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Podcasts from Aberdeen Standard Investment Trusts, invest in good company.

Interviewer Hello and welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is Hugh Young, manager of the Aberdeen Standard Asia Focus Investment Trust. We're going to be talking about the ongoing fallout from COVID-19 and how he's managing the Trust in these uncertain times. Welcome Hugh. The last time we spoke we were in the early stages of the COVID-19 outbreak and the outlook was still very uncertain. Have you been able to build any clarity around both the economic and corporate outlook in the intervening couple of months?

Hugh: Well, I wish I could be clearer but of course, things are still quite uncertain. Asia has been dealing with COVID arguably much better than many other parts of the world. And COVID has been substantially under control in large economies such as China and smaller economies such as Singapore. Although we have seen second waves of COVID coming in Australia which has caused further lockdown, so I think at the moment it's very much a matter of reacting day by day to news on COVID. I think what has happened, and what has stabilized, is the way much businesses is done within Asia. So I think people have been quick to adapt to new circumstances, change business practices and employ novel practices where necessary. So that's stabilized, but the outlook for broader economic growth is still uncertain given COVID. And of course, we have some of the traditional issues cropping up again. So in recent weeks, we've had the renewal of tension on the US-China trade front, which has really been running sore for a couple of years. So as ever, life is not terribly certain - it never has been. But of course, we're still finding plenty to do and luckily plenty of value within the portfolio.

Interviewer Okay, so how would you kind of describe your current mood? Are you generally optimistic or pessimistic – where do you lie on that?

Hugh: Well, as a fund manager, I think one always borders on the pessimistic and is always looking out for the worst things that can possibly happen and trying to protect things on the downside. And it's certainly hard to be super optimistic about economic growth and this year economic growth is going to be very, very poor. I think to a large extent markets are discounting that and recognising that, so no one expects economic growth to be exciting this year. There are expectations and indeed, growth should pick up next year - there should be a rebound. Not necessarily a complete V-shaped rebound, but nonetheless still a strong rebound in economic growth and in earnings growth. But this year we're not expecting great shakes out of growth in either economies or indeed corporate earnings.

Interviewer And markets have obviously moved a long way. I mean, to the point where people are suggesting that they're looking rather over-optimistic. I mean, to what extent do you think they're adequately reflecting the risks?

Hugh: Yes, I think there's, in broad market terms, I think there is a degree of truth in that when you look at the major indices. Of course, if you dig down and look at the major indices, you'll see that they've really been fueled by the stock prices of a handful of companies and typically that’s the Amazon and Netflix of this world that have been powering the global indices. So as far as we're concerned, where we have a big hunting ground for opportunities among small caps, thousands of small cap within the Asian region. There's still the opportunities, but certainly I worry, looking at some of the major markets, that things have become a little stretched. But that’s largely among the larger cap companies, and very much focused on the internet.

Interviewer And as markets have become a little less volatile, have you made any changes to the portfolio?

Hugh: Yes, we have. Not huge changes, so the portfolio is still very much recognisable from when we last did a podcast. We've added sort of one new holding in Australia – an investment management company, we've been topping up a relatively new holding in Singapore of a hospital company, and various other companies we've been topping up - a financial company in India, for example, where the market’s been quite weak. Conversely, we've been continuing to tidy up in areas where we don't see that tremendous growth. So these are companies that might be in the financial sector. So conversely, having topped up a company in India in finance, we sold our holding in City Union Bank in India which has done well since we bought it. And we’ve been top-slicing various companies in Thailand, Hong Kong, and one in Sri Lanka.

Interviewer And looking at the top 10 holdings today, it's a real eclectic mix. We've got a precision toolmaker, a life sciences company, property company, convenience store chain. What binds them all?

Hugh: Yes, we do – and in a sense it’s been deliberate. We haven't put all our eggs in one basket. We spread our eggs, between countries and between sectors of the economy. And in fact our largest holding is to do with internet shopping which has done fabulously well in Taiwan. And really what binds them, is that in their fields, they're all typically market leaders. That might be a small market - so for example, in Sri Lanka, we have one of Sri Lanka's largest conglomerates who are involved in a variety of fields. But because Sri Lanka's a small country, it's also a small cap. And then we might have a highly specialist company involved in microscopes and the like in Korea, for example, but they're all leaders in their field. And the other thing that binds them is their strong balance sheet. So financial strength has been a key really since day one of Asia Focus all those years ago, because certainly when you're small cap, you never quite know when something goes wrong, and you don't want to be in the grip of the banks if something does go wrong. So that was one reason we've survived various crises quite well, given financial strength.

Interviewer Yes. And presumably that was important during this crisis as well.

Hugh: Absolutely, because certainly for some of our countries, and we do have a couple of hotel companies, about 4% of the portfolio also, which would have seen earnings just disappear. But both groups that we have are backed by a very solid parent, very strong balance sheets – they’re not developing, they're just running hotels. So they don't have huge capital expenditure demands, and they've got through it and they're now seeing business pick up again.

Interviewer And are there any areas where you're finding opportunities or looking around at the moment - either by country or by sector, that are sparking an interest?

Hugh: Funnily enough, I wouldn't say there's any particular area. Given price movements in markets and volatility in markets, suddenly something that you think is not of interest one day might be of great interest the next because of price movements accordingly. And then, of course we're always on the lookout for new investment opportunities. So that might be through initial public offerings, and also uncovering new stocks that not even we have heard of.

Interviewer And where is the trust on gearing at the moment?

Hugh: Oh, yes, that's an important point. Gearing has come down slightly. So we're give or take at about just under 10% geared on a net basis, which is a bit lower than we've been historically.

Interviewer And how are you feeling about the rest of the year? Do you believe earnings will bounce back or is it sector specific or really are we looking into 2021 before anything gets back to any kind of normality?

Hugh: I think general normality - yes, we're probably looking at 2021 for a return to normality. We are seeing, as we speak, a normalisation - so as I mentioned, companies having seen their business drop off the edge of a cliff in many areas. I mean, not all areas – again, a substantial amount of our portfolio has actually been a beneficiary of what's gone on. Certainly the newer companies, the tech companies and the like, even some of the retailers have been beneficiaries. So you’re going to see a mixed pattern, but certainly a better quarter coming ahead. So the bad quarter will have been the second quarter of this year, when the full effects were felt, and now you're seeing a steady improvement, but not a return to normality as yet. I think we have to wait until next year for that.

Interviewer And what about the major risks? I mean, obviously everyone's very minutely focused on coronavirus at the moment, but are there other things lurking in the background that might surprise markets should the coronavirus risks ebb?

Hugh: Yes. They're the broader risks that have been ever present and that we've dealt with since day one of the Trust’s existence. So they’re the broader economic risk of the resurgence of the China-US tension. We've even had India-China tension on the border. It hasn't affected the economies as yet, but again, issues such as geopolitical tension can always throw things off track. And then you have things peculiar to individual countries. It can be due, again, typically things to do with elections, and the like - changes, change of control, new regulations coming in, but these are the things that we've lived with for the last 25 odd years that the Trust has been going. So always things to worry about and we spend our lives worrying.

Interviewer Great. Okay, thank you Hugh for your time today and thank you to everyone for listening in. You can find out more information about the trust at www.asia-focus.co.uk. We're working to keep you updated throughout these tricky times. So please do look out for future updates.

Important information:

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 or products mentioned here in 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 may get 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.

Transcript of audio recorded on Thursday 30th July

Podcasts from Aberdeen Standard Investment Trusts - invest in good company.

Interviewer: Hello and welcome to the latest in the Aberdeen Standard Investment Trusts podcast series. With me today is Abby Glennie manager on the Aberdeen Smaller Companies Income Trust. We'll be talking about how smaller company dividends have fared during a tough time for company payouts. Welcome, Abby.

Abby: Hi

Interviewer: Hi. The most recent statistics paint a difficult picture for dividends. UK dividends have fallen by more than half in the second quarter. How have companies in the Trust fared by comparison?

Abby: Yes, so I think the dividend environment has clearly been difficult for all types of companies and that’s been for a variety of reasons. So you know, some companies have actually had challenging operational periods, but some of even the best performing companies have this pressure let’s say of not paying dividends, either because they’ve taken part government schemes, so the furlough scheme or some of the other assistance schemes, or they’ve just felt a bit of pressure to be cautious and hold on to cash reserves because the high level of uncertainty. And you know, there was pressure that sort of if you had taken part in schemes, you shouldn’t really be paying out to shareholders at the time. And I also think there just became a very sort of general view in the market that because of the unusual situation we were in, it was okay not to pay dividends. So companies weren't really being punished for not paying dividends. Now actually, what we've seen across the portfolio is, because we invest in quality businesses they have been businesses with good balance sheets, and they've gone into this in strong positions. Actually a lot of them because of the sectors that they're in and the services that they provide, are actually very resilient throughout this. So right through this period, we saw a lot of stocks in the in the portfolio continue to expect to pay dividends. The thing we've been looking at more recently is that there were some that have surprised us by saying they weren't going to pay a dividend when we thought they were in a position to be able to. And what we've noticed in the past couple of months is that that's really coming back again. So companies who didn't pay before, actually, they're starting to pay dividends quicker than the market expected. Some of them are even making up for the dividends they didn't pay before. So I think overall, while we're definitely not going to be immune from this sort of lower income situation, and where earnings are lower, dividends are going to be lower. But actually, we've been very pleased by the sort of high proportion of stocks in the portfolio that will pay dividends this year.

Interviewer: Okay, and you mentioned that companies are giving a bit more clarity on the outlook. I mean, what feedback are you getting from companies - has that generally left you feeling more positive or negative?

Abby: Yes, so I think there’s still a huge amount of uncertainty in markets, and the degree of that really varies between different industries. So, for instance, if you're in travel and leisure at the moment, I think there's still a high degree of uncertainty. But other industries who have operated throughout this for them more settled environment. So for, like food producers or technology businesses, you know, I think they're in a position to actually feel more certain about their outlook. Some of these companies have even been seeing improving trading through this environment. I think the challenge for a lot of companies from here is that there's a lot of areas that are just outside of their control. So for example, government rate restrictions, and what are demand levels going to be like. But for me, the highest level of uncertainty is probably about unemployment levels, because we're just not really seeing evidence of that yet. Certainly people are still on the furlough scheme, and when I talk to companies, a lot of companies are talking about just not the need to take back everyone off furlough, because they’ve sort of learnt how to operate more efficiently, to be honest. So I think how the government unwinds that furlough scheme and how companies sort of adjust staffing levels, not for cost expenses but just to balance the demand path I think will be tricky. And the other thing that we're seeing is that, I think a lot of the, a lot of the recovery is really going to be about things like consumer confidence and unemployment levels. So in that way we think that the market outlook is much more about main street than it is about Wall Street.

Interviewer: Okay, and with that in mind, have you made any changes to the portfolio in recent months?

Abby: No, we really have made any changes recently. We added a few new stocks at the beginning of the COVID environment. We saw a few interesting investment ideas. We marginally increased our fixed income exposure you know for security of income. But actually, no, in the past few months, we haven't made any changes. I think we feel very comfortable with the positions we have, and how those companies are trading. And importantly as well, the performance of the Trust has been very strong this year so we're really continuing to run with those winners. And we're pleased, you know it's quite a busy reporting season again now, and we're very pleased with the positive reporting we’re seeing at our holdings. And importantly, as well as the sort of share price reaction to those. So even the sort of quality growth businesses which have held up well to this environment, when they are reporting good results, they are also again, seeing share price appreciation.

Interviewer: And, obviously markets have improved quite a long way, although it does seem to have been quite narrowly drawn. I mean, are there areas where you're still finding kind of good value?

Abby: Yes, I mean, because we haven’t been trading the portfolio kind of tells you that we still think there's value in the holdings that we have. So we think because of their operational performance, actually they continue to offer strong investment outcome. I mean, in tough environments, which I think is what we have for at least the rest of this year, probably going into next year easily. You know, I think investors will pay up for that quality growth, and certainly what we've been through the past few months, and just with the level of uncertainty we have in markets and we are going to have increasing unemployment, we're going to have tougher economic growth, how the government's going to pay back and fund all that they've done in recent months is hard to understand. So I just think in that environment, actually sort of resilience and quality and companies you can still grow irrelevant of, you know, all the headwinds against them. I think those become even more valuable businesses. And so when we think about valuation, you know, it's embedded within all of our investment decisions, but actually the value in terms of multiples on our businesses at the moment, even those which have re-rated, they're not at a level that puts us off being long term holders. I think we might see some short value rallies which tend to be bad for our investment process. We saw that in late May but really, I just don't think in this environment that those value rallies are going to stay.

Interviewer: Are there any kind of themes you’d highlight in the portfolio, or any sort of examples that highlight that?

