The advent of social media has led to an increase in activism of all types, the like of which has not been seen since the penny press changed the course of American history in the 1800s. From #MAGA to the Arab Spring, platforms such as Facebook have had a profound effect on politics and society. Everywhere, we are invited to support campaigns on social media. Where once it would have taken a petition (which requires a pen, frayed paper, and someone to hand it around at the very least), it is now as easy as “liking” at the touch of a button any cause on Facebook to lend your support. As a result, individuals in society are ever more expected to engage on topics and issues that affect them (and even those that do not). In a further extension of democracy, rather than have our elected representatives debate and decide issues on our behalf, technology enables us to engage ourselves in the argument and help contribute to the decision-making process. And having tasted the forbidden fruit, it seems unlikely that things will ever be the same again. We are all becoming activists in one way or another. Absolutely, we may not have the same passion for a subject that the leader of a campaign might have. But we are increasingly happy (or indeed desirous) to have our views sought, and vote taken. In the same way, leaders of organisations are having to adapt. No-longer can they make decisions and feel insulated from the people who gave them the mandate. There is now a much wider grey area they have to navigate, and woe betide them if they alienate their electorate!
Companies: TPOU AGT AJOT
AVI Global (AGT- previously British Empire Trust) seeks to generate capital growth for investors through investment in a reasonably concentrated portfolio of listed companies whose shares trade at a discount to the manager’s estimate of fair value. AGT is managed by Joe Bauernfreund, CIO of Asset Value Investors. With a history stretching back over 130 years, this is one of the oldest trusts in the UK, and has seen gradual but ultimately substantial changes to the investment strategy over this time period. Under manager Joe Bauernfreund, who took over in 2015, AGT has evolved its investment strategy, looking to increase portfolio concentration, utilise attractive borrowing rates on long-term debt, and place a greater emphasis on identifying a catalyst for value realisation, amongst other factors. Holdings can be categorised as either: 1) closed-ended funds, 2) family-backed holding companies, or 3) asset-backed special situations, which currently consists primarily of Japanese cash-rich operating companies. The exposure to Japan has been gradually increasing in recent years, as AVI believes there is a substantial investment opportunity in their investment strategy in this area, so much so that they launched a separate investment vehicle focusing solely on this opportunity. Despite having outperformed its benchmark under the current manager, AGT has remained fairly stubbornly at a discount to NAV. The board has undertaken share buybacks, and there is evidence that they have been successful at reducing discount volatility in recent years, as detailed in the Discount section. On a look-through basis (i.e. factoring in the underlying discounts on the various holdings), there is a substantial double discount of c.37%. Whilst a number of AGT’s holdings are listed in the UK, it is truly global in its outlook, and has very low exposure to the UK on a look-through basis. This tends to make it sensitive to any fall in sterling (i.e. a decline in sterling tends to positively impact performance), though this is partially mitigated by borrowings in foreign currencies.
Companies: Avi Global Trust
Japan’s Prime Minister Shinzo Abe is likely to be re-elected leader of the country’s Liberal Democratic Party on 20 September. Given the parliamentary strength of that party and the fragmentation of the opposition, this means he is likely to become the longest-serving prime minister in Japanese history. This unprecedented political stability has allowed Abe to implement radical corporate governance reforms, which have made Japan a much more attractive place to invest in the opinion of many managers, and which may not have been fully priced in to the market. For, despite the growing likelihood of the UK crashing out of the EU without a deal, and despite the fact a Marxist is closing in on Number 10 Downing Street, Japanese equities are still trading on a discount to British stocks. The reforms have not finished yet, and in the opinion of many managers working in the country will cause radical changes in Japan as a place for investment, which, along with Japan’s world-leading companies, makes the country an interesting place to consider.
British Empire invests in closed-ended funds, family-owned holding companies and asset-backed companies which they believe are trading well below intrinsic value, looking for situations with a catalyst to unlock the value. Frequently this catalyst is their own activism, and they are an activist shareholder in many of their holdings. The trust has top quartile NAV returns in the global sector over three years. Over the past year the trust has been boosted by holdings in Japan, where the managers find exciting opportunities in businesses with inefficient balance sheets and the opportunity for activist shareholders to unlock that value. The good returns follow a series of changes made by Joe Bauernfreund when he took over as sole named manager in October 2015: he has made the portfolio more concentrated, focused more on closed-ended funds with clearer routes to a narrowing discount, and taken on extra, cheaper gearing. The discount remains significantly wider than its sector peers, although there has been some narrowing in 2018.
