Fidelity European Values (FEV) plans to change its name to Fidelity European Trust later this year to better reflect its objectives; however, there will be no change to the disciplined investment process. Manager Sam Morse continues to focus on cash-generative companies with strong balance sheets and significant dividend growth potential. He has increased the trust’s level of gearing to benefit from an anticipated recovery in the European stock market, as equity prices typically discount an economic improvement by around six months. However, the manager is continuing to run the portfolio in a measured way, acknowledging that ‘there is no big rush to change the portfolio, as costly mistakes can be made’. FEV has outperformed the continental European market over the last one, three, five and 10 years in both NAV and share price terms.
Companies: Fidelity European Values
Fidelity European Values (FEV) is managed by Sam Morse, who selects stocks on a bottom-up basis, focusing on quality companies with strong balance sheets that are able to grow dividends over the long term. He notes that investor concerns that affected the market in 2019 are abating: central banks are very supportive; a resolution to the US-China trade war is looking more likely; and within Europe, there is the prospect of fiscal stimulus to support economic growth. While there is potential for a rotation in market leadership towards cyclical stocks, which could put the fund’s relative performance under pressure, the manager is ‘sticking to his knitting’, and remaining disciplined, rather than shifting his portfolio exposures in an effort to try to ‘time the market’.
In January 2019 we unveiled our new quant rating system for investment trusts, identifying both the top 20 trusts for capital growth and the top 20 trusts for income by using a quant screening system. We believe this is the first quant rating system for closed-ended funds to be based on NAV returns, which reflects the performance of the manager much more purely than the share price, which is a far noisier signal. We aimed to reward consistent long-term outperformers within the metrics we chose and the five-year time period over which we assessed them. In the New Year we will be rerunning our screens and rebalancing our ratings, but for now we are pleased to be able to report that in the first ten months since we revealed our selection, subsequent performance has been strong across both lists.
Companies: FEV TRY THRG IPU
Fidelity European Values (FEV), run by Sam Morse, aims to offer long-term capital growth through a portfolio of European equities. The trust is managed cautiously, with Sam seeking growth opportunities at a reasonable price. A key element of his strategy consists of picking companies based on their prospects for producing dividends and dividend growth, as he believes this indicates steady structural growth. The portfolio is relatively concentrated, typically with 40 to 50 holdings and the top ten holdings making up around 40% of the portfolio. Sam has more than 25 years’ experience as an investor and has produced strong results at the helm of the trust since his appointment at the start of 2011. He has managed to carry this into 2019, and despite the cautious approach, has managed to outperform during the rebound, as we discuss in the Performance section The discount currently sits at 8.7%, having narrowed slightly since we last covered the trust in December.
Fidelity European Values (FEV) has had a conspicuously strong period of outperformance since March 2017, building on its positive long-term track record. Its NAV total return is ahead of the AIC Europe sector average over one, three and five years, ranking first or second out of eight over each period, and FEV has clearly outperformed its benchmark over one, three, five and 10 years to end-May 2019. Helped by a reallocation of expenses between the revenue and capital accounts, the board raised the FY18 dividend by 44.4% to 6.28p – representing a 2.5% yield – while also adding to reserves, and an interim dividend will be introduced in FY19. FEV’s discount has narrowed to 8.3%, similar to the sector average of 8.5% but wider than its five-year low of 2.8%, and from 2019 the board is seeking to maintain the discount in single digits in normal market conditions.
As with most people, we are sick of discussing Brexit’s endless possible scenarios and how it might impact equity markets. The outlook is forever shifting, the large majority of “information” being pure conjecture. Nevertheless, the political and economic backdrop means that Europe is now one of the most out of favour investment regions. In the open ended IA sector, Q3 and Q4 of last year saw total outflows of -£1.6bn in Europe, relative to the US and Global sectors which saw inflows of £289m and £114m respectively. Only the UK saw greater outflows. The discounts on closed-ended funds also suggest an out-of-favour asset class. As can be seen below, relative to both historical averages and global peers, European investment trusts are good value. In fact, Europe is even more out of favour than the UK, judging by discounts.