Abby: Yes, I mean, so the themes are really outputs rather inputs of our process. For us it's much more about companies specifics and that bottom up stock analysis. I mean, we're pleased that even where we have exposure to more cyclical sectors, like for example electronics – you know, the names we hold within that very much focuses on those higher quality growth names, that have been resilient and performed well. I think also we’ve seen that through, we've got quite a few asset manager type related stocks that have traded well, so things like Liontrust, AJ Bell, Intermediate capital. But I mean, I guess the key theme in our portfolio is really an investment style which persists throughout. You know, we’re very true to that and we don't step away from that. So the real theme is about that quality and growth, that resilience.

Interviewer: And I mean, obviously there are still risks out there. Coronavirus hasn't gone away. We've seen, you know, a resurgence of the US-China poor relations. But I mean, does the price of smaller companies today reflect those risks do you think?

Abby: Yes, I mean, I think one of the challenges is that smaller companies often just get treated all with the same brush. So despite what resilience they might actually offer at an individual level, we see markets panic towards smaller companies. So we saw them trade off the most when we started this COVID-19 situation. It's the same as when we saw Brexit, back in 2016, when we saw that first trade up, everyone sort of rushes out of smaller companies because they have this risk perception. I think firstly, our investment process is set up to invest in smaller companies in a lower risk way. We do that through the quality focus. And actually, what I would say on an individual level is that often smaller companies can adapt more quickly, you know they're more nimble, and perhaps they play to market niches where they can still grow. And I think the easiest way for people to see examples of that actually is just to look at the businesses in their local community. And what many of them achieved during the lockdown situation. Now actually, a lot of them have thrived and you know it’s been much easier for those companies to adapt.

Interviewer: And just finally, there's been a lot of problems for traditional income funds with areas like banks and the oil majors hit quite hard. Do you think investors should be being more creative in the way they hunt for income, and in particular obviously, should that include a greater focus on smaller companies?

Abby: Yeah, so I mean, I guess what we've been pleased about is the resilience of many of the smaller companies. And, you know, I talked about their ability to actually continue to pay their dividends through the crisis or to return to them more quickly. And I think it'll be really interesting at the end of the year to look back at how smaller companies and income portfolios like this have held up relative to large cap. Because I think some investors will be quite surprised by that outcome. You know, within large cap in some of these sectors which the income funds rely on heavily have been some of the most challenged. Some of them are from pressure by their regulators to not pay any income. And a lot of them are big businesses, which are heavy users of government schemes, which also limits their ability to pay. So actually, you know, I feel like when, where we've positioned ourselves within the smaller companies with that quality resilient business, we sort of capture two elements – we’ve captured businesses with good balance sheets who have been in a strong position to pay. And we've also captured enough businesses in sectors who have traded well through this environment. They've also been in a position to pay. So I think, yeah, I think some people could be surprised at the end of this year.

Interviewer: Great, okay. Thank you so much Abby for those insights today and thank you to our listeners for tuning in. You can find out more about the trust at www.aberdeensmallercompanies.co.uk and please do look out for future episodes.

Important information:

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.

Podcasts from Aberdeen Standard Investment Trusts, invest in good company.

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.

Podcasts from Aberdeen Standard Investment Trusts – invest in good company.

Interviewer: Hello and welcome to the latest in our podcast series where we look at how the managers of the Aberdeen Investment Trust range are handling the upheaval in market created by the COVID-19 outbreak. Today we welcome Kristy Fong, Manager of the Aberdeen New India Investment Trust. Kristy, could we start by talking about India’s experience of the virus, how has it impacted the country’s economy?

Kristy Fong: Yeah sure. Today as we stand India is still seeing the number of cases rise so we have yet to see the peak in India, so it’s still looking pretty challenging as it stands. But, if I were to take a step back and look at how the government has managed the virus situation, I would say that they have been quick to address it by announcing social distancing measures, having an early lockdown, and also an extended lockdown. But, unfortunately the reality is it is hard to control in a country like India and so in certain cities there are real stressors with regards to the healthcare system. It has affected the country, particularly the lockdown does come with severe cost. So we have seen demand affected by worries about job security, wages, and this is particularly painful for the informal economy, daily wage earners, on even certain sectors like retail or travel. Then you also have supply disruption, because clearly the lockdown means that the state borders have been closed, so that’s effected movement of goods. And so because of this there has been little choice but for the government to actually start reopening again, even as cases continue to rise.

Interviewer: Okay, and what about fiscal and monetary measures? I mean what support has the government put in place?

Kristy Fong: I must give thumbs up to the central banks. They have done a lot to boost liquidity, to provide relief to the banking sector, to provide support to the low income or even small medium enterprises such as having guaranteed loans for example, as a way to try to encourage more credit flowing to this particular segment. Where it has been underwhelming would be on the fiscal stimulus front, but that's also because the government has a fiscal deficit target to monitor and so hands are tied and there is not a lot that the government can do to stimulate demand the way that one might have seen in other countries.

Interviewer: Okay, I know it's early days, but do you have any sense of whether India will tip into recession, or the quantum of the decline in the Indian economy?

Kristy Fong: Yes, we have people talking about recessionary -- who are talking about recessionary scenarios, decline in growth, negative growth perhaps in the short term, that wouldn’t be surprising. I think what is realistic is that as the economy reopens that is a good start, but it would be difficult or long U-shaped recovery. And depending on how the virus situation goes, if we could track the kind of recovery rate. Yes in the next one year, numbers are not going to look great for India's GDP, but if you look ahead two or three years then I think we are looking at a better economic situation.

Interviewer: Okay and what’s been the impact on stock markets?

Kristy Fong: Well, stock markets like we have seen in global equities, we saw a sharp correction around February followed by a recovery. But if you look at India today, it is still about 16% lower than the start of the year. So it has lacked the recovery that one might have seen in other markets, I think reflecting some of the difficult situation that the country faces today.

Interviewer: And to what extent have you reshaped the portfolio in light of the current crisis, I mean have there been areas where you kind of topped up because valuations have fallen or areas you've backed away from?

Kristy Fong: Yes, well if we look at our portfolio strategy it has not changed, simply because we have always been very bottom-up driven, focusing on quality. And by that I mean buying companies that are strong, that will do better than peers despite of the macro situation. So because of that we haven't had a need to really restructure the portfolio because our companies we believe are the ones that will come out of this a lot stronger than others. What we have done was also to actually have a solvency check across the balance sheets of our holdings, and they are all looking healthy as we would expect. We have just exited one name that was more highly geared, had high operating leverage and exposed to the tourism sector. Overall, structurally our portfolio remains the same. We have been opportunistic in buying on dips - some of the banks for example that we've had we’ve topped up on weakness and we continue to back the high quality names that have been defensive such as consumer staples and IT services.

Interviewer: Okay, I mean do you think the COVID-19 outbreak could change the longer-term prospects for India? I mean, could Indian companies benefit from some of the manufacturing moved away from China for example, and is that reflected in the portfolio?

Kristy Fong: Yes, so I have spoken about the near-term and medium-term challenges, but obviously with any crisis there should be opportunities and we see this as an opportunity for India as the world thinks seriously about diversifying away from China for example. So while we have been underwhelmed with the fiscal stimulus initiated, we were encouraged that the Modi government has not forgotten their reform agenda. He's done difficult measures such as he's recently spoken about addressing the land and labour reform, and all these would really help to attract more foreign direct investment. Of course, at the same time he's spoken about increasing resilience, Made in India campaign. So there is an opportunity for India to really use this COVID situation as a chance to restructure.

Interviewer: Right and there's no danger that Modi’s reform program might be derailed by the COVID crisis, do you think he can still push ahead with that?

Kristy Fong: Well, where there could be constraints would be on funding, financing it, which is again why it is India's chance to really show the world that they can be a reliable place to invest in, draw long term sticky foreign direct investment flow. I guess, we also hope to see more focus on addressing the weak economy. Right now at this moment, we are hearing a lot about the border tensions with China, we hope that's not going to be a distraction away from what the government should be focusing on and that’s really fixing the economy.

Interviewer: Okay, and I wonder if you could just go back to the portfolio quickly and just talk a little bit about whether there are any key themes that are running through the portfolio and possibly anything you’re looking for in the companies that you're selecting?

Kristy Fong: Yes, okay so when we look at India what we find attractive is the huge market opportunity, the growing demographics, middle class growth, so if you look at our portfolio it's very domestic oriented. We like companies that do well selling to the consumer, the aspirational Indian consumer, so consumer staples is an area that we favour. We also recognise the strength of Indian talent and being able to outsource that talent and whether that is through IT services or even healthcare. Those are the themes that we find attractive in India. More than that I think what's really interesting about India is that one hears a lot about the macro challenges, but actually what is very interesting to us is the strength of the underlying companies. So within even difficult sectors for example, in banks, we are able to find world class operators that will benefit from consolidation as the challenges in the economy and the second step, there will be market shaping for the best in class operators. That is theme that we find not just within the private sector banks but also in real estate. I guess to sum it up as well, what India lacks is infrastructure, again a difficult sector, but we have identified cement, paint as a proxy to that infrastructure demand potential. So this is how our portfolio looks really being more biased towards domestic oriented companies and consumer staples, services in IT, IT services and healthcare, we find attractive as well, a consolidation phase within banks and real estate as well as cement as an infrastructure proxy.

Interviewer: Okay, and how do valuations look relative to their history?

Kristy Fong: Well, with the market 16% lower, then it is cheaper than before, but obviously one has to remember that earnings would also be weaker and we are probably going through a cycle of earnings downgrades as well. So this is how it looks for the near term where valuations may not be as cheap as it's been because of the earnings pressure, but again looking out two/three years ahead then this is actually an interesting time to be picking up stocks that have been beaten up. If you are to look at a more stable measure as in price-to-book then we are at two standard deviations lower than its 10-year historical average. So if one was to be longer term and patient enough for this recovery then India does look interesting at current prices.

Interviewer: Okay, and do you have any kind of final messages for investors who are holding their nerve in this tough environment?

Kristy Fong: Yes, I mean investing is a long-term game and one has to be patient because there really would be interesting opportunities at this point to be investing in good quality companies and that's who we are. India can be a difficult market, obviously we are looking at a challenging growth outlook at the moment, but being stock pickers we see this as an opportunity to be invested and backing the best in class operators within each sector.

Interviewer: Okay, great, thank you Kristy, for those insights today and thank you also to our listeners. You can find out more about the Trust at www.aberdeen-newindia.co.uk and please do look out for future updates.

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 may get 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.

Podcasts from Aberdeen Standard Investment Trusts - invest in good company.

Interviewer: Welcome to the Aberdeen Standard Investment Trusts podcast series where our investment trust managers discuss how they're responding to the COVID-19 outbreak. Today we welcome Alan Gauld, Manager of the Standard Life Private Equity Trust. Hi, Alan. Clearly, it will take some time for revaluations in private equity to work through the system. But I'm wondering what early signs you're seeing in terms of the impact of the outbreak on private equity?

Alan Gauld: I think it seems clear that private equity valuations will decline in March, by how much is difficult to say at this point as I speak. But in Q1 public stocks dropped 20%, 30% or more, depending on the sub sector and private equity firms use relevant listed companies as values and comparators for their unquoted companies, and so there will be some impact. The earnings of private equity European companies anyway are not likely to been especially impacted in Q1 other than perhaps the second half of March. It should have held up reasonably well. But yes, we do expect there to be a COVID-19 as the March accounts come in. I mean, private equity valuations are for the most part quarterly. So more generally, it is difficult to say how things will progress as the year does, but the June mark will certainly be difficult to say. Public markets have bounced significantly since March. Which seemed somewhat illogical, but they have and if that continues to be the case until the end of the month, then obviously that will have a positive impact. Equally, earnings will have been impacted by lockdowns across developed western economies in Q2. So it’s difficult to say more longer term, but I think, we can say with some certainty that March numbers will be down and materially so. That said, private equity is not especially well correlated with public indices. Private equity firms tend to put in some buffer on the way up and on the way down, they tend to discount their companies on the way up, and that does dampen some of the volatility relative to public markets. More broadly, we're seeing new mergers and acquisitions have significantly dropped and it’s very difficult to start new sales processes, to buy businesses without face to face interaction. It’s possible that some deals that were already in train just prior to COVID could be resurrected, but we expect 2020 to be significantly down in terms of new deals and private equity exits. I think at the moment just to conclude I think private equity firms are focused on supporting their existing portfolio companies right now. We can come on to that in a little bit more detail a bit later on, but that’s certainly where they can most focused in the last couple of months.

Interviewer: Presumably, you've been talking to your sort of underlying holdings through this process, and what kind of feedback are you getting from them - what's the mood music there?