Closed-ended funds have outperformed open-ended funds in the major equity sectors since 2000. Unlike the latter, investment trusts have outperformed their benchmarks net of fees too, according to research from academics at Cass Business School. According to research recently published by Andrew Clare and Simon Hayley, one major reason for trusts outperforming was that they hold more illiquid assets, namely smaller companies. They stripped out this effect in order to calculate the alphas generated by managers running these two types of investment fund (because overweighting higher beta areas, like small caps, should lead to extra returns irrespective of manager skill). However, they found that investment trusts still showed significant outperformance over their benchmarks and open-ended peers. Interestingly, gearing was not a reason for the outperformance, on their analysis, although market timing and share buybacks did contribute. The fact that closed-ended funds held significantly more in smaller companies is no accident: the structure allows managers to take larger positions in less liquid parts of the market and be truly long term about investment, both of which favour investing more in small and mid caps. While it makes sense to exclude a higher small cap weighting from the alpha attributed to a set of managers, as Clare and Hayley have done, when comparing the relative merits of open and closed ended funds it is clearly relevant. This is particularly true given that one cannot invest passively in small caps due to precisely the same liquidity issues. We drill into the details of the research before asking whether closed-ended funds will retain their advantages in the future. We find reason to be optimistic they will, and consider some trusts which display the key characteristics the research highlights.
Companies: AGT SMT ASL RCP
British Empire Trust (BTEM) has a highly-active, benchmark agnostic portfolio of global equities that follows a value-orientated investment approach. The trust differs from most global funds due to the types of companies that it focuses on, which can broadly be split into three buckets: family-controlled holding companies, closedended funds and asset-backed special situations – and all of those companies have the common feature of owning portfolios of businesses or assets, either listed or unlisted, that can be independently valued. Manager Joe Bauernfreund, chief executive and chief investment officer of AVI, is supported by four analysts and has solely responsible for the portfolio since October 2015 (though Joe has worked on the portfolio since 2002). He honed the investment process at the time and this has been a major contributor to the trust’s recent outperformance. Though it has a strong long-term track record (having more than doubled the returns of its peers and the MSCI AC World index over 20 years to the end of December), it struggled in the years following the global financial crisis due to the underperformance of value stocks and the trust’s historic underweight to the US market. However, when Joe assumed sole responsibility for the portfolio, he honed the process, concentrating the portfolio and increasing exposure to stocks where there is a specific event or catalyst for value to be realised. Since October 2015 to the end of 2017, the trust’s NAV total returns have been 64% - meaning it has comfortably outperformed its average peer, the MSCI AC World index and its own benchmark, the MSCI AC World ex USA index over that time. Though much of that outperformance was generated in 2016 (a year when value investing made a brief return to form following a prolonged period of doldrums), the trust managed to outperform the MSCI AC World index over the course of 2017 with NAV returns of 14.9% despite a clear style headwind owing to the team’s stockpicking and recent increased exposure to Japan.
In a report early last year, we analysed the argument surrounding whether value investing (a style that has significantly underperformed relative to growth investing) was about to make a sustained comeback. Simply put, value investing involves buying shares in companies that the managers believe are ‘cheap’ relative to the wider market and their own histories. Many value managers, however, will only buy ‘cheap’ stocks where they have pinpointed a potential catalyst they believe will lead to share prices increasing (by analysing metrics such as cashflow, leverage, balance sheets and external factors) in order to avoid ‘value traps’ - stocks that are still in a period of decline or worse, are heading for total collapse. Growth investing, again put simply, means buying companies that are displaying above average earnings growth. Most growth managers will follow a GARP (growth at a reasonable price) approach, which means they don’t mind paying higher than average valuations for a stock if they believe future earnings growth is undervalued by the wider market. In recent times especially, value investing has become synonymous with more cyclical stocks such as mining, energy and banks, while growth investing has meant a focus on more defensive companies (with futures which aren’t dependent on economic growth) such as utilities, telecoms, tobacco and other consumer goods stocks. Those who predicting that value stocks were on the verge of a new era of outperformance were proved wrong (or too early), as they generally underperformed growth over the course of 2017. However, in our report last year (and with the proviso that the past is no guide to future returns), we found that had been a correlation between the relative performance of value versus growth stocks and the trajectory of UK government bond (or gilt) yields, with value generally underperforming when yields fell (or when bond prices rose) and outperforming when yields rose (or when bond prices fell). Government bonds have delivered almost unprecedented risk-adjusted returns over the past three decades due to factors such as credit boom prior to the global financial crisis and ultra-low interest rates over the past 10 years. However, many believed bond yields would rise last year (as they did in 2016) as inflation picked up in the UK following Brexit-induced weakness in sterling, coupled with Donald Trump’s commitment to economic stimulus. However, despite these two strong forces at work, 10-year gilt yields fell from their peak of 1.54% in late January 2017 to 1.26% by the end of the year (representing a fall of c.20%). We don’t claim to be experts in global fixed income markets, but the commonly-held view among those who do, is that bond yields will rise over the coming years (though as we mentioned last year, many have incorrectly called the collapse of the bond market for a number of years now…). While this might not be repeated, and again like last year, our analysis shows that value stocks have historically outperformed growth when bond yields have risen. However, as we highlight in this report, it is surprising how little exposure the ‘average’ UK investor has to “value” as a style, with the large majority of inflows into equity funds heading towards funds with a clear “growth” or “quality” bias. As such, if this long-anticipated revival in value investing does indeed occur – most investors look likely to miss out, or worse, be hit by capital losses.
