British stocks will not be cheap forever – this trust is poised to capitalise on their eventual rise

The company’s record of dividend growth highlights its long-term income investing appeal

Gloomy investor sentiment towards British stocks will not last forever. While investors are mostly emotionally driven people who will happily follow the stock market herd in the short run, hard facts are sure to convince them to buy UK shares over the longer term.

Stocks in the FTSE All-share index trade at dirt-cheap prices and offer exceptionally high yields, whether looked at in isolation or compared with other major indices. The capital gain and income potential of London-listed shares will, therefore, eventually prove too alluring for any remotely logical investor to decline in perpetuity.

Furthermore, investment trusts such as JP Morgan Claverhouse continue to trade at attractive discounts to net asset value. Investors are essentially able to buy bargainbasement stocks for less than their already cut-price market value.

The trust, a holding in Questor’s Income Portfolio since April 2020, currently trades at a 5.4pc discount to net asset value. This compares favourably with its average discount of 2pc over the past five years. Its focus on large British stocks such as Astrazeneca, Shell, BAE Systems and Rio Tinto allows it to offer investors exposure to a broad range of attractively priced income stocks that together offer an enticing yield.

The trust’s income appeal is striking.

It currently yields 5.2pc, against around 3.9pc for the FTSE All-share, and has paid dividends amounting to 23pc of our notional purchase price since we added it to our portfolio. It has raised shareholder payouts in every year since 1972 and dividends have increased at an annualised rate of 5.8pc over the past decade.

This easily beats an average annual inflation rate of 2.4pc over the same period. With inflation currently at 4pc and likely to fall significantly over the coming months, investors in the trust are well placed to enjoy strong “real” returns. Its reliable record of dividend growth, as well as its focus on larger companies with a solid financial position and sizeable competitive advantages, should translate into stable income prospects.

We must acknowledge that gearing of 6.3pc means that the trust’s share price is likely to be more volatile than the wider index. This, though, is a price worth paying in return for greater long-term capital growth potential. And while British shares are very unpopular at present, the trust has nevertheless generated a capital return of 20pc since its addition to our portfolio. This highlights its capacity to offer a potent mix of income and capital growth.

Over a longer period, the shares have narrowly outperformed their benchmark. They have produced an annualised return of 5.6pc, versus 5.3pc for the FTSE All-share index, over the past decade.

Given that the trust’s holdings are geographically diversified, it is likely to benefit from an improving global economic outlook as the era of high inflation and restrictive monetary policy gradually comes to an end. Questor expects dividend shares to become increasingly popular in such an environment thanks to the waning appeal of cash and the inability of bonds to produce income growth at a time when dividends are likely to rise.

In terms of hard facts, therefore, JP Morgan Claverhouse has great appeal. Its relatively high yield, excellent record of dividend growth, wide discount to net asset value and sound past performance make it a logical purchase for long-term investors who want income as well as capital growth.

However, many investors will hesitate to buy any investment trust that focuses on London-listed shares.

Their underperformance of other major indices over recent years, as well as the fact that stock markets in other countries are themselves likely to benefit from the impact of falling inflation, lower interest rates and improving economic growth, means JP Morgan Claverhouse could remain unpopular over the short run.

History suggests investor sentiment will change. The opportunity to make significant capital and income returns on grossly undervalued stocks will prompt a reversal in gloomy attitudes towards British shares. As the trust is well placed to capitalise on such a transition, it remains a highly worthwhile holding in our portfolio.

Update: Biopharma Credit

Uncertainty over one of this fund’s holdings has now been resolved and as a result it has been able to resume share buybacks. The shares have rallied from a low of 79 cents in November to 92 cents yesterday. Hold.

‘Trust will benefit as the era of high inflation and restrictive monetary policy gradually comes to an end’