The coronavirus pandemic has caused dividends to be cancelled or cut across the world, but the impact has yet to be fully felt – with more bad news likely to come in the second half of the year. Pressure has come through reduced revenues, due to a slowdown in economic activity and a regulatory interference in dividends being paid by industries which have received taxpayer support. The task for income investors is to identify the regions and sectors which are expected to be less affected; to which the Janus Henderson Dividend Index report has made an important contribution. In this article we summarise the key findings from the detailed report and apply them to the investment trust sectors, highlighting where we think the best opportunities lie.
Companies: BRNA NAIT JETI SOI HFEL BRFI BEE
Since we last reviewed our portfolio of discount opportunities, an awful lot has happened. The period from October to December saw a new Brexit deal, followed by the UK government winning a parliamentary majority to implement it. Both were bullish for UK and European markets, and led to a sharp rally in markets and a rapid narrowing of investment trust discounts. Globally, the mood was pretty optimistic for 2020; with a growing number of managers and commentators forecasting a rally in cyclical assets and a good year for markets. Some of our picks saw their discounts narrow in, such that we were even tempted to try to find other opportunities. But since then two major shocks have changed the picture entirely. The first was the assassination of Iranian general Qassem Suleimani, which led to fears of a wider conflagration between the USA and Iran. The second has been the ongoing coronavirus pandemic, which has had a more severe impact on markets, and looks likely to be a long-lasting situation with further economic pain to come. The overall average sector discount has widened, but not excessively (yet), as share prices have fallen only slightly more than NAV. Nevertheless there are some interesting opportunities emerging. As of market close on 13 March, the average discount was just under 7%; still significantly narrower than the level of c. 10% reached after the 2016 EU referendum (see chart below). The situation is changing every day, however. Good news about the progress of the virus around the world could lead to markets rallying and trust investors staying the course, while further bad news could see the discounts widen further in the short term. Last week’s budget and Bank of England rate cuts both gave some fuel for recovery, even if a slowing of the progress of the virus in Europe and the USA is likely to be necessary before the eventual relief rally begins.
Companies: SST BEE SJG TFG OCI
It is something of a truism to say that emerging markets are not a homogenous blob, but a range of highly differentiated economies and stock markets. Yet as investors, we often categorise them as one and the same, especially from an asset allocation and risk management perspective.
Companies: FCSS BRFI ANII BEE BRLA
Baring Emerging Europe (BEE) aims to generate long-term total returns from a disciplined bottom-up approach, selecting the most attractive companies in the currently attractively valued emerging Europe region. The benchmark, the MSCI EM Europe 10/40 Index, is dominated by Russia (59%), and BEE has outperformed thanks to strong returns in that country as it recovers from the recession in 2014 and 2015 (discussed further in the Performance section). Returns have been strong on a risk adjusted basis too thanks to the skill of the manager, and BEE has added the most alpha of any emerging markets trust over five years. Russia has been benefiting from a secular change in dividend culture in the region. As well as benefiting total returns, this has been particularly welcome for BEE given the shift of dividend policy in 2014 that led to greater emphasis on shareholder payouts and gave the board the ability to pay out capital. The yield is currently 4.1%. BEE trades on a discount of 9%, below its 11% one-year average. There is an annual tender offer triggered if performance or discount don’t match up to certain targets, which should help to control the discount.
Companies: Baring Emerging Europe
“Is life always this hard, or just when you’re a kid?” “Always like this” (Leon: The Professional) In the post-financial crisis world, value investors have found themselves facing a period of structural underperformance relative to growth investors which has been unusual relative to history. In fact, this is the longest period of underperformance since at least the 1920s. This raises the question; what, if anything, could cause this to change?
Companies: GVP ASL BEE MIGO TMPL
In January we introduced a new quantitative rating system for investment trusts. Our ratings look at NAV total return performance. They are, we believe, the first quantitative rating for closed-ended funds to do so and thereby capture the performance of the management team rather than the noisier share price movements. Our ratings aim to identify the top performers for capital growth and for income. We have designed the quants to identify those trusts which have added the greatest alpha to their benchmarks and which have displayed an attractive balance between performance in rising and falling markets. For the income ratings, we have set out to identify those trusts which have managed to generate a high yield while growing their dividends and without sacrificing capital growth. We have scored all AIC trusts on our selected metrics and awarded the top twenty in each category our growth or income ratings. We believe our ratings highlight those trusts which have displayed the most highly attractive characteristics for investors in the recent past. Pleasingly, since we launched the list the trusts have done well on average, outperforming their benchmarks significantly – particularly the capital growth trusts We will rebalance the ratings at the end of 2019, but here we give an update on the performance of the trusts we have rated and the key factors affecting performance.
Companies: FGT SLS IPU BEE JCH
Baring Emerging Europe (BEE) aims to provide capital growth and a high dividend yield from a portfolio of stocks in developing Europe, mainly Russia, Poland and Turkey. The manager, Matthias Siller, focuses strongly on bottom-up stock selection to generate returns, and has produced impressive amounts of alpha over the past five years, higher than all but one of the global emerging markets trusts. While total return performance has been strong, the income dimension is a more recent feature. Since the start of 2017 the trust has paid semi-annual distributions, been able to pay dividends from revenues or capital and been committed to paying an uncovered dividend where necessary. The dividend yield is therefore an impressive 4.5%, higher than all but one global equity income trust and all but one global emerging markets trust. BEE therefore offers a diversifying source of income from a region which, being an emerging market, offers strong long-term growth potential too. Emerging Europe, as a region, is trading on depressed valuations, with the forward P/E on the index just 6.7x compared to 11.6x for the mainstream Emerging Markets index, 13x for developed Europe and 15x for Brexit-hit UK. As such, it represents an interesting “Value” opportunity for investors. BEE is trading on a discount of 7.3%. Although the discount has narrowed after a strong start to 2019, we understand that the trust will need to average a 9% discount or under from the end of April to the end of September to avoid a tender offer early next year. We note that after the announced winding up of BlackRock Emerging Europe, BEE is the only specialist investment trust focused on this region.
