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
Recent years have seen companies opt to remain private for longer; due to their ability to access capital from alternative areas and to remain free of the increasingly burdensome requirements of being listed. The implosion of the Woodford Equity Income Fund as a result of liquidity problems has shone a negative light on open-ended funds holding stakes in private companies. However, the capacity to hold illiquid assets is one of the key characteristics of the investment trust structure. In this article we assess the advantages and disadvantages of holding minority stakes in private companies, and the impact that being re-valued periodically can have in a market characterised by wild swings in sentiment; which is perhaps of most relevance in the current market.
Companies: MERI USA SMT FCSS RCP EWI AUGM
The most terrifying words in the English language are, or were at least according to the late president of the United States Ronald Regan: "I'm from the government and I'm here to help." and for investors in global smaller companies, this could be prescient. Most investors into smaller caps are attracted by the prospect of exponential business growth. Young companies with innovative products are supposed to offer a disruptive threat to established companies, with huge potential markets to grow into. However, developments in society and politics could be calling into question the ability of smaller companies to generate the same excess returns in the coming decades. The chief issue is regulation: while regulation is often mooted as in the interest of society at large, there is evidence that in recent years the chief beneficiaries of regulation have been the large players in existing industries, who are better able to adapt to the increasing costs. In this study we consider how the regulatory burden is affecting markets around the world and what it means for investors in the various regions.
Companies: JUS USA JEO MINI AJOT
2018 saw the first negative calendar year for the S&P 500 and the Dow Jones since 2008 and, despite a subsequent rally, sentiment remains divided between those who believe the US market has more room to run, and those who think the longest bull market in history will soon come screeching to a halt. Instinctively, it feels like a correction must be due and, indeed, a recent survey of Kepler Trust Intelligence readers showed the majority feel that there are choppy waters ahead. Among those who felt that the outlook was negative, the concern raised most often was the impact of any escalation in the ‘trade-war’ talk between China and the United States, while the national ‘black dog’ that is Britain’s constant companion – Brexit – continues to weigh on investor spirits closer to home. However, there are many other indicators which suggest the bull market could continue, making this a difficult time for investors wondering which way to jump. Against this confusing backdrop we look at three different scenarios for the US over the next year, and identify a number of trusts which are positioned well for each.
Companies: USA ATT GVP JUSC BRNA IBT JAM TPOU
Baillie Gifford US Growth (USA) launched in March of 2018, aiming to produce long-term capital growth through investing in US equities. Gary Robinson and Helen Xiong are at the helm of the portfolio, searching for exceptional growth companies, where their innovations are likely to offer significant contributions to society. The managers undertake rigorous bottom-up analysis to uncover information others might be missing, in particular looking for companies that exhibit high barriers to entry, a large market opportunity and a culture that is aligned with their end goals. In order to fully expose investors to the highest growth opportunities, the managers also have latitude to invest in unlisted companies. In their view, the most compelling growth companies are choosing to stay private for longer, which they believe gives the trust a unique edge over its peers. On sectoral basis, the trust is dominated by the consumer discretionary (26%), information technology (19.6%) and health care (17%) sectors. Since the launch of the trust, performance has seen its fair share of ups and downs. The first six months of the trust’s life saw NAV returns of over 30%, close to 10% greater than the S&P 500 and the AIC peer group, and close to 15% ahead of the IA peer group. However, the final four months of 2018 saw the trust lost close to 19%, considerably more than peers (-12.9%) and the benchmark (-11.4%). Since then, the trust has once more rebounded and over 2019 the trust has delivered 20.8% NAV returns, to the 6 May. This volatility is likely to continue, and with a down capture ratio of 128 (sector average of 85) and standard deviation of 30.6 (relative to the sector average of 19.9) the trust might not be for the faint hearted. Currently, the trust is trading on a premium of 2.7%. This premium has been reasonably consistent throughout the 14-month life of the trust, reaching highs of over 10%, and only dipping to a discount a handful of times for very short periods. The company has been issuing shares over recent months to help grow the trust and make sure the premium does not expand too far.
