Napoleon insisted he would rather have his generals be lucky than good. Increasingly, especially when investing in the US stock market, many investors opt for a passive fund, presumably viewing markets through the same prism that managers are really only ever lucky, as opposed to good. Yet many still choose active funds for a variety of reasons: a preferred investment style (or factor bias), or an alignment between the investor and the manager on the macroeconomic outlook are chief among them. For these investors, forming a view on when different styles are likely to perform, and on which macroeconomic environment we are likely to see is crucial. In this article we look at how different factor indices in North America have performed in different economic and market scenarios. We then examine which US-focussed trusts have offered the closest correlation to these factor indices in the recent past. Understanding the impact that broader economic trends have had on the performance of factors – and, by extension, on trusts that seem to operate in close alignment with those factors – can help us to understand and contextualise historic performance. It may also give us some insights on how to position for any anticipated future environment, although there can be no guarantee that historic patterns will repeat.
Companies: GVP BRNA PCT JAM
BlackRock North American Income Trust (BRNA) offers investors a portfolio of high-quality US companies at attractive valuations, with a track record of strong dividend growth. The trust is overseen by Tony DeSpirito (lead manager), Franco Tapia (co-manager) and David Zhao (co-manager). Last year, in an attempt to attract new investors, the board announced a shift in strategy, increasing the dividend by 62% and allowing a proportion to be funded from capital. At the current share price the trust offers investors a yield of 4.3%. The move has paid off and the trust now trades at a premium of 1.2%. BRNA believes that companies which pay dividends have stronger management teams, and that those that can grow their dividends offer attractive long-term returns at lower levels of volatility. To find these companies, the team uses a bottom-up, stock-specific approach, starting with a universe of the 500 largest US companies by market cap and breaking it down by fundamental analysis. Since the current managers took over in 2014, there has been a marked improvement in the trust’s performance: it has now outperformed the benchmark Russell 1000 Value index in four of the past five calendar years, and this has been achieved at low levels of beta.
Companies: Blackrock North American Income
All leaderships come to an end at some point. With investment trusts, however, it is rarely the electorate (aka shareholders) who initiate the change in manager. In some cases it is the board. In others, it is the management company itself recognising the need for a new manager, and replacing them before the board feels the need for more decisive action. A change instigated by the board will often result in a transformative outcome for a trust, perhaps with a change in management house as well as personnel. Changes proposed by the management company itself can be just as transformative, but can also be subtler. The aims are always the same: to improve performance for shareholders, and to stimulate demand to bring in the discount, or grow the trust through share issuance. Last week witnessed one of the more dramatic changes of manager in recent years. On 29 November Baillie Gifford effectively took control of the portfolio of European Investment Trust, one of the last remaining value trusts in the sector. The mandate being awarded to Baillie Gifford (the pre-eminent growth investment house) represents a significant change for shareholders, and comes after several years of a growth bull run. Time will only tell whether the board’s decisive (and dramatic) switching of horses will prove correct. In this article we reveal the results of a detailed analysis on how effective past manager changes have been for investment trusts.
Companies: JAM BRNA BRIG MWY
BlackRock North American Income Trust aims to provide an attractive and growing level of income, with capital appreciation over the long term. The managers, Tony DeSpirito (lead manager), Franco Tapia (co-manager) and David Zhao (co-manager), utilise a bottom up stock specific approach to managing the portfolio. The team starts with a universe of the 500 largest US companies by market cap, searching for attractively valued, high quality companies with histories of dividend growth. Currently the portfolio is made up of just 81 holdings. Illustrating the valuation led approach, the average company in the portfolio has a P/E of 13.8x, relative to the average in the benchmark Russell 1000 Value Index of 14.5x. Since Tony DeSpirito took the helm of the portfolio towards the end of 2014, the trust has seen a marked improvement in performance. Over three years (to the end of May 2019) the trust has generated 47.2% in NAV returns, outperforming the Russell 1000 Value Index (42.2%) and only narrowly trailing the average trust in the AIC North American sector (53.4%). The trust has now outperformed the benchmark in three of the past five calendar years. This has been achieved with lower levels of volatility and over the past year the trust has the second lowest beta of the two AIC North American sectors, sitting at just 0.82. Alongside the potential for capital appreciation, one of the key draws for investors is the robust income, with the shares currently yielding 4.5%. The dividend saw a dramatic increase last year, when the board increased its dividend by 61.6% to 8p per share. Part of this is paid from capital reserves, but is also supplemented through option writing, headed by the BlackRock Equity Derivatives option team in Boston. The strong performance, defensive characteristics and now very significant dividend yield have had a clear impact on demand for the shares. The discount has narrowed and the trust currently trades at a premium of 2.8%.
