Schroder Asian Total Return (ATR) has been the standout Asia Pacific trust over five years, thanks to strong stock selection and an innovative hedging overlay based on proprietary economic modelling. Not only has the trust generated the highest NAV total returns in its sector, but as we discuss in the Performance section, it is also the top-performing trust on a risk-adjusted basis, with the hedging strategies helping protect investors in rough markets. Managers Robin Parbrook and King Fuei Lee draw on the company research of Schroders’ large, locally based analyst team. They aim to identify high-quality companies and the best time to buy them, namely when companies’ current valuations underestimate their long-term growth potential. The philosophy is that if the managers are longer term in their thinking than their peers, the trust can outperform. The hedging strategies are based on the results of short- and long-term statistical models. These models use numerous indicators to highlight the risks of a correction or periods of material overvaluation in the underlying stock markets, and suggest to the managers when to hedge out exposure to certain countries. This allows the managers to maintain exposure to their preferred stocks when they think they will continue to perform in absolute terms. ATR has traded on a premium for most of the past two years. Following the emergence of the COVID-19 pandemic, it fell onto a wide discount but has rebounded to just a 1% discount at the time of writing. The trust’s overall strategy aims principally for capital growth, but dividend growth on the underlying companies means that the prospective dividend yield is now 2.1%.
Companies: Schroder Asian Totl Retrn Invstmt Co
This spring the Association of Investment Companies (AIC) overhauled its sector classifications, adding 13 new sectors and renaming 15 others. This decision was made in an attempt to more accurately reflect the shape of the industry, and help offer investors greater clarity when comparing peers. Several of the changes came in the alternative asset spaces and these are very welcome. Alternative assets have been an area of increased popularity in recent years, making a rationalisation of the sector definitions valuable. The amount of money invested by investment companies in alternative assets has grown by 92% over the past five years, rising from £39.5 billion in 2014 to £75.9 billion in 2019 (as of 8 May 2019). There have also been significant, and sensible, changes to the way Asia-focused trusts have been classified. In this research we take a look at these new sectors and the broader changes which have taken place, identifying the trusts which now stand out in their new peer groups. We also explain where we think the sector classification system may still be leading investors astray, and consider the case for a slightly different set of divisions.
Companies: ATR PAC JAGI KKVX VSL
Schroder Asian Total Return (ATR) aims to benefit from the impressive growth potential in Asian stock markets. At the same time, the managers seek to limit the equally impressive volatility that stock markets in the region have exhibited historically. Managers Robin Parbrook and King Fuei Lee have built an investment process on a foundation of highly active, valuation-sensitive stock selection. They overlay this with the use of quantitative economic models to warn them of impending market corrections in the underlying countries, which allows them to apply hedges to the portfolio to limit the exposure to the downside. The managers take a highly active, benchmark-agnostic approach, which they view as crucial in Asian markets. The valuation element to the stock-picking and the hedging strategy have helped the trust produce one of the highest upside/downside capture ratios in the sector over the past five years. At the same time, the trust has handsomely outperformed the index and peer group under the strategy implemented by Robin and King Fuei since March 2013. Over the past five years, the trust’s NAV total return has been 110%, while the average trust in the AIC Asia Pacific ex Japan sector has returned just 76% and the index even less – 71.1%. The trust has also displayed NAV volatility significantly below the sector average over the period. Although the trust has a total return objective, the managers view dividends as a sign of a well-run company and have been increasing their exposure to yielding companies as their view on the marker becomes more bearish. As a result, the trust’s dividend growth has been substantial in recent years, and the shares now yield 1.7%. Schroder Asian Total Return has traded on a premium since July 2017, currently 1.3%, and has been regularly issuing shares. The trust has a performance fee charged on absolute rather than relative returns.
Since the start of 2018, investors in Asian equities have had a torrid time, with the region underperforming global stock markets. Perhaps reassuringly for investors, the drivers of this underperformance have not been economic fundamentals but more unpredictable factors, which are external to the economies and markets of the region – namely, the ongoing trade dispute between the US and China, and expectations for the US federal funds rate (the global economy’s risk-free rate). However, this does make it harder to read what the future has in store for the region and the trusts that invest in it. Interestingly, despite the poor returns from markets and the growing negative news flow (concerns about the demand for smartphones have been another factor weighing on markets), managers of trusts investing in this region remain bullishly positioned, with a few exceptions. As we show below, on average investment trust managers have retained their strong bias to economically-sensitive companies and sectors. We consider the possible scenarios that could develop from here, economically and financially, and the ramifications for the different trusts in the sector.
