Today, we introduce our investment trust ratings. According to the quantitative screens we have selected in an attempt to highlight the best performers in the closed-ended universe, the trusts discussed here have been the best in their classes over the last five years. We have selected trusts using two different sets of criteria, aiming to identify the top performers for capital growth and for achieving a high and growing income. There are many rating systems for open-ended funds, but no quantitative-based system for investment trusts that is available to the average investor. While we cannot identify trusts which will perform well in the future – past outperformance is no guide to future out-performance – we hope these ratings will highlight the outstanding performers in the closed-ended universe and those managers who have best used the advantages of investment trusts to generate alpha. We are trying to reward consistent and long-term outperformance, and so we have decided to look over a five-year period. All data is as of the end of December 2018, sourced from Morningstar and JPMorgan Cazenove. We have looked at NAV total return performance and discount value has not been considered: the aim is to identify those trusts which have performed the best rather than highlight bargains.
Companies: IPU FAS ATR JEO FEV FGT THRG SEC PAC BRSC IAT HNE MIGO TRY JMG DIVI SLS BGS SDP JETI SOI BCI MRC TIGT EDIN JAGI BEE SDV BRIG AAIF HFEL SCF SIGT BRFI IVPG CTY HINT JCH NAIT
Income has for a long time been top priority for British investors, stripped of the traditional source of income that a savings account once represented by a decade of negligible interest rates. But with bonds in a parlous state and the wheels finally coming off the buy-to-let bubble, the range of options available is increasingly narrow. Equities have for some time now been the beneficiary of this search for yield and equity income funds have done very well on the back of this, attracting huge inflows. However, as we have highlighted in the past, many of them are investing in just a small range of companies and those companies are themselves increasingly stretching for yield - putting this refuge for the income seeker on somewhat thin ice. With all this behind us, and mounting uncertainty about the current rally in front of us, where then is a sensible place to find it?
Companies: JCH IVI EDIN BRIG IVPU SOI BEE
Edinburgh Investment Trust owns a portfolio of mainly UK stocks, supplemented by up to 20% listed abroad, and aims to outperform the FTSE All Share on an NAV basis while providing a dividend that grows faster than inflation. Manager Mark Barnett uses a value approach to picking stocks, and so takes contrarian positions in companies, sectors and themes which are out of favour in the market. This can cause the performance to deviate significantly from the index, and has led to underperformance since the 2016 Brexit referendum. Currently Mark has tilted the portfolio to stocks with UK earnings, which he thinks are undervalued as the market is too pessimistic about the prospects for the UK economy. Mark looks for businesses with the ability to maintain or grow their dividends, and the result is a portfolio with an attractive yield of 3.9% and a dividend that is well-covered by reserves, meaning he should be able to grow the dividend in future years. The current discount of c.9% is wider than the one-year average of 8% and the weighted sector average of 4.2%, following the underperformance since mid-2016.
