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 CIFU SQNX FAIR ICON RSE CRS GWI USF DIGS
The COVID-19 pandemic is far from over, but with March coming to a close we have perhaps seen the end of the first act. Most of the developed world is in various degrees of ‘lockdown’; anxiously watching poorly reported – and often poorly understood – numbers for indications that their government’s strategy is working. Meanwhile equity markets saw one of their worst ever quarters in Q1 2020, as whole swathes of the economy were shut down by government diktat. The speed with which the situation developed was remarkable; and it is fair to say that all managers would have been surprised, even if they had other reasons for being bearish. We take a look at how and why certain investment trusts have done well in absolute and relative terms amidst the carnage, and ask if the causes of the crisis can provide any indication how the situation might end, and which trusts might outperform.
Companies: BHGU BHMG RICA PSHD BGUK MWY USA BGEU SMT MNL ATT FGT TIGT
In our recent research, Measure for Measure, we discussed the importance of a manager’s activeness and the difficulties involved in gauging it. As we have highlighted before, the chance of generating alpha generally rises with how active a manager is, and the UK closed-ended universe has become significantly more active in response to the challenge of cheap passive products. In that article we took a look at a range of measures for assessing the ‘activeness’ of a manager and their strengths and weaknesses. In this article we take a deep dive into the numbers, using tracking error, concentration, gearing and sector movements to look at how active the managers are across the major closed-ended equity sectors; the UK All Companies, UK Equity Income, Global, Global Equity Income, Japan, Europe and North American sectors. We rank the trusts based on each individual metric, but also relative to the rest of the sectors. Finally, we discuss which trusts stand out across the different metrics, and establish an overall ranking for each trust which shows how ‘active’ they are. As always, we are not recommending anything here, and this ranking should not be construed as anything other than a scale showing how ‘active’ each fund is relative to the other funds in the study, according to the metrics we have used. Neither are we suggesting that being very active is, in itself, meritorious.
Companies: IIT LTI SMT JEO FSV BGEU SCF JMF DIG
The European Investment Trust (EUT) is managed by Craig Armour at Edinburgh Partners. This company follows a strict value-based investment process, based on the philosophy that there is a stable relationship between expected share price total returns and a company’s current share price compared with its long-term earnings per share (see chart below). In recent years, global markets have been led by growth rather than value stocks, and EUT’s investment performance has consequently lagged that of its benchmark FTSE All-World Europe ex-UK index. The board has announced that it is undertaking a review of EUT’s management arrangements and will update shareholders in due course.
Companies: Baillie Gifford European Growth Tru
The European Investment Trust (EUT) is managed by Craig Armour at Edinburgh Partners (EP, which is now a wholly owned subsidiary of Franklin Templeton Investments). He aims to generate attractive investment returns from a diversified portfolio of continental European equities, employing a disciplined, valuation-based stock selection strategy. The manager believes investor sentiment has become too negative, on the back of slowing global growth in response to the US/China trade dispute. He says that as a result, many sectors of the European stock market – including industrials and other cyclicals – are looking attractively valued. EUT’s board has a progressive dividend policy and the trust currently offers a yield of 3.5%, which is the highest for a non-income-focused fund within the AIC Europe sector.
The European Investment Trust (EUT) adopts a strict valuation-based investment approach to construct a relatively concentrated portfolio of stocks that can be held for the long term. Manager Craig Armour says that monetary conditions are slowly normalising following the extreme policies adopted as a result of the global financial crisis. He believes that this process will lead to an increase in stock market volatility, which will in turn lead to a greater investor focus on company valuations. Armour has been selectively adding attractively priced new positions to EUT’s portfolio across a range of industries. However, on balance he has been taking some risk off the table by reducing the fund’s cyclical exposure.
The European Investment Trust (EUT) has been managed by Edinburgh Partners (EP) since 2010. Lead manager Craig Armour employs EP’s strict valuation-driven investment process, aiming to generate long-term capital growth from a diversified portfolio of continental European equities. Following a period of outsized equity returns, Armour says that investors will once again pay more attention to individual company fundamentals and valuations. Since July 2017, EUT pays semi-annual, rather than annual dividends. While the focus is on capital rather than income growth, the ordinary distribution has increased every year since 2009. EUT’s current yield, including indicated and special dividends, is 2.5%.