Companies: IAT JAGI SST PAC ATR BRFI
Today, we introduce our investment trust ratings. According to the quantitative screens we have selected in an attempt to highlight the best performers in the closed-ended universe, the trusts discussed here have been the best in their classes over the last five years. We have selected trusts using two different sets of criteria, aiming to identify the top performers for capital growth and for achieving a high and growing income. There are many rating systems for open-ended funds, but no quantitative-based system for investment trusts that is available to the average investor. While we cannot identify trusts which will perform well in the future – past outperformance is no guide to future out-performance – we hope these ratings will highlight the outstanding performers in the closed-ended universe and those managers who have best used the advantages of investment trusts to generate alpha. We are trying to reward consistent and long-term outperformance, and so we have decided to look over a five-year period. All data is as of the end of December 2018, sourced from Morningstar and JPMorgan Cazenove. We have looked at NAV total return performance and discount value has not been considered: the aim is to identify those trusts which have performed the best rather than highlight bargains.
Companies: IPU FAS ATR JEO FEV FGT THRG SEC PAC BRSC IAT HNE MIGO TRY JMG DIVI SLS BGS SDP JETI SOI BCI MRC TIGT EDIN JAGI BEE SDV BRIG AAIF HFEL SCF SIGT BRFI IVPG CTY HINT JCH NAIT
Being a huge but emerging economy, China is a much larger part of global stockmarkets and GDP than is reflected in the main global indices. As a result, many investors are structurally underexposed to one of the fastest growing parts of the world. The inclusion of A-Shares into the main MSCI indices in May allows investors outside China to invest in Chinese equities easily for the first time, which may have consequences for this trend. The opening up of Chinese markets to foreign capital may lead to an increase in liquidity and interest in the stockmarket.
Companies: JCGI PHI FCSS ATR
A commitment from the board exists to buy back shares if the discount extends beyond 5% under the proviso of ‘normal market conditions’, however, the trust has traded at a wider discount than that – notably in 2015 when China’s ‘wobble’ saw the discount reach out into double figures, and last year after the Brexit vote when it stretched to its widest point under Schroders’ tenure (15%). The board is under considerable pressure to control discount volatility, given the absolute return nature of the mandate and the need to appeal to investors with an absolute return mindset, but in the past its small size has made it difficult to buy back shares. Chairman David Brief spoke to Kepler Trust Intelligence last year and explained that the board’s strategy was to focus first on generating the performance needed to put positive pressure on demand for the trust’s shares. Performance has improved since then and the trust moved to a premium in Q3 last year, and has been issuing shares (from treasury) since then, increasing its size by almost £100m since our last review.
The original essay plan for this article was put together in January, and so it is with an unpleasant mix of irritation (because we didn’t publish it sooner) and impotent smugness (because we told you so, only we didn’t) that we have watched the market stumble in the last few days. Our view for some time has been that after almost nine years of gains and with global stock markets trading at all-time highs – the very broadly evident optimism towards risk assets which had gripped investors until very recently was somewhat misplaced. Before the tide turned on the back of US payrolls data last Friday, 2018 had seen the Dow Jones and FTSE 100 break out of their historic ranges, and record flows into index tracking ETFs. The economic backdrop in nearly all corners of the world appears stable and, in many cases, is improving (particularly in the US) while central bankers’ extraordinary monetary policies of ultra-low interest rates and money printing, as the FT recently put it, “look as though they might actually allow the world economy to take off again without having to endure a crash or a bout of hyperinflation first”. But as we have seen since stocks began to tumble in the US, then Asia and Europe, asset prices are not the same thing as the economy. Further, behind all the euphoria, there has been a consistent narrative among more sophisticated investors that a correction is inevitable and probably desirable, and that asset prices have become overly inflated during the ‘endless bull market’ which has driven them forward since the end of the credit crunch.
Companies: RICA PNL RCP ATR
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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
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
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
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.
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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.
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
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.
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.
Life sciences is one of Mercia’s areas of focus and investment expertise. Seven of Mercia’s top 20 holdings at 31 March 2020 were in life sciences, valued at £29m in aggregate or 33% of total portfolio value (all of which had originated through Mercia’s third-party managed funds), with another c 40 earlier-stage life sciences investments across its third-party managed funds. COVID-19 has accelerated the opportunity for a new generation of novel and recombinant vaccines. This explosion of potential new treatments will require new diagnostics and bio-manufacturing support to scale supply once they are approved. These are areas where Mercia is already invested.
Companies: Mercia Asset Management PLC
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.
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
It was a remarkable second quarter with global markets staging the sort of comeback few would have thought plausible, at the end of March. With some countries still battling the first wave of infection and others seemingly headed to a second, not to mention what happens when governments start to remove direct stimulus measures, uncertainty still abounds.
Companies: NCYF EGL NAIT NAIT THRG GCP IGC HHI JLEN PCT VNH ASLI IBT HRI CSH SIGT