The quality style of investing may be at its lowest point in 25 years, but Dunedin Income Growth (DIG ) is still hoping quality picks, like new addition Haleon, will be the medicine it needs.

It was a frustrating first half – measured to the six months to end of July - for investors in the £388m UK equity income portfolio, as managers Ben Ritchie and Rebecca Maclean confirmed the trust tracked the FTSE All-Share in the five months to end of June, and even outperformed during the ‘liberation day’ turmoil, but struggled to keep up with the sharp rally in July.

This resulted in a net asset value (NAV) total return of 3.1%, which underperformed the FTSE All-Share by 4.4%.

Style has been a major factor in the performance problems facing DIG, with returns concentrated in a ‘narrow selection of large-cap stocks’ over the period, including banks, tobacco, and defence – areas which the managers are typically underweight or exclude from the portfolio entirely.

Quality has been out of favour more generally in recent years, which the managers said was ‘frustrating’. Ritchie and Maclean said the style has ‘underperformed to the deepest extent and for the most extended period in the past quarter of a century’.

However, they believe a high-conviction approach to investing in quality stocks, with ‘resilient income streams’ will ensure the trust outperforms.

‘Over the long-term, owning quality companies has been a winning trend, yet today the portfolio’s valuation premium to the wider market has shrunk to the lowest level that we have seen, at just 7%, while return on equity and operating margins, respectively remain 60% and 25% higher and balance sheets 20% less geared than the market,’ they said.

They are not, however, ‘passively waiting’ for sentiment to turn positive towards quality stocks, and have been finding new businesses to add to the trust.

They initiated a position in Haleon, the consumer healthcare company that was spun out of GSK in 2022 and owns brands such as Sensodyne and Advil. Its leading brands across oral health, pain relief and vitamins, should ‘enable it to deliver industry leading revenue growth while it has significant opportunities to enhance its margin profile and returns to investors’, said the managers.

They also bought into LondonMetric, a specialist real estate company focused on logistics, convenience retail, healthcare and entertainment, which has been snapping up new assets from sub-scale real estate investment trusts (Reits).

Its strategy ‘supports a high and growing dividend distribution’, said Ritchie and Maclean. To fund the LondonMetric purchase, the duo reduced their position in NHS landlord Assura (AGR ) ahead of its takeover by Primary Healthcare Properties (PHP ), and ‘further upside appeared limited’.

‘In July, we also participated in the rights issue by Chesnara, the consolidator of closed life insurance assets, which was undertaken to finance the acquisition of HSBC Life,’ they said.

On the sell side, construction group Morgan Sindall was removed from the portfolio after ‘extremely strong’ performance in recent years. Pharmaceutical giant Novo-Nordisk was sold after it revised growth expectations for its obesity drugs, while chemicals distributor Azelis was exited after weaker revenue growth in its Americas business.

Downbeat sentiment towards DIG’s style has weighed heavily on both the NAV and shares, with the former up just 2.1% over one year, and the latter growing 6.6% over the same period, far below the 14.4% return from the benchmark, according to Deutsche Numis data.

However, the dividend yield of 6.5% may make up for the poor capital growth. Earlier this month, the board of DIG announced it was significantly increasing payouts to a minimum of 6% of NAV as at 31 July 2025.

This means a dividend of at least 19.1p will be paid for the year ending 31 January 2026, an increase of 34.5% on the 14.2p paid in the previous year.

The board has also committed to a progressive dividend policy, funded from a combination of revenue and capital generation.

Chair Howard Williams said changes in the distribution policies of the portfolio businesses had pushed the dividend change as cheap valuations have encouraged companies to buy back shares rather than distribution income.

Williams added that equities are also having to compete with higher interest rates that has made holding cash more attractive.