Companies: Edinburgh Investment Trust
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
Investment trusts are often the structure of choice during booming markets. The ability to gear, plus the investment freedom of a closed-ended structure allow skilled managers to capitalise on rising share prices. However, the same has not necessarily been true on the way down, as leverage exaggerates losses and discounts widen. This has often been a time to buy, with market volatility providing a chance to buy into good trusts at knockdown rates. Cherry Reynard asks, has the market rout since the start of the year produced any opportunities for value-hunters? There are 28 trusts that have seen their discounts widen by more than 5%* since the start of the year. This appears a mild reaction to the market sell-off. The FTSE 100 was down 7.5% over the same period. Peter Walls, manager of the Unicorn Mastertrust (a fund of investment trusts), said this first bout of volatility, triggered by expectations of higher interest rates in the US, passed much of the sector by unnoticed: “There was some intra-day volatility in some of the more highly geared, specialist funds. Some of the trusts that had enjoyed strong demand from self-directed investors also proved volatile – Fidelity China, Scottish Mortgage and F&C Global Smaller Companies. However, those hoping to pick up cheap opportunities were disappointed.” There were a number of reasons why investment trusts didn’t exhibit panic selling. Notably, companies proved active in buying back shares. Scottish Mortgage, for example, bought back 3,000,000 ordinary shares at a price of 449.34p at the start of March. Walls added: “The boards are aware that discount volatility is not great for shareholders and did their best to manage discounts through this time.” However, while the rout itself did not throw up any conspicuous bargains, it did exaggerate some existing trends among some familiar investment trusts. The first is the weakness of the infrastructure trusts. There were seven infrastructure trusts among those trusts that saw the greatest discount widening over the period. In some cases, the moves were extreme - GCP Infrastructure saw a 9.4% move, while HICL saw an 8.0% move. 3i Infrastructure and John Laing Infrastructure moved from a long-standing premium to a small discount. Infrastructure trusts have long been seen as a ‘bond proxy’ investment and as such, might be expected to suffer on the prospect of rising rates. However, as Walls points out, there were also other factors at work. Concerns over the collapse of Carillion and an increasingly aggressive stance from the Labour Party on PFI have weighed heavily on investors. This has unquestionably led to better value, with discounts at multi-year highs. The question for investors is whether the rising interest rate environment is reflected in current prices, or whether any further inflation shocks could send prices lower still. Simon Moore, senior investment manager at Seven Investment Management (7IM) believes a more fertile ground may be the UK Equity income sector, where sentiment has been dented by Brexit concerns. He says: “There are three investment trusts which stick out where their price has fallen significantly over the last three months. All of these have Neil Woodford/ Mark Barnett connections (make of that what you will): Edinburgh Investment Trust, Perpetual Income & Growth and Woodford Patient Capital. “These have a few UK small caps that have been in trouble, arguably nothing to do with the market sell-off, but each manager have been vocal supporters of UK listed companies despite obvious global pessimism on UK equities post-Brexit referendum. If they are right - and their judgement calls have often been right in the past - then these funds could be rerated.” Moore points out that both managers have styles that will go in and out of favour. Certainly, all three trusts have moved down a long way. Patient Capital has seen its share price total return dip 10.7% and its discount widen 5.4%. Edinburgh Investment Trust hasn’t seen a significant change in its discount, which is hovering around 9%, but its shares are down 8.6%. It is a similar situation with Perpetual Income & Growth, where the shares are down 7.7%, but the discount remains at around 9.5%. Moore says: “It is worth remembering that Patient Capital is a very different fund to either Edinburgh Investment Trust or Perpetual Income and Growth and is not for the faint hearted. Given the nature of some of the companies it invests in, there may well be more ups and downs to come. But the clue is in the name - investors who can afford to be patient may well be rewarded over the long-term." Walls sounds a note of caution, saying that some of the classic equity income type stocks favoured by these two managers are still seeing a difficult time. Some of the outsourcing groups, for example, remain out of favour with investors. Much will depend on whether investors come to believe in the ‘value’ trade, where this type of stock will revert to more normal valuations. The other sector to see some change in ratings among the recent volatility has been the technology and media sector. Of course, this comes after a lengthy expansion in the technology sector, with companies such as Facebook, Amazon and Netflix leading markets higher for much of 2017. Walls says: “A couple of the technology trusts, such as Polar Technology Trust and the Allianz Technology Trust have moved to a small discount. I wouldn’t say they look like bargains.” Walls suggests that some sectors where there should have been bargains – such as UK smaller companies – have not seen any real movement in aggregate and are certainly ‘not exciting for value-minded investors’. That said, some are certainly cheaper than they were: Chelverton Growth trust has taken a hit, for example. The other weak trust has been the River & Mercantile UK Micro Cap, though this dropped following the departure of manager Philip Rodrigs over a ‘conduct issue’. Overall, most trusts have held up well since the start of the year. This reflects well on the sector, which appears to have grown better at managing market downturns. There are opportunities, but these have arisen from issues idiosyncratic to each sector rather than market volatility as a whole
Companies: SMT EDIN PLI SUPP PCT ATT RMMC
Research Tree provides access to ongoing research coverage, media content and regulatory news on Edinburgh Investment Trust.