Companies: AGT WTR ASL TMPL GVP
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AFH interim results have shown resilience in a tough period. Revenues grew by 5% yoy and Adj. EPS is up 8% yoy. We reduce our FY20 EPS forecast by 8% to reflect the wider market falls and slower new business due to the lockdown. This reduction in earnings is significantly less than peers, highlighting the defensive nature of the business and the prudent temporary cost measures being introduced in FY20. The improved FCF of the business should lead to a re-rating, particularly as AFH now trades on 9.3x CY20 P/E, a significant discount to peers. Our reduced target price of 524p implies 81% upside. Re-iterate BUY.
Companies: AFH Financial Group
Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
Companies: AGY ARBB ARIX DNL GDR NSF PCA PIN PHNX PHP RE/ RECI STX SCE SIXH TRX SHED VTA
Burford has announced its results for 2019. As previously indicated, these were lower than in the previous year. Revenue fell 17% from $430m in 2018 to $357m. Profit after tax, on Burford’s basis, declined 31% from $329m to $226m. As announced earlier, there will be no final dividend so only the interim dividend of ¢4.17 was paid for FY19. Unusually, Burford has also released a trading update for early 2020 alongside its main figures. Court results and arbitral awards have been obtained that would generate some healthy profits. Most notable is $200m in income ($300m in cash receipts) regarding which further legal review is unlikely.
Companies: Burford Capital
Aside from its FY 19 earnings presentation, British Land has adopted a more cautious anticipation about Offices in the City of London. We share this pessimism and have been surprised by the recent share’s bump. The latter is the opportunity to turn negative, again, and update our divestment case.
Companies: British Land Company
Hipgnosis Songs Fund (SONG LN) has today announced a trading update for the full year ending 31 March 2020. The unaudited NAV has risen 13% YoY to 116.7p, up 14.3% since the last published NAV of 102.2p as at 10 January 2020. This represents a like for like valuation uplift of 11.4%. All equity has been fully deployed and shareholder approval has been sought to increase net debt from 20% to 30%. Revenue is strong with £64.7m generating an EPS of 10.7p (more than 2x the annual 5p dividend target). NAV growth has been driven by revenue statements which were up 2%, and an increase in streaming growth rate assumptions by the independent valuers. The portfolio comprises 54 catalogues, with 13,291 individual songs, now valued at £757m which was acquired at purchase price of £697m on an acquisition multiple of 13.9x – now valued on 15.0x historical earnings.
Companies: Hipgnosis Songs Fund
Ramsdens has reported a strong set of trading results in the last twelve months to March 2020. COVID lockdown has led to store closures, which will lead to weaker trading over the following months. However, Ramsdens has a very solid balance sheet, is diversified and is well positioned to re-open stores and continue its growth. We use an 8x multiple on last 12 months to March 2020 earnings as a reflection of a normalised earnings base which reduces our target price to 162p from 180p. At this target price Ramsdens would trade on a CY20 P/B of 1.5x. This target price offers 15% upside and we re-iterate BUY.
ULR’s finals were in line with on EPRA NAV and earnings a little better than expected. Valuations remain stable and full rent collection has been achieved for the current quarter. We see fundamental quality and resilience in the (now expanded) portfolio – ULR has already invested nearly £100m in the first two months of the new year following the £136m equity raise. We make no material changes to forecasts. Current valuation points to an 7%+ annualised return, with upside remaining from deployment of funding headroom, active management and potential for valuations to improve.
