Indeed, sometimes whether a risk pays off is dependent on your approach to it (just ask Icarus and Daedalus), as opposed to being dependent on the risk itself. In this vein, we think it is sometimes important to understand the investment risks you are taking. Not in terms of volatility; however, we think there may be one obvious macroeconomic risk (or opportunity, depending on your viewpoint) that needs to be considered when constructing portfolios and selecting strategies at this time. That is the current confluence of two core investment decisions and one macroeconomic variable.
Companies: Jupiter European Opportunities Trust Blackrock World Mining Trust
“What a difference a quarter makes”, as Dinah Washington’s accountant used to sing. When last we updated on our investment trust picks for 2020 at the end of March, it is fair to say that collective optimism was thin on the ground. However, we all retained ultimate conviction in our selections (or else had grown so despairing at the market environment that we had settled into a kind of other-worldly fatalism), keeping faith that our initial logic had been ultimately sound. This has proved a good decision, with widespread rallies in financial markets and strong performance subsequently from the majority of our investment trust picks. All it took was a little optimism and long-termism from us, not to mention untold trillions of stimulus from governments and central banks around the world. It is fair to say that whoever wins this competition at the end of the year will be primarily thanking Jay Powell… Indeed, so strong has been the rally that two of us are actually in profit for 2020, without – even indirectly – enriching Elon Musk (thus meeting your author’s definition of an ethical investment). We can see below the contrast between Q1 and Q2 returns. They say understatement is a billion times better than exaggeration, so suffice to say there have been some fairly large divergences between the two quarters! And yet some discount opportunities seem to remain, with an average discount of 23.4% across our picks (albeit skewed somewhat by the massive 61.3% discount on Tetragon).
Companies: BRWM IEM JRS OCI TFG NBPU JMI
J.K Galbraith’s comment has always seemed to me possibly the most egregiously misused quote in financial markets. It is seemingly a statement of the obvious, but what it is surely saying is that the future is inherently uncertain. To state that markets are discounting mechanisms is also not controversial, because it is making the same point. Nobody knows the future, not even readers of trustintelligence.co.uk, by definition the brightest and most discerning segment of society (and probably the bestlooking too). But when participating in the market we make an assessment of probabilities and then try to measure those against the assessment by the wider market. In this piece, we assess whether there may be a higher probability than the market currently assumes that later in 2020 we will see an equity market melt-up, ripping prices higher; and that this will not be a rational move, thus adding subsequent downside risks. We have looked at some alternative sources of returns which we believe could broadly participate in such a rally while at the same time ultimately serving as an (at least partial) hedge for portfolios. ‘Buy and hold’ is ingrained in the minds of most of us because of recency bias. Yet, among others, Christopher Cole of Artemis Capital1 has highlighted how anomalous this current epoch has been in generating consistent long-term asset price returns. Over time there have been numerous sustained periods in which a typical 60/40 portfolio has delivered poor or even negative longterm returns. With a significant proportion of global government issuance currently exhibiting negative yields, and UK gilts and US Treasuries not far behind, there is incredible duration risk in just allocating blankly to bonds; and this risk is likely also present (to a lesser extent) in your equity book if you invest in high-quality or high growth names. Perhaps it is no surprise then that Terry Smith of Fundsmith recently moved a proportion of his assets from bonds to a long/short equity fund.