Alan Gauld: Well, I think we see the private equity firms generally reacting pretty well to the crisis. You know, we're coming off with one of the longest bull markets in history, if not the longest. So these firms have been expecting something to happen, perhaps not a global pandemic, but they've been expecting a crisis of some sort and so they've been building more recession resilient portfolios in recent times. All of the managers that we back and have funds with Standard Life Private Equity Trust are managers we've known for over 10 years and weathered the global financial crisis which wasn't that long ago. I think how they’ve reacted - the first thing has been to look after their people, so people within the private equity firm itself, but also in their portfolio companies. And then they've moved really quickly to shore up liquidity in the underlying portfolio companies and to cut costs there. Certainly businesses have been effectively mothballed depending on sector, particularly travel dependent companies. They've been really good actually at communicating with investors such as ourselves and provided really detailed reporting. It's been impressive actually. So, so far so good in terms of their reactions to what is a very difficult situation. In terms of portfolio companies themselves, I don't think it's as simple as like black and white and haves and have-nots. It's a very broad spectrum in terms of impact of COVID-19 across our underlying book. You see sectors like for example software, just slightly to a lesser degree healthcare and consumer staples proving to be resilient so far. And in some cases actually have a positive impact on the back of COVID. For example, we have a business called TeamViewer in our portfolio, which is backed by a private equity sponsor called Permira. And they listed the business in Frankfurt in 2019 actually, and that business does remote desktop software. So it’s seen record sales as so many people are working from home. On the flipside, you see sectors like consumer discretionary, and we have a number of bricks and mortar retailers and travel businesses as well and they're not doing anywhere near as well for obvious reasons. That said, we've got a business called Action which is backed by 3i, which is a discount retailer in Continental Europe. And it has managed to keep all its stores open during the crisis, and it's traded well given the circumstances. Ultimately, I think this is all part of it. It's important to be diversified and within the Standard Life Private Equity Trust we have over 400 companies and pretty balanced diversification by sector and country.

Interviewer: And have you made any adjustments to the portfolio during this period? I mean, I recognize private equity isn't always liquid enough to sort of make radical changes, but at the margins have you backed away from certain areas or taking new investments in certain areas?

Alan Gauld: Not especially, not so far. For us, private equity is about long term investing, and as I said before, I think that we've been anticipating a recession or crisis of some sort for some time and so have the private equity managers that we back. Really, we will continue to back managers that we know well, that we know them for a long period of time, and at the moment all managers that we back we have known for over 10 years. All of them have had experience of the global financial crisis, and all of them bring strong operational value add to their underlying companies. That's the type of manager we'll just continue to back. In preparation for this period of more difficult situation, we introduced the co-investment strategy in 2019, and we have been cautious about deploying that. So far we've only deployed into two businesses, and whilst they're admittedly consumer focused, they are more resilient consumer staple in nature. So Action, which we've mentioned already, and Mademoiselle Desserts is the leading European frozen bakery business, which is selling frozen dough and products into supermarkets. And so with stockpiling that's managed to show resilience through COVID-19 as well thus far. We could have done more in co-investment, but we didn't want to be aggressive in what we saw was a market which was reaching its peak. And other ways that we have been preparing for this in advance have been things like conducting a secondary sale of assets in 2019, assets that were deemed non-core, where we saw limited upside, which light us to free up cash and free up commitment and simplify our portfolio frankly.

In addition as well, we feel our balance sheet is in a pretty good position right now. We have held back cash in recent times. We’ve extended our revolving credits facility to a 100 million from 80. We still are in a much stronger setting in this sense than we were prior to the global financial crisis in 2008. It’s not about making changes now so to speak, it’s sort of -- it is more preparation months and years in advance of this.

Interviewer: Okay, so there hasn’t been any sort of revaluation of the way you look at risk or anything like that because you were doing that already.

Alan Gauld:That’s not to say there might not be some change in the way that we look at things going forward, I mean hand on heart, we didn’t model out every -- well we did not model out the risk of a global pandemic when we considered our co-investments before. That’s something we will likely do now. Obviously, certain sectors will be a lot more sensitive to -- beat yourself up about that, I mean how many people did do the downside case around a global pandemic, and I think that will be common place now. As I say I don’t think there will be a change in the way that we assess private equity managers and income funds. We look for managers that can endure different cycles, different points in the cycle via differentiated sourcing of deals or value creation capabilities and have learned lessons from difficulties in the past.

I don’t see us changing our approach to diversification. We have over 400 companies. We don't really want a single sector of country to be more than 20% of portfolio NAV. There has been a shift in our portfolio in recent times to more sector growth, resilient sectors like technology and healthcare. For example, in 2015 technology and healthcare was a combined 18% of portfolio NAV, now it is over 30%.

The one change we might -- well, we are making frankly. For the rest of the financial year 2020 we’ll likely reduce our commitments to new funds. There will be less European fundraisings in the remainder of this year that does interest us in any case, just with the uncertainty and just until we realize how things are panning out. We’ll be opportunistic around co-investments, but again there we will probably fall in line with the following merger and acquisition activity and will remain opportunistic.

There's likely to be more secondary opportunities which is basically buying a fund, a private equity fund from another investor part way through the fund’s life so that our deployment rate may pivot that way naturally. But, yeah I don’t think other than perhaps assessing the global pandemic risk when we’re making the investments, I don’t see us fundamentally changing the way that we assess opportunities.

Interviewer: Okay, and in light of that, is there an advantage to running an investment trust structure in this environment? You got less pressure with fund flows, you can possibly be in a better position to buy distressed assets if they come on the market and that kind of thing.

Alan Gauld: Absolutely, I think the situation last year with Woodford showed the advantage of the closed ended model in terms of managing illiquid assets such as private equity. We don’t have to deal with redemptions and hold back cash for that or potentially undertake a fire sale of our assets. It gives us stability and advantage there. As I said, I think we see the opportunity being in secondaries, secondary activity tends to increase in a period of market dislocation or crisis, as investors in private equity perhaps come under liquidity or allocation pressures and need to rebalance their portfolios by selling some of their exposures in private equity asset. We have an established track record in the secondaries and a team of nine investment professionals that look at this week in week out, and so we’re well positioned to identify the opportunities for our Standard Life Private Equity Trust. I think that’s the area that we should be able to be aggressive around, and certainly the investment trust structure helps us.

Interviewer: What about the gearing levels on the trust? I mean is that something you are using at the moment?

Alan Gauld: Right now as I speak, we have over 60 million Sterling in cash and short span investments and we also have an undrawn 100 million revolving credit facility, which I mentioned earlier. We feel we’re in a good position and a better position than what we went into the global financial crisis with. That said, we do anticipate the COVID-19 and the crisis will mean that there is more of a cash burden on us, that’s due to a likely drop in cash distributions from private equity funds due to the drop in merger and acquisition activity, i.e. private equity funds will not sells many of their underlying companies as they would have done before.

This will also on the flipside be offset by a decrease in drawdowns or calls from private equity funds, but that will be at a later stage in the cycle than the fall in distribution due to the repayment of fund credit facilities, due to the need for private equity managers to inject further equity capital to support some of the existing portfolio companies. What I mean is drawdowns will outpace distributions for a time and obviously have a detrimental impact on our cash. But the good news is that we were prepared for this, and that's exactly why we held surplus cash and endured the cash drag on returns during the good times. It was for a rainy day like this frankly, in terms of gearing, a hundred million revolving credit facility in total equates to roughly around 14% of our net assets, so gearing even in the worst case it should be assessed.

Interviewer: Okay great, and then just finally, I was wondering if you could outline some of the arguments for retaining exposure to private equity in these market conditions.

Alan Gauld: Yeah, well from my perspective I get comfort on our existing portfolio in the Standard Life Private Equity Trust due to the quality of the managers which hopefully I’ve outlined, the diversification which we talked about. The fact that the funds have the capital available to support their underlying companies through the crisis, the greater flexibility in underlying company's debt structures relative to the 2008 and the GSC, the fact that covenant light packages are more commonplace, there's a higher equity as a percentage of enterprise value. That will give more flexibility to the companies to trade through this. I get comfort personally from the Trust’s balance sheet position which we've talked about.

But in terms of the more broadly I mean we don't believe in market timing in private equity, it’s a long term asset class. That said, as you look forward, private equity managers are typically adept to picking up assets at good prices in times of crisis or dislocation. There will be an opportunity for the best managers to pick up quality assets just that little bit cheaper than in the recent past. Our team has been investing in private equity since the late 80s, 90s and we’ve seen this time and time again that the vintages post crisis are often the best performing for those reasons. You will see distressed sellers, you will see public to private transactions, you will see carve outs from corporates. These are transactions where private equity has shown time and time again it can really add value.

I will say as well the private entity continues to evolve and is specializing in particularly areas such as digitalization of companies, responsible investment, real secular areas that will shape the companies of the future, so all of that gives me the confidence in the asset class and why I would argue for retaining exposure to private equity during these conditions.

Interviewer: Great, okay, we’ll leave it there. Thank you so much Alan for your time today and to our listeners for tuning in. You can find out more about the Trust at www.slpet.co.uk and please do look out for future episodes.

Important information:

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 may get 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.

Podcasts from Aberdeen Standard Investment Trusts - invest in good company.

Interviewer: Welcome to the latest in the Aberdeen Standard Investment Trusts podcast series where we catch up with our investment trust managers to look at the implications of the COVID-19 outbreak on their portfolios. With me today is James Thom from the Aberdeen New Dawn Investment Trust, welcome James. Now, Asia is some way ahead of Europe and the US in the progress of the virus. To what extent are you seeing a return to normal for businesses there?

James Thom: Well, it’s fairly piecemeal is the honest answer. There are some countries where businesses are definitely getting back to normal and there are others where they are still very much in lockdown and really no different to what you're seeing in Europe. I think China is the most obvious example of a country where life is getting back to normal. Obviously, they were the first into the virus outbreak in early January and are now the first to emerge. Lockdown has been eased substantially and people are back to work and companies are functioning almost normally now. When you look at the sort of high frequency economic indicators and some of the more some anecdotal points that we've had from our conversations with companies in the mainland, in many cases they are now back to sort of 80%, 90% of normal levels. But certain parts of the economy even in China remain pretty restricted. So there are still travel restrictions in place so passenger volumes are still down heavily on subways, airports down heavily, some of the sort of more discretionary sectors continued to be impacted by those travel restrictions. And I think the concern was that all looks quite positive as a sort of case study for how Asia and indeed the rest of the world might begin to normalise. There is still this lingering concern and risk of a second wave of infections particularly as travel resumes once again, which could dent any recovery.

Interviewer: With that in mind, have you drawn any conclusions about the likely hit to the broader economy in Asia?

James Thom: So I think that the main conclusion, although it’s still early days, is that we’re unlikely to see a true kind of V-shaped economic recovery. I say that because even in China where the recent data looks encouraging, you're not seeing a V-shaped recovery even there given there are still restrictions on travel and that is impacting certain parts of the economy. I think outside of China you still see the virus is in various different stages of its evolution. While China is emerging from the outbreak, markets like India are still in the relatively early stages, and by that I mean the case numbers are still escalating. So even if you see a continued healthy recovery in China, you won't see that uniformly happening across the Asian region as other markets are lagging behind China. So I think it will be a bumpy recovery, unlikely to be a V-shaped recovery, and therefore much more sort of gradual phased recovery over time.

Interviewer: Okay, and turning to the Trust now, how were you positioned ahead of the outbreak and how did the portfolio perform during the period?

James Thom: So, when we construct the New Dawn portfolio, we’re very much focusing on identifying high quality companies and one of the big attributes that we focus on is the strength of balance sheets and cash flows. With that in mind, the portfolio has been pretty resilient through this period of market turmoil with these high quality businesses faring better than the broader market as there’s less of a question mark or concern around their viability through a sort of period of lockdown and zero revenue potentially. So the trust has inevitably, in an absolute sense, been impacted in performance terms but it has fared better than the broader market, thanks to this quality focus. I think from a kind of sector and geographic positioning standpoint too, that worked quite well for us. We were relatively light in China, which was hit at least initially, obviously the hardest when the outbreak first kicked off, and that had knock-on impact for other countries particularly the sort of more commodity dependent markets like Australia and again, the Trust is relatively light in that market so that helped our relative performance. And we have a fairly sizable exposure to the tech sector and to the healthcare sector with both of those sort of being relatively defensive through this period.

Interviewer: OK and did you make any adjustments to the Trust during the volatile market conditions?

James Thom: Yes we did, and really we adopted a two pronged approach here. So we've been both defensive and opportunistic in response to the market sell-off. Defensive in a sense that I think we have been focused on risk mitigation through this period of turmoil and really doubled down on quality stock. So we want to make absolutely sure that we are invested in those companies with the strongest balance sheet, the healthy cash flows, the strong market positions, and the companies that will survive or maybe even prosper if they're able to consolidate the market through M&A and so on through this period. That's been a big focus and we have kind of also weeded out companies where we had question marks really on that and the conviction was waning somewhat. So we’ve been through that process and made adjustments there. And then we’ve also been opportunistic so with the sell-off in markets we have seen value emerge in certain sectors and countries in stocks either that we already own and this has been an opportunity for us to buy more of those stocks where we have high conviction, or in stocks that we didn't own previously but we had done all of our homework on, done all of our analysis, felt that we wanted to be shareholders but we couldn't justify the valuation and we had them on our watch list. Well, this was an opportunity for us now to become shareholders in these companies. And so we've been pretty active on that front initiating eight new stocks into the portfolio, which is quite unusual for. We are typically long-term buy and hold investors in our approach and style, so to initiate eight new names in just a handful of weeks was somewhat unusual.

