Aberforth Split Level Income Trust (ASIT) aims to generate a high yield from a value investment strategy in UK small caps and from gearing taken through zero-dividend preference shares (ZDPs). The trust has a fixed life and is to be wound up in 2024. All income is distributed to ordinary shareholders. On a historical basis, following the coronavirus crash the yield is extremely high, at 8.5%. However, as we discuss in the Dividend section, investee companies are having to cut their payouts because of the current crisis. Although the trust has some reserves the board could employ, this means there is a chance of a cut this year or next. Nevertheless, thanks to the gearing as well as the investment approach, the income potential is still high relative to peers. Recent portfolio activity has been limited, with the managers confident the majority of their holdings can generate superior returns despite the crisis. However, they have been tilting the portfolio towards companies which should be better placed to maintain or resume dividend payouts thanks to the strength of their balance sheets and the nature of their businesses. On a total-return basis, ASIT has suffered in the COVID-19 sell-off owing to its value strategy, and because of structural gearing. However, this gearing means it could outperform considerably in any rebound. The portfolio is overweight UK earnings, meaning that it is particularly exposed to a recovery at home. ASIT trades on a 13.6% discount to NAV, close to the sector average of 11.5%. However, the discount has been volatile relative to peers, perhaps thanks to the gearing.
Companies: Aberforth Split Level Income Trust
Smaller companies are usually a problematic area to invest in during significant downturns or recessions; and the sharp fall in 2020 hasn’t been an exception. In this article we assess the performance of smaller companies trusts throughout the pandemic, while identifying the factors that have differentiated the winners from the losers. This includes the impact that cash, market cap exposure, sector allocation, revenue exposure and growth or value biases have had, with some surprising results. We also ask whether now is an attractive time to invest in smaller companies, highlighting the trusts which stand out to us…
Companies: THRG GHE MINI RMMC ASIT ASL MTE TRG BRSC DSM
We have knitted together the impact on the investment companies from what is now widely considered to be the most severe pandemic in a century. The collapse in asset prices over the latter part of March, brought the curtain down on an up-market that lasted more than ten years. In amongst this, there were pockets, such as the technology sector, that held up well. For many industries, the worst is still to come, as we brace ourselves for the sharpest contraction to global growth since the US great depression.
Companies: ASL SDV ASIT BGEU BRLA CCPE DPA IEM JMF JZCP JUKG EPIC PSHD CSH RIII CCPG BLP TMPL BPCR SEQI AIF SMT KKVX FAIR ICON RSE CRS GWI USF DIGS
Aberforth Split Level Income Trust (ASIT) invests in UK smaller companies in order to provide a high income to investors, by aiming to identify undervalued companies with attractive dividend yields and use structural gearing to enhance the income they provide. The ordinary shares currently yield 5%. ASIT is managed by a team of seven at Aberforth Partners, who have been employing a disciplined value strategy in the small-cap space since 1990. The track record of the team illustrates the outperformance potential of such an approach, while they also have experience in managing geared income portfolios like ASIT. The trust has a fixed life and will be wound up in July 2024. It is geared through the issuance at launch of zero dividend preference shares (ZDPs), which pay back a fixed amount at wind-up and receive no dividends, allowing ordinary shareholders to receive a higher yield (see Gearing section for details). Gearing can amplify returns, but it can also exacerbate losses. ASIT is the successor to Aberforth Geared Income Trust, which was managed with the same approach for seven years to June 2017, and which successfully met its income objectives and generated a total return of 20% per annum to shareholders (up to the time when it was wound up at the end of its fixed life). These high returns were aided by an excellent period for small caps, which might not be repeated. ASIT was launched into a rough period for a value approach to investing, but the portfolio it owns looks extremely cheap relative to the market, and relative returns since mid-August have been strong. The managers take a highly active approach which offers long-term outperformance potential. Following the strong run in recent months, the discount has narrowed and sits at 8.3%, wider than the average AIC UK Smaller Companies trust.
There is a problem with the UK’s core crop of income funds. UK equity income trusts are highly concentrated in a few big names, which we think is a potential cause for concern for income-seeking investors. It is also a good reason to diversify one’s sources of income. This concentration is particularly worrying when you consider that many of the largest yielders in the index have an uncertain future, and there are question marks over the sustainability of their dividends. Just eight companies make up over the 50% of the yield of the FTSE 100, according to Bloomberg figures, and the likes of Shell, BP and GlaxoSmithKline feature 17, 14 and ten times in the top five holdings across the 24 trusts in the UK Equity Income sector. As we discussed in our recent article, Rebel Rebel, the AIC has overhauled its sectors, aiming to make it easier for investors to identify and compare appropriate investments. However, we believe they have overlooked a potentially interesting group of trusts that could more properly be considered a sector and which might help mitigate this problem: small cap equity income. As we highlighted in Rebel, Rebel, trusts that don’t easily fit within sector definitions frequently trade on wider discounts than might otherwise be the case. We think this may be the situation with the trusts in our new sector, which offer an interesting way of diversifying an investor’s sources of income and resolving the problem of concentration in the AIC UK Equity Income sector. Although yielding less than the large cap income vehicles on average, there are some trusts with innovative structures and policies offering significant yields, and there are good dividend growth prospects from some of them too. There are other benefits to small cap equity income trusts, including the potential for capital appreciation. Here, we discuss the overlooked opportunity in small cap equity income and the benefits for income-hungry investors.