Companies: RICA DIG DIG MNL BHMG BHGG BRWM BRWM KIT RICA
BlackRock World Mining (BRWM) is a specialist trust which aims to maximise total real returns. As opposed to an investor buying shares in a ‘real’ miner, BRWM aims to deliver returns with a smoother trajectory, but also to be more nimble than a diversified miner in re-allocating between commodities. A recent example is the success BRWM has had from sharply increasing its exposure to gold, which started in early 2019. With ballooning government debt, negative rates and a slowing economy, gold retains its place as a diversifier and the ultimate safe-haven asset. Gold and precious metals now constitute around 36% of the portfolio, as at 30/04/2020. BRWM’s portfolio also reflects other long-term themes. Chief amongst them is the ‘era of the shareholder’, in which global diversified miners will continue to focus on dividends. Given these companies’ strong balance sheets, the team believe they should ride out Covid-19 related issues better than many other sectors. A key differentiator of BRWM is its exposure to fixed interest, debentures and royalties. An increased investment in a Vale debenture last year contributed significantly to revenues; while 2019 also saw a landmark moment for the OZ Minerals royalty, whose income surpassed US$12.3m, a more than full payback on the trust’s initial investment. Currently it represents an impressive 176.5% total return. BRWM’s dividend yields 6.5% on a historic basis. The managers have worked hard to diversify their income stream over time, but the immediate outlook for dividends everywhere is cloudy. The managers believe that the diversified miners – in addition to the gold miners – are in a relatively good place, with strong balance sheets and strong free cashflow.
Companies: Blackrock World Mining Trust
To those who regularly invest in investment trusts, discounts can often be part of the opportunity. But to others, discounts are an extra complication, not to mention an extra risk. The last six weeks has probably strengthened the prejudices of both sides on the topic. The recent bout of volatility has – in our opinion – more clearly exposed both the advantages and the disadvantages of investment trusts. Our perspective is that discounts are like a drunk friend. They are fun to have around, but at times they let you down, often when it matters most. Ultimately, the investment trust sector is defined by its discounts. The NAV is what the manager delivers, which is the reason why most of our research is focussed on the NAV. Whereas the share price return reflects the NAV with an accelerant (or detractor) – represented by the change in discount over the respective holding period. Why discounts narrow or widen is a matter of continuing debate and, in most cases, comes down to very specific factors applicable to each trust. We would argue that – with the exception of very broad patterns or trends – past movements in discounts are significantly less repeatable than past NAV performance. Fundamentally this is why we believe it is more helpful to use historic investment trust NAV returns as a prism through which to judge the performance characteristics of a trust, rather than historic share price returns. On the other hand, there are ways to incorporate discount analysis into an evaluation of the opportunity presented by an investment trust at any given point in time. We feel that understanding the historic volatility of the discount is fundamental to the task of analysing a trust’s discount, and of defining factors that will influence it in the future. In this article we attempt to quantify the reasons for discount volatility, and point to trusts which offer significantly less discount downside from the current level.
Companies: PLI BHGU SMT RCP TIGT MWY RICA JAM BRWM
An Englishman, an Irishman and a Scotsman walk into a bar. But they can’t get past the front door because it’s been boarded up. And then they get floored by a soldier in a hazmat suit who is now part of a unit patrolling London because there’s a ban on public gatherings. It’s funny because it’s true, right? We aren’t quite at the stage where troops are patrolling London’s streets, but back in January, when we published our ‘top picks for 2020’, nobody could’ve predicted that by now we’d be locked in our homes, banned from meeting our friends and relatives, and facing the indefinite cessation of most economic activity until further notice. When all’s said and done, it’s been one hell of a month. In any sort of broad market move, some share prices move outside of what we might consider a rational boundary. As investment trust experts, it is our job to try and point these out. Clearly the advent of the apocalypse has made this job harder; the minute a share price or discount reaches a particular level, by the time we are in a position to publish anything, time (and prices) have moved on. So, with our feeble excuses made, we now return to the selection of trusts we put forward in January as our ‘top picks for 2020’; when we were all bored of headlines about Brexit, and snug behind the magical wall that protects us from respiratory conditions found only in far-flung parts of the Orient. Readers of a delicate constitution are advised to look away now.
Companies: IEM TFG NBPU BRWM OCI
Last year the five-strong team at Kepler Trust Intelligence – including analysts and mere mortals – chose a trust each as our personal ‘top pick’ for 2019 and we will be reporting back on the performance of those trusts in early January, once the final numbers are in for this tumultuous year. In the meantime I can reveal that an investment of £5,000 spread equally across our selections, made on 1st January 2019, would at the time of writing be worth a cool £6,349 today and that performance puts us comfortably ahead of an equivalent investment in a passive fund; the iShares MSCI World ETF being our example, £5,000 invested there being worth £6,280 today. And so, buoyed by that success and a surfeit of mince pies and Babycham, the team at KTI – our ranks now swelled to seven – are back with more predictions for 2020, like lucky first-timers, staggering drunk on glory to the next roulette table with a pocket full of chips, confident in our mastery of the great game. For the benefit of those who take life too literally, it should be noted that this is a light-hearted article and these selections do not represent advice or any form of prediction. Don’t buy these trusts and then blame us if they don’t perform well – we aren’t telling you that they will and this isn’t ‘proper’ research.