Interviewer: And have they been focused on any particular areas or are they diversified across different sectors and that kind of thing?

James Thom: So it's been relatively broad base, but I would say we've added several new holdings in China and that is a market where we have been historically light relative to the benchmark. We’ve kind of closed that gap a little bit by buying several new holdings in China as it sold off. And in Australia interestingly - another market historically we have had relatively little exposure to, but we did see an abrupt sell-off there. And some of these stocks, just to give you a sense, had sold off by about 50% so they'd lost half their value, which we thought was an overreaction and it was a great opportunity to buy into some of these higher quality names. So from a geographic standpoint, it’s China and Australia. We pulled back a little bit from India, from Hong Kong, and Southeast Asia. And from a sector perspective we've been adding quite a bit in the tech sector, and that's both within sort of hardware but also software and internet names and kind of, as I say, many of these been more resilient to the impacts of the virus outbreak and also in the healthcare sector which has interesting dynamics.

Interviewer: You mentioned valuations there. There’s obviously been a meaningful recovery in stock markets. Do you think that might have got out of whack with the economic prospects, or do you think markets are kind of fair value in terms of valuations now?

James Thom: Yes, it’s an interesting question. I think we are pretty cautious at this point. So whilst there absolutely was, in our opinion, value through the sort of core of the sell-off in late March and going into April, we've seen quite a strong rebound now in markets, and that seems to be very much at odds with the economic reality which is still very painful. I think value is now much less apparent and we've been, as a consequence, rather less active with the portfolio. The fear and concern is that markets have become propped up through the stimulus packages that various governments in this part of the world and obviously globally have come out with and an assumption that the easing of lockdown will be successful and we won't have a second wave of infections and the Asian economies will get back onto stable footing sooner rather than later. And I think whilst certainly, as I said at the outset, we've seen encouraging signs in China, where I'm based in Singapore has been a very different picture where we have had that second wave. And having avoided lockdown in the early phases of the outbreak we now find ourselves in an extended lockdown with all of the implications that has for economic growth. So I think whether it's fair value, or arguably even overvalued at this point, hard to say, but there’s certainly less opportunity in my view.

Interviewer: Ok and do you think there is further fiscal or monetary stimulus to emerge from Asian policymakers, or do you think that largely we are through that now?

James Thom: I think we've probably seen the majority of it. I hesitate slightly because I think if we do the second wave of infections, that's likely to prompt further stimulus and that's certainly been the case in Singapore. So there was an initial generous stimulus package announced by the government, but as this second wave has taken hold and the lockdown has been extended, government has recently come forward with further measures. And I suspect other governments would follow suit in that event. And certainly I think one of the positives for Asia is that governments are equipped financially for the most part, and there are one or two exceptions, to continue to provide stimulus both fiscal stimulus and monetary stimulus with rates still very much in positive territory in contrast to much of the world. So room to cut there and to keep supporting the economy if it needs be. But I suspect the majority is now done. I think the one big laggard in this region has been India, which had come out with a pretty underwhelming stimulus package initially, well under 1% of GDP, but have followed that up subsequently with a much more meaningful package in line with what we've seen from other governments across the region and the globe.

Interviewer: And looking at Asia in contrast with western economies, Asia is likely to emerge from this with substantially less debt, I mean it already had less debt. I mean, is that an argument for the continuation of the Asia growth story and are these economies likely to fare better in the longer term because of this sort of contrast?

James Thom: Yes, I mean I strongly believe that the long term kind of structural investment case, if you like, for Asia remains intact. Absolutely it looks pretty grim in the short term, but the underlying structural drivers of growth in Asia are still there. So if you think about the demographics of this part of the world, the rising wealth levels and the sheer size of populations here, all of that remains in place. And, as you said, debt levels generally speaking whether it's at a sovereign level or indeed a corporate level remain much lower than many parts of the rest of the world. And when I look at Asian companies specifically and obviously as a stock picker that's what I'm focused on primarily, I’m very encouraged by the low levels of debt that we see on balance sheets in aggregate across Asia. So I think Asian companies are generally well positioned to weather this storm. There will be casualties obviously, but for the most part most should survive. And once conditions normalise those structural drivers will continue to support growth for the longer term.

Interviewer: Okay, and just finally a little crystal ball gazing if we could? Do you think there will be any long term structural changes brought about by the outbreak - changes to the way people work, changes to technology, all those kind of things?

James Thom: Yes, absolutely, but I am not sure these will be specific to Asia, I think these will be global trends. And already in the conversations that we've been having with companies here in Asia, we've been asking these kinds of questions. And even the most sort of old, traditional kind of industries, I'm thinking of cement for example, we’ve heard management teams talk about the acceleration of digitisation of processes, moving to paperless offices, downscaling of office space as their employees will continue to work from home, far reduced headcounts in terms of operating plants that they have been operating there - the cement plants in this part of the world are at 30% of the usual headcount and that's been fine. So I think, absolutely there will be lasting implications for companies at the industry level. I do anticipate a degree of consolidation. Not all players will survive, the weak ones will, I suspect, collapse or be acquired so we'll see consolidation there. I think there will be changes to supply chains as well and I think the early stages of this outbreak revealed a heavy dependence on China across a whole raft of industry supply chains, and I think that will have to be addressed, and there will be winners and losers in that as well.

Interviewer: Great, okay thank you so much James for those insights today and to our listeners for tuning in. Please check into our website which is www.newdawn-trust.co.uk and please do look out for future episodes.

Important information:

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 or products mentioned here in 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 may get 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.

Podcasts from Aberdeen Standard Investment Trusts - invest in good company.

Interviewer: Welcome to the latest in our Aberdeen Standard Investment Trust podcast series where we catch up with our investment trust managers to look at how the COVID-19 outbreak is impacting their portfolio . Today we welcome Mubashira Bukhari Khwaja and Viktor Szabo, Managers on the Aberdeen Latin American Income Fund. Welcome to you both. What has been Latin America's experience of the crisis? Viktor, could we start with you on that?

Viktor: Sure. Latin America reported its first coronavirus case in late February and the virus has spread across the entire region since. Countries responded in different ways, but some form of mobility restriction has been introduced on national or regional levels everywhere. Countries with stricter lockdown measures manage to flattened their infection curves, but those where presidents opposed lockdowns, like Brazil and Mexico, are still seeing high infection rates and are now in the epicenter of the pandemic.

Mubi: Looking at stock market performance, Latin American markets have been hit the hardest due to the risk-off sentiment because of the commodity exposure. If we compare current year-to-date performance, the MSCI Latin American index is down almost 39%, which is significantly more than the MSCI emerging markets index, which is down around 17%. So there is some sharp underperformance that we've seen for the region until now despite the rally -- the recovery that took place in April and May. If you look at within the region and at individual markets then Brazil was a clear laggard. This was primarily because starting the year, going into the year expectation was that there would be a domestic recovery, and now that recovery is derailed because of the virus.

Interviewer: Okay, and how have policymakers responded? Have you seen the same kind of stimulus packages and monetary policy moves that you've seen in developed markets?

Viktor: Yes, we saw really bold policy responses. Central banks across the region cuts their policy rates aggressively and provided liquidity support to their banking sectors. We saw intervention on the foreign exchange market, plus several countries contemplated allowing central banks to support local bond markets with direct government securities purchases. New loan and refinancing facilities were introduced to help the corporate sector with their financing needs. Meanwhile, the US Federal Reserve broadened its swap lines to include Brazil and Mexico hence providing additional access to US dollar liquidity for these countries. The fiscal response was also overwhelming, with special focus on protecting the most vulnerable households and companies and safeguarding jobs. Amongst other measures, this includes direct cash handouts, tax deferrals, acceleration of tax refunds, broader unemployment coverage and government loan guarantees. Chile’s stimulus package is equivalent to 4.7% of GDP, whilst Peru’s total measures could reach up to 17% of GDP. Brazil increased its primary budget deficit by 4.4% of GDP, while Colombia also announced an increase in social welfare programs and credit lines. The only notable exception is Mexico, where the administration was relatively slow to react to this pandemic outbreak and still wants to maintain its original tight fiscal funding objectives with only relaxation allowed in healthcare related spending so far.

Interviewer: Ok, Mubi, I know it's very early days, but what are your assumptions about the economic impact? Is it very different for different sectors and different geographies, for example?

Mubi: Yes, so the economic impact for the region would depend on which market you're looking at, and that is determined by the time period of the lockdown . But if you look at Latin America and consider factors such as ICU beds per 100,000 inhabitants, or popular support for isolation then Chile stands out in the best position. That would be followed by Peru, Argentina and Columbia. The larger markets like Mexico and Brazil are clearly lagging and the expectation is that they may take longer to normalise. But this does not mean that we may not see a second half recovery, that is possible, but it is quite clear that GDP contraction is unavoidable at country and regional level. So far estimates are -- and they are changing every day, but so far the estimate is that for the region as a whole GDP contraction would be around 7% and Brazil and Mexico would be the hardest hit. If you look at economic impact by sector, then yes, it would be very different by sector. COVID-19 will have a lasting impact on consumer behaviour for sure. There will be some winners like e-commerce companies that will benefit from growing adoption and also there will be some losers. This could potentially be real estate companies and airlines that can face a slower recovery.

Interviewer: Okay, and maybe another question for you if I may - how was the trust position going into the crisis, and how has it performed through this volatility?

Mubi: So starting the year we were positioned for domestic recoveries in the regions, particularly in Brazil, which hasn't come through. It’s a different world now than it was at the start of the year. There has been an impact from a currency and stock selection perspective as a result of that. So the benefit we saw from an underweight to financials going into this crisis, particularly banks and insurance companies, and the underweight to energy going into this crisis has helped us offset to a large extent the overweight to consumer discretionary names.

Interviewer: Okay and have you made any changes to the portfolio as the crisis have unfurled and the pictures become a bit clearer?

Mubi: Certainly, so given macro expectations are now very different we have made changes to the portfolio to appropriately reflect our current macro views and also to take advantage of changes that are apparent in different industries. So we have added to sectors that would benefit from lifestyle changes as a result of COVID-19, and in here particularly e-commerce names such as Mercado Libre, as well as recovery plays such as the Brazilian Stock Exchange. We have added to these positions. We've also selectively topped up financials, but in particular banks which are well capitalised and high quality and in a better position to absorb the losses due to this crisis, and they're still offering value.

Interviewer: Okay, and Viktor, you handle the fixed income section of the portfolio. Have you made any changes there?

Viktor: Yes, on the fixed income side we have reduced our exposure to Brazilian rates and the currency as within, this country mismanages the pandemic. On the other side, we have increased allocation to Colombia, and also added duration exposure in Peru.

Interviewer: Okay, and Mubi to what extent do you think equity market prices fully reflect the risks of Latin America? Have markets overshot or is it sort of fair value now?

Mubi: Okay, so if you look at the region as a whole in terms of price to book ratio for instance, then currently after the recovery in April and May, the price to book for the region is about 1.6 times, which is similar to the average since 2006 for instance. But, this is misleading to an extent, because at the corporate level we haven't seen a full recovery, especially in companies that we would like to invest in, so high quality names. We haven't seen a recovery there. Momentum stocks have done better, and we think that there is still an excellent opportunity for bottom-up stock pickers like ourselves to pick up high quality companies at valuations that are cheaper than they were before the crisis.

Interviewer: Okay, and what has happened on the income side? I mean in the UK we've seen a lot of distress among dividends and about half of companies have cut their dividends. What's the picture there? Are you seeing companies able to sustain their payouts?

Mubi: Certainly we have seen companies even with a strong balance sheet to be in a cash conservation mode, and so there have been dividend cuts in many sectors, in particular banks. Across the board we've seen that they have been reducing their dividend payout. And this is certainly not something that we are opposed to as long as we feel that there is a good reason for it and we understand that given the level of uncertainty it’s quite natural for these companies to preserve their cash.

Interviewer: What about the fixed income side Viktor?

Viktor: What we have seen is a knee jerk reaction to the global risk sell off in March and it was a sharp depreciation of the currencies then the rise in yield, which was basically consistent with the large portfolio capital outflows we have seen across all emerging markets. However, LATAM central banks started to cut rates and outflows subsided, we have seen stabilisation and then the recovery in currencies, and local rates markets also strengthened. While the long end yields in most countries are already below their pre-covid levels, the short end of the curves rallied so much on the back of Central Bank rate cuts that yield curves are now quite steep and that’s why duration looks quite attractive.

Interviewer: Okay, back to you, Mubi if I can. I recognise that it's very early days, but are you getting any feedback from the companies you're talking to that gives you some kind of clues as to what the future might look like?