Companies: HNE BRGS TRG FEV JESC
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
Fidelity European Values aims for long-term capital growth via a portfolio of European equities. It is managed with a conservative stockpicking approach, aiming to identify companies with strong balance sheets, proven business models and disciplined use of capital which the manager hopes can grow their dividend regardless of the economic environment. The portfolio will typically be comprised of between 40-50 holdings, and at the time of writing the top ten holdings make up c.40% of total assets, making its concentration quite punchy, although by no means the most concentrated in the sector. The portfolio is dominated by large caps, defined by businesses with a market cap over €10bn make up 76.8% of the holdings. Geographical restrictions are not imposed, and the portfolio is heavily concentrated in France (26.7%), Switzerland (15.3%) and Germany (15.3%). The rest of the portfolio is made up of smaller weightings around the 5% mark. The largest sectoral exposures come from financials (17.6%), health care (17.2%) and consumer goods (16.8%). The fund manager, Sam Morse, has more than 25 years’ experience as an investor and has produced solid results at the helm of the trust since his appointment at the start of 2011. During this period, he has delivered an NAV total return of 107.4% against a return of 68.6% from the benchmark FTSE World Europe ex UK index. The trust has failed to produce positive returns since the start of the year (-1.5%), though this is largely due to the October correction. Sam is reasonably positive on the outlook over the near future and foresees a pick up toward the back end of 2018. However, he thinks the outlook is more clouded over the medium term – with a recession possible in 2019/20. The discount currently sits at 9.8%, having widened slightly since we looked at the trust in January last year. Over the past five years we have seen the trust’s discount vary greatly, ranging from -2.8% to close to -18%.
It was only last year that Europe was considered one of the hottest sectors, and we produced research (‘En Garde!’) highlighting the sheer pace at which the discounts were narrowing, and how the sector was witnessing its highest inflows since 2015. Over a one-year period, to the end of July 2017, the average trust in the sector had delivered NAV total returns of 26% which – supported by that closing discount – translated to share price total returns of 39%. To put that in context, the average fund in the sector outperformed the average fund in any and all of the Investment Association’s OEIC sectors over the same period. However, this has all but completely been forgotten and, rightly or wrongly, Europe is now one of the most out of favour geographical sectors in the world. We believe it is likely to be ‘wrongly’, and having met with multiple European fund managers, we feel there may be a discrepancy between the opportunities in Europe, and the sentiment of investors. We look at a range of investment trusts and examine the case for Europe.
Companies: FEV BEE JEO
Fidelity European Values (FEV) is a relatively defensively positioned trust investing primarily in continental European equities. Recent performance has been strong relative to its FTSE World Europe ex-UK index benchmark and peers, helped by its exposure to defensive technology stocks, less interest rate-sensitive banks, and energy stocks, as well as holding no automotive stocks. The portfolio remains well-balanced, but is now more concentrated in a smaller number of stocks (currently 47), as the manager has taken profits where prospects for sustained dividend growth have weakened, and few new ideas have met his investment criteria. FEV’s consistent longer-term track record and tendency to outperform in periods of market weakness may find appeal in an uncertain market environment.
Fidelity European Values (FEV) aims to achieve long-term capital and income growth from a portfolio of primarily continental European equities. Although well diversified, the portfolio became more concentrated during 2017, as the manager sold stocks that had performed well and reinvested in existing holdings. While retaining a positive net market gearing, the manager added 10 single-stock short positions to the portfolio in August 2017, reflecting the view that valuations had become stretched in many parts of the market. A lower 0.75% management fee on assets over £400m takes effect from April 2018, while a reallocation of fees and expenses from revenue to capital will positively affect the level of future dividend payouts.
