There is some evidence that, in recent years, the rise of passive funds has caused investment managers to become increasingly concentrated, endeavouring to be considered active managers as opposed to ‘closet trackers’. The most active trusts tend to generate the highest levels of alpha, as we have often noted, and on average managers have been decreasing their number of holdings in the hope of achieving this. Academic support for taking this approach has been provided by Martin Cremers and Antti Petajisto, who have shown evidence that portfolios with higher ‘active share’ tend to beat their benchmark net of fees whereas the least active tend to match their benchmark index performance before fees, and under-perform after fees. In this article we assess how the trusts that have been increasing their concentration have performed in the most recent market corrections. We then assess the performance of the most concentrated trusts, including investors in both small and largecaps, through the COVID-19 crash, and compare how they have done relative to the broader investment trust universe and their peers. Our research shows that more concentrated funds are not necessarily more susceptible to underperformance in a falling market.
Companies: MNP MNL BAF FGT TIGT
Finsbury Growth & Income Trust (FGT) has been managed by Nick Train since January 2001. Given the economic uncertainty due to the global COVID-19 pandemic, he stresses the importance of determining which companies will survive and thrive, and which could ultimately fail. The manager also seeks to invest in firms that can take advantage of the upsurge in digital and software services, as technology is advancing at an accelerating pace. While Train rarely initiates new holdings in the fund, in recent months he has added a position in premium mixer producer Fever-Tree, taking advantage of a significant pullback in its share price. FGT has a very strong performance record and has outpaced the broad UK market over the last one, three, five and 10 years.
Companies: Finsbury Growth & Income Trust
The COVID-19 pandemic is far from over, but with March coming to a close we have perhaps seen the end of the first act. Most of the developed world is in various degrees of ‘lockdown’; anxiously watching poorly reported – and often poorly understood – numbers for indications that their government’s strategy is working. Meanwhile equity markets saw one of their worst ever quarters in Q1 2020, as whole swathes of the economy were shut down by government diktat. The speed with which the situation developed was remarkable; and it is fair to say that all managers would have been surprised, even if they had other reasons for being bearish. We take a look at how and why certain investment trusts have done well in absolute and relative terms amidst the carnage, and ask if the causes of the crisis can provide any indication how the situation might end, and which trusts might outperform.
Companies: BHGU BHMG RICA PSHD BGUK MWY USA BGEU SMT MNL ATT FGT TIGT
Finsbury Growth & Income Trust (FGT) has been managed by Nick Train since the beginning of 2001. He has a reputation for investing with a long-term view, willing to take the ups and downs in performance, primarily in consumer branded goods companies. However, the manager is keen to stress that FGT also has important holdings in other businesses with strong franchises and brands, whose shares may be more volatile. Of note, the trust’s three best-performing stocks in 2019 were not consumer goods companies – London Stock Exchange (+91%), Daily Mail & General Trust (+48%) and Schroders (+36%). Despite a pullback in relative performance in recent months as UK stocks with domestic operations have rallied due to a less uncertain political backdrop, FGT has outperformed the FTSE All-Share Index over the last one, three, five and 10 years.
Quality as an investing style has outperformed significantly in recent years, and over the past 12 months especially so. After this kind of outperformance, it is natural to ask whether a trend is over-done and profits should be taken – and that is what we have done. When analysing the typical quality benchmarks, it quickly becomes apparent that these indices have significant industry and sector exposures, which could affect how they perform in the future and put them at risk of a down period. But the picture is also complicated by the fact “quality” is a hard factor to define, making it crucial to understand the investment process of a manager thoroughly. In our view, there are good reasons to think that quality, properly defined, could continue to do well. In particular, we think that the strong performance of quality in down markets could appeal given the weakening sentiment towards equity markets this summer. However, the issues of index composition and the shifting definition of “quality” means that an active approach is preferable to a passive we argue. In this article, we take an in-depth look at the outlook for quality, and consider a selection of trusts taking varied approaches to achieving a strong quality tilt.
Companies: FGT FEET JUSC SST ANII DGN
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
In January we introduced a new quantitative rating system for investment trusts. Our ratings look at NAV total return performance. They are, we believe, the first quantitative rating for closed-ended funds to do so and thereby capture the performance of the management team rather than the noisier share price movements. Our ratings aim to identify the top performers for capital growth and for income. We have designed the quants to identify those trusts which have added the greatest alpha to their benchmarks and which have displayed an attractive balance between performance in rising and falling markets. For the income ratings, we have set out to identify those trusts which have managed to generate a high yield while growing their dividends and without sacrificing capital growth. We have scored all AIC trusts on our selected metrics and awarded the top twenty in each category our growth or income ratings. We believe our ratings highlight those trusts which have displayed the most highly attractive characteristics for investors in the recent past. Pleasingly, since we launched the list the trusts have done well on average, outperforming their benchmarks significantly – particularly the capital growth trusts We will rebalance the ratings at the end of 2019, but here we give an update on the performance of the trusts we have rated and the key factors affecting performance.