Companies: Urban Logistics REIT
TCS has confirmed it will pay the previously announced interim dividend of 3.25p. A number of mitigating actions to preserve cash ensures that this is affordable. We estimate the £1.7m payment is less than 10% of cash and available facilities, which should be little changed from the April update. Rent collection levels of 75%, or 86% including deferrals, is resilient under the circumstances. There are also optimistic signs from Europe that people will be shopping in material numbers from 15 June. TCS will have all locations safely open from that date. We lower our NAV forecasts c.2%, mostly for the dividend payment, but also for a tougher outlook for CitiPark. Official guidance understandably remains withdrawn. The shares currently price in a c. 30% decline in underlying property values, which we think is excessive. On this basis, we see upside to the share price, setting it at 235p, still a c. 25% discount to NAV while short-term visibility is low. BUY
Companies: Town Centre Securities
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
Companies: AEWU CREI CSH BOOT INL HLCL THRL SUPR RESI RGL DIGS GR1T SOHO PHP BOXE ASLI UTG AGR UAI BLND UANC CAL SHED CWD WHR EPIC WKP GRI YEW HMSO PCA INTU NRR
Today’s FY update reports that the decisive action taken at the outset of the COVID crisis has protected returns. Revenues held up through to the May year end. Aided by cost savings, adj. EBITDA is expected to be 20% ahead. We expect a more modest final dividend to protect the capital surplus. Additional savings have been outlined, which we overlay on a conservative “flat market/fewer new clients” scenario for FY21e – where we hope outperformance is possible. Updating EPS forecasts: FY20e +25%, FY21e -10% and FY22e -7%; also incorporating the Hurley Partners acquisition (+8%). We consider MW a high quality core holding with long term potential.
Companies: Mattioli Woods
Tetragon Financial Group (TFG, Tetragon) achieved a 13.6% NAV/share total return and a 13.4% ROE in FY19, in line with its long-term target of 10–15%. The main driver of Tetragon’s performance was its asset management business (TFG Asset Management), which comprises managers with a total AUM attributable to Tetragon of US$27.4bn and generated an EBITDA of US$59.5m in FY19 (up 51% y-o-y). The late-2019 investment activity left Tetragon with a relatively low net cash position (4.1% of NAV at end-April). The shares trade at a three-year average discount to NAV of 44% (currently at 62.7%), which is relatively wide compared to peers given the company’s track record of delivering a 16% NAV TR pa over the last 10 years. The recent market sell-off has so far resulted in a 5.1% decrease in NAV (ytd to end-April 2020).
Companies: Tetragon Financial Group
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGR CSH ESP DIGS IHR LXI PHP RESI SIR SUPR THRL SOHO BBOX SHED WHR
Seneca Global Income & Growth Trust (SIGT) is managed by a four-strong team at Seneca Investment Managers, seeking undervalued securities across multiple asset classes in order to diversify the trust’s risk and return drivers. Its UK equity portfolio was particularly negatively affected by the coronavirus-led market sell-off in March, given its focus on domestic, mid-cap value stocks, which performed relatively poorly. However, these holdings could stand SIGT in good stead during an economic recovery. The trust’s board has committed to continue paying quarterly dividends, using reserves where necessary if income falls short, which seems likely given the number of dividend cuts announced by corporates in response to the global pandemic.
Companies: Seneca Global Income & Growth Trust
MJ Hudson has confirmed that it expects to achieve profits in line with expectations for FY20E. This is a good result linked to new client wins during the COVID-19 disruption and timely cost management. Whilst much of the group's activities are proving resilient, uncertainty remains and in line with most of the peer group, MJ Hudson is withdrawing guidance for FY21E. We similarly withdraw our FY21E forecasts until visibility improves, moving our rating to Under Review. Meanwhile, the shares are now down 30% since their pre-COVID-19 highs, which is beyond that seen at outsourcing peers (Sanne, JTC). Whilst COVID-19 is presenting challenges for many businesses, we believe that: 1) the structural growth drivers in alternatives that underpin MJ Hudson's growth will continue to remain highly relevant, and 2) its strong balance sheet gives it a relative advantage.
Companies: MJ Hudson Group
Today's update confirms Equals delivered another quarter of significant revenue growth YoY, delivered by organic and acquisitive means. Performance across the product range has varied unsurprisingly and we expect these trends to continue over Q2/20E. Given the great uncertainty over the duration and severity of COVID-19's impact on the group, we withdraw FY20-21E forecasts and place our recommendation Under review, awaiting further clarity. Equals is supported by a strong, debt-free, balance sheet and is undertaking measures to further conserve cash.
Companies: Equals Group