Companies: JMI IEM TFG BRWM
The objective of BlackRock World Mining (BRWM) is ‘to maximise total real returns to shareholders through a world-wide portfolio of mining and metal securities’. Income has become a more important part of the total returns objective, and the board’s view is that a ‘significant’ dividend will serve as an effective discount control mechanism over time. BRWM uses all of the tools available to it as an investment trust, a clear differentiator to peers. Chief among these is the managers’ ability to make private royalty investments, which are now starting to contribute meaningfully to returns to shareholders. The managers also invest in fixed income which serves as a useful boost to returns, and to write covered call options on an opportunistic basis to generate extra income. The managers aim to use gearing so that, broadly speaking, investors maintain a fully invested exposure to equities, but achieve much greater diversification than would otherwise be the case. One of the central tenets of investing in BRWM for metals and mining exposure is that the managers can deploy the company’s assets to different commodities in a far more nimble and opportunistic way than the large listed diversified miners. Illustrating this, one of the key themes in the portfolio currently is exposure to gold and precious metals. The managers have been adding to positions over the last year, such that gold now makes up 26.6% of the portfolio, an increase from 13% a year ago. A long-running theme in the portfolio is that the wider market is underestimating the mining sector’s resolve to maintain capital discipline, to deliver dividends and buybacks to shareholders, and to pursue only value-accretive growth opportunities. As evidenced by the trust’s strong income flow so far this year, the managers’ view has been proved correct, and prodigious cash flows are being used to reward shareholders in the form of special dividends. The trust’s historic dividend yield is 5.2%. Over the six months to 30 June 2019, BRWM’s net revenue earnings (including specials) amounted to 11.43p per share, an increase of 23% over the same period last year. The board has committed to pay out substantially all of the trust’s income in dividends, which means that the entire increase in income is likely to flow through to dividends. The trust’s discount has remained resolutely wide. The board has been buying shares back, most recently on 26 September 2019 at a discount of 15.2%.
Inflation has been relatively tame for the past two decades, yet history suggests it would be unwise to reject the possibility of a damaging period of higher inflation out of hand. Central banks’ post-crisis quantitative easing policies have not led to the high inflation expected by some, but periods of high inflation in the past have been due to very different causes. When looking at the historical record, we see clear signs that the threat of inflation cannot be written off, and so taking out an insurance policy might be wise. Below we consider the potential sources of an inflationary shock to the global economy, and some assets and trusts that offer protection.
Companies: UKW RICA BREI BRWM
Over the 25+ years that it has been in existence, the BlackRock team that have been managing this trust has demonstrated a strong track-record, and is one of the most experienced teams of specialist investors in the metals and mining sector, globally. Echoing the wider sector in which they invest, income has increasingly become a more important part of the total-returns objective. The board’s view is that a “significant” dividend will serve as an effective discount control mechanism over time.
Currently, the managers believe the wider market is underestimating the mining sector’s resolve to maintain capital discipline, deliver dividends and buybacks to shareholders, and only pursue value accretive growth opportunities. This theme remains the mainstay of the portfolio, with “mega-cap” diversified miners forming 45% of the portfolio, and five of the top ten holdings. Their positions as the globe’s lowest cost producers means that their prodigious cash-flows, having been previously used to repay debts, are now increasingly being used to reward shareholders.
