Will Meadon is leaving JPMorgan Claverhouse (JCH ) on a high but the new managers are tackling the uncovered dividend with a ‘modest repositioning’ – including ramping up exposure to UK banks.

Meadon, who is leaving the £405m trust this month after 12 years, departs with the portfolio in a strong position, having racked up a net asset value (NAV) increase of 9.2% in the first half of the year – ahead of the 7.4% return from the FTSE All Share benchmark.

Over the past decade, under Meadon’s control, the fund has returned 77.8% and the share price has risen 85% versus a 77.3% increase in the benchmark.

The fund paid a first-quarter dividend of 8.25p per share and the three subsequent dividends will also be paid at this rate, ensuring the fund retains its Association of Investment Companies (AIC) ‘dividend hero’ status. However, the dividend is not fully covered and the quarterly payout was funded partially from revenue reserves.

New manager Callum Abbot, who is joined in running Claverhouse by Anthony Lynch and Katen Patel, said that although the UK equity income trust would continue to follow Meadon’s investment strategy, they had increased the portfolio’s diversity of income and, as a result, have ‘greater confidence in the dividend growth prospects of the aggregate portfolio going forwards’.

This includes building new stakes in Natwest (NWG) and Barclays (BARC) ‘both of which plan to return a large proportion of their market cap to shareholders over the next few years and generate double-digit returns on equity across the cycle, yet still trade at material discounts to net asset value’.

The position in Intermediate Capital Group (ICG) was also topped up, making it one of the fund’s largest active investments.

‘The alternative asset manager continues to demonstrate that its business model is more resilient than in previous cycles and has delivered significant fundraising at attractive margins, which has driven profit growth ahead of market expectations despite the difficult competitive backdrop,’ said Abbot.

The switch into UK banks was at the expense of Asia-focused financials Prudential (PRU) and Standard Chartered (STAN). The failure of the Chinese reopening has weighed on the financial giants and the managers have instead increased exposure to UK banks, ‘which are returning more excess capital and have higher return on equity targets’.

Also facing the chop were retailers from across the spectrum. The biggest detractor was sportswear retailer JD Sports (JD), while luxury watch retailer Watches of Switzerland (WOSG) also waned, leading the managers to exit both positions.

‘Both stocks benefited from strong trading through the pandemic period, however now end markets have become more challenging as demand has waned,’ said Abbot.

The fund benefited from an overweight to aerospace and defence, with aerospace engineer Rolls-Royce (RR) becoming the top-performing stock. A holding in aircraft engineer Qinetiq (QQ) also rallied thanks to ‘increasing defence spending by Nato members’ governments’.

Private equity giant 3i (III) continued to soar, delivering a return of 28% on top of the 88% it delivered last year thanks to the ongoing success of European discount retailer Action, which is its largest holding.

‘We continue to believe that the market underappreciates the duration of the growth potential at Action and 3i remains our largest portfolio holding,’ added Abbot.