Fidelity European Values (FEV) aims to achieve long-term capital growth from its European equity portfolio by focusing on companies that are able to deliver medium-term dividend growth. This approach gives FEV a defensive bias as well as a yield close to the sector average. Although he acknowledges a number of positive indicators for the near term, manager Sam Morse sees an upcoming turning point in the economic cycle and the prospect of rising bond yields as negative catalysts for equity valuations. His caution is reflected in FEV’s low gearing and the recent concentration of the portfolio, as a number of holdings with weakening fundamentals have been sold into market strength during the first half of 2017.
Fidelity European Values (FEV) recently celebrated its 25th anniversary. It aims to generate long-term capital growth from investment primarily in continental European equities, although up to 20% of gross assets may be invested in companies outside the FTSE World Europe ex-UK benchmark. Since January 2011, FEV has been managed by Sam Morse, who uses a bottom-up process to select companies that have solid fundamentals and are able to grow their dividends over a three- to five-year horizon. FEV’s NAV total return has outperformed the benchmark over three, five and 10 years. Revenue earnings are fully paid out as an annual dividend; the current dividend yield is 1.8%.
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Since the restrictions were lifted in mid-May, Belvoir has seen a surge in activity due to pent-up demand, resulting in June being a record breaking month for the group’s Newton Fallowell estate agency network in terms of instructions and sales and the financial Services division in terms of written income. Management have stated that with the positive impact of the stamp duty reductions still to take effect they are confident that the Group is well positioned to capitalise on the current market upturn and to take advantage of the opportunities arising from more challenging conditions. We have upgraded our PBT forecasts for FY 2020 to the level we forecast pre-COVID. We have also upgraded our target price from 169p to 233p and highlight that H1 2020 has demonstrated the resilience of the group, management’s ability to navigate difficult market conditions and the power of the franchise-led strategy.
Companies: Belvoir Group Plc
As expected, the quarter saw a sharp increase in loan impairments. However, one can wonder if the increase was not capped by the group’s willingness to keep its results afloat. Management’s downbeat guidance in terms of revenue recovery potential and cost reduction does not bode well as regards the group’s future credit loss absorption capacity.
Companies: Lloyds Banking Group
What’s new: Purplebricks Group results for the year to 30 April 2020, show the Australian and US units as discontinued; but include the Canadian unit sold for C$60.5m (i.e. £35m) in July. Investors will focus on the UK unit which revealed:
11% fall in UK revenue to £80.5m (FY19: £90.1m), as the number of instructions fell 23% (impacted by early Covid uncertainty and lockdown), but the average revenue per instruction “ARPI” rose 12% to £1,394;
UK gross profit margin improved to 64.1% (FY19: 63.0%);
UK marketing costs to revenue improved to 25.6% (FY19: 29.6%);
Spend on Digital capacity pushed UK operating costs 32% to £26.2m (FY19: £19.9m), as new management team pursued initiatives which are being “delivered at pace with significant opportunity for further innovation.”
UK adjusted EBITDA fell 53% to £4.8m (FY19: £10.2m).
Companies: Purplebricks Group Plc
For this Monthly, we are delighted that Rooney Nimmo and 24Haymarket have allowed us to reproduce a recent report they jointly published, entitled An analysis of UK exits (2015-2019), which provides a granular analysis by sector of the activity in our dynamic private companies world. We hope you find the insights of interest.
Companies: AVO AGY ARBB ARIX CLIG ICGT NSF PCA PIN PXC PHP RECI SCE TRX SHED VTA
The group continued to opportunistically take advantage of its CIB division’s performance to front-load pending credit losses. The third quarter should mark the beginning of a normalisation in the revenue mix and the cost of risk assuming no change in the macro-economic scenario retained by the group.