Mubi: Yes, so it’s undoubtedly a very tough time for companies across sectors. There's a lot of uncertainty, we've seen many of our companies withdraw guidance as well for the full year. But the message we are getting from most of our holdings is that it could be a chance for them to strengthen their market positioning. This could be organic through the weakness of their peers or through M&A. So while there is a lot of uncertainty, there are also opportunities which are emerging.

Interviewer: Okay, great. So to what extent do you believe companies can kind of bounce back?

Mubi: So the bulk of our portfolio is positioned to benefit from domestic demand. So we would expect a significant bounce back for those companies as lockdowns would ease across the region. But having said that, certain businesses which, in particular for retailers, for instance, which had the competitive moat previously based on ownership of physical stores, that may see that moat being weakened by emerging trends, such as faster penetration of e-commerce going forward. We don't expect such businesses to go back to previous ways of doing business, generating the same kind of operational results. And as a result, we have made changes for our portfolio in recognition of these risks, and we're comfortable with our position now.

Interviewer: Okay, great. And just finally to you Viktor, any closing observations about the environment that we find ourselves in today?

Viktor: Well, this is an unprecedented shock with unprecedented policy support as well. So now countries will start to gradually reopen, and hopefully in around two months’ time economic activity will normalise and growth will recover. Even if in some sectors like tourism and hospitality, recovery will take a very long time. So as investors, we have to keep in mind that every downturn also creates opportunities, and the Latin American region now offers plenty of those.

Interviewer: Great, okay, thank you Viktor and Mubi as well for those insights today, and thanks to our listeners for tuning in. You can find out more about the Trust at www.latamincome.co.uk and please do look out for future episodes.

Important information:

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 or products mentioned here in 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 may get 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.

Interviewer: Welcome to the Aberdeen Standard Investment Trusts podcast series where our investment trust managers discuss how the Covid-19 outbreak has impacted their portfolios to date and the outlook from here. Today we welcome Evert Castelein, Manager of the Aberdeen Standard European Logistics Income Trust. Hi, Evert.

Evert Castelein: Hello, hi.

Interviewer: I wonder if we can start with a look at kind of the bigger picture? So how have you seen the market change in the last few months and how do you think things will work out going forward?

Evert Castelein: Yes, I think to answer this question it's relevant to make a distinction between short term and mid or long term implications. The first reaction we have seen in Europe in March is that countries went in full or partial lockdown and companies shut in order to flatten the curve as we say. So the global supply chain was immediately disrupted and especially companies depending on international trade have felt this immediately but also discretionary spending, for example, in the automotive industry and high street fashion and restaurants and many others. At the same time, we've also seen companies that have benefited from the situation such as groceries and pharmaceutical companies and packaging and e-commerce related industries in particular. So the rise of e-commerce, or the growth in online sales, is a very strong trend and it's a structural one, not a cyclical trend. And it’s a driver behind the growth of the logistic market and the demand for logistics space. So this trend really has accelerated enormously in the last few months with people working from home and shops being closed. So as consumption has moved online, more people are just buying more online, and new groups of people have entered the online market. For example, older generations have started to buy more online as well, realising that delivery of food is maybe the safest way to get groceries at this point of time. And as always, I think Amazon is the best example in the market to see how e-commerce is evolving and they've recently announced that they're recruiting an additional 100,000 staff and needed six million square meters extra warehouse space within the next 18 months. So that's an additional 20% of their existing stock, so that’s a lot and we think that growth in online sales has a much larger impact on logistics than, for example, growth in traditional bricks and mortar shops. And that's been calculated by Prologis - that roughly two and a half times more logistics spaces required to support the central volume of e-commerce sales compared to store retail sales. So these are things that we are seeing happening right now, and for us therefore the focus is very much on managing the weaker tenants that we have, or that have mobility issues, but also the stronger performing tenants in our portfolio that need more space. So there's a wide variety and just depending on the sort of sector you’re in, what the impact will be on their business. If we look at the mid and long term implications of COVID-19, besides the continuous growth e-commerce, we see a restructuring of supply chains by making them shorter and more resilient to shocks by reshoring manufacturing activities and bringing it closer to home. If you take, for example, car manufacturers in Germany or Jaguar and Land Rover, have all mentioned that they couldn’t have completed production of cars because some parts come from Asia, but also a lot of medical equipment, such as medicines and face masks need to come from Asia. So all of a sudden, supply chains and logistics have become of national importance. I think supply chains were maybe too efficient, too much focus on ‘just in time’ deliveries and this is now changing. A final and third effect and impact is the increased inventory levels for the same reason to reduce risks in the supply chain and absorb delays in deliveries. Also cold storage, by the way, is in high demand now the supermarkets are doing good business. So these factors altogether have accelerated growth of e-commerce, the increasing inventory levels and also the reshoring of manufacturing activities from Asia to Europe will be beneficial I think for the demand for logistics. Although in the short run, we also will see some demand falling away with companies that are having liquidity issues or maybe even going bust as a result of the recession we are in. That's why I think it's really important to have scale and local offices across Europe like Aberdeen Standard Investments. That enables us to work really closely together with our tenants and help them where needed. This is really one of our main USPs I would say.

Interviewer: Okay, I mean with that in mind, can you talk us through how the portfolio looks today - the type of companies you've got exposure to and geographic regions and that kind of thing?

Evert Castelein: This is a core strategy and we're focusing on the most liquid part of the logistic market, which is the range of mid price, big box warehouses with asset sizes through portfolio around 30,000 square meters, and urban logistics as we think this part of the market has really strong growth prospects thanks to the growth in last mile deliveries. We’re fully invested right now with 14 buildings in the portfolio in five different European countries. These are France, Germany, Spain, Poland, and the Netherlands where half of the portfolio is located, which makes by the way perfect sense to me as the Netherlands is a small country, yes, but it's big in logistics as a team as the gateway to the West European markets thanks to its strategic location and the presence of the largest port in Europe, the Port of Rotterdam. So for an income driven strategy like ours, it has always been really important to create durable income streams from which we can pay a healthy dividend. We think the best way to achieve this is by buying warehouses that have a second life, meaning we have not spent the capital on very large bespoke assets in the middle of nowhere and then hope for the best. No, we have invested the capital with a long term view, meaning we've had a focus on established locations alongside main transport corridors and on high quality warehouses with modern specifications and good asset sizes, because these are the sort of assets that are highly sought after by companies and that would give the asset a second life. So the ultra big boxes which also have a role to play, we haven’t invested in these because we're more concerned about the second life. If we look at the most recent additions to the portfolio, I think they're all really good examples of this strategy. Since the second capital raise held almost a year ago, we've invested in three warehouses in Europe all with a very strong urban profile. Just to give you a couple of examples we’ve bought assets in Madrid and Warsaw, in Poland with DHL as main tenants. And we bought an asset in Den Hoorn, that's in the Netherlands between the cities of the Hague and Rotterdam which is by the way the most densely populated area in the Netherlands. Den Hoorn is the largest asset that we currently hold. It's a development that has been completed in January this year, that’s a size of 33,000 square meters and it’s a very liquid and flexible building which can easily be split into parts. That for us is really important. It has a long index lease and green credentials with LED lighting and solar panels that we hope to put in place this year showing our management capabilities.

Interviewer: Okay, I mean it's been a tough time for valuations in the wider commercial property market but obviously this area has some structural growth trends in its favour. What is the picture for valuations in the logistics market across Europe?

Evert Castelein: I think property values have held up quite well in the first quarter of the year. On the fund’s level we have experienced an increase in portfolio value of 0.7%. That's no surprise because that was until the end of March and since then the virus has spread of course. Going forward you would expect that theoretically that yields should go up due to this recession we're in, which should result in high risk premiums due to low liquidity and also the impact of high financing costs. But so far we have not seen this happening in deals that have recently transacted. And I think logistics and core logistics in particular will really be on top of many business lists going forward. I expect a wall of capital will be directed towards logistics for the obvious reasons. If you look at the alternatives, office and retail in particular are struggling, retailed because the sales, retail sales are moving online which is beneficial for logistics so it's not really difficult to explain why logistics is very much in vogue nowadays. And it will be a flight to quality and core strategies just like ASELI’s strategy have that quality and have that low risk profile with a lower gearing than for example, value added or more opportunistic strategies which will struggle a bit more I would say on the capital side. If we look at the rents of core logistics, we think rent levels will be quite resilient and hold up well as there was an undersupply situation across Europe with vacancy rates around 4% on average. So the starting point is really low although we expect vacancy is likely to rise just modestly, but from a low starting point, also with only limited new developments taking place right now.

Interviewer: Okay, and what feedback are you getting from your tenants on the rental side at the moment ? Do they feel they've got their kind of business under control and they can predict going forward?

Evert Castelein: Well, we get a wide range of sort of feedback from our tenants. Some tenants are working at full capacity and some tenants are having difficulties as they experience decreased turnovers. We've had a couple of discussions with tenants on deferrals, for example, with a distributor of bikes that had difficulties with imports of these bikes from Asia, and the fact that many bike shops in Europe were closed in Europe for a period of time. Since then bike sales have picked up very rapidly, so based on latest information we have received from that company I think I feel quite comfortable that they will be able to pay back the deferred rents in due course. But we have had similar discussions with a sports retailer, a retailer in home furnishing, but also a food caterer. However, there are several tenants in the portfolio that have told us that they have experienced much higher turnovers than before and that they are running at full capacity. So just to give you an idea none of the top five tenants representing almost half of the total annual rent have come to us. Companies like a transport company with direct links to the food sector, a leading supermarket chain, a distributor of fruit and vegetables, a leading drug store running a national ecommerce business and an industrial company specialised in the production of sprinkler parts which is working on their order book, so they are just doing great business. It's really a wide range of feedback that we have received so far.

Interviewer: So I see the Trust has maintained its quarterly dividend. Could you just talk me through that and also what you expect to happen going forward?

Evert Castelein: Yes, last week's announcement stated that the company is going to pay the full interim dividend of EUR1.41 cents per share in line with the dividend policy which makes perfect sense as we have collected all rents for Q1 which we're going to distribute. We are closely monitoring the quarterly rent collection together with the board. Actually we realise income is really important for our shareholders - it’s fair to say I think that we are at the moment in a very good position to deliver. We have invested in a high quality portfolio with very liquid investments that have a second life if, let's say, a tenant would fall over. And we have a cash positive position and sufficient headroom in our loan covenants with banks. So the fact that we have local feet on the ground as well makes a huge difference and this will, going forward, enable us to stay really close to our tenants and survive this period together.

Interviewer: Great, okay thank you Evert for those insights today and thank you to our listeners for tuning in. You can find out more about the Trust at www.eurologisticsincome.co.uk and please do look out for future episodes.

Important information:

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 or products mentioned here in 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 may get 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.

Podcasts from Aberdeen Standard Investment Trusts, invest in good company.

Interviewer: Welcome to the latest in our Aberdeen Standard Investment Trusts podcast series where we catch up with our investment trust managers to look at how the Covid-19 outbreak is impacting their portfolios. Today we welcome Bruce Stout, Manager of the Murray International Trust and Martin Connaghan, Deputy Co-Manager alongside Samantha Fitzpatrick. Bruce, if I could start with you, could you give me a short history of the trust through this period? I mean, how were you positioned going into the crisis for example?

Bruce Stout: Yes, sure. I think it would be fair to say that we entered into 2020 in a very cautious frame of mind and not because we anticipated a global pandemic or anything like that, but just towards the end of 2019 global equity markets, particularly the US, looked extremely overvalued to us relative to fundamentals. There’s been a great multiple expansion without really any improvement in earnings. And after 11 years of a business cycle, which was getting pretty long in the tooth, we were a bit concerned that we’d see growth slowdown and maybe a recession in the developed world anyway. So the portfolio was de-geared from equities, we only had 94% exposure to equities because we had 16% in bonds. And within the portfolio, we had quite a high rating - 80% in telcos and 17 in consumer and 15 in tech and 11 in pharma and things. So you can see we were well positioned in terms of focusing on quality and what we felt was sustainable earnings. And I guess the other thing you might add is that there was quite a significant Asian exposure towards year end as well.

Interviewer: And have you made any changes to the portfolio as the crisis has unfurled or did you generally find it was kind of resiliently positioned as it was?

Bruce Stout: No, I mean, there was quite a few surprises. As I say, we've never managed money in a global pandemic, so we didn't anticipate the way different business models would respond. But what we did find is that some very interesting opportunities started to present themselves as the crisis unfolded. Particularly during the third week of March, when we saw a lot of real volatility in markets and the breakers on during the day in various stock markets to prevent losses. We sold a lot of our short dated Brazilian and Indonesian sovereign bonds, which had held up very, very well and use those funds to buy a couple of positions in Abbvie a pharmaceutical company in the US and Broadcom, a global semiconductor company, both of which increase the yield - we've got yield pickup and obviously enhanced dividend growth. And then since then we've also had some very interesting opportunities. We've added two new positions in China with a purchase of Ping An Insurance and China Resources Land, two companies that we've been monitoring and watching for some time and just waiting for the opportunity. So having the money to move from bonds to equities during this particularly volatile time was advantageous for us and it's the first time really in five years that we're close to being almost geared into equities, but not quite.

