Alliance Trust (ATST) is one of the UK’s oldest and largest investment trusts. Almost three years ago, on April 1 2017, the trust adopted a new approach which sees management of the portfolio outsourced to nine fund management groups in different parts of the world, each tasked with managing a portfolio comprised of a concentrated, bespoke selection of their fund managers’ best ideas. The management groups in this stable – many of them otherwise out of reach for ordinary investors – are selected and overseen by Willis Towers Watson (WTW), which manages allocations toward them so that performance is primarily driven by stock selection in the long run, rather than by sector, style or country weightings. In August 2019 WTW brought a new fund manager onto the roster. Vulcan Value Partners, a manager that WTW has known and liked for many years, was added when Vulcan reopened for new capacity. In the first two years under the new strategy, ATST has generated strong returns relative to both the benchmark and comparable open and closed-ended global peer groups. The past year in particular has seen the trust deliver impressive returns, benefiting from the blend of both growth and value managers which the portfolio contains as the market has rotated slightly to the latter. ATST’s discount narrowed significantly around December 2016 when the trust announced the change in strategy. The trusts average discount in 2018 was 6% and the board continues to manage the discount, and is committed to buying back shares where necessary. Currently the trust trades at a discount of 4.1%, relatively wide in comparison to its peers.
Companies: Alliance Trust
Fees in the fund management world are a hot topic, and average fees across collective investment funds around the world have seen relentless declines. According to research from Morningstar, the average asset-weighted fee for actively managed equity funds has fallen by 18% since 2013, compared with a 28% decline at passive funds.
Companies: JAM ATST SUPP JEO RIV
Alliance Trust (ATST) is one of the UK’s oldest and largest investment trusts and has delivered a growing dividend to shareholders every year over the last 52 years. In 2017, the trust changed its spots dramatically, adopting an innovative portfolio management approach that uses eight managers, each tasked with managing a bespoke highly-concentrated portfolio, selected and overseen by Willis Towers Watson (WTW). WTW chooses a line-up of stock pickers that has similar characteristics to the MSCI ACWI benchmark, in terms of style, country and sector exposures, to ensure that performance is primarily driven by stock selection in the long run. As such, and with net assets of c.£2.7bn, ATST is a truly ‘global’ trust. Having had nearly two years in the new form, the equity portfolio has generated a decent return during what could be considered a difficult global market for active stock selection. The equity portfolio has risen by 10.4% since the start of April 2017 to January 2019, outperforming the MSCI ACWI index by almost 1.6%. Relative performance was somewhat hindered over 2018, as we saw a much smaller than usual number of (large cap) companies outperform the index during the first nine months of the year and a strong, broad-based market correction in the final quarter. ATST’s discount narrowed significantly on the announcement of the change in strategy in January 2017 and the board continues to manage the discount where necessary. Over 2018 the trust traded on an average discount of 6% and this has since come in to the current discount of 4.9%.
“The single greatest edge an investor can have is a long-term orientation”, according to Seth Klarman, the American billionaire hedge fund investor. On the Hargreaves Lansdown platform the number of people with more than £1m in their ISA has increased from just three in 2012 to 168 today. However while this sounds very impressive, £1m doesn’t seem that fanciful given full historic contributions to PEPs and ISAs since 1987 would have added up to more than £291,000. We calculate that an investor would “only” have to have generated an IRR of 7.74% on every year’s subscription to have generated a seven-figure sum today. ISAs offer an excellent way to grow capital and benefit from compounding (that eighth “wonder of the world”) over the very long- term entirely free from the clutches of HMRC. Investments are tax neutral within the ISA wrapper, and in contrast to a SIPP, there is zero tax payable on the entire amount when capital or income is withdrawn. Another contrast to a SIPP is that there is no size limit – under current legislation an individual’s ISA can be as big as it gets. Whilst building an ISA pot of £1m is clearly a huge achievement, our analysis suggests that many investment trust managers would have delivered significantly more. There are around 48 trusts for which we have meaningful statistics going back to 1987 which have had broadly the same strategy and/or elements of the same management team over this time. Of these, an incredible 34 trusts would have delivered a total ISA value (share price returns net of fund fees, but before the ISA wrapper fees) of over £1m, if an individual had put their entire PEP / ISA subscriptions in the same trust every year.