S4 Capital has announced the merger of Orca Pacific with Mighty Hive. Orca Pacific is a full-service Amazon agency and boutique consultancy based out of Seattle, which builds on the existing Amazon relationship of the group. The combination with Mighty Hive creates an end to end eCommerce offering encompassing retail management, advertising and content on the Amazon platform. Orca has a blue chip client list including Reebok, Uni-Ball, Mars, OshKosh BGosh, Godiva, Del Monte and Kenroy Home. We view Orca Pacific as an ideal merger partner with MightyHive, while we also see potential to align with the creative capabilities of MediaMonks. No financial details were disclosed, though we believe the transaction would have been structured consistent with the 50/50 cash/equity structure used by S4 Capital. The group recently raised £116m to fund the cash element of its M&A strategy. S4 Capital will release interims on 9th September followed by a Capital Markets Day. We await the outcome of two pitches for Whopper accounts before updating our forecasts. We retain our Buy rating and 375p price target.
Companies: S4 Capital
European Metals Holdings today announce that a support and financing agreement with EIT InnoEnergy, the principal facilitator and organiser of the European Battery Alliance has been agreed. This agreement is to help progress at the large Cinovec Lithium project in the Czech Republic, a JV for which has just been set up between European Metals Holdings and the large Czech utilities Group CEZ to fully fund the project through Feasibility and to a construction decision.
Goldplat today provides an update on its Q4 2020 and the end of its financial year (FY2020). Despite the best efforts of COVID Goldplat has had an excellent year. Overall business units in Ghana and South Africa have seen an increase in profit levels, and losses have been stemmed from the Kilimapesa mine in Kenya which is now on care-and-maintenance. Cash at the end of June was £3.2m.
Digitalbox is an AIM-quoted digital publishing company, currently owning two distinct digital media assets and with a scalable platform to grow through acquisition. This morning the group has provided a trading update for the six month period to 30 June 2020. H1 2020E revenue is reported to be flat against the prior period on a comparative basis at c.£1.0m, reflecting increased audience volumes being offset by the well-publicised fall off in digital advertising pricing. However, despite this present backdrop, H1 2020E adj. PBT is anticipated ahead of management's expectations due to a strong margin performance in the period; this driven by changes made to improve operational efficiencies. Encouragingly, as at 30 June, the cash balance has increased by £0.6m to £1.2m.
With this morning's announcement, NBB has confirmed that the thorough overhaul of the company in recent years has continued to bear fruit notwithstanding the pandemic. Notably, the news that the company has been EBITDA positive in H1 is a tribute to the proactive actions taken by the management in (1) building new businesses which now make up more than half of the group, and which continue to progress, (2) taking out significant costs, and (3) developing tailored solutions for clients which incorporate all of the separate business strands as required. We view the achievement in a particularly positive light since the market for Executive Search has been challenging as a result of the global Covid situation.
Companies: GDP NBB DBOX
The Bankers Investment Trust (BNKR) has continued to deliver on its twin objectives of long-term capital and income growth, rebounding strongly from the global market declines of Q120 and declaring increased dividends for H120 despite the difficult backdrop for corporate earnings. Coming into 2020, manager Alex Crooke had positioned the trust relatively cautiously with a net cash position of c 3%, which he put to work during the sell-off, boosting the portfolio’s long-term total return potential. At the half year the board reiterated its intention to increase BNKR’s FY20 total dividend by c 3%, using reserves as necessary, which would secure a record-equalling 54th consecutive year of dividend growth for the trust’s shareholders.
Companies: Bankers Investment Trust
Today's update highlights that despite the Covid-19 outbreak and UK/IRE lockdown, which has affected trading, Duke has continued to collect cash royalties from most of its royalty partners. Short-term alternative payment terms have been agreed with those partners hardest hit, to support them to periods where royalties can be fully recouped. Therefore the 61% fall in p/b from 1.3 (at 20 Feb) to 0.5 today, appears overdone.