Companies: FGT SLS IPU BEE JCH
Finsbury Growth & Income Trust (FGT) has been managed by Nick Train since 2001. His strategy of running a highly concentrated portfolio (currently 20 names) – focused on just three business areas – has proved to be very successful, as illustrated in the 10-year relative NAV chart below. FGT has outperformed the FTSE All-Share Index over the last one, three, five and 10 years, helped by a recent step-up in capital appreciation, and has outpaced the performance of all of its larger-cap peers in the AIC UK Equity Income sector over these periods. Train remains optimistic about the outlook for selected UK equities, focusing on high-quality companies that can grow regardless of the stage of the economic cycle.
Finsbury Growth & Income is a highly-concentrated investment trust with a portfolio of mainly UK stocks, aiming to achieve capital and income growth in excess of that produced by the FTSE All-Share. Fund manager Nick Train ignores the benchmark entirely - investing in companies which he believes will perform well regardless of their weighting in the index. The trust tends to invest in companies that have been resilient over various cycles and exhibit steady earnings growth over the long term. He runs a highly-concentrated portfolio which stood at just 22 stocks when last reported in February, and Nick is renowned for his very long-term, low-turnover approach. For example, the most recent addition to the portfolio was Manchester United last summer, and he has only added one other new stock to the portfolio over the past four years. This, along with his focus on high-quality, cash-generative companies with strong franchises means his portfolio is highly differentiated to his peers in the AIC UK Equity Income sector. Over the past five years (to the end of March) the trust has delivered an NAV return of 78.9%, beating the AIC UK Equity Income sector by 44.5%and more than doubling the returns of the FTSE All Share. The trust’s returns over the longer term have been equally as strong, with it having beaten the index in nine of the past ten calendar years. The trust is known for trading at a slight premium to par, however, in recent times we have seen this gap narrow. At the time of writing the premium is just 0.2%, relative to the three year historical average of 0.6%.
“The single greatest edge an investor can have is a long-term orientation”, according to Seth Klarman, the American billionaire hedge fund investor. On the Hargreaves Lansdown platform the number of people with more than £1m in their ISA has increased from just three in 2012 to 168 today. However while this sounds very impressive, £1m doesn’t seem that fanciful given full historic contributions to PEPs and ISAs since 1987 would have added up to more than £291,000. We calculate that an investor would “only” have to have generated an IRR of 7.74% on every year’s subscription to have generated a seven-figure sum today. ISAs offer an excellent way to grow capital and benefit from compounding (that eighth “wonder of the world”) over the very long- term entirely free from the clutches of HMRC. Investments are tax neutral within the ISA wrapper, and in contrast to a SIPP, there is zero tax payable on the entire amount when capital or income is withdrawn. Another contrast to a SIPP is that there is no size limit – under current legislation an individual’s ISA can be as big as it gets. Whilst building an ISA pot of £1m is clearly a huge achievement, our analysis suggests that many investment trust managers would have delivered significantly more. There are around 48 trusts for which we have meaningful statistics going back to 1987 which have had broadly the same strategy and/or elements of the same management team over this time. Of these, an incredible 34 trusts would have delivered a total ISA value (share price returns net of fund fees, but before the ISA wrapper fees) of over £1m, if an individual had put their entire PEP / ISA subscriptions in the same trust every year.
Companies: SMT IIT JEO IEM JEO ICGT OCI SUPP ATST LWI FGT
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
Finsbury Growth & Income Trust (FGT) has a distinguished track record of outperformance – its NAV total returns are above those of the FTSE All-Share index benchmark over one, three, five and 10 years. It also ranks first over these periods when comparing its performance with that of its 10 larger-cap peers in the AIC UK Equity Income sector. Manager Nick Train highlights the trust’s 7.7% dividend growth in FY18, which was fully covered by revenue. He says this growth rate is very encouraging compared to the much lower levels of UK inflation and interest rates, and illustrates the strong cash flow being generated by portfolio companies, which he argues should continue to support FGT’s annual distributions.
Finsbury Growth & Income is a highly-concentrated investment trust with a portfolio of mainly UK stocks, aiming to achieve capital and income growth in excess of that produced by the FTSE All-Share. Fund manager Nick Train ignores the benchmark entirely - investing in companies which he believes will perform well regardless of their weighting in the index. The trust tends to invest in companies that have been resilient over various cycles and exhibit steady earnings growth over the long term. He runs a highly-concentrated portfolio which currently stands at just 24 stocks and Nick is renowned for his very long-term, low-turnover approach. For example, the most recent addition to the portfolio was Manchester United last summer, and prior to this he had only added one new stock to the portfolio over the past four years. This, along with his focus on high quality, cash generative companies with strong franchises means his portfolio is highly differentiated to his peers in the AIC UK Equity Income sector. Over the past five years (to the end of May) the trust has delivered an NAV return of 73%, beating the AIC UK Equity Income sector by a considerable margin and doubling the returns of the FTSE All Share. Its returns over the longer term have been equally as strong, with the trust having beaten the index in nine out of the past 10 calendar years. The premium has fallen to around 0.5% in the recent market sell-off, with the board committed to buying back shares if the trust moves to a 5% discount.