Companies: SMT IIT JEO IEM JEO ICGT OCI SUPP ATST LWI FGT
Last year saw investment trusts soar in popularity among both retail investors and wealth managers. Statistics from the AIC show that during 2017, independent financial advisors bought £990m-worth of investment trusts through platforms. That was 46% more than in 2016, and 41% more than the previous record of £704m in 2015. This increased demand has shown itself in the average discount across the investment trust universe, which has narrowed markedly, as shown in the chart below.
Companies: ATST JCH WTAN
Since the launch of the first index fund in 1976, passive investing has proven to be a successful investment strategy for both institutional and retail investors. The first of its kind, the Vanguard 500 Index fund, has delivered an annualised rate of return of 10.01% totalling to a return of over 1,500% since 1989. Whilst good in absolute terms, in relative terms because of fees it has underperformed the index, with the S&P 500 delivering an annualised return of 10.12% over the same period. Although there is only a small difference between the two annually, we calculate that over the 42 years this equates to underperformance of c.53%. However, this difference is a declining feature, and with fees now at only 0.14%, another 42 year period would see a difference of only 6% relative to the index. On the other hand, active management hasn’t (if one looks at the performance of the average fund) covered itself with glory either in terms of outperforming benchmarks. According to the most recent S&P Indices vs Active Management (SPIVA) report, which offers information on the passive vs active debate in the US over the course of 2017, 63.1% of large-cap managers, 44.4% of mid-cap managers, and 47.7% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively. Over a five-year period, the numbers look even worse for supporters of active management:- 84.23% of large-cap managers, 85.06% of mid-cap managers, and 91.17% of small-cap managers lagged their respective benchmarks. Outperformance of a benchmark is possible, but the numbers above suggest that active managers are mediocre, and that those who can achieve outperformance over the long term are therefore difficult to identify. So, what marks this small sub-set out? What are the small minority of active managers who are outperforming their benchmarks doing differently?
Companies: FGT JEO SMT ATST IIT
Alliance Trust has changed its spots dramatically, adopting a portfolio management approach that uses 8 sub-managers, each tasked with managing a highly concentrated portfolio, who are selected and overseen by Willis Towers Watson (WTW). WTW allocate to managers so that stock selection is the key driver of returns, but weightings relative to country and sector are managed so that they are broadly in line with the MSCI AC World Index benchmark. As such and with net assets of c £2.7bn, ATST is a truly ‘global’ trust. With only 9% invested in the UK, ATST is differentiated to peers. The UK is a much more significant part of the portfolio at nearest competitor Witan for example, where the UK makes up 34% of the trust’s exposure, and within the AIC Global investment trust peer group where it averages 19%. Now having had just over a year in the new form, shareholders have seen an improved performance, with the NAV rising by 13.7% since the start of April 17, outperforming the MSCI AC World index which is up 10.8%, and Witan which is up 13.2% (all figures to 19th June). ATST has achieved this with much lower volatility than most peers. The one year NAV standard deviation is 7.5%, which puts it in the top decile of the closed and open ended Global peer group according to data from Morningstar. Alliance Trust is one of the UK’s oldest and largest investment trusts, and has delivered a growing dividend to shareholders every year over the last 51 years. WTW have not proscribed any income requirement to any of the managers and so portfolio revenue has fallen somewhat in the last year. The board accepts that in providing a “smooth annual rise”, it may be necessary to pay an uncovered dividend by drawing in part on revenue reserves, which they believe are sufficient to support a progressive dividend for the next five years. ATST’s discount narrowed significantly on the announcement of the change in strategy in January 2017, and has remained close to 5% since then.
Alliance Trust (ATST) is a global equity investment trust differentiated by its focus on sustainable businesses and long-term investment in subsidiaries. Significant changes announced in October 2015 give ATST a simpler organisational structure and clarify the investment proposition. Measures include focusing on the global equity portfolio, introducing the MSCI AC World index as a formal performance benchmark for the trust, appointing ATI as investment manager with a 0.35% fee and a target 0.45% ongoing charge, confirming the progressive dividend policy and committing to share buybacks to help maintain the discount below 10%.