The thesis behind BRWM has always been that investors would benefit from an investment trust that offered exposure to different commodities, but with much greater flexibility to shift allocations between commodities than the listed diversified miners that own mines rather than shares in other companies. The current commodity breakdown reflects this, especially the managers' positioning in what they describe as “sustainable metals” and “green metals" – themes that the managers are gradually building up exposure to, and which constitute 4% of the portfolio. The sustainable metals theme offers shareholders exposure to the huge changes that will occur with the rise of electric vehicles (EVs), and includes companies that produce metals for cathodes in batteries, such as lithium, cobalt and nickel. Green metals is another environmentally-related theme. The managers' thesis is that the environment, carbon footprint and energy efficiency will increasingly be factors impacting the price of commodities, with the managers positioning themselves to be more exposed to those miners that own high grade iron ore, which results in less waste, energy and processing to produce products than competitors.
BRWM’s outperformance has usually been achieved during periods of positive sentiment. 2016 and 2017 gave grounds for optimism on performance, but over five years, the trust is marginally behind the benchmark, with much of the underperformance attributable to the write-off of the Marampa royalty in the summer of 2014. So far this year, performance has been challenging, with the trust lagging the benchmark due to the Vale tailings dam failure and the strong rally in pure play iron ore names.
The trust’s historic dividend yield is 5.5%. The managers use the company’s low-cost gearing to ensure that investors have a full exposure to equities, but benefit from a diversified income stream stemming from other investments in fixed income, a recently significantly increased holding in an illiquid royalty-type debenture and the unquoted Avanco royalty contract (which has been renamed the OZ Minerals Brazil royalty following the acquisition of Avanco in 2018). Aside from these revenue sources, the managers also make use of option writing to boost income from the portfolio, which helps them achieve a yield premium to the benchmark.
In the managers' view, 2018 was the first time that underlying portfolio holdings’ managements had the latitude and the opportunity to prove their commitment to capital discipline and put shareholders first. Strong dividends received by the trust tell their own story, and so Olivia Markham (co-manager) is optimistic that managements will not give back the credibility they have won so far, and that the dividend path – assuming spot prices for commodities don’t weaken significantly – remains on an upward trajectory. The yield of 5.5% compares very well in our view to other Global Equity Income trusts (average yield 4%) and the IA Global Equity Income sector, which currently has a median yield of 3.14% (according to data from Morningstar). In fact, with a yield of 5.5%, the trust is amongst the very highest yielding equity trusts in the entire investment trust sector.
The trust’s discount has remained resolutely wider than the 10% level, and currently sits at around 12%. However, the discount has started to move in gently from it’s lows. The board last bought shares back at a discount of c.14.9% in October 2018, and so the narrowing discount since then could suggest the tide of buying interest has turned, with investors perhaps now recognising the attractive yield and prospects for the trust.
BlackRock World Mining Trust | Invesco Income Growth Trust | Perpetual Income & Growth IT | BlackRock Energy and Resources Income Trust | Scottish Oriental Smaller Companies | JPMorgan Asian
Companies: BRWM IVI PLI SST BERI JAGI
BlackRock World Mining Trust celebrates its 25th anniversary this year. Over the last 25 years, the team has demonstrated a strong track record and is now one of the most experienced teams of specialist investors in the metals and mining sector globally. Over this time, the team has developed strong relationships with company management teams, which helps them fully understand each company’s aims and strategy. As we noted earlier in the year, the managers went into 2018 relatively bullish on the prospects for the sector. Whilst this confidence has not yet been rewarded, the managers’ central investment thesis remains that mining companies will be disciplined in terms of capital expenditure, and will continue to prioritise deleveraging and returning cash to shareholders for much longer than the market is giving them credit for. As such, BlackRock continues to believe shareholders will enjoy the benefit of strong dividends from underlying companies over the short term, but over the medium term, once the wider market catches on to the fact that capital discipline is here to stay, the managers expect a rerating. Aside from electric vehicles, which remains a major theme within the trust through copper, lithium and cobalt exposure, the team is developing a “green metals” theme in the portfolio. Recognising increasingly strict environmental