Companies: Duke Royalty
Primary Health Properties (LON:PHP) recently announced interim results for the period to June 30, 2020. The company reported net rental income of £64.8mln, up 20.4% versus H1 2019. Net profit was up 29.0% at £36.0mln (European Public Real-estate Association earnings measure). Dividend per share for
Companies: Primary Health Properties
Worldwide Healthcare Trust (WWH) is celebrating its 25th anniversary. Managed by Sven Borho and Trevor Polischuk at OrbiMed, the trust has an enviable absolute and relative performance track record. The managers remain very constructive on the prospects for the global healthcare sector, suggesting that while President Trump has once again focused on the issue of US drug pricing, his ‘bark is worse than his bite’, and his efforts are a negotiating ploy to get the healthcare industry to the table to discuss reforms. They highlight minimal disruptions at the US Food and Drug Administration (FDA) as a result of the coronavirus, and expect an uptick in industry mergers and acquisitions (M&A) in H220 and beyond.
Companies: Worldwide Healthcare Trust
The group’s earnings surprise was driven by goodwill impairments. On the negative side, management upgraded, albeit slightly, its full-year loan impairments guidance and warns about revenue and CET1 pressure. It also reckoned that the tensions between the US and China will impact the group.
The Brunner Investment Trust (BUT) is now managed by Matthew Tillett at Allianz Global Investors (AllianzGI), who worked closely with his predecessor Lucy Macdonald as co-manager on the fund for four years, with a particular focus on income generation. He is able to draw on the well-resourced investment team at AllianzGI, including BUT’s new deputy managers Jeremy Kent and Marcus Morris-Eyton. Tillett says BUT offers a balance between growth and income, having provided investors with consistent capital appreciation over the long term, pays an attractive yield and has a distinguished record of 48 years of consecutive annual dividend increases. He believes we are in an exciting part of the cycle, where there are extremely interesting investment opportunities for those with a disciplined approach.
Companies: Brunner Investment Trust
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: AGY ARBB ARIX BUR CMH CLIG DNL HAYD NSF PCA PIN PXC PHP RE/ RECI SCE SHED VTA
PetroTal (PTAL LN/TAL CN)C; Target price £0.45: 1Q20 results/Bretaña expected to restart in July – 1Q20 financials are in line with expectations and 1Q20 production had been reported previously. At the end of 1Q20, current trade and other payables had been reduced to ~US$45 mm compared to ~US$55 mm at YE19. Most importantly. PetroTal continues to expect the Bretaña field to be re-opened this month. The contingent liability with Petroperu is estimated at US$25 mm at the current oil price and the company has entered into a financial swap for 0.46 mmbbl of oil with an ICE Brent reference price of US $40.58/bbl to cover the upcoming sale by Petroperu at the Bayovar port. This is a recovery story that we continue to like. It offers a combination of value, production and cash flow growth and reserves upside. We anticipate that the imminent reopening of the field with be an important catalyst to the share price.
i3 Energy (I3E LN): Reveals takeover target in Canada | Maha Energy (MAHA-A SS): Production update | Aker BB (AKERBP NO): 2Q20 update in Norway | Energy (RRE LN): Recommended offer by Viaro Energy | Spirit Energy: Dry hole in Norway | Enwell Energy (ENW LN): Ukraine update | JKX Oil & Gas (JKX LN): 2Q20 update in Ukraine and Russia | Pharos Energy (PHAR LN): Operating update in Egypt and Vietnam | Sound Energy (SOU LN)C: Terms of Moroccan licence renegotiated | Tethys Oil (TETY SS): June production in Oman | Victoria Oil & Gas (VOG LN): Gas sales contract with ENEO in Cameroon terminated
EVENTS TO WATCH NEXT WEEK
14/07/2020: Aker BP (AKERBP NO) – 2Q20 results
15/07/2020: Premier Oil (PMO LN) – 1H20 update
13-17/07/2020: GeoPark (GPRK US) – 2Q20 update
Companies: I3E MAHAA JKX PHAR EQNR AKERBP ENI HUR PTAL REP RRE SOU TPL VOG OMV