In our February article 'Sweet Treats', we launched our list of discount opportunities - trusts we felt had the potential to see their discounts close significantly and, in turn, supercharge investors' returns. Our list has had a good beginning to its life, with the majority seeing their discounts close slightly in the almost three months since, aided by a good period for the markets. The investment trust universe has seen its average price rise by 3.2% since 13 February, as the below graph shows. We can trace the rally in the market to the meeting of the Federal Reserve’s interest rate setting body, the FOMC, on the 20 March. Shortly after that meeting, global equity markets began their rise, as investors lowered their expectations for future interest rates.
Companies: ASCI HOT ASCI HOT RMMC OCI MHN TFG BEE
One of the attractions of investment trusts is the potential to pick up discounted bargains, which can supercharge NAV returns if correctly anticipated. As we have remarked before, closed-ended funds have historically delivered superior NAV returns. But buying shares on a substantial discount can significantly enhance those NAV returns should the discount narrow on a sustained basis. The reasons for investment companies long run NAV outperformance of equivalent open-ended funds, lies with their structural advantages, as we discussed in detail last year. Firstly, they have the ability to make the best use of less liquid assets and managers can manage those assets without having to worry about inflows and outflows. Secondly, they can employ gearing, which should be accretive to returns over the long run even if timing isn’t attempted, assuming equity markets continue to rise over the course of each cycle. While we tend to focus on the trusts with long-term potential, here we are considering those trusts currently sitting on discounts that have caught our eye. These trusts are trading on unusually wide discounts (at least 10% in absolute terms), but most importantly, have the potential to produce attractive NAV returns (in relative or absolute terms) as well.
Companies: BEE AAS RMMC MHN OCI TFG
As the end of the financial year approaches, we enter ‘ISA season’. In the first of several articles on generating income for an ISA investment, we look at the advantages of investing in equity income trusts. We explain why investment trusts can be useful for long-term, income-hungry investors, and the myriad benefits that the closed ended structure offers. We also identify trusts that best exploit the tools that investment trusts have to offer to achieve their income objectives, and illustrate how they may provide investors with a more dependable income stream for many years into the future.
Companies: MAJE PLI ASCI CTY BEE SAIN STS IPU IVI IBT
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
It was only last year that Europe was considered one of the hottest sectors, and we produced research (‘En Garde!’) highlighting the sheer pace at which the discounts were narrowing, and how the sector was witnessing its highest inflows since 2015. Over a one-year period, to the end of July 2017, the average trust in the sector had delivered NAV total returns of 26% which – supported by that closing discount – translated to share price total returns of 39%. To put that in context, the average fund in the sector outperformed the average fund in any and all of the Investment Association’s OEIC sectors over the same period. However, this has all but completely been forgotten and, rightly or wrongly, Europe is now one of the most out of favour geographical sectors in the world. We believe it is likely to be ‘wrongly’, and having met with multiple European fund managers, we feel there may be a discrepancy between the opportunities in Europe, and the sentiment of investors. We look at a range of investment trusts and examine the case for Europe.
Companies: FEV BEE JEO
Baring Emerging Europe offers capital growth and a dividend yield from a portfolio of stocks in developing Europe, mainly Russia, Poland and Turkey. The manager, Matthias Siller, aims to outperform his benchmark through stock selection, and has achieved this over the medium term as shown by strong alpha figures over a five-year period. The dividend has been given greater emphasis since the start of 2017, with a substantial increase to the payout last year and a 46% increase in the interim dividend this year. The trust can pay income from capital and is currently yielding 4.6%. Following a poor period for the region and emerging markets the trust is on a significant discount, although the board has the intention and ammunition to defend a 12% limit over the medium term. Buybacks and a tender offer arrangement should help reduce the downside risk to the discount. After the announced winding up of BlackRock Emerging Europe, the trust will be the only specialist option in this space.
Emerging markets remain a highly attractive place to invest for the longer term, despite the difficult period for the region this year. We do not believe that the current travails amount to a broad-based crisis in the region. In fact, many of the recent headlines surrounding emerging markets are irrelevant to long-term investor as they are focused on small and insignificant markets. We believe the index has done poorly mainly thanks to specific issues with individual countries and regions rather thanks to global dynamics besetting the region, with the important exception of the confrontation between Trump and the Chinese on trade. In our view, investors in emerging markets need to hold their nerve rather than trying to wait and time the bottom before reinvesting.
Companies: JAGI DGN SDP EMF BEE
Income has for a long time been top priority for British investors, stripped of the traditional source of income that a savings account once represented by a decade of negligible interest rates. But with bonds in a parlous state and the wheels finally coming off the buy-to-let bubble, the range of options available is increasingly narrow. Equities have for some time now been the beneficiary of this search for yield and equity income funds have done very well on the back of this, attracting huge inflows. However, as we have highlighted in the past, many of them are investing in just a small range of companies and those companies are themselves increasingly stretching for yield - putting this refuge for the income seeker on somewhat thin ice. With all this behind us, and mounting uncertainty about the current rally in front of us, where then is a sensible place to find it?
Companies: JCH IVI EDIN BRIG IVPU SOI BEE
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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.