regulations, as well as the evolving preferences of consumers, the managers have been investing in companies which can produce aluminium either carbon free (Alcoa and Rio Tinto), or with a significantly reduced environmental impact (such as high grade iron-ore). The managers are also looking at how demand for metals will change over time, and as such have introduced a new holding in Umicore, which specialises in the recycling of metals and battery components. On it’s 25th Anniversary, BRWM has achieved strong returns for investors since it’s launch, both relative to generalist global funds and the MSCI ACWI. Whilst there have been good and bad periods to time an investment since then, the trust has made strong returns over the benchmark (demonstrating the benefits of being an active manager), and this has shown that it pays to take a long-term view on the sector. BRWM’s outperformance has usually been achieved during periods of positive sentiment. 2016 and 2017 gave grounds for optimism on performance, but over five years, the trust is marginally behind the benchmark, with much of the underperformance attributable to the write-off of the Marampa royalty in the summer of 2014. So far this year, performance has been more challenging. However, the managers observe that whilst global equities are near all-time highs in terms of historical valuation ranges, the mining sector has struggled to make ground, which may mean it has an element of relative protection should the current “growth correction” become more entrenched. The trust’s historic dividend yield is 4.5%. The managers use the company’s low-cost gearing to ensure that investors have a full exposure to equities, but benefit from a diversified income stream stemming from other investments in bonds, convertibles, and the Avanco royalty contract. Aside from these revenue sources, the managers also make use of option writing to boost income from the portfolio.
Long-term secular trends provide a strong tailwind to investment returns. One of the most talked about themes in recent years, a clear beneficiary of which has been Tesla’s share price, is the potential for a shift toward electrification. However, far from being a ‘one stock’ story, we believe that there are widespread implications across many sectors, and in this research we identify a range of trusts which have exposure to them.
Companies: IEM UEM UKW IEM BRWM
We have for some time argued that traditional equity income funds are too heavily dependent on a narrow range of stocks, and that the stocks themselves are perhaps looking overstretched in terms of the dividends they pay compared to their underlying earnings. In November last year we published research showing that 25.1% of the capital in the AIC UK Equity Income sector is invested in just ten stocks, and across those companies the average dividend cover is 1.17x. We found that open-ended funds are even more heavily concentrated, with just under 30% of assets invested in ten stocks, among which the average dividend cover is just 1.04%. The mood amongst investors seems to be changing as awareness of this concentration grows, not least because of articles like this one in the Times warning of a ‘squeeze’ ahead for investors and, where once UK Equity Income was regularly the top selling Investment Association sector, outflows have been building steadily for some months. In fact the IA UK Equity Income sector saw bigger retail outflows in January this year than any other bar the Specialist sector. Even after recent outflows, however, the sector remains one of the largest overall with assets of more than £62bn under management – accounting for roughly ten percent of all assets invested in open-ended funds. Among investment trusts, assets amounting to £10bn are held in UK Equity Income trusts. Income still commands a strong pull, then, and within the Investment Trust sector, the practise of boosting income by paying out a proportion of capital profits has become increasingly common as a means to attract new investors. The appeal of this practice from a fund manager’s point of view is obvious. Many investors clamour for income, so introducing a yield can encourage greater demand for shares. International Biotechnology Trust (IBT), which we cover in detail here, announced plans in September 2016 to convert some of the capital it generates into income, aiming for a yield of 4%. As the chart below shows, the discount has come in sharply since it did so, moving to a premium earlier this year having previously rarely traded inside a double figure discount for a large proportion of its lifetime. Invesco Perpetual UK Smaller Companies (IPU) saw a similar re-rating when the board announced plans to pay a significantly enhanced dividend partly funded by the capital account in September 2016. Like IBT, the trust, which yields 3.5%, has seen its discount tighten up sharply, moving in from a consistently wide double-digit discount to trade in single figures since the enhanced dividend was introduced. Looking at these share price movements, we thought it might be interesting to examine the broader investment trust sector and see whether a correlation exists between discount and yield.