Companies: IPU SDV ASIT ASL ASCI
There are more than 26,000 investment funds available to UK investors today, yet the average UK investor has just six funds of any kind in their investment portfolio. Clearly, then, investors must be filtering out a lot of potential investments before they make a decision, and an obvious way to do this is by choosing an appropriate sector - but here too, there is a somewhat daunting range to choose from. The AIC announced yesterday an “overhaul” of its sectors, in order that they are as “clear and helpful as possible” for investors, and there are now more than fifty of them to choose from. In our view, this move by the AIC recognises that investors are using labels to search for funds - and the more granular those labels are, the more likely investors are to find them useful; so full marks for effort. But examination of the 300 trusts that now sit in those sectors highlights a challenge which still remains; however refined a sector label is - many trusts don’t sit easily among their peers. This presents a problem. Filtering funds by sector helps see the wood for the trees, which is essential given the great ‘taiga’ we face as investors seeking one tree among 26,000. But it also means many investors routinely overlook great funds just because they sit in the ‘wrong sector’. The only way to really work out where these trusts are is hard graft - real analysis at a fund level. The good news is that, for investors who have the time to search for them, trusts like this often trade on a wider discount than might otherwise be the case, presenting an opportunity. The even better news is that we’ve done the legwork to find eight of them, so you don’t have to.
Companies: IIT MAJE ASIT ARR TFG
Aberforth Split Level Income Trust (ASLIT) is a high yielding smaller companies fund with a disciplined value approach, offering a historic yield of 4.9%. This is the highest natural yield on offer from a pure smaller companies trust. The trust is in its second year, having launched on 3 July 2017 (as a rollover vehicle for Aberforth Geared Income Trust). Relative total return performance has been held back by the value style being out of favour, particularly in the second half of 2018 – although Q1 2019 was much more positive in performance terms. The trust met its first-year dividend target of 4p, supplementing that with 0.6p of specials in a bumper year for those. The first interim dividend of 2018/19 saw a slight increase over last year, while income received from specials on the portfolio has been considerable, though lower than in 2017/18. The trust has built up a revenue reserve already, holding back 0.8p last year, or 20% of the full-year dividend. This is consistent with the approach taken by the antecedent trust AGIT, which built up substantial reserves in the first few years in order to provide greater security to the dividend – we would note that three of the six board members of ASLIT, including the chairman, previously served on AGIT. The trust is team managed, with decades of experience between its members. The two remaining founding partners, Alistair Whyte and Richard Newbery, have been part of the team managing the trust since 1990. Richard retires at the end of this month (April 2019), leaving a committed team of six experienced investors who follow the same philosophy and approach. Being contrarian and value investors, the managers have built up an overweight to UK domestic stocks on a bottom-up basis. They are also biased to the small end of the market and do not buy AIM stocks, meaning the exposures are different from the average smaller companies fund. The managers aim to have ASLIT near fully invested at a portfolio level at all times. The company has structural gearing in the form of zero dividend preference shares (ZDPs), which means that the ordinary shares are 28% geared, considerably higher than most smaller company trust peers, most of which do not have any gearing at all. The Aberforth approach, the income mandate and the company’s structure mean that ASLIT is highly differentiated to its peers. ASLIT has the most extreme positioning towards value (according to Morningstar data) in both the closed- and open-ended sectors. Relative to peers, the ordinary shares of ASLIT have the highest gearing to equities of peers thanks to the ZDP shares. The trust’s discount has been volatile. The current discount of 9.9% is wider than the sector average of 7.4%. The board is able to buy back shares, but has not done so to date, with the trust’s limited life representing a hard form of discount control.