The European Investment Trust (EUT) aims to generate long-term capital growth from a diversified portfolio of European equities. Since August 2016, EUT has been managed by Craig Armour, who follows the disciplined Edinburgh Partners valuation-driven investment process, aiming to buy stocks that are trading on a five-year P/E multiple (Y5 P/E) of less than 11x. The manager is currently more cautious on the outlook for continental European equities as EUT’s portfolio Y5 P/E is towards the high end of its 7x to 11x long-term historical range. As a result, EUT is currently ungeared and Armour is not planning to increase cyclical exposure in the near term. Near-term investment performance has improved versus the peer group and the benchmark, and EUT has increased or maintained its ordinary annual dividends since 2009.
The European Investment Trust (EUT) aims to provide long-term growth in capital from a diversified portfolio of European ex-UK equities. There has recently been a change in lead fund manager; however, Craig Armour follows the tried and tested Edinburgh Partners investment process, which aims to select stocks based on a five-year P/E multiple (Y5 P/E). Evidence suggests the best performing stocks have a Y5 P/E of less than 11x; EUT’s portfolio currently has an average Y5 P/E of c 9x. Although the primary focus is on capital growth rather than income, ordinary dividends have been maintained or increased since 2009; the current dividend yield (including a special dividend) of 2.1% is above the peer group average.
The European Investment Trust (EUT) focuses on continental European stocks expected to deliver superior returns based on five-year earnings forecasts. Performance has weakened over the last 12 months on market volatility and outperformance of growth stocks. However, the manager is sticking to a disciplined, valuation-driven process; expensive names have been reduced and the concentration in core ideas increased. Moreover, the trust moved from net cash to net gearing in February, towards the recent market lows, when the average year five P/E fell to a cyclical low of 7.5x. Despite a widening of the discount back to historical averages, the share price total return has outperformed the benchmark over the last five years.
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Trading in the royalty partner portfolio over Q1/21 shows a material rebound from May, which has been sustained to date, as the portfolio as a whole returns to more normalised trading. Consequently, Duke's cash receipts, while down 20% YoY currently, are set to step up in H2/21 as forbearance measures largely expire and deferred royalties realised. This bodes well for a rebound in earnings and a return to cash paid dividends. A share price down over 55% since Feb 20, standing at p/book of 0.56x H1/20A's NAV p/s thus appears overdone. We await further clarity on the portfolio before reissuing forecasts, thus leave our recommendation U/R.
Companies: Duke Royalty
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.
What’s new: Purplebricks Group results for the year to 30 April 2020, show the Australian and US units as discontinued; but include the Canadian unit sold for C$60.5m (i.e. £35m) in July. Investors will focus on the UK unit which revealed:
11% fall in UK revenue to £80.5m (FY19: £90.1m), as the number of instructions fell 23% (impacted by early Covid uncertainty and lockdown), but the average revenue per instruction “ARPI” rose 12% to £1,394;
UK gross profit margin improved to 64.1% (FY19: 63.0%);
UK marketing costs to revenue improved to 25.6% (FY19: 29.6%);
Spend on Digital capacity pushed UK operating costs 32% to £26.2m (FY19: £19.9m), as new management team pursued initiatives which are being “delivered at pace with significant opportunity for further innovation.”
UK adjusted EBITDA fell 53% to £4.8m (FY19: £10.2m).
Companies: Purplebricks Group Plc
For this Monthly, we are delighted that Rooney Nimmo and 24Haymarket have allowed us to reproduce a recent report they jointly published, entitled An analysis of UK exits (2015-2019), which provides a granular analysis by sector of the activity in our dynamic private companies world. We hope you find the insights of interest.
Companies: AVO AGY ARBB ARIX CLIG ICGT NSF PCA PIN PXC PHP RECI SCE TRX SHED VTA
H1 20 operating profit declined by 12% to £1,225m and the COVID-19 claims impact was £165m. Cash remittances from business units to the group was only £150m. The insurer said that it will focus on the UK, Ireland and Canada, which means an exit from other European and Asian markets. The Board has declared a second interim dividend in respect of the 2019 financial year of 6p/share and will inform shareholders about the 2019 final dividend in Q4 20.