Interviewer: Okay and Martin, this has obviously been a challenging time for dividends. How have the companies in Murray International held up generally? Are you seeing cuts on a similar magnitude to those seen in the UK?

Martin Connaghan: I mean, we’ve really seen everything to be honest. In terms of across the globe, we have not seen them cut to the same magnitude as we have in the UK, but we have still, we’ve seen cancellations from businesses where the business model is under pressure given the environment. The airlines, for example, not that the portfolio invests directly in them, but we do have some exposure to airports for example, via Auckland Airport. We've seen cancellations as a result of the business model and we’ve seen cancellations as a result of the regulatory or government pressure in the case of European financials, for example. Then we've also seen reductions in dividends, and again, for example, from certainly oil and gas industries where stocks including Schlumberger and Royal Dutch Shell have cut their dividends by 75% and 66% respectively. On the other side of that, we've seen companies that have already paid their full dividends for the year. Examples of that would be healthcare companies, pharmaceutical companies such as Roche and Novartis whose business models have just thus far seeing far less of an impact. And companies like these two have paid their dividends in full during the first quarter. Then we've also seen companies in Asia for example where there hasn't been the same government or regulatory pressure to act on dividends. So again, for example, Siam Commercial, a financial in Thailand, which pays its dividend for the year in full. So we've seen a handful of cancellations, a handful of reductions, and a handful of companies pay in full. The uncertainty is really, you know, what happens with subsequent interim dividends as we move through the year and that, regardless of geography, as a particular fluid situation.

Interviewer: Okay, so that's the outlook - it's still not clear, it's not like we can say we're kind of through this dividend cycle and we've got all the bad news out there.

Martin Connaghan: No, I mean, where we go from here is really the trick question. I mean, we believe that a number of the core holdings within the Trust that are from more resilient sectors via technology or healthcare, communication services, consumer staples could very well have the strengths of balance sheet and the resiliency of cash flows to maintain incentive payouts for the remainder of the year. The uncertainty comes from, management teams, for example - they may just take the opportunity, the free pass if you like, to reduce, delay or cancel dividends over the next quarter or two, just to preserve cash and see what happens and visibility improves. The other uncertainty is there could still be subsequent government or regulatory pressure on dividends in certain geographies or industries that we haven't seen yet. Then finally, there’s massive uncertainty around whether we see a second or third wave of this virus, or even a deterioration in the current situation of countries that may have been too slow to initiate restrictions, or countries that have lifted them too quickly. So it's still really too early to say where we are with this – those are the three main factors that will drive what happens, we believe. The difficulty comes from the fact that only one of them are really in the control of the management teams in which we invest.

Interviewer: And Bruce, where companies have cut dividends, do you have a policy that you would automatically sell out or is it much more nuanced than that? How are you assessing whether that dividend might come back?

Bruce Stout: Yeah, I mean, the short answer here is no. We haven't just automatically sold out. You have to assess the fundamentals of the business. I think a good case in point there is Martin’s already actually alluded to it, within transportation, we own the two airports, Auckland Airport in New Zealand and Grupo Asur in Mexico. Auckland immediately cut its dividend, not surprisingly, I guess because because all flights to and from New Zealand were stopped, and it maybe some time before they come back, but that doesn't actually detract from the long term attractiveness of the airport. It's a unique asset that it owns in the business model with growth opportunities longer term, because at some point in time, travel will be resumed . We don't just divest immediately and then conversely Asur which owns airports in Mexico and the Yucatan Peninsula and Cozumel in Cancun, it's maintained its dividend. The interesting thing here I think is that the company has previous experience of business interruption where business has suddenly stop, by hurricanes affecting the Gulf of Mexico, or swine flu in 2009. And in previous periods, it's weighted to assess the longer term implications of what actually went on at that time. That gives you confidence because the management has actually been through that before. But I guess the final point is, when assessing whether companies might bounce back, that poses a much more difficult question because of the timeframes that may or may not be involved. Thankfully, we’ve no exposure to some of the more challenged sectors, such as bricks and mortar retailing or developed market, banks and insurance companies and deep cyclical consumer discretionary type companies, such as autos. So the very simplistic business models that we own, it gives us some degree of comfort there.

Interviewer: Markets have come back a long way, particularly in, in places like Asia which seems to be kind of further through the pandemic. How much, or to what extent do you think they reflect the risks? Or is there a danger that they've got ahead of themselves?

Bruce Stout: There's a real dichotomy here. The market prices really reflect the risks. You look down any screen of markets, and you will see markets in Asia that are down 20%, as many are in Europe, and the UK is not far off there too. Any then you get other markets such as the Nasdaq which was up yesterday and the S&P not that far off it either. So there's obviously some real diverse opinion here. I think the important thing is, the consensus view, I think is probably because of the global financial crisis experience of 2008/2009, believes that the deeper recession, the steeper the recovery. And we're in a really deep recession at the moment, but we're not so sure about that view. I mean, normally it's the cause of the recession that dictates the pace of recovery. Previous recessions because of inventory builds or property collapses or banking crises have been monitored in the past. But we don't know exactly what happens when you voluntarily shut down a substantial portion of society and business. We know of absolutely no parallel to the current conditions, so the range of possibilities of economic outcomes are still extraordinary wide, as are potential clinical developments as Martin said. So we suspect there are many tough obstacles still that lie ahead as we go back to work and it proves to be a long, small protracted return. But that's why we'll maintain great caution, but we'll also need to capitalize on the opportunities when mispricing occurs along that way.

Interviewer: Okay, and Martin, what feedback are you getting from the companies you're talking to? I mean do they believe that the economic fallout will be as calamitous as some are suggesting?

Martin Connaghan: Again, it really depends on the end market conditions that they’re facing. I mean, most of the companies that we have met with aren’t -- or simply really can't say too much in that regard. The vast majority of companies have actually removed guidance altogether for this year, for the reasons mentioned earlier in terms of what's driving the uncertainty. I mean, some of the communication services stopped – Murray International typically has around 15% exposure there, Horizon in the US for example - they have removed revenue guidance for this year, because they have absolutely no idea what the base sales are going to look like for the rest of the year. But they have given earnings per share guidance of between being down 2% and up 2% on last year, so there is a degree of visibility and stability in a business like that. Again, some of the healthcare stocks have also managed to affirm guidance for the year. Murray International’s core holdings from within healthcare is Roche and at their Q1 earnings back in April they maintained their 2020 guidance which was to grow earnings per share in line with revenues and that would be low to single digit growth. So again, some business models allow management teams that luxury so far. In terms of some of the negatives, some of the large international oil companies for example have seen unheard of demand disruption with regards to their downstream operations. In terms of demand for petrol and diesel at the pumps for aviation fuel, some markets have seen 90% to 100% in terms of demand disruption. In some geographies that has begun to come back but again that still remains a pretty fluid situation. Some of the airlines have said that it could take years for the level of travel to return to where it was previously, if indeed it ever does subject to the change that we're going to see in behaviours and in terms of our approach to travel for business and for leisure. In some areas it remains quite stable and some areas it remains quite weak, but the vast majority is uncertainty and that's just due to the lack of visibility. The only point and the final point that I would make on that is Q1 earnings season or the period of reporting only really included a snippet of the period where lockdown which really have started to bite. So even though we have thus far seen guidance meetings, we could see management teams walk that rhetoric back, depending on what we see in terms of the second quarter. So again, the overriding thing is uncertainty.

Interviewer: And Bruce, I think I might know your answer to this question, but it's obviously been a very difficult time for some of the major UK dividend players. To your mind, does this environment strengthen the argument for investing globally, particularly for those who need an income from their investments?

Bruce Stout: Yes, I mean, I think there has always been an argument for investing in global income even more so over the past 20 years when particularly companies in Asia have embraced the concept of returning cash to shareholders through dividends, which they didn’t do 20 years ago. But, I think the key to future income will lie in the orthodoxy or not that prevails in the countries in which companies do business and are domiciled. By that I mean that in the developed world where we have such incredibly low bond yields, I think the 10 years gilt today is 20 basis points, and such huge debt loads, it suggest that dividend yields of the past may prove pretty difficult in the future when we’re talking about nominal levels. When we look at more orthodox areas of the world such as Asia and some areas of the emerging world, then we have economics of broken yield curves and rising savings and everything that suggest that a dividend level of 3% or 4% is totally in line with prevailing fundamentals of the countries. Therefore that emerging dividend culture that is there, we think will just develop further from here. And from that respect we're optimistic about the income prospects from various parts of the world going forward.

Interviewer: Martin, have you changed the way you assess risk in the portfolio at all? I know that elements like balance sheet strength and cash flow have always been important, but I wonder if there are a number of tweaks you've made just to reflect the new environment?

Martin Connaghan: Not really at the moment. I mean risk for us, quite simplistically perhaps, has always really been at the stock level. As you say, getting a firm understanding of what we really are exposing the shareholders to in terms of what any business does and where it does it. You know what its key markets are, the currencies involved, the regulatory environment, and what the government situation is, the management team and what their policy has been historically towards shareholder returns, how the financials look in terms of cash flows and balance sheets. So we've always looked at those things and we'll certainly continue to do so. How we look to manage risk by looking at those things is to drive levels of diversification within the portfolio, and if anything, we will just continue to do that. That may well increase as a result of the environment that we'll find ourselves in. And at some point there will be a pandemic scenario for us to have a look at within our own risks systems to see how the portfolio would, in theory, stack up against it. But right here right now we will just continue to focus on what the business is doing and what we're really exposing our clients to.

Interviewer: Okay, great, and Bruce just finally, this has obviously been a rocky time in markets, even though there have been some recovery. Is there anything you would say to investors just to give them some reassurance about the environment we're facing today?

Bruce Stout: Yes, I mean, it's always very difficult for investors at times of deep uncertainty. Past history and experience has shown it’s normally very prudent to remain calm, humble and unemotional if you can and focused on the long term at times like this. It is very important at times also like this to trust in the management of the quality businesses in which you’re invested. Management that maybe demonstrated the capability to deal with adversity and emerge stronger in the past. And we feel across Murray International’s portfolio we’ve got a lot of that exposure, exposed to various different countries, diverse sectors, diverse businesses throughout the world. Such diversification has served us well in the past in delivering our investment objectives and we believe it will continue to do so in the future.

Interviewer: Okay, great. Thank you so much Bruce and Martin as well for those insights today and thank you to our listeners for tuning in. You can find out more about the trust at www.murry-intl.co.uk. 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 or 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 may get 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.

Podcasts from Aberdeen Standard Investment Trusts - invest in good company.

Interviewer: Welcome to the latest in our Aberdeen Standard Investment Trusts podcast series where we catch up with our investment trust managers to look at how the Covid-19 outbreak is impacting their portfolios. Today we welcome Fran Radano, manager of The North American Income Trust. Welcome Fran.

Fran: Thank you.

Interviewer: Could we start by looking at the dividend landscape in the US. Are you seeing similar dividend cuts to the ones we've seen over here? And if so, are they in similar sectors such as oil and leisure and those kind of things?

Fran: So I guess in the highest level, we're not seeing the same dividend cuts to the same extent that that are seen in the UK. But I think we need to step back on this question since a typical US company may buy back with their free cash flows 2% of their shares and then pay 2% dividends. So they're returning 4% of cash to shareholders: maybe 2% share repurchase, 2% dividends. And many of these companies have suspended share repurchase, but have continued to pay the 2% dividend. So essentially that's tantamount on a free cash flow basis to a UK company cutting a 4% dividend in half. So in the North American Income Trust we're typically selecting companies with stronger cash flows and balance sheets, such as dividend cuts are less likely in a normal environment. But if these companies are a consumer facing business and there are no customers to be found, surely they'll have to consider all possibilities.

Interviewer: Okay, so it's around half of UK companies I think have cut dividends. What are we looking at in the US?

Fran: I would say, I looked at a list recently, I would say It's probably less than 10% of the S&P 500 type companies, with the caveat that most of them have suspended share repurchase which to them, and to many companies, is a big use of cash flow, returning to shareholders. And of course you have several growth stocks that pay no dividends - they would obviously be unaffected.

Interviewer: And what about this Trust? How were you positioned going into the crisis and how have you performed through this volatility?

Fran: So I would say, stepping back, if we were to talk a few months ago, the Trust is generally positioned in companies that are probably a bit more defensive than the market. So, subsequently, we've seen some modest relative outperformance versus our benchmark. The markets generally rewarded some of the growthier names. You know, in a ex-growth environment, the growthier names are seeming to accumulate the capital right now. Companies that have visibility. But I would tell you in a 40 stock portfolio that some days when the market’s up, we outperform and some days when the markets are down, we underperform. So it's very much a best ideas portfolio. So it's different on any given day and given the volatility we've seen, the outcomes have been wide ranging. But generally, we've sort of done what we said we've done, with the obvious caveat that clearly certain days, certain weeks things have certainly not gone to script. But I think over time, I think we're well positioned in the Trust going into this and then hopefully coming out of it as well.