Aberforth Split Level Income Trust (ASLIT) was launched on 3 July 2017 as a successor to the fixed life Aberforth Geared Income Trust (AGIT), which had a similar split-capital structure and a clear income mandate. As a result of the income bias, the portfolio has a slightly different flavour to big sister Aberforth Smaller Companies Trust (ASCOT), with 12 stocks owned that ASCOT does not, but also not holding the 29 stocks in ASCOT’s portfolio that do not have a significant dividend yield. The companies that the managers are currently finding most attractive from a valuation basis are those that have a heavy UK domestic bias. As such, at an underlying sales level (as at January 2018) only 35% of sales for ASLIT’s companies come from overseas, compared to the Numis index of 38% and ASCOT’s more internationally balanced 46%. By comparison, large caps (as represented by the FTSE 100) have overseas sales of 75%. Value as an investment style has been out of fashion for nearly a decade now. According to Morningstar data, ASLIT has the largest weighting to value of all of the AIC and IA UK Smaller Companies sectors, at 65% of NAV. This compares to the average (for the closed- and open-ended UK smaller companies sectors) excluding Aberforth vehicles of 16.8%. All this leads to a portfolio that is highly differentiated to its peers in both the closed- and open-ended sectors. We calculate (using Morningstar data) that ASLIT’s average crossover with peers in the AIC UK smaller companies peer group is just 9.1%. ASLIT potentially offers significant diversification benefits. Longer term, Aberforth has a very strong track record. However, owing to its clear value bias it has underperformed peers and the Numis Smaller Companies Index over the past decade. Since launch ASLIT has outperformed the Numis smaller companies index, but (perhaps of more relevance to the discount) the trust has underperformed peers. Of note however, is the recent strong relative performance, with the trust starting to eat back some of the relative underperformance. We understand that the portfolio yield is currently 4.4%, which compares to ASCOT’s 3.1%. At ASLIT’s launch (July 2017), the ordinary shares were offered on a prospective yield of 4%, and the company will be reporting on how the first year has gone at the end of July. However, the difference between the company’s cum- and ex-income NAVs and the dividend so far paid (the company pays two dividends per year) reveals that earnings have so far been in the order of 4.5p per share, considerably ahead of the 4p target at launch. Split capital investment trusts structured to include multiple share classes - which might include ordinary shares, which pursue the income and growth objective, and ‘zero dividend preference shares’ which provide no income at all, and act as a form of structural gearing on the trust. In the case of this trust, the ordinary shares, being 23% geared through Zero Dividend Preference (ZDP) shares, have considerably higher gearing than most peers, most of which do not have any gearing at all. As well as capital gearing (which brings risks as well as opportunities), the ZDPs - which we examine in more detail in the portfolio section of this note - also enable higher distributable income. ASLIT’s share price rating has struggled somewhat since launch, and the shares currently trade at a discount of 7.2%. By comparison ASCOT trades on a wider discount of c.11.5%.
UK equities are among the most unloved investments globally, with domestic-facing stocks particularly out of favour. Valueorientated investors may be asking themselves if there is an opportunity here, or if the ‘Brexit discount’ is justified. The Bank of America Merrill Lynch fund manager’s survey of global allocators saw weightings to the UK reach a historic low in March, and the country has been one of the least favourite locations all year amongst respondents. James Goldstone, manager of the Invesco Perpetual Select UK Equity and Keystone trusts, tells us US investors are on a “buyer’s strike”. Amongst domestic investors the data shows a similar pattern: the Investment Association reports that the open-ended UK All Companies sector was the worst-selling in March, as it was in four other months of the past 12. The UK equity income sector was the worst-selling in two months over the same period. We examine a number of trusts which have managers who believe they may benefit from a resurgence of interest in stocks exposed to the UK domestic story.
Companies: ASIT HOT IVPU SUPP
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Cenkos’s first half results demonstrated the benefits of its flexible operating model and strength of its client relationships. While challenges related to COVID-19 are set to continue, Cenkos’s focus is on growth companies and its fund-raising year-to-date has had a greater emphasis on corporates financing M&A and growth opportunities rather than for defensive purposes. This should prove more sustainable although, as always, the timing of transactions in the encouraging pipeline reported remains uncertain.
Companies: Cenkos Securities plc
Avation is a lessor of 46 commercial aircraft to a diversified airline client base. This morning, the group has released results for the 12-months to 30 June 2020, which illustrate the challenges faced by its customer base as a result of Covid-19, as well as the corrective actions taken by the Board that have resulted in profitability being maintained in the year as a whole. Loan repayment deferrals of c.$24.4m were obtained in the period, in comparison to $13.1m short-term rent deferrals being granted to airline customers and thus emphasising management's focus on liquidity during an unprecedented period for global airlines. Avation again reports that it is currently reviewing alternatives in relation to the 6.5% senior notes due in May 2021. Whilst at this point our forecasts remain under review, and near term challenges remain across the industry, we believe that demand for aircraft from lessors such as Avation will increase in time as a result of airlines being even more reliant upon aircraft leasing firms due to the retirement of older aircraft during 2020 in combination with much weaker balance sheets that are unable to support direct aircraft purchases.
Companies: Avation PLC
Record’s Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.