Companies: IVPU IBT MVI MUT DIG EDIN PLI BEE BRWM IVI SCF AAIF PLI
The last year has represented a return to outperformance for the managers, as well as marking another very strong performance in absolute terms. Notwithstanding the gains, the managers remain positive on prospects based on fundamentals and valuations. They observe that in contrast to most global equities, which are hitting all-time highs in terms of historical valuation ranges, they believe their companies remain within the mid-cycle range with valuation very attractive at current commodity price level. As well as attractive valuations, the team report being bullish on fundamentals. They believe that periods of synchronised global growth are almost always good for commodity prices. As such, they have been continuing to add to their allocations to mid and small caps, but for the core of the portfolio maintain their holding in large-cap “self-help” companies that are deleveraging and have high-quality assets with good free cashflow. They continue to believe that the sector is under-owned, and that investors still (in their view, wrongly) doubt management’s capital allocation discipline. The managers tell us that market expectations for many companies they own are on the conservative side, and that if commodity prices hold their current levels, they expect earnings upgrades in the order of 30-80%, which – should it prove to be true – would provide a catalyst for strong performance in share price terms. Commodities are notoriously volatile, however, and forecasts are clearly not guarantees. The board have recently announced the final dividend (now payable quarterly), which will mean a full year – covered – payout of 15.6p per share for 2017. The yield of 4.1% compares to Global Equity Income trusts (average yield 3.7%) and the IA Global Equity Income sector, which currently has an average yield of 3.1%. The trust’s discount has remained resolutely wider than the 10% level.
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To achieve YoY revenue growth over H1/20A despite the challenges of Covid-19 and its impact on the travel sector is testament to Equals' resilience and increasing focus on B2B and International payments services. While weaker gross profit and EBITDA margins have impacted profitability in H1/20, we see potential for an earnings recovery in H2/20 given cost reduction measures currently being undertaken. This should lead Equals to cash breakeven in Q4/20 and FCF positive by early FY21.
Companies: Equals Group Plc
Litigation Capital Management has announced FY20 results with gross profit up 7% to A$21.7m and PBT of A$9.2m, slightly behind expectations albeit the Group had already flagged that delays to 3 cases during the year would result in resolutions in FY21, thereby impacting FY20 results. That said, excellent strategic progress through the year and good news flow as well as increasing scale suggests more value to come. Reiterate buy
Companies: Litigation Capital Management Ltd.
In June, faced with the task of replacing its longstanding portfolio manager, Alistair Mundy, Temple Bar Investment Trust’s (TMPL’s) board reiterated its commitment to a value style of investing. The board has now opted to hand the management contract to Nick Purves and Ian Lance of RWC Partners, two managers with considerable experience of managing income portfolios using a value-style approach. Value investing, where managers buy stocks that are valued more cheaply than market averages – based on measures such as price/earnings, price/book and yield – is deeply out of favour. The RWC team says that value stocks have never looked more unloved in the 30- odd years that they have been managing money. In their view, this makes it imperative that TMPL investors keep faith with the strategy and it also means this is an attractive entry point for new investors. One important change, however, is a cut to TMPL’s dividend to a level that the RWC team believes will be more sustainable.
Companies: Temple Bar Investment Trust
FY20A results largely reflect a period prior to the Covid-19 lockdown, yet show Duke entering a more challenging FY21E with momentum. Yesterday's trading update demonstrated another notable rise in quarterly cash receipts for Q2/21, as royalty partner trading continues to improve. As some partners' forbearance measures will expire this month, Q3/21 receipts should continue this upwardly momentum. This opens the door to a return to cash dividends at some future point. Today, Duke also confirms it is now seeking new royalty partners, alongside follow-ons.
Companies: Duke Royalty
HSBC’s future should be clarified as soon as the US and China come back to the negotiation table. This will not happen before the US elections are over. In the meantime, HSBC will continue to be instrumentalised and its share price will remain under pressure.