We currently have 36 research reports from 3
Although 2020 will probably go down in history as one of the most challenging years experienced during our lifetime, it will also likely be chronicled as one of the best years for the recognition and appreciation of science. As we entered 2020, the COVID-19 pandemic was in its infancy. However, it rapidly evolved through the exponential rise in infections and mortality globally. Much has been achieved during the past 12 months in the fight against COVID-19, but, as we enter 2021, there are considerable concerns about the emergence of a mutant version of the virus and the second wave that we are now facing.
Companies: AVO ARBB ARIX BBGI CLIG DNL FLTA ICGT OCI PCA PIN PHP RECI STX SCE TRX SHED VTA YEW
AuM grew by +43% (+16% organic) to £29.4bn in Q3. Investment performance was strong (+£2.5bn) as COVID vaccine news propelled markets. Net inflows were maintained qoq (£792m). Sustainable was the stand out performer (+24%). AuM has broken through £30bn post-period end. Better than expected AuM drives +3% FY21e EPS and +5% in outer years. Continued distribution efforts in Sustainable, Global Equity and Multi-Asset funds stands to catalyse earnings. Alongside flow momentum, 12x FY22e PER is not reflecting this upside.
Companies: Liontrust Asset Management PLC
Further media reports that Dr Martens, the British Boot brand is planning an IPO on the LSE. It is currently owned by PE group, Permira who is expected to sell down its stake at the IPO. March 2020 YE the group had revenues of £672m and EBITDA of £184m. Deal size TBC. Upon Admission to AIM, Nightcap will acquire The London Cocktail Club Limited (the "London Cocktail Club"), which is an award winning independent operator of ten individually themed cocktail bars in nine London locations and one location in Bristol. Offer TBC Due mid Jan. HSS Hire Group, HSS.L transfer from Main to Aim. Mkt Cap c. £70m. Recently raised £52.6m. Leading supplier of tool and equipment for hire in the United Kingdom and Ireland and has provided equipment hire services in the United Kingdom for more than 60 years, primarily focusing on the B2B market. Due 14 Jan. VH Global Sustainable Energy Opportunities plc, a closed-ended investment Company focused on making sustainable energy infrastructure investments, today announces intends to launch an initial public offering of shares on the Official List (Premium) of the Main Market of the London Stock Exchange. Due by Early Feb.
Companies: IUG CBP KAT APP RST DIS NICL BOKU CNIC HE1
Urban Logistics REIT (“REIT”) has acquired another high quality “last mile” asset in the Wirral for £16.3m (5.0% NIY). The 169k sqft site is let to a subsidiary of Culina. It is leased through to 2032 and has clear rental progression, with an uplift on commencement of a reversionary lease in 2022 and a rent review in 2027. 99% rents for the Jan-Mar quarter have already been collected – highlighting the resilience in the tenant base/income. We do not change forecasts, already assuming full deployment by year end. We estimate that c.£75m capital capacity remains. We note a 6%+ dividend yield in FY22e – a 12m period of full capital deployment – and note that the discount ignores embedded NAV growth potential.
