, if you do see some slippage in forecasts and revenue growth, etc, then be a bit more careful that these stocks begin to get left behind and that money gets invested back into the premium names again.

“And also, I suppose, that disruptors get disrupted. Ultimately, if they’re industries that are open to disruption then it's not always the first business that finds the opportunity that actually reaps the rewards down the road. But generally, we're still investors in some of these names, and I think it's still got further to go. These are great businesses that have found the lockdown and Covid actually beneficial in the sense of driving further growth for them.”

Lee:“Do you think UK banks would ever be on your radar?”

Alex:“It's got to have that inflation, you know. If you think of a bank, it takes in deposits, it lends that to clients at a longer-term interest rate. It needs a positive yield curve, so higher long-term rates. And when it gets that again, I think they will be quite profitable, we’ll see dividends resume and they’ll be good investments. But at the moment there's no prospect, that long-term interest rate is very low, it's very difficult for banks to consistently make profits, and we're obviously at a point where there are some genuine worries about loan losses, and regulators have stopped them paying dividends in many parts of the world, so they're rather unappealing. But I think they will get back, to the point, yes, we need them for a stable economy.”

Lee: “So, no light at the end of the tunnel yet, unfortunately, but Alex Crook at Bankers Investment Trust, thank you very much for joining us.”

Alex:“Thank you.”

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