‘Dividend hero’ tweaks portfolio to tackle performance gap

Despite a respectable return of 21% on a share price total return and a net asset value (NAV) basis for Bankers Ord (LSE:BNKR), it underperformed its FTSE World benchmark’s return of 26% throughout the year to end of October 2024.

An underweight to the US, which outperformed global markets, as well as stock selection across consumer discretionary and healthcare, are cited as the predominant reasons for relative underperformance.

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Additionally, the decision to not own NVIDIA Corp (NASDAQ:NVDA) specifically was also detrimental as the stock continued to account for a fair portion of the market’s return over the period.

The numbers in detail (for financial year to 31 October 2024)

Net Asset Value (NAV) Return: +21.1%
Share Price Total Return: +21.4%
Benchmark Return (FTSE World): +26.1%
Discount: -13.4% (+2.4% vs prior year)
Dividend: 2.7p (+5% vs prior year)
Gearing: 1.5% (-5.6% vs prior year)

Outlook

Manager Alex Crooke thinks the path for global equities going forwards will be largely defined by the health of the US economy, but anticipates that Donald Trump’s return to the White House and his key policies may have only modest influence on markets in the long run.

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Still, Crooke cautions that the overarching challenge for the US comes in the form of the sizeable budget deficit. Nonetheless, he expects corporate profits to continue to rise in 2025 and thinks that falling bond yields will make equities increasingly attractive despite current high valuation levels.

Portfolio

Bankers saw a higher degree of turnover than normal during the period, and this is partly due to the ongoing restructure of the portfolio to a smaller number of stocks (closer to 100), with more emphasis on best ideas.

Notably, the US allocation has been consciously increased in the year, from 40% in the prior year to 50% at year end. The US now accounts for more than 60% of the portfolio – a relatively radical change for the trust.

The UK exposure has fallen to its lowest-ever level for Bankers (now 7%).

Also of note is that the Chinese A share portfolio was trimmed to just two holdings given a lack of faith in the government’s policies to revive the economy.

Tech is now in line with index for Bankers, at 27% of the portfolio, and while there are small overweight positions to healthcare, industrials and financials, sector allocation doesn’t differ wildly from the benchmark.

Dividend

Bankers’ has announced (subject to shareholder approval) a 5% increase in the dividend versus last year, covered almost entirely by earnings. This means the trust will achieve a 58th consecutive year of dividend increases. The yield on the portfolio stands at around 2.3%.

Gearing

The reduction in gearing to 1.5% in October has been partially reversed since period end, increasing back to circa 3% in the months since.

Discount

The trust’s discount to NAV narrowed by just over 2% throughout the year, ending the period at 13.4%.

ii View

While investors may be content with the circa 21% return for Bankers in the period, the trust continued to underperform a global benchmark during a year where the US drove markets. This made for a fourth consecutive year of underperformance both on a NAV and share price basis.

The effect of a small narrowing of the discount continuing after period end was positive for investors, but the current level still stands at just shy of -10%.

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Alongside some negative stock-selection effects noted in the results, the same theme from previous years played out for Bankers: the trust paying for its underweight position in the US.

Throughout the past decade and beyond, Bankers has positioned itself to be substantially underweight US equities, and overweight the less-loved UK market – a factor that has made the task of outperforming a challenge.

The most notable takeaway from this annual report is the shift in this stance to bring these allocations much more in line with its FTSE World benchmark, in the hope that this will spur better relative performance in years to come.

This decision also has implications for income generation within the portfolio, given that US companies typically favour buybacks over cash payouts, and the US market’s yield is a fraction of the level seen in the UK (which until last year made up more than one-fifth of the portfolio). We already see this change reflected during the period by a fall in the absolute level of income received from portfolio companies.

The income focus of the trust has been a headwind to performance historically, given the dominant performance of low-to-no dividend US equities over other regions. It is noted that future payouts may be supplemented from revenue reserves to allow Crooke the flexibility to access those lower-yielding areas of the market where capital returns are more promising.

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The revenue reserve is already very sizeable and far exceeds the value of dividends paid out in the year, meaning it likely would easily provide a sufficient supplement to ensure future dividends continue to grow.

In all, those investors who valued Bankers for its distinct rejection of the favouritism of US equities that prevails across many active and passive peers may take the view that Bankers now loses this point of unicity.

However, if the status quo of US market dominance above other regions continues under Donald Trump, investors will likely be glad of Bankers’ move to unwind its somewhat contrarian positioning that favoured domestic and European stocks.