Interviewer: Okay. Have you made any changes to the portfolio? Are there any kind of areas where you've concluded that really the outlook is very different now and you've had to sell out or any kind of opportunities?

Fran: I think most of the bigger opportunities we saw were right at the outset, in that last week or so of March where we always have a watch list of a dozen or so companies that are interesting to us that are either a bit more expensive than we'd like to pay or something where maybe we have a duplicate company where it doesn't make sense from a diversification perspective. Or simply the yield isn't compelling to us. So what we saw is, in that time period in March, we saw a couple of these companies, re-rate lower along with the market. And because these are companies that we've done the work on and are familiar with, we were able to be fairly aggressive in buying a couple of these companies off our watch list. Companies we would have loved to have owned historically, that were never cheap enough for us. So we have a few examples like that. I wouldn't say it was a wholesale portfolio change, but a couple of examples where we were nimble enough to pull a few names off our watch list that had met our valuation and dividend criteria. And then I would say beyond that, it's been more portfolio management around the edges where, in some of these violent moves to the upside, we've taken some money off the table. And some of the violent moves to the downside, we've added back to some positions.

Interviewer: Okay, what is your policy where companies have cut dividends? How are you making the decisions as to whether they can bounce back or whether the dividend is likely to be permanently impaired?

Fran: So we don't have a formal policy per se. Obviously we’re seeking companies that grow their dividends in a progressive manner, not cut them. And as I mentioned earlier, most of the companies in the North American Income Trust have a strong balance sheet and predictable cash flows. But one example is that we own a high quality, consumer facing real estate investment trust where we did reduce our position slightly during that March time period as the world began to shut down. And subsequently they did cut the dividend and it was recently, roughly a 15% cut. So that was one example for us. We do know that there will likely be more dividend cuts in the future in the market more broadly. So we try to avoid those in as much as, they're not priced into the market. I think if these stocks quickly re-rated lower, we know that there's dividend cut on the horizon. And we're not going to simply sell out because there's a dividend cut if we think that the business model and the future cash flows are not impaired. But generally speaking we're looking for companies that have a progressive dividend, are conservatively managed and that is something that we look at very routinely.

Interviewer: Okay. And do you think, looking at markets in aggregate, do you think that prices today reflect the risk or is it very much stock by stock?

Fran: I would say it's very much stock by stock and sometimes it's sector by sector. We've seen financials marked down recently in a zero interest rate environment. For us, one of the things I like to say to investors is we only manage a 40 stock portfolio, on average, which is a good thing. We can just focus on the very best stocks that meet our criteria and we're not forced to contemplate stocks 71 or 82 and try to justify its position in the portfolio. And stating the obvious, I’m not a doctor, it’s impossible to predict the depth and duration of the virus and for the US right now, we're now weighing the risks of sort of a phased, phased in reopening that’s just beginning. If we were to assume this largely goes as planned, we do think there are opportunities for the companies in our fund to begin to see some revenue growth again and be able to rebuild their coffers. Whereas, in other stock, I think it's going to be a long time before people are comfortable in a group setting, are willing to take an aeroplane or companies where those end markets will take a bit longer to get back to some sense of normalcy?

Interviewer: Are you getting any feedback from the companies that you're talking to? I mean, are they optimistic or pessimistic? Or is it just really so uncertain at the moment?

Fran: I think it's a good question. I think most of our companies would have told you they're always prepared for rainy days with reserves, with strong balance sheets. But, even our companies that meet that criteria perfectly, that might even have some revenue visibility, will be the first to admit that this is completely different to any downside scenario they've ever expected or seen. Typically what managements telling us is they're focusing on employee safety first. And it's not really a throwaway sentence because they do know that a mistake on that front would be far more costly than trying to be too nimble and trying to get back into the marketplace. So they've continued to emphasise that and I think a lot of these companies (and we've just started speaking them coming off the earnings season), I think they're being very prudent from a cost perspective. So they know that the revenues are not coming in. So they're obviously pulling back on some easy things like travel, but also some growth investment spends that are good for the long term health of the company, but something when visibility essentially has gone to almost zero, that they're going to hold back on some of that incremental spend until they have a little more idea on how the future will unfold.

Interviewer: Okay, will that stymie growth over the longer term as we as we recover from the virus or do you think there is still growth out there in selected industries?

Fran: That's definitely the case that there will be growth in selected industries. It would be very difficult to be the CEO of an airline or something in the leisure space would be difficult, or even to someone running a conference centre to understand what it's going to take to get people to come back to that. I think for a CEO running a business, it may mean that one segment of their business may see accelerated growth in this type of environment, whilst another segment within their same company may be impaired for some extended period. And I think as fund managers, I personally need to be very careful where we allocate capital and not simply to those companies that only have near term visibility, but a healthy balance of companies that are less impacted, then looking at the sort of best managed companies that are feeling some of the impact that are better positioned to come out of this stronger than they were before.

Interviewer: Okay, and have you changed the way you manage risk at all on the portfolio. I know you've always had an emphasis on quality and balance sheets and things like that, but perhaps an extra focus on cash flow or any of those elements?

Fran: As you know, quality companies are the first cut - if it's not a quality company it won't make the portfolio. And then obviously alongside that is the price you're paying for it. We all know what a quality company looks like, but if you're paying a very high price for it, that's also a risk. So we need to be cognizant of that. But once you get past that, I think management quality during periods of duress really can't be understated. So really knowing our CEOs and our CFOs of our companies is probably more important than ever. It's one of the companies - when I speak to analysts on the team, tell me about the CEO, tell me about the CFO. I know visibility is not great, but is this a person who can see through that and figure out where to invest, where to pull back and how to manage their business. I think that's incredibly important right now. And you would see that just on a day to day basis - who are the leaders that are coming out of this crisis, the best. Management quality is really put to the test right now, that really shines through in that regard during periods like we’re seeing. And of course, a business model that we're looking at that, on the cash flow front that has the ability to take sales and convert that to free cash flow. And then ultimately for the management to prudently allocate that capital is very important to us. So the obvious companies that fit that criteria that we've owned before and own currently, they're the ones that are obviously interesting to us. And from a risk perspective, those are some of the most important things we're looking at at this time.

Interviewer: And a little bit of crystal ball gazing if possible. Have you made any early conclusions about the shape of the global economy in future> How much is it likely to change?

Fran: Well, I've been in the business following the 9/11 tragedy unfortunately, and the great recession and I think both times all of us have spoken endlessly about how it's going to be different this time - life will change, we'll never do this, we'll never do that. And I think a year or two later, everyone sort of goes back and reverts to the things that they've always done. I think certain things here will clearly be different but I think that most people want to ultimately return to the offices with their colleagues and congregate. I think I would love to go to the pub and have a pint. I think those things will not be very different. So I think it's one of those where, if there's opportunities where people are assuming that we're going to be on video conference calls forever, I think there'll be a portion of the business world where that becomes an easier path but I think a lot of people want to look their client in the eye, want to look there management team in the eye for someone like us and really get close enough to understand and have a relationship. I think that's important. It's one of those things where I do think things may be different in some instances, but I think largely a few years out, hopefully of course, it'll be more similar than it is different.

Yeah. And just finally, any reassurance that you can provide investors in these tough times as they watch their portfolios bounce around?

We're not trying to make market timing calls by switching to cash or investing in the growthiest names. But I think over the long run, investing in prudently managed, well positioned, cash generative companies that return excess cash to shareholders, we think is a winning formula over the long run. So we're very much invested in those types of companies. We like to have companies that can grow faster than inflation, companies that have pricing power and companies where these cash flows will be able to pay a progressive dividend over time. So that's the goal of the North American Income Trust. And I think that, looking at the portfolio today, I think we're as well positioned as we possibly could be.

Interviewer: Great. Thank you, Fran, so much for those insights today. Thank you to our listeners for tuning in and you can find out more about the trust at www.northamericanincome.co.uk and please do look out for future episodes.

Important information:

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 or products mentioned here in 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 may get 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.

Podcasts from Aberdeen Standard Investment Trusts, invest in good company.

Interviewer: Welcome to the latest in our Aberdeen Standard podcast series where we catch up with our investment trust managers to try and gain some perspective on these complex market conditions. Today we are focusing on the Japanese market with the manager of the Aberdeen Japan Investment Trust, Hisashi Arakawa. Welcome Hisashi. Could we start by looking at the Japanese experience of the virus - how severe has the lockdown been there for example, and are there any early clues as to the economic impact?

Hisashi Arakawa: Yes, the number of COVID-19 cases has been relatively contained in Japan which probably explains why the Japanese market has been relatively resilient compared to elsewhere in the world. But as the number of infection cases was not falling, Japan went into a soft lockdown last month. Now what this means is that people are encouraged to stay at home but they're not legally required to do so. I live in central Tokyo and my personal experience is that streets are relatively quiet except for a few places such as supermarkets and drugstores. But the outlook is highly uncertain as there are mounting concerns of an economic downturn. There are fiscal and monetary stimulus that will help to support global economy. But in my view the more important factor is how quickly infection can be contained and economic activities restored.

Interviewer: Okay, and what stimulus packages have they put in place in Japan? I mean, obviously monetary policy was already very loose.

Hisashi Arakawa: Yes, so the diet has just passed the supplementary budget equivalent to 240 billion US dollars. Now this is the largest ever such budget in history and includes 900 US dollars cash hand out in Japan. Separately the Bank of Japan, they raised its limits to buy government bonds, corporate bonds, and ETF and these are designed to support liquidity in the market.

Interviewer: The real headline grabbing piece of news was the postponement of the Olympics. To what extent will there be a knock on effect from that on the economy and on individual companies?

Hisashi Arakawa: As you say the postponement of the Olympics is not ideal, but its impact is probably milder compared to the full cancellation of such event. Activity such as advertising and hotels were inevitably affected more, but the portfolio's exposure to these sectors is relatively limited.

Interviewer: Okay, are there any notable areas within the portfolio that have proved vulnerable or by contrast particularly resilient? I know that quality and resilience is a particular focus for you, but how does that balance out in the portfolio?

Hisashi Arakawa: I think companies such as resorts and conference room operators within the portfolio are being affected more obviously as people stay at home. Another area is consumption of more discretionary type of goods, such as pianos has been affected more. But, we have actually reduced the trust exposure to these areas, to a more comfortable level earlier on when we saw the infection spread from China to elsewhere in the world. In times of uncertainty like these, companies with a stable cash flow, stronger balance sheet, and better access to liquidity have fared better. As you rightly point out, this is the case for the majority of the holdings in the Trust. We also invest in companies with global operations. They could begin to see recovery in their end demand as governments around the world gradually restart their economies.

Interviewer: Markets have moved a long way. Have you found any opportunity in this environment, maybe where share prices have come down to a level that stocks now look attractive? And if so, in what kind of areas?

Hisashi Arakawa: Yes, the market sell off during the first three months of the year enabled us to initiate six companies, which is higher activity than usual. These are companies with quality businesses we liked, but held off from buying the past due to rich valuations. As the valuation became more attractive, we took the opportunity to initiate these companies. We uses proceeds from lower conviction names that we exited or took profits from other stocks that did well. New stocks include Advanced Media, which is a pioneer in speech recognition software. They help automate the writing of minutes for example. Another one is Nihon M&A Centre, a financial boutique that helps ageing SME owners with succession issues sell their businesses.

Interviewer: Presumably you're in regular contact with the companies in your portfolio. What kind of feedback are you getting from them? Are they confident that they can bounce back after this or do they see a more enduring problem as a result of the outbreak?

Hisashi Arakawa: We’ve been speaking to the holdings individually to check that they have the liquidity and resources to survive this difficult time. Given the uncertainty of the economic impact, not just first order effects of the pandemic but also second or third, we’re in fact encouraged to hear that the companies held at doing what they can. For example, Elecom which is a consumer electronics peripherals company is saying that they've been working hard on switching suppliers to make sure that they don't run out of product. They are also using different modes of transport to get the product shipped. On the demand side they are working on providing the work from home equipment such as web cameras and headphones, and they are seeing a surge in demand. The other day I saw a long queue of workers trying to buy such goods at an electronic store. It's just one example of businesses that trust holdings possess. We also hold other companies that are seeing a rise in demand whether remote work, e-commerce, or the sale of essentials. These include NEC Networks & System Integration and Otsuka Corp that help set up remote work systems in companies. We also hold Sansan which is a cloud based business contact management software provider. Next month they will introduce an online based business card exchange service.

Interviewer: What about Japanese valuations? How do they look relative to their global peers? My sense is that they were -- Japan, the Japanese market looked relatively cheap even going into this crisis.