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
BlackRock North American Income Trust (BRNA) has a diversified portfolio comprised mainly of US equities, focused on the 500 largest stocks by market cap. The company’s objective is to provide an attractive and growing level of income return with capital appreciation over the long term. The managers have a low-turnover approach, and a strong focus on valuation, aiming for well-established cash generative companies with clear revenue streams and the potential for dividend growth. The board announced plans in December last year to boost the dividend the trust pays by paying a small proportion from capital, and have specified a quarterly dividend of 2p per share for the current financial year. As such the trust currently offers a yield of 4.6%, putting it comfortably ahead of all of its comparable peers in the AIC North America sector on yield terms (excluding the highly idiosyncratic, and therefore probably not comparable, Middlefield Canadian Income trust). The trust was launched in September 2012 and, because of its focus on quality and valuations, had a rocky start, underperforming the index in 2013 and 2014 as bond proxies and financials raced ahead. Stock selection also played a part. Since then, Tony DeSpirito, David Zhao and Franco Tapia turned the performance around, focusing particularly on formalising the investment process. This has involved increasing the number of staff in the team, as well as developing a new quant screen to ensure opportunities are flagged up more rigorously. The team now consists of 21 investment professionals, with on average over a decade’s worth of experience. The trust outperformed the index in 2015 and then kept pace with it in 2016. More latterly, BRNA produced almost double the return in NAV terms of the Russell 1000 Value index in 2017, and has comfortably outperformed the benchmark so far in 2018. Over the past year the discount has been relatively volatile, ranging between c.- 10% and -2.3%. At the time of writing, the discount is -2.5%, with the consistent outperformance since 2015 helping to improve sentiment towards the trust. BRNA remains relatively small with net assets of £121m but it offers a very high yield, and this may increase its appeal to larger investors who might otherwise consider it too illiquid to be an option, particularly given the board’s demonstrable willingness to buy back shares.
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
BlackRock North American Income Trust (BRNA) has a diversified portfolio comprised mainly of US equities, focused on the 500 largest stocks by market cap. The company’s objective is to provide an attractive and growing level of income return with capital appreciation over the long term. The managers have a low-turnover approach, and a strong focus on valuation, aiming for well-established cash generative companies with clear revenue streams and the potential for dividend growth. The board announced plans in December 2017 to boost the dividend the trust pays by paying a small proportion from capital, and have specified a quarterly dividend of 2p per share for the current financial year. As such the trust currently offers a yield of 5.2%, putting it comfortably ahead of all of its comparable peers in the AIC North America sector on yield terms. The trust was launched in September 2012 and, because of its focus on quality and valuations, had a rocky start, underperforming the index in 2013 and 2014 as bond proxies and financials raced ahead. Stock selection also played a part. Since then, Tony DeSpirito, David Zhao and Franco Tapia have changed the investment process. This has involved increasing the number of staff in the team, as well as developing a new quant screen with the aim of ensuring opportunities are flagged up more rigorously. The team now consists of 21 investment professionals, with on average over a decade’s worth of experience. The trust outperformed the index in 2015 and then kept pace with it in 2016. More latterly, BRNA produced almost double the return in NAV terms of the Russell 1000 Value index in 2017. Over the past year the discount has been relatively volatile, ranging between c.-10% and -2.3%. At the time of writing, the discount is -3.4%.
The trust has seen performance improve markedly since the appointment of Tony DeSpirito and the overhaul of the investment process which began in October 2014. Over three years to the end of December 2017 the trust is up 52.5% in NAV total return terms, outperforming the Russell 1000 Value index (47.9%) and keeping pace with the average trust in the AIC North America sector. Prior to Tony’s appointment the trust was an underperformer and the discrete figures tell the story. The trust underperformed the index in 2012, 2013 and 2014, hit by a combination of a style which didn’t suit the market and a focus on analyst-led research which, without the rigour of a quant screen, resulted in a number of missed opportunities. Since then the trust has fared better, outperforming the index in 2015 and then keeping pace with it in 2016. The trust produced almost double the return in NAV terms of the Russell 1000 Value index in 2017, but share price performance was hampered by the discount which widened out since the start of 2017. The trust’s largest overweight, toward financials, is yet to make a meaningful contribution toward the trust’s performance but the managers remain positive on the outlook as inflation gathers pace and interest rates become to come along more often. The positive effect of an inflationary environment ahead for financials is compounded by the fact that stress tests and higher capital ratios have ultimately led to banks being easier to judge from a risk perspective than they have been in the past, and in many cases more well insulated by capital buffers. They are also positive on the outlook under Donald Trump’s lighter regulatory touch. The biggest positive contributions have come from the trust’s healthcare and energy positions and this includes their exposure to companies outside the US, like AstraZeneca. It is interesting to note that the managers have allowed a small cash position (5%) to build up which they say, rather than reflecting a bearish position, is an opportunistic cash pile which will allow them to take advantage of any opportunities that arise from the quantitative tapering that is now underway
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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