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FY20A results largely reflect a period prior to the Covid-19 lockdown, yet show Duke entering a more challenging FY21E with momentum. Yesterday's trading update demonstrated another notable rise in quarterly cash receipts for Q2/21, as royalty partner trading continues to improve. As some partners' forbearance measures will expire this month, Q3/21 receipts should continue this upwardly momentum. This opens the door to a return to cash dividends at some future point. Today, Duke also confirms it is now seeking new royalty partners, alongside follow-ons.
Companies: Duke Royalty
Litigation Capital Management has announced FY20 results with gross profit up 7% to A$21.7m and PBT of A$9.2m, slightly behind expectations albeit the Group had already flagged that delays to 3 cases during the year would result in resolutions in FY21, thereby impacting FY20 results. That said, excellent strategic progress through the year and good news flow as well as increasing scale suggests more value to come. Reiterate buy
Companies: Litigation Capital Management Ltd.
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
Companies: AVO ARBB ARIX CLIG DNL GDR ICGT NSF PCA PIN PXC PHP RECI STX SCE TRX SHED VTA YEW
Frontier IP has announced it has invested £320k in a £720k convertible loan financing of Nandi Proteins. Nandi Proteins is developing functional proteins for food ingredients aimed at reducing levels of fat, additives and gluten in processed foods addressing important social, health and environmental concerns about processed food. Frontier IP holds a 20.1% equity stake in Nandi Proteins; the last disclosed value of the holding was back in July 2017 at approx. £2.9m. Connected in part to the announcement today, we have used the opportunity to refresh our cash flow forecasts to reflect the net £2.1m proceeds of the July 2020 fundraise, the planned deployment of proceeds into bridge financing and refreshed our Sum-of-the-Parts valuation analysis to reflect the excellent portfolio progress made in FY’20. We anticipate a 50% increase in the unrealised profit on the revaluation of investments in FY’20e to £5.82m (vs. £3.0m prior estimate; £3.85m in FY’19). Applying the peer group multiple of 1.6x on Yr1 Book value of late-stage assets and incorporating the £2.1m proceeds and dilution associated with the July placing, implies an intrinsic value of 82p/share, 27% above the current share.
Companies: Frontier IP Group Plc
Interim results demonstrate YoY growth and a resilient outcome that has exceeded management's expectations from the start of the Covid-19 pandemic. This is testament to the degree of recurring revenue generated across the business. FY21 trading looks to be more challenging, as notably lower new insurance sales post-lockdown will translate into lower premium income. A number of organic opportunities are being worked on to fill the shortfall. Rising UK redundancies and their impact on policyholder retentions creates great uncertainty, hence our forecasts remain withdrawn and recommendation remains Under Review.
Companies: Personal Group Holdings Plc
Sigma Capital (“Sigma”) has partnered with global alternatives manager EQT to deliver and manage a £1bn GDV private-rented sector (“PRS”) housing fund focused on Greater London. EQT will invest £300m equity, complemented by debt (including a Homes England facility), to build 3,000 homes in 5 years. Sigma will generate fee income as development manager, a recurring fee income stream from managing completed assets, as well as participation in returns via a minority co-investment (£16m) and a profit share. We estimate that the fee income alone is worth £45m to Sigma in the first five years: 50% of the current market cap. Crucially, this is a step up in AuM bringing a high quality long-term recurring earnings stream. We will reforecast following interim results (expected tomorrow) to provide full context.
Companies: Sigma Capital Group Plc
With the sale of the Singaporean operations for £1.6bn, the new CEO, Amanda Blanc, shows her intention to focus rapidly on its preferred markets (the UK, Ireland and Canada). The next candidate for sale is the French unit. This transaction is more complicated than the previous one, with the necessity to obtain the agreement of Afer, its key partner in France. With potential proceeds of £2.9bn, Aviva could reduce its debts significantly and allocate more capital to the UK bulk annuity business.
