A long, long time ago, I can still remember how, that election had us all talking about sterling (well, some of us). Instead now we are hard put not to talk about mass dividend cuts, with Link Group estimating dividend cuts of 47% or more in the UK equity market. Way back in those distant epochs of early December 2019, we appeared to be approaching a greater degree of certainty about the shape of the future in the UK: an election was in the offing which promised to help resolve the outlook for our relationship with the EU and the rest of the world, and to clarify what kind of environment businesses would face going forward. At the time, GBP looked undervalued on the basis of the Economist’s ‘Big Mac’ index (a way of looking at the relative valuations of various currencies based upon the relative cost of a McDonald’s Big Mac in different countries). With signs that global investors’ positions in UK assets were starting to move towards normality from their previous large underweights, it seemed prudent to highlight that a rising currency could prove a headwind for dividend streams. With UK payout ratios (the proportion of earnings paid out as dividends) very elevated, and in general terms a roughly inverse relationship between UK corporate earnings and the strength of the currency, dividends funded by overseas earnings logically seemed somewhat vulnerable. Sure enough, following the general election we saw the GBPUSD rate move up to c. 1.35 in fairly rapid fashion (having traded below 1.30 since May 2019). Even so GBPUSD remained short of the ‘fair value’ level of c. 1.42 suggested by the ‘Big Mac’ index at the time, but there were certainly positive signals in sentiment surveys that suggested sterling was setting up for a more durable rally.
Companies: TIGT ASEI JCH CTY DIG SCF BRIG ASL
March is traditionally considered ‘ISA season’, when UK investors focus on their annual ISA allowance and are encouraged to ‘use it or lose it’. As we highlighted in our article last year, investment trusts within ISAs are an excellent way to benefit from the power of compounding over the long term, without worrying about the tax consequences of whether you are receiving capital gains or dividend income. Our analysis last year showed that the top ten compounding trusts – since Personal Equity Plans or PEPs (the precursor to ISAs) were first introduced – come from a very wide range of asset classes. We determined that the distinguishing factors between them were manager skill and the unique ability, afforded by the structure, for investment trust managers to truly invest with a longer-term horizon than the open-ended competition.
Companies: UKW JCH JPGI ASEI CTY
City of London’s (CTY) objective is to provide long-term growth in income and capital. Bearing in mind the fact that this trust has the longest track record of providing annual dividend increases in the investment trust sector – 53 consecutive years – it is also true that a rising level of dividend income is a very important part of what CTY aims to provide for shareholders. In the context of this very long track record having been developed by the company, it is reassuring for investors that the last 28 years worth of dividend increases have been delivered by the same manager: Job Curtis. Job has sole responsibility for CTY, although as we discuss in the Management section, he leans on his team members in Janus Henderson’s global equity income team to help him form ideas about relative valuations and changing industry dynamics. Within the mandate, the manager has a certain degree of flexibility to invest outside equities (opportunistically in fixed interest or convertibles), and outside the LSE. As at the end of June 2019, Job had 10% invested overseas, in companies which all offer either better income opportunities or non-replicable exposures to that found in the UK. Overseas holdings (and income received in foreign currencies) have clearly had a beneficial impact over the last few years, but with the end to the Brexit process potentially looming, Job is gently positioning CTY towards more domestically-focused areas. He has built up exposure to what he views as resilient domestic themes such as UK housebuilders, and travel and leisure businesses, which should generally benefit from a rise in sterling, and which add portfolio stability. Fundamentally, Job aims to invest in companies that have strong balance sheets, which, in share price terms, offer a margin of safety, and have demonstrably sustainable cash generation to support both dividends and capital expenditure for the future growth of the company. He likes to spread investments across a wide variety of companies. The board has encouraged him to concentrate the portfolio very slightly, which over the last financial year saw the number of stocks come down from 117 to 97. Valuations are an important determinant in the investment process. Job has been paring back exposure to what he views as very highly rated ‘quality growth’ stocks, and reinvesting in high quality cyclicals and value stocks. This subtle shift shows up in our correlation analysis, and CTY has recently become more highly correlated with ‘value’, whilst correlation to ‘growth’ has declined. In our view, this is an interesting by-product of the investment process of CTY and a cautious UK equity income mandate. As a pragmatic and experienced manager, Job instinctively sells into ‘hot’ areas of the market, recycling into less well-appreciated areas. NAV total returns over both the long- and the short-term have been ahead of the FTSE All Share index – which this year replaces the AIC UK Equity Income peer group as the benchmark. Job’s style means he is not aiming to ‘shoot the lights out’ in any one year by having particularly large weightings to any one sector. As such, he expects to outperform gradually over the medium to long term, and fully accepts that over short periods, he may underperform. We observe that the dividend focus and investment strategy generally lends itself to the trust outperforming during periods of market difficulty; since June 2008, the trust has outperformed the FTSE and the Morningstar Equity Income sector more often during periods where the FTSE All Share has fallen over the previous 12 months. Conversely, it has tended to lag in rising markets. At the current price, the shares yield 4.5%, a decent premium to the AIC UK Equity Income sector weighted average of 3.9%. One of the key selling points of CTY is its dividend track record, which has seen the board pay an increased dividend for the past 53 consecutive years – the longest track record in the investment trust sector. The board has been able to add to revenue reserves for the past seven years, such that revenue reserves (as at 30 June 2019) are were 0.83x the current dividend level of 18.6p per share. A premium rating has for quite some time been the norm for the trust. The board’s aim is that the share price should “reflect closely its underlying asset value” but also to reduce discount volatility. The company continues to issue shares, which over time has enabled the board to negotiate lower fees with Janus Henderson. The OCF was 0.39% in the last financial year, and the board predicts it will fall further once recently negotiated lower management fees have had a full year’s impact.