Companies: Baillie Gifford US Growth Trust
Two years after the shock election of Donald Trump and with the US mid-term elections approaching on 6 November, we thought it a good time to strip out all the noise and bluster and assess what the Trump administration has really meant for US markets and the trusts that invest in them. We can identify two key policy moves Trump has achieved as President: tax reforms and trade tariffs. Each has significant ramifications for certain sectors and trusts, some good and some bad. The long-term effects are still in the balance, with the midterms a crucial fork in the road. Since Trump was inaugurated as president, the landscape of the US market has arguably transformed, with greater optimism around the near-term prospects for equities and greater pessimism around international relations. We take a look at how trusts have positioned themselves vis-à-vis these trends. “I promised the American people a big, beautiful tax cut for Christmas. With final passage of this legislation, that is exactly what they are getting.” Arguably the most significant piece of Trumpian legislation for the economy and the stock market was his wide-ranging tax reform introduced at the end of December 2017. This included cutting n the corporate tax rate from 35% to 21% and a dramatic change to the current model of taxation, in particular the taxation of US corporations’ foreign subsidiaries.
Companies: IBT USA BRNA ATT JAM JUS GVP GVP
Investors have become increasingly aware in recent years of the rich pickings which can be found among companies which are yet to see an IPO. Indeed, statistics show that the range of companies which have already listed on a stock exchange are less and less representative of all of the growth opportunities which exist in an economy. Investment trusts have been quick to respond to this trend, and an increasing number have come to market in recent years looking to invest into unquoted, private companies. Certainly, there are success stories – witness Scottish Mortgage’s investment in Alibaba way before it IPO’d. Naturally, examples like this can lead to investors worrying about missing out and, without addressing the private company investment universe, clearly investors are limiting themselves to only a sub-set of the complete opportunity set. For many investors the worry is that the companies they are ignoring, arguably, have the best long-term wealth creating characteristics. However, there are risks involved in unquoted stocks, and before getting carried away with the new trusts targeting them, it is worth bearing in mind that listed private equity sector, within which many trusts have demonstrated strong returns over various cycles, has for some time been focused exclusively on this area.
Companies: SMT PHI USA AUGM ICGT SLPE NMCN
2017 was by all measures a very good year for investors. With an equity market in full cry, we saw the FTSE 100 reach all-time highs on the final trading day of the year, and the S&P 500 achieve its first ever ‘perfect’ calendar year with positive returns every month. Meanwhile, volatility was low, particularly in the US, and the VIX Index ‘fear gauge’ continued to reflect a singular calmness among investors.
Companies: AUGM SGEM USA MATE
The strategy employed for Baillie Gifford US Growth (ticker: USA) which launched at the end of March 2018, revolves around the notion that long-term wealth is best created through finding exceptional growth companies, and where those companies’ innovation is likely to offer significant contributions to society. The portfolio will be comprised of both listed and unlisted companies. This, the managers believe, gives the trust a unique edge over its peers, giving investors exposure to the most compelling growth companies, which are now choosing to stay private for longer. USA has not at the time of writing made any announcements revealing what the portfolio constitutes so far, or how far the managers have got in terms of investing the capital raised. The managers have stated that they expect that companies held within the portfolio will exhibit three common characteristics: they address a large market opportunity; they are able to create and maintain a deep competitive moat; and the company’s culture is aligned with what they are trying to achieve. USA is the only trust in the AIC North America sector to be trading on a premium (currently +3%). The board has not adopted any formal discount or premium targets; however, it has stated that it does recognise the importance of purchasing or issuing further shares when it might need to mitigate the effects of an imbalance. The trust has an annual management charge of 0.7% on assets up to £100m and 0.55% thereafter. This is the second cheapest management fee in the North American sector, behind only JPMorgan American.
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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
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
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
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
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.
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
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
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
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
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
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
Picton Property Income has completed a new £50m revolving credit facility (RCF) to replace two existing facilities that were due to expire in June 2021. Although initially undrawn, the facility maintains operational and financial flexibility, for a longer duration, at a slightly reduced cost. We expect FY20 results to be released later in June, although no date has been confirmed, including an update on the impact of COVID-19. The company entered this period of acute economic and sector uncertainty with a strong and liquid balance sheet and material internal asset management opportunities to support income and capital values.
Companies: Picton Property Income
In the past month the group has made significant progress in pivoting its business away from its traditional face-to-face model. Although lending levels remain appropriately subdued, it has achieved an impressive collections performance, with its largest business running at about 90% of pre-lockdown levels. This, combined with the group’s high risk-adjusted margins has enabled it to generate £3m of FCF in the first three weeks of April, taking its net cash position to £38.7m as of 21 April. This strong financial position, combined with the group’s innovative approach to product development puts it in an extremely strong position to serve its clients and win share when the current government restrictions are eventually lifted. Reflecting this positive outlook we reiterate our BUY rating.
Companies: Non-Standard Finance