Companies: Urban Logistics REIT plc
Hipgnosis Songs Fund, is independently valued by Massarsky, who in December chose to reduce the discount rate on the revenues generated by the portfolio from 9% to 8.5%, due to strong evidence of growth in streaming numbers and the stable nature of the revenue stream. This produced a NAV of 125.35p as at the 30 September interim period end. It is worth noting the recent publication of significant changes in the discount rate as announced by Professor Aswath Damodaran of the Stern Business School in New York for the Entertainment Industry to 4.82% from 7.83% in January 2020. Combined with recent evidence that music streaming revenues in 2020 are now larger than the entire music market in 2016, we believe this is an encouraging backdrop for potential further reductions in the discount rate being applied by Massarsky going forward
Companies: Hipgnosis Songs Fund C Shares
Henderson Opportunities Trust (HOT) has performed strongly since experiencing sharp NAV and share price declines in the Q120 market sell-off, powering to the top of the AIC UK All Companies sector over the past 12 months with an NAV total return of c 40% in the second half of 2020. Managers James Henderson and Laura Foll say performance has benefited from holding a number of ‘next-generation leaders’ in the UK. The portfolio is esoteric in its make-up and seeks to avoid being overly exposed to trends in the global and domestic economy. The managers continue to see good value opportunities across the UK market, particularly on AIM, and say their intention to maintain gearing at a ‘decent’ level (c 10–15%) is indicative of feeling the portfolio and market offer good value.
Companies: Henderson Opportunities Trust
Cornish Metals (TSX-V: CUSN) intends to list on AIM. The Company is proposing to raise £5 million by way of private placement of new Common Shares (the "Fundraising") to advance the United Downs copper-tin project. The Company expects that Admission will become effective in February 2021. The Company's Common Shares will continue to be listed and trade on the TSX-V in Canada. Further media reports that Dr Martens, the British Boot brand is planning an IPO on the LSE. It is currently owned by PE group, Permira who is expected to sell down its stake at the IPO. March 2020 YE the group had revenues of £672m and EBITDA of £184m. Deal size TBC. VH Global Sustainable Energy Opportunities plc, a closed-ended investment Company focused on making sustainable energy infrastructure investments, today announces intends to launch an initial public offering of shares on the Official List (Premium) of the Main Market of the London Stock Exchange. Due by Early Feb. Moonpig, the digital greeting card company, is planning an IPO with a potential valuation of £1bln, according to multiple media reports. Further details expected to be announced over the next two weeks.
Companies: ZPHR PANR PRSM SENS CYAN G4M ITX CRCL FEN ZIN
CVC Credit Partners European Opportunities (CCPEOL) has achieved a total NAV return of 1.9% (target 8% annual return) in the last 12 months. Its index outperformance was helped by sector rotation early in the COVID-19 crisis and by staying positive on the market. The manager sees the greatest opportunity in the upper CCC and lower B segments and in structured finance. CCPEOL remains optimistic in the credit opportunities segment, despite the market recovery. It expects 2021 will bring more leveraged loan issuance from broader industrial segments, thus providing greater investment prospects. Portfolio resilience led CCPEOL to raise its annual dividend from 4p/4c per share to 4.5p/4.5c in September 2020.
Companies: CVC Credit Partners Europn Opprtnity
Allied Minds has announced that Joe Pignato has decided to step down as CEO and from the board with immediate effect. However, he will continue to support the company as CFO for an interim period as the board continues its search for a permanent CFO. As part of a streamlining process, Allied Minds will now become a board-led company with no immediate intention to appoint a new CEO. The chairman and NEDs (experienced VCs and private company investors) will represent Allied Minds on portfolio company boards (including Federated Wireless, BridgeComm and Spin Memory) with an intention to accelerate realisations where possible.
Companies: Allied Minds PLC
Interim results demonstrate YoY growth and a resilient outcome that has exceeded management's expectations from the start of the Covid-19 pandemic. This is testament to the degree of recurring revenue generated across the business. FY21 trading looks to be more challenging, as notably lower new insurance sales post-lockdown will translate into lower premium income. A number of organic opportunities are being worked on to fill the shortfall. Rising UK redundancies and their impact on policyholder retentions creates great uncertainty, hence our forecasts remain withdrawn and recommendation remains Under Review.