Companies: City Of London Investment Trust
Anyone who takes a strong interest in financial markets sometimes feels the pull of market timing. It is seductive to imagine yourself a canny trader, buying or selling positions just before the market shifts, trading investments daily and beating the herd with superior analysis and instincts. We can add to the existing research suggesting this is a bad idea, and that taking a long-term view of your investments is the way to go. We looked at investment trusts that have outperformed over the past ten years and ran monthly NAV returns. We then calculated how many months were responsible for their outperformance. In other words, how many months did you need to miss to have ended up with market performance or less, negating any benefit of choosing an active fund over a passive fund? The results were surprisingly low, suggesting that switching in and out of investment trusts is fraught with danger and a potential recipe for underperformance, and underlining the case for a long term approach.
Companies: SDV CTY SMT FGT MNP JMG SDP
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
City of London (CTY) ’s objective is to provide long-term growth in income and capital. The broader objective includes a reference to the “importance of dividend income to shareholders”, which cuts to the heart of CTY’s mission: an unrivalled 52-year record of increasing dividends paid to shareholders in consecutive years. Within the UK mandate, there is a degree of flexibility to invest outside UK equities. Job Curtis has had sole charge of CTY since 1991, and over the ensuing 28 or so years, has demonstrated opportunistic adventures into fixed interest, convertibles and equities listed on other exchanges around the world in order to boost the yield, or add an exposure otherwise lacking in the FTSE All Share. In Job’s view, the UK has much to attract investors: good yields, a dividend paying culture and a wide range of listed companies to choose from. Job aims to invest in those which have strong balance sheets, those that offer a margin of safety in share price terms, and have demonstrably sustainable cash generation to support both dividends and capital expenditure for the future growth of the company. Understanding that he is investing people’s hard-earned savings, Job believes in maintaining a diversified portfolio, with around 100 holdings at any one time. Job emphasises that dividend yield is a key attraction for him when selecting investments, but that he tries to achieve a blend of higher and lower yielding companies through the portfolio. The resulting breadth of income sources is a key part of his approach, and is part of the reason for such a strong dividend record on the trust. Overall, Job believes that dividends form a decent part of overall returns for the vast majority of companies. In his view, selecting those companies that have the discipline of paying consistent and growing dividends, results in a high-quality portfolio which should over time outperform passive equity indices. NAV total returns over both the long and the short term have been ahead of both the FTSE All Share and the IA peer group average, but have been moderately behind those of the AIC UK Equity Income peer group (the trust’s benchmark). Job’s style is one in which he is not aiming to “shoot the lights out”, and as such he expects to outperform gradually over the medium to long term, fully accepting that over short periods he may underperform when sectors such as mining or technology shares outperform. At the current price, the shares yield 4.7%, a decent premium to the AIC UK Equity Income sector weighted average of 4.1%. The trust’s record of paying an increased dividend for the past 52 consecutive years is important in this context. However, perhaps of more interest to investors is the fact that that the same manager has been responsible for delivering a rising income for nearly 28 years. Over the very long term, generating a rising income every year is only really achievable using revenue reserves. Indeed, CTY has had to dip into its reserves seven times over the period in which Job has been running the trust. In most years, the board aims to increase the dividend, but also retain a little of the income earned for the revenue reserves. As at June 2018, revenue reserves (after adjusting for the final dividend payable) amounted to 0.59x the current dividend level of 17.7p per share. In fact, the board has been able to add to revenue reserves (per share and as a proportion of the dividend) for the past six years, even though at the same time it has been increasing the dividend and diluting the revenue reserves through issuance of stock. A premium rating has for quite some time been the norm for the trust. The board’s aim is that the share price should “reflect closely its underlying asset value” but also to reduce discount volatility. Over the eight years to June 2018, the trust has issued 145.7m shares, increasing the share capital by nearly 70%. The trust’s size increasing has also meant that the OCF has reduced over time to 0.41% in the last financial year.