Finsbury Growth & Income has a highly concentrated portfolio of mainly UK stocks aiming to achieve capital and income growth in excess of that produced by the FTSE All-Share. Fund manager Nick Train, a major shareholder in the trust, ignores the benchmark entirely - investing in companies which he believes will perform well regardless of their weighting in the index. The trust tends to invest in companies which have shown themselves to be resilient over various cycles and exhibit steady earnings growth over the long term. He runs a highly-concentrated portfolio which currently stands at just 25 stocks and Nick is well known for his very long-term, low-turnover approach. For example, the most recent addition to the portfolio was Manchester United last summer, and prior to this he had only added one new stock to the portfolio over the past four years. This, along with his focus on high quality, cash generative companies with strong franchises means his portfolio is highly differentiated to his peers in the AIC UK Equity Income sector. Over the past five years (to the end of May) the trust has delivered an NAV return of 90.6%, beating the AIC UK Equity Income sector by a considerable margin and doubling the returns of the FTSE All Share. It’s returns over the longer term have been equally as strong, with the trust having beaten the index in nine out of the past ten calendar years. Finsbury Growth & Income has a rigorous discount control mechanism. Strong demand for the shares has allowed the board to raise c.£70m of assets over the course of 2017.
Since the launch of the first index fund in 1976, passive investing has proven to be a successful investment strategy for both institutional and retail investors. The first of its kind, the Vanguard 500 Index fund, has delivered an annualised rate of return of 10.01% totalling to a return of over 1,500% since 1989. Whilst good in absolute terms, in relative terms because of fees it has underperformed the index, with the S&P 500 delivering an annualised return of 10.12% over the same period. Although there is only a small difference between the two annually, we calculate that over the 42 years this equates to underperformance of c.53%. However, this difference is a declining feature, and with fees now at only 0.14%, another 42 year period would see a difference of only 6% relative to the index. On the other hand, active management hasn’t (if one looks at the performance of the average fund) covered itself with glory either in terms of outperforming benchmarks. According to the most recent S&P Indices vs Active Management (SPIVA) report, which offers information on the passive vs active debate in the US over the course of 2017, 63.1% of large-cap managers, 44.4% of mid-cap managers, and 47.7% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively. Over a five-year period, the numbers look even worse for supporters of active management:- 84.23% of large-cap managers, 85.06% of mid-cap managers, and 91.17% of small-cap managers lagged their respective benchmarks. Outperformance of a benchmark is possible, but the numbers above suggest that active managers are mediocre, and that those who can achieve outperformance over the long term are therefore difficult to identify. So, what marks this small sub-set out? What are the small minority of active managers who are outperforming their benchmarks doing differently?
Companies: FGT JEO SMT ATST IIT
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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.
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
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
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
Sigma Capital (“Sigma”) has partnered with global alternatives manager EQT to deliver and manage a £1bn GDV private-rented sector (“PRS”) housing fund focused on Greater London. EQT will invest £300m equity, complemented by debt (including a Homes England facility), to build 3,000 homes in 5 years. Sigma will generate fee income as development manager, a recurring fee income stream from managing completed assets, as well as participation in returns via a minority co-investment (£16m) and a profit share. We estimate that the fee income alone is worth £45m to Sigma in the first five years: 50% of the current market cap. Crucially, this is a step up in AuM bringing a high quality long-term recurring earnings stream. We will reforecast following interim results (expected tomorrow) to provide full context.
Companies: Sigma Capital Group Plc
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
In line interim results to 30 June 2020 show the strength of this business amid a difficult environment. This is the first step in what should be an exciting growth trajectory toward a larger, scaled up business with high recurring revenues and ownership of the full supply chain in the personal injury and clinical negligence market for clients requiring long-term, risk-adjusted returns. We reiterate our TP of 50p, noting further upside potential as acquisitions are completed.
Companies: Frenkel Topping Group Plc
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
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.
As anticipated, Record has confirmed a material uplift in AUME following the rebound in financial markets from April. We upgrade FY21E forecast EPS by +18%, with higher staff costs offsetting some of the benefit. We expect AUME growth to be more modest from herein. While no performance fees have been recognised over Q1/21 and will be harder to achieve due to Covid-19, any future recognition would have a materially positive impact on earnings. Covid has temporarily paused new client wins, but we expect further additions to come as conditions improve.
Companies: Record 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
COVID-19 and a further cut to power price assumptions saw NAV per share fall to 309p in H120 (FY19: 337p). However, PPP performed well, bidding momentum has picked up recently and John Laing Group (JLG) expects ‘modest’ NAV growth in H2. New CEO Ben Loomes highlighted digital connectivity and energy transitions as potential future investment themes, and will set out further details in November. We cut our FY20 NAV per share forecast by 14% to 308p. The share price stands at an 8% discount to FY20e NAV per share.
Companies: John Laing 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
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