Hisashi Arakawa: Yes, as you point out the Japanese market is priced at a discount to many other developed markets around the world. But it’s not such a straightforward comparison because it also depends on the types of sectors that comprise these markets. But what I can say is that it’s times like these that present opportunities for bottom up stock pickers like us, because those quality businesses get sold off along with the rest of the market. For example, there are some small and mid cap names that have been sold off indiscriminately and appear more attractive at this point in time.

Interviewer: Okay, and what about on the dividend side? Obviously, in the UK market there’s been a lot of high profile dividend cuts. Are you seeing a similar issue in Japanese markets? I know the board increased the dividend last year. Is that likely to be more difficult to do this year as payouts from investee companies have been cut?

Hisashi Arakawa: Given the uncertainty, there will inevitably be some cut to dividends. However, our holdings certainly have strong balance sheets and business stability that will enable them to pay stable or rising dividends. They've endured similar disruptions in the past. What’s also encouraging is to see positive changes in our invested companies’ attitudes towards capital efficiency. These include Okinawa Cellular Telephone and real estate developer Daibiru that announced their first ever share buyback recently. We view this as a positive outcome of our engagement efforts over a number of years. They've also raised dividends for the financial year just ended.

Interviewer: Okay so part of a wider sort of improvement in governance. What about the trust current position on gearing?

Hisashi Arakawa: Gearing enables us to buy more high conviction stocks, especially when valuations have become more attractive for some names in times like this. At the same time it's not easy to time leverage so it’s been kept between 5% to 15% to cope with market volatility.

Interviewer: Okay, and finally these are clearly unsettling times for investors. Markets have dropped a long way. What would you say to clients to give them comfort?

Hisashi Arakawa: We don't expect a strong rebound in fundamentals in the very near term. But what gives us comfort in these times of uncertainty is that our holdings in the Aberdeen Japan Investment Trust generally have strong balance sheets, sustainable cash flows, good access to liquidity, business flexibility, and tried and tested management team to endure the difficult operating environment. They are also well positioned to recover quickly as economies restart around the world because many of them are world class companies with diversified operations across the world.

Interviewer: Okay, that's great. Thank you Hisashi for those insights today and thank you to our listeners for tuning in. You can find out more about the Trust at www.aberdeenjapan.co.uk and do look out for future episodes, many thanks.

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 or 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 may get 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.

Transcript of audio recorded on Tuesday 28th April 2020

Podcasts from Aberdeen Standard Investment Trusts - invest in good company.

Interviewer: Hello and welcome to the latest in our podcast series where we look at how the managers on the Aberdeen Standard Investment Trust range are handling these complex and unpredictable markets. Today we're talking to Abby Glennie manager of the Aberdeen Smaller Companies Income Trust. Welcome Abby. Could we start by looking at the impact of the measures to curb the spread of the virus on smaller companies? It seems to me that the market’s assumption is that smaller companies are particularly vulnerable, but are you seeing that reflected among the companies in your portfolio.

Abby: So I think the impacts really depend on the nature of the business and in particular what sector it's operating in. So some of the investments in the portfolio have seen operations which have been incredibly resilient. So, for instance, businesses like Assura, whereas others have been more heavily impacted by the lockdown. So an obvious example would be Hollywood Bowl. And I think the market sometimes has quite generalist views though that smaller companies get hit harder than large companies. And if we look at the market reaction in general, across five categories, we have seen that, and I think that’s actually quite unfair. Often we find smaller companies are more nimble, they can actually adapt their business models quicker and more efficiently than large companies. We can see even if everyone looks in their own lives, we can look at how SMEs in your local community have adjusted. And I think that's a good example of where small companies can be nimble. And the government schemes have been really critical in helping businesses to financially get through this lockdown and putting them in a position where, coming out of this, they can retain the staff employment levels that they need to be in a good position to start up again. The main thing for us would be, because of our quality focus, the portfolio went into this environment with a focus on resilient businesses. Companies with strong balance sheets, cash liquidity, and therefore actually, the level of financial distress that we've seen has been very limited across our companies. They might be small companies, big companies, it doesn't matter, it’s really been that quality focus. We have seen a small number of capital raising, either to get through this period without sort of market concerns about cash flow and liquidity, or actually for some of them, just in terms of being able to continue on their growth plans, post lockdown period.

Interviewer: Okay, and I mean, presumably, you're in regular contact with the companies in your portfolio. Is there a mood music to how they're feeling about this period and their sort of immediate future or is it so sector dependent that it's very difficult to kind of draw generalisations?

Abby: I think it is very sector dependent. But I think the key thing I would characterise is just levels of uncertainty. And because no one really knows when or how we're going to come out of it. And it does feel that that will be quite sector dependent. And in the past, I think we're week five or six now of working from home lockdown, we've had a huge number of meetings with companies that we invest in, and also a lot of interaction with sell-side analysts. And we have seen most companies utilising the government help schemes in some way. I would say in particular the furlough scheme. One side effect of the increased focus on cash liquidity and balance sheets and the support received by government is that we have seen a lot of dividend cancellations across the market. So to some extent, this has actually been irrelevant of the sector or the financial stability, there seems to just be an aspect whereby it’s unacceptable to pay dividends if you're going to ask the government for aid. If we think about sectors I mean, travel and leisure is probably obviously one of the most impacted sectors, those companies are seeing virtually 100% reduction in activity, meaning no revenue. We've got quite limited exposure here. One company is Hollywood Bowl, which we do have. It went into this with a very, very strong balance sheet but, they have done a small 5% equity raising and extended bank facilities. This means that you know, they're really well placed to get through what could be an extended lockdown for them and still be in a position to get back on the growth aspects coming out of this. I think sectors which have been more resilient have been technology where businesses have adapted well for work at home models. And in many cases, demand for their products and services has remained. Companies like Assura in the property space or Chesnara in insurance, revenue streams there really haven't been negatively impacted. So we're really pleased those types of companies can continue to pay dividends.

Interviewer: You mentioned that some companies you feel have been kind of unfairly treated by the market? Have you taken advantage of that? And indeed does the Investment Trust structure make it somewhat easier to do so? And if so, has that been kind of focused in any areas? Or is it perhaps too early to be making those sort of moves?

Abby: Yeah, so I mean, I mentioned earlier the breadth and depth of dividend cuts and cancellations. I mean, overall this has impacted across the board. Like I said it hasn't necessarily been sector specific because of that reliance on those government schemes. We have reshaped the portfolio a little bit. So we remain long term investors - we don't want to veer away from our quality growth momentum focus. But the hunt for income in this environment has definitely got a bit trickier. We went into this market with cash levels higher than usual in terms of providing some protection in tougher markets. So that means we've been able to increase exposure to some names which we've felt confident about in this environment. So for instance, Softcat is a value add IT re-seller. We’ve trimmed some businesses where we expect to see larger earnings decline and slower recoveries unfortunately. So things like Robert Walters workspace. And we have taken this opportunity as well to add new holdings to the fund where we feel optimistic about the quality growth momentum aspects, but also the income resilience. And so Primary Health Properties and Target Health REIT - both of those have been added where we think there's strong investment cases. The other thing we've been able to do is that, in this fund we have the ability to have fixed income exposure. And in this environment, we think there's a big income support for that, as well as these investments having their own structural investment cases. So we have been adding a handful of new holdings there, well diversified across sectors. I would say the other thing, I mean, you mentioned about the structure of the investment trust obviously. I mean, running closed-end vehicles here means that the manager doesn't have to focus on the risk of outflows, and you're thinking about cash to fund what those might be. Having said that, our corporate team, we really haven’t actually seen outflows which has been very pleasing. And I mean, I think the thing for clients about the investment trust space is that the market has obviously had a really sharp reaction. So we've seen that discount really widen out and investors who are willing to take a longer term view, hopefully, you know, at this sort of discount level we can provide an attractive entry point.

Interviewer: Okay. I know in previous discussions, you’ve talked about your matrix tool that helps shape your, your views. I wonder if you could just explain quickly what that is and what it's telling you today?

Abby: Sure, so the matrix is our stock screening tool. It's a core part of our process. And this is our internally developed tool that we've used for well over 20 years now within the team. It's really focused on looking at data which fits our quality growth momentum investment process and it helps us screen that wide addressable market that we have. Now, we do continue to use the matrix in this environment. But it’s fair to say that in times of sharp market correction, there's more uncertainty about forecasts in the market, and therefore some of the data that’s out there. So I think, you know, fundamental stock analysis and engaging with companies is really always core to any of our investment decisions. But I think at the moment that's become even more so. Within the matrix, the sort of quality factors, I think are increasingly important at the moment. The data for those is much more long term data. It doesn't have the same volatility. And so I think we feel very comfortable continuing to rely on that. And also, I think that in this sort of market environment, quality aspects will increasingly be well rewarded by shareholders.

Interviewer: Okay, it may, it may be too soon to consider recovery. But I guess gradually the picture does become clearer as more and more data points come into play? Do you have any sense of whether the companies in your portfolio will be able to pick up where they left off when the dust settles? And what sort of a recovery we might be looking at?

Abby: I mean, I think we feel confident that a lot of the companies we invest in will be in a strong position coming out of this. And, you know, especially financially balance sheet wise because of that quality focus. But I think when we think about areas like consumer confidence and economic growth, it just feels incredibly hard to judge at the moment. We could be faced with a long period of tough environments. A lot I think it is dependent on what happens with some of the government support schemes as well. So companies, for instance, are very dependent at the moment on that furlough scheme, and how the government tapers that off and helps companies to manage that sort of cash burn I guess, once they're getting up to full operations again, is going to be critical. I guess the other field of points I should probably mention on that would just be that, going into this we were already cautious that we've been in a very long bull market and 2019 definitely showed signs of slowing economic growth already. I think one of the things that have come to my attention increasingly in this environment is just the benefit of investing in what we believe are high quality management teams. We’ve seen that as we've been engaging with these companies through the past couple of months, and we've seen the strategies and leadership that they provided, you know, I think those high quality management teams are coming through on their own. So a good example, I said Hollywood Bowl did a capital raise. In that meeting we talked through a lot of the actions that they took both before and around the period of lockdown, which should mean that actually in terms of trading and operationally when they're permitted to reopen, they're in a very, very strong position to do.

Interviewer: How are you judging that ahead of time? Because, I mean, presumably, any kind of crisis, you're never quite sure how a management team will behave until they get there. But are you making sort of working assumptions based on a team's previous experience, whether they've delivered and that sort of thing?

Abby: Yeah, I mean, I think that management quality is always one of our key focuses. Investing in a high quality management team tends to be something that's easy to say you do, but actually, in practicality is much more challenging. We've got long relationships with a lot of these management teams and I think we're very lucky that we tend to meet all of our companies face to face. I mean, obviously, at the moment, face to face isn't really possible but we have built up relationships with them over the years. And a lot of these companies as well, you know, we will have owned in some portfolios for many, many years. So it's been an ongoing engagement, but has seen how those management teams have reacted I guess. I mean we have seen lots of different market environments. This is probably the sort of sharpest change anyone's ever seen, but we have experience on how that have handled different situations previously. And then I think at the moment, our engagement with them is sort of critical in terms of also, you know, the next step up of how quickly they can adapt business models. So I think that's going to teach us something as well going forward, you know, about the quality of different management teams.

Interviewer: And how are valuations looking today? I mean, quite often small caps have traded at a as a small discount to the large caps, but where does that large, mid, small, kind of relative valuation fall today?

Abby: Yeah, so if you think about the UK market as a whole lot at the moment, I mean, going into this, because of Brexit and political uncertainty, you know, UK equities as a whole hasn’t been a place that investors have been that optimistic or buoyant about in recent years, actually, in terms of inflows that we've seen to that area. Even though we've seen strong markets, actually, when we look at the relative valuations of UK equities, I think already compared to other regions, they were pretty attractive levels. And what we've seen in this environment is that, sort of all regions have been challenged by this COVID-19 situation. So, you know, we’re definitely not on our own here. But in that way, I think when we look at valuations now, compared to other markets, I think they look attractive, but the challenge is that the outlook for earnings is still very uncertain. But I think that's true across all regions. If we look at, and think about P/E (price to earnings) ratios of the market, unfortunately the one number that we really don't have certainty about is the earnings number. But we would encourage people to be long term investors. And, you know, historically, if you've been an investor in any of the portfolios within our team, we’ve shown that we really encourage you to not try and time the market and to be long term investors in our funds. And, I mean, if there's any insight that we have, I guess from the global financial crash would be that actually, that was a good entry point for a long term investor. So if you think that this environment is anything similar to that in terms of market correction, hopefully this is an attractive entry point.

Interviewer: Great. Okay. Thank you, Abby, for your time today and thank you to all our listeners for tuning in. You can find out more about the trust at www.aberdeensmallercompanies.co.uk. Please do join us for future podcasts.

Important information:

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 or products mentioned here in 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 may get 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.

Podcasts from Aberdeen Standard Investment Trusts. Invest in good company

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.

Outro: 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 may get 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.