Companies: Aviva Plc
Since the restrictions were lifted in mid-May, Belvoir has seen a surge in activity due to pent-up demand, resulting in June being a record breaking month for the group’s Newton Fallowell estate agency network in terms of instructions and sales and the financial Services division in terms of written income. Management have stated that with the positive impact of the stamp duty reductions still to take effect they are confident that the Group is well positioned to capitalise on the current market upturn and to take advantage of the opportunities arising from more challenging conditions. We have upgraded our PBT forecasts for FY 2020 to the level we forecast pre-COVID. We have also upgraded our target price from 169p to 233p and highlight that H1 2020 has demonstrated the resilience of the group, management’s ability to navigate difficult market conditions and the power of the franchise-led strategy.
Companies: Belvoir Group Plc
Vacancy strongly increased in Q2 20. LTV surpassed the 50% mark on 30 June 2020 due to strong value destruction in H1 20. Hammerson announced a £550m cash capital increase coupled with a disposal of £270m. Its ex-post pro forma net debt should be £2.2bn, i.e. LTV of 42% on a proportionate basis. Too high?
Companies: Hammerson 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
Today's update highlights that despite the Covid-19 outbreak and UK/IRE lockdown, which has affected trading, Duke has continued to collect cash royalties from most of its royalty partners. Short-term alternative payment terms have been agreed with those partners hardest hit, to support them to periods where royalties can be fully recouped. Therefore the 61% fall in p/b from 1.3 (at 20 Feb) to 0.5 today, appears overdone.
The group’s earnings surprise was driven by goodwill impairments. On the negative side, management upgraded, albeit slightly, its full-year loan impairments guidance and warns about revenue and CET1 pressure. It also reckoned that the tensions between the US and China will impact the group.
Companies: HSBC Holdings Plc
The Law Debenture Corporation (LWDB) has reported another strong set of results for its independent professional services (IPS) business in H120, with EPS growth remaining in the target mid- to high single-digit range despite a more challenging economic backdrop. With the trust’s largely UK investment portfolio having been hit by the widespread stock market sell-off in February and March, IPS has provided a larger than average contribution to revenue returns. This means fund managers James Henderson and Laura Foll can continue to search for attractive total return opportunities in a broad range of sectors, while maintaining LWDB’s focus on both capital appreciation and above-inflation dividend growth.
Companies: Law Debenture Corporation
As expected, the quarter saw a sharp increase in loan impairments. However, one can wonder if the increase was not capped by the group’s willingness to keep its results afloat. Management’s downbeat guidance in terms of revenue recovery potential and cost reduction does not bode well as regards the group’s future credit loss absorption capacity.
Companies: Lloyds Banking Group Plc
Despite challenging market conditions, Picton’s Q121 DPS was well-covered by EPRA earnings and robust portfolio capital values. Combined with low gearing, NAV per share was just 1.3% lower versus Q420 and including DPS paid, the NAV total return was -0.6%. With encouraging rent collection data continuing and the lockdown easing, we have reinstated our estimates and look for the quarterly DPS run-rate to increase in H221.
Companies: Picton Property Income Ltd.
The scaling of Duke's royalty portfolio was progressing as expected up to March 2020, with record cash receipts that month. Due to Covid-19 and the UK's economic shutdown, macro conditions have worsened and become highly uncertain. This is likely to see some royalty partners' future cash royalties decline, which in turn, will negatively impact FV's in the FY20E results. Duke's high margin and cash generative nature ensures it is well placed to trade through these challenges. Given the degree of uncertainty in outlook, we remove forecasts and put our recommendation Under Review and await further clarity on the portfolio.
Raven’s positive trading update was reassuringly robust, despite ongoing uncertainty regarding the long-term impact of Covid-19 on the Russian market. We believe that kind of performance deserves attention, although we plan to reinstate detailed forecasts post (a) the General Meeting scheduled for 31 July, which will decide upon proposals designed to create a simplified capital structure (outlined below) and (b) the interim results due in August.
Companies: Raven Property Group Ltd.