Companies: HSBC Holdings Plc
Mercia’s FY20 results reflect continued progress, delivering on management’s three-year strategy. AUM climbed 58% to £0.8bn, while FUM rose 73% to £658m. Following the acquisition of the NVM VCT fund management business, the company is operationally profitable on a monthly basis, with annual revenues exceeding operating costs for the first time in FY20. Net assets rose 12% to £141.5m, with the direct investment portfolio stalled at £87.5m reflecting the impact of COVID-19 fair value adjustments and a £15.7m net investment. The group remains well-placed for a downturn with £30m of unrestricted balance sheet cash and £320m of group cash. Post period end the group exited The Native Antigen Company, with £5.2m in cash (8.4x return, 65% IRR) expected. Despite the group’s progress, Mercia’s shares continue to trade at a material discount to NAV (0.60x), even before considering the embedded value of the third-party fund management business (> 4.5p at 3% of AUM).
Companies: Mercia Asset Management Plc
Today's news & views, plus announcements from VOD, POLY, SMDS, BLND, BYG, WEIR, DC, SNR, SHI, INTU, IHR, CNC, ARE, INCE
Companies: INTU SHI INCE
The impressive full year 2019 results included some eye-catching numbers, including a record PBT of £40.1m (nearly 3x FY18 @ £14.3m), £620m of reserves acquired over 16 legacy deals, and $842m of (estimated) Contracted Premium in the Program business – on track to breach $1bn in FY20 as previously guided and $1.5bn-$2bn in 2022-2023.
Companies: Randall & Quilter Investment Holdings Ltd.
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.
Companies: Legal & General Group Plc
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
Companies: AVO ARBB ARIX CLIG DNL GDR ICGT NSF PCA PIN PXC PHP RECI STX SCE TRX SHED VTA YEW
Secular stagnation refers to the economic theory that growth will be persistently low for some time to come, due to an imbalance between savings and investment. If capital is saved rather than invested productive capacity lies idle, while the drag on consumption reduces demand in the economy. As a result GDP growth is reduced. As we have previously discussed, there is no historical evidence that GDP growth has a direct impact on stock market growth – in contradiction of the theorised linkage via earnings. However, in a world of secular stagnation in which there is a glut of savings, corporate earnings will be muted as demand for companies’ wares remains sluggish, which should negatively impact stock market growth. High rates of savings would also push equity valuations higher than they would otherwise be and thereby reduce future returns. Investors can respond to this situation in a number of ways. One is to try to find active strategies, which either seek to harness certain factors likely to boost returns or to generate high stockspecific alpha. In the first case this could mean looking to harness the small cap premium or to the emerging markets which should see greater earnings growth over the long run. It could also mean looking to the tech sector, where earnings are dependent more on secular changes within the economy than the growth rate of the economy. In the second case this would mean looking for highly active stock pickers who run concentrated portfolios and aim to pick the winning companies which can steal market share from competitors. We believe the investment trust universe is the perfect place to find such strategies, as the structure allows managers to focus on managing their strategy and not inflows and outflows, while being able to take exposure to relatively illiquid assets and harvest the premium for doing so. Another way of responding is to look for alternative assets which offer comparable or superior returns to the equity market as a whole. In our view, when we look at likely equity returns over the next ten years, some alternatives look compelling. In the below we sketch a rough idea of likely equity returns over the next decade and then introduce some trusts we think have the potential to generate similar returns from more predictable cash flows and potentially less volatile NAVs.
Companies: USF HICL NESF TRIG UKW NBLS
Activity was limited by housebuilding shutdown in H1 as a result of COVID. Sigma remained profitable and, with a strong balance sheet, has weathered the storm. With yesterday’s launch of the £1bn EQT London fund, a material step change is expected for the coming financial year. We reinstate forecasts; updating for EQT and revised expectations post-COVID. We revisit our valuation: a “sum of the parts” approach, assuming no additional AuM, implies an intrinsic value of 200p/share.