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 JAI BEE SDV BRIG AAIF HFEL SCF SIGT BRFI IVPG CTY HINT JCH NAIT
Over the last few years, fees and costs have become a lightning rod in the investment world, attracting the scrutiny of regulators, the media and the public alike. Investment trusts, with their independent boards acting partly on the views of shareholders, have been quick to respond. We review the changing fee landscape among investment trusts in 2018 through proprietary analysis, and discuss those which boards have done most to reduce costs for investors.
Companies: PCT SMT HSL CTY JAM IPU MWY LWI
City of London Investment Trust, established in 1891, is one of the oldest and largest investment trusts in the country and has an unbroken track record of increasing dividends every year for more than 50 years. Managed by Job Curtis (pictured) at Janus Henderson Global Investors since the early 1990s, the trust is well resourced and has outperformed the benchmark FTSE All Share in seven of the last ten calendar years. In addition, it has maintained an impressive income profile with the trust consistently yielding around 4% for most of its recent history. Job takes a value approach to the market, backing companies he deems be out of favour but offer good upside. Nevertheless, and though he is a bottom-up stockpicker, he also runs the portfolio in a relatively conservative manner tending toward larger companies and not straying too far from the composition of the index. As such, the portfolio has tended to underperform its AIC UK Equity Income sector in strongly rallying markets (which is understandable, given the ‘average’ trust in the peer group is overweight small and mid-caps relative to the index) but it has tended to protect capital more effectively in falling markets – such as in 2011 when it delivered a positive return despite the impact of the European sovereign debt crisis. The £1.4bn trust was slightly behind the index in 2017 and fell behind considerably in 2016, when smaller companies in particular rebounded strongly after the initial shock of the Brexit referendum. As a result over three years the trust has underperformed its peer group – the AIC UK Equity Income sector, where the average trust has a much higher weighting to mid and small caps – by a small margin and is behind the index too. However the tendancy to underperform rallies whilst outperforming during more difficult periods means the trust has a good long-term track record of outperformance relative to the wider UK market. Over 10 years to the end of February 2018 it has delivered annualised NAV total returns of 7.8% per annum, against a backdrop of 6.6% per annum from the FTSE All Share. Though it has struggled to keep pace with its peer group average over the course of 2017 to the end of July, it is outperformed the index over that time with NAV total returns of 7.4%. The trust’s solid yield has won it a strong following and it has regularly traded on a premium to NAV over recent times, as it does today (7th March 2018) at 2%. The board has the ability to buy back shares to manage the trust’s discount and issue new ones to prevent it reaching too high a premium, and has used this feature extensively, issuing more than five million new shares in 2017. Although there is no formal discount policy in place, the board’s active approach suggests that buybacks would be used if the fund traded at a discount for an extended period of time.
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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
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
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
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.
ULR’s finals were in line with on EPRA NAV and earnings a little better than expected. Valuations remain stable and full rent collection has been achieved for the current quarter. We see fundamental quality and resilience in the (now expanded) portfolio – ULR has already invested nearly £100m in the first two months of the new year following the £136m equity raise. We make no material changes to forecasts. Current valuation points to an 7%+ annualised return, with upside remaining from deployment of funding headroom, active management and potential for valuations to improve.
Companies: Urban Logistics REIT
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
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
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
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
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
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
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
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
Seneca Global Income & Growth Trust (SIGT) is managed by a four-strong team at Seneca Investment Managers, seeking undervalued securities across multiple asset classes in order to diversify the trust’s risk and return drivers. Its UK equity portfolio was particularly negatively affected by the coronavirus-led market sell-off in March, given its focus on domestic, mid-cap value stocks, which performed relatively poorly. However, these holdings could stand SIGT in good stead during an economic recovery. The trust’s board has committed to continue paying quarterly dividends, using reserves where necessary if income falls short, which seems likely given the number of dividend cuts announced by corporates in response to the global pandemic.
Companies: Seneca Global Income & Growth Trust