Companies: Personal Group Holdings Plc
I once sat through a three-hour performance of Samuel Beckett’s Waiting for Godot at the Theatre Royal which, despite the best efforts of Ian McKellen and Patrick Stewart – both of whom I like very much – to this day remains one of the dreariest experiences of my life. It is on that note that we welcome 2021, with all the promise it holds, and return to our ‘top picks’ for 2020, a year which is probably best summarised (for those of us lucky enough to have been not directly impacted by the virus) by the Lord Chamberlain’s censor in his review of the first performance of Godot in 1955 – in which he described having to ‘endure hours [and hours] of angry boredom’. As always, these ‘picks’ do not represent advice, and should in no way be relied upon as such; they have been chosen on a lighthearted basis with no thought given to their suitability for your personal circumstances.
Companies: TFG IPU IEM HOT OCI BRWM JRS RICA BHMG BRLA JMI GPM MINI SMT
Trident Royalties plc is a relatively new royalty and streaming company focused on building a diversified portfolio of royalty assets to broadly mirror the mining sector. Unlike the majority of other royalty companies which are focused on gold/silver in the Americas, Trident’s aim is to unearth value with low-cost acquisitions across multiple commodities in tier 1 and lower risk mining jurisdictions. Acquisition of the Pukaqaqa royalty marks the 6th transaction since listing on AIM in June 2020 reflecting the company’s fast-paced growth strategy. TRR's shares are up over 100% since IPO.
Trident is superbly positioned to exploit the gap in the royalty/streaming space. With producing cash-generative royalties already under its belt and an active pipeline of new opportunities, Trident is firmly pursuing an aggressive yet disciplined growth trajectory. Scale will bring higher royalty income, increased diversity and lower risk, the convergence of which should help unlock premium valuation multiples. In the current volatile markets, picking individual mining equities is challenging but Trident offers ground-floor entry into what looks likely to become a major royalty player in London. We have analysed the evolution of royalty peers and investing early appears to be the key. We see TRR’s current share price and value as unchallenging versus peers given the company is already a significant revenue generator. We initiate coverage with a 47p/sh price target.
Companies: Trident Royalties Plc
RLE’s recent updates address two concerns expressed by investors: security of rent and the reliability of appraised asset values. Rent collection is arguably the key measure of portfolio performance for a REIT, particularly in a period of uncertainty and on that basis the first update is reassuring. It confirmed 89.92% collection of rent due for the September quarter (Oct-Dec), including monthly and deferred agreements, broadly in line with the two prior quarters at the same stage. That provides evidence of tenants’ ability to deliver, the durability of RLE’s rental income (and dividend cover) and demonstrates management’s ability to influence events in the short term. The second announcement relates to the sale of properties for £9.725m, all at prices at or above book value. These disposals, some of which will complete in FY21 will reduce net debt and put the group in a strong position to capitalise upon opportunities to acquire assets, which meet its criteria, at attractive prices in a distressed market.
Companies: Real Estate Investors plc
Redde Northgate has come through the COVID crisis in very good shape so far. We expect minimal impact on the former Northgate business from “lockdown 2.0”, a strong recovery in profits and a re-rating as normality returns and Redde reverts to mean. We could see further useful earnings upside from acquisitions such as Nationwide and revenue synergies not yet included. The Group is transforming itself into a mobility business which is higher returning, more diversified and has sustainable compounding growth prospects.
Companies: Redde Northgate PLC
Upon Admission to AIM, Nightcap will acquire The London Cocktail Club Limited (the "London Cocktail Club"), which is an award winning independent operator of ten individually themed cocktail bars in nine London locations and one location in Bristol. Offer TBC. HSS Hire Group, HSS.L transfer from Main to Aim. Mkt Cap c. £70m. Recently raised £52.6m. Leading supplier of tool and equipment for hire in the United Kingdom and Ireland and has provided equipment hire services in the United Kingdom for more than 60 years, primarily focusing on the B2B market. VH Global Sustainable Energy Opportunities plc, a closed-ended investment Company focused on making sustainable energy infrastructure investments, today announces intends to launch an initial public offering of shares on the Official List (Premium) of the Main Market of the London Stock Exchange.
Companies: PMI RMM SUN BOIL ITM TRMR MLVN 88E IME ANP