Companies: Record plc
Primary Health Properties (LON:PHP) is a real estate investment trust (REIT) that holds a portfolio of 510 primary health facilities in the UK (92% of the portfolio by value) and Ireland (8%). The business model is to manage the properties for rental income and to grow the portfolio over time. The
Companies: PHP PP51 PHPRF
Cenkos Securities plc has terminated coverage of Record Plc. Our previous recommendation (BUY) and forecasts can no longer be relied upon.
Please contact Cenkos for further information.
What’s new: Today’s trading update reveals 17% rise in assets under management (AuM), double digit revenue growth, and an increasing operating margin as the business scales. The outlook is positive. Highlights are:
12.6% rise in 1H Group Revenues to £11.0m (1H last year: £9.7m);
21.9% rise in 1H adj operating profit to £5.0m (1H last year: £4.1m);
17.4% rise over 6 months in AUM to £7.8bn on 30 September 2020,
n.b. From 31 March 2020 the WMA balanced index rose 11.6% to 4510;
- Market movements added 12.5% to AUM (i.e. Tatton outperformed WMA);
- 1H net inflows of £328.1bn were 4.9% of opening AUM (i.e. c 10% annualised net inflows);
3.0% rise in Paradigm Mortgage Services member firms to 1,591
2.5% rise in Paradigm Consulting member firms
Interims will be announced on Wednesday, 18 November 2020
Companies: Tatton Asset Management Plc
Following on quickly from its impressive full year results, these interim results confirm that our confidence for growth in the Program Management business was not misplaced.Contracted Premium increased 95% YoY (and 12% ahead of December 2019) to $925m –a stone's throw away from the $1bn 2020 guidance set in 2018. At the same time, Gross Written Premium (GWP) grew 42.6% to £247.2m, resulting in Economic EBITDA turning positive, at £0.8m compared to a loss of £0.3m in 1H19
Companies: Randall & Quilter Investment Holdings Ltd.
As expected following the US banks’ releases, Barclays’ third quarter results saw a sharp reduction in provisions build-up while the emergence of delinquencies has been delayed by the State’s supporting measures. Management continues to expect a reduction in the cost of risk next year. It remains to be seen if this guidance is capable of withstanding new lockdowns or a no-deal Brexit.
Companies: Barclays PLC
Tatton has reported an in-line H1 financial performance: revenue totalled £11.0m (vs N+1Se £10.9m) and £5.0m adj. EBIT (50% N+1S FY21e). AuM grew by 3.4% to £7.8bn as net inflows continued throughout H1 (+£328m) – a positive performance given the backdrop. Paradigm, particularly in Mortgages, has been resilient post-lockdown. Having delivered 50% of our earnings forecast for FY21e, there is potential for upside. However, we leave our forecasts unchanged and a margin for safety as we remain alive to potential external risks/volatility.
The most pleasing aspect of Tatton’s trading update for the six months ending 30 Sep 2020 (H1 2021) was how robust its fundamental offering to clients (financial advisers) has proven to be in highly uncertain market conditions. It continued to attract strong net inflows into its asset management business while also growing its base of IFA consulting and mortgage services clients. The prospect of beating our previous FY21 forecasts looks promising. Longerterm growth prospects also look strong. We do, however, remain wary of the potential impact of further large market dips. For now, we maintain our fundamental valuation of 300p per share but see room for significant upside on that mark if Tatton continues to deliver.
ANGLE plc (AGL.L): Acceptance of FDA submission | Feedback plc (FDBK.L*): Partnership agreement | Open Orphan (ORPH.L): Human Challenge Study Model contract with UK Government
Companies: AGL FDBK ORPH
The interims confirmed that Covid-19 was minimally disruptive operationally in H1 20 and, ironically, may have improved both of R&Q’s divisions’ mediumterm trading outlooks. As the pandemic and other industry events have generated significant losses for insurers, they have created the current ‘hardening’ market driving demand for Legacy and Program Management.
John Laing Group (JLG) has announced the sale of its Australian wind farm assets for A$285m (£157m), a valuation described as a ‘small uplift’ to book value. This news is significant for two reasons: 1) it provides some reassurance that the book value of JLG’s renewable assets is now relatively conservative; and 2) accounting for about a third of its renewable portfolio, the disposal represents material progress on JLG’s strategy to exit this market. We make no change to our numbers ahead of the company’s Q3 trading statement expected next week.
Companies: John Laing Group Plc
NextEnergy Solar Fund has low operating costs, low finance costs and has consistently delivered generation outperformance. We estimate that it can sustain its current level of dividend with an electricity price well below today’s price. The shares show the lowest NAV premium of all the UK renewable yieldcos and the highest yield.
Companies: Nextenergy Solar Fund
Whilst there are some bright spots, such as payments companies, which are beneficiaries of the shift to online shopping, fears about the potential impact of COVID-19 have hit valuations across much of the financial sector. The fall in Polar Capital Global Financials Trust’s (PCFT’s) NAV reflects this situation.
Companies: Polar Capital Global Fincls Trust