Companies: Sigma Capital Group Plc
Trident Royalties Plc (AIM: TRR) has, this morning, announced the acquisition of a 1.5% Net Smelter Royalty (NSR) over the resourcestage Lake Rebecca Gold Project located in the highly prospective Eastern Goldfields province in Western Australia. The royalty package is being acquired from a private seller for a total consideration of A$8.0 million (c. US$5.63 million), comprising of A$7.0 million in cash and A$1.0 million in new ordinary shares in Trident. The acquisition is Trident’s fifth overall and its third gold deal. As per strategic guidance the company is moving fast assembling a diversified portfolio with a paying cashflow stream from iron ore and copper production and several strategic gold royalties with the potential for near term revenues. The market is paying attention with TRR shares up 49.8% since its IPO on AIM in June this year. There is clearly more to come with c. US$7.5 million of uncommitted cash as well as the potential for debt funding and the ability to use equity as acquisition consideration. The Lake Rebecca Gold Project operated and wholly owned by Apollo Consolidated (ASX: AOP), is located 150km ENE of Kalgoorlie in the Eastern Goldfields Province of the Yilgarn Craton. The Project, envisaged as a simple open pit operation, is close to existing gold infrastructure namely Saracen Mineral Holdings Limited’s (ASX: SAR) Carosue Dam Operation whose processing plant is in the process of being upgraded to increase throughput to 3.2 Mtpa.
Companies: Trident Royalties Plc
Top decile total returns continue.
Financial results. The March 2020 NAV increased by 3% to 285p, continuing the company's strong NAV record since flotation in 2016 (compound growth rate of 16% or total return CAGR of 18%). Adjusted PBT rose by 10% to £2.41m, benefiting from last August's purchase of Concorde Park in Maidenhead, partly offset by higher irrecoverable service charge costs. The final dividend of 2p gives a total of 5.3p, 16% lower than 2018/19, reflecting the Board's decision to maintain liquidity.
Investment Portfolio. 99% of the £140m portfolio is invested in regional offices, with more than 50% by income and value in business parks close to Milton Keynes, Bristol and Maidenhead most notably. We believe that high quality, well located business parks are likely to outperform in terms of rental and capital values during the COVID pandemic as tenants focus on the combination of easier transport access and the well-being of their employees.
Robust rent collection. The company has collected almost 90% of its rent roll in respect of H1/20-21, 91% in Q1 and 87% in Q2. This positive data reflects the quality of both its portfolio and its diverse tenant base. The portfolio has been individually selected, based on asset location and letting prospects, and the company's strategy is to minimise voids by letting at economic rents with minimal tenant incentives.
Forecasts. H1/20-21 has been positive in terms of rent collection but we are withholding our PBT and DPS forecasts for now. Further positive rent collection following next Tuesday's Rent Quarter day will provide additional confidence for the current year. The statement refers to the target of reducing gearing by selling assets where significant value has been added – sales at close to Savills latest valuation will provide confidence in the robustness of the NAV.
Share Valuation. The shares are trading on a 48% discount to NAV yielding 3.6%. Regional REIT and Palace Capital are peer companies which focus primarily on regional offices and both have reported NAV falls in their most recent results, yet trade on lower NAV discounts (but with higher yields and greater liquidity). Circle shares look undervalued, trading just below their IPO price despite a near doubling of NAV since early 2016.
Companies: Circle Property Plc
Hunters delivered a resilient performance in H1 and is now experiencing a very positive rebound in H2. After a strong start to the year, CV19 lockdown led to a reduction in H1 revenues of -18% to £5.4m largely due to a fall in residential sales income, with lettings and franchise income holding up well. Restructuring of the cost base and utilisation of government support resulted in EBITDA increasing +30% to £1.4m. As lockdown restrictions have eased since the period end, activity has rebounded with instructions in August up +38% y/y. Hunters benefits from a favourable geographic spread of branches and is well placed to benefit from the strong property market as, prompted by CV19, people reconsider where they wish to live. As with many industries, CV19 has accelerated technological change and Hunters expects to release its SKIPA CRM platform shortly, which should deliver material productivity benefits. We resume forecasts with PBT/EPS of £2.2m/6.2p for FY20 and introduce estimates of £2.4m/6.6p for 2021. The shares trade on 7x 2020 earnings which we view as an unwarranted discount to peers Belvoir (10.4x) and The Property Franchise Group (12.1x). Further, the anticipated reinstatement of a dividend for FY20 will see the shares yield over 6%.
Companies: Hunters Property Plc