Companies: Aviva Plc
We believe now is an interesting time to invest in Northgate, with a new executive board and a capable management team in place who have already delivered progress on an ongoing turnaround as we await a full strategic review. The group now has a clear and well communicated capital allocation strategy in place and improved earnings quality, in our view. We believe that the growth opportunity in the UK, the value of the Spanish business and the progress made to date with the turnaround are not being reflected in the share price, which is currently 15.9% below book value (414p per share in FY19A rising to 468p in FY22E). We use a variety of valuation methods including P/B, SOTP, DDM and DCF modelling and arrive at an average implied share price of 450p, 29.0% above the current share price.
Companies: Redde Northgate Plc
As anticipated, Record has confirmed a material uplift in AUME following the rebound in financial markets from April. We upgrade FY21E forecast EPS by +18%, with higher staff costs offsetting some of the benefit. We expect AUME growth to be more modest from herein. While no performance fees have been recognised over Q1/21 and will be harder to achieve due to Covid-19, any future recognition would have a materially positive impact on earnings. Covid has temporarily paused new client wins, but we expect further additions to come as conditions improve.
Companies: Record Plc
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
Companies: Legal & General Group Plc
Belvoir’s H1 results evidence both strategic progress and profits growth. Given the challenges presented by COVID-19, this bodes very well for the group’s long-term growth potential. H1 adj. EPS grew +16%, the acquisition of Lovelle contributed well and in July the group entered into a strategic alliance with The Nottingham Building Society. Cash flow remained strong and the progressive dividend policy has been reinstated, with a 3.4p interim declared plus an additional 2p, as partial compensation for the missed 2019 final. With the resilience of lettings and the current record activity levels in sales and new mortgages the Board is optimistic that full-year results will hit its pre-COVID expectations and we make no changes to our PBT/EPS forecasts. Our target price of 233p (48% upside) assumes a 10% discount to the small/mid cap market. Given the above average performance in H1 and continued evidence that the long-term growth strategy is yielding value we see good upside to this target over time.
Companies: Belvoir Group Plc
JPMorgan Global Growth & Income (JGGI) aims to provide superior total returns and outperform its benchmark over the long term by investing in a portfolio of 50–90 companies from around the world. It has achieved this objective, delivering outright gains and outperforming its benchmark since the inception of its current strategy in 2008. JGGI makes quarterly distributions set at the beginning of the financial year, with the intention of paying at least 4% of NAV at the time of announcement. Dividend payments can be funded from reserves, which means the managers are not constrained by the need to purchase high-yielding stocks but are instead free to invest in non-dividend paying stocks for capital growth. The managers believe this gives investors ‘the best of both worlds’.
Companies: Jpmorgan Global Gwth & Inc Plc
City of London has announced its full-year results for FY’20. As previously indicated, over a volatile year, FUM grew to $5.51bn. This led to a 4% increase in fee income to £33.3m. With cost control excellent, as usual, this led to a 9% increase in operating profits to £11.6m. Earnings were impacted by exceptional costs for the Karpus transaction and losses on the seed investments in the new REIT strategies, and fell 19% to £7.37m. The final dividend was increased from 18p to 20p, giving 30p for the full year. This leaves cover ahead of the target cover over a rolling five-year period of 1.2x.
Companies: City of London Investment Group Plc
In line interim results to 30 June 2020 show the strength of this business amid a difficult environment. This is the first step in what should be an exciting growth trajectory toward a larger, scaled up business with high recurring revenues and ownership of the full supply chain in the personal injury and clinical negligence market for clients requiring long-term, risk-adjusted returns. We reiterate our TP of 50p, noting further upside potential as acquisitions are completed.
Companies: Frenkel Topping Group Plc
There have been few structural shifts in the property sector as profound as the one currently taking place in retail. Consumer spending patterns have drastically changed over the past five years, with online sales now accounting for 19.7% of all retail spend in the UK (August 2019, source: ONS), compared to 11.5% in August 2014. When you look at fashion retailing specifically, online sales accounted for 26.8% of consumer spend on clothing in 2018 (source: Mintel).
Companies: CAPC CAL HMSO INTU NRR SHB