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.
Companies: Finsbury Growth & Income Trust
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 JAI 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
Finsbury Growth & Income Trust (FGT) is managed by Nick Train, who runs a concentrated portfolio of primarily UK equities, aiming to generate long-term capital and income growth. A key feature is the trust’s low portfolio turnover – initiating a new holding or a complete disposal of a position happens very infrequently. FGT is invested in just four out of 10 sectors of its benchmark FTSE All-Share index. Shareholders have benefited from the manager’s focused, long-term investment approach, with the trust having significantly outperformed its benchmark over the last one, three, five and 10 years. Train remains optimistic on the outlook for FGT’s portfolio companies and has been taking advantage of individual share price pullbacks, adding to some of his largest positions, such as Burberry.
Finsbury Growth & Income Trust (FGT) aims to generate long-term capital and income growth from a concentrated portfolio of primarily UK equities. Manager Nick Train has recently initiated a position in Manchester United, which is FGT’s first new holding since 2015. He believes that the football club has a very strong and valuable franchise, along with a history of generating positive returns for shareholders. FGT has a long-term track record of outperformance versus its FTSE All-Share index benchmark, with higher returns over the last one, three, five and 10 years. The trust has a progressive dividend policy; the FY17 dividend was 8.4% higher than in FY16, despite a meaningful dividend cut at portfolio company Pearson.
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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.
Premier Miton have reported their H1’20 results, which have shown delivery of key operational milestones during the period and strong performance despite the COVID-19 fears. Since the end of March, markets have recovered and net flows have been positive in April, meaning AUM has reached £9.9bn. We believe this shows the resilience of the business and that the benefits of the merger are coming through. As delivery continues we believe Premier Miton will see a significant re-rating as the shares currently trade on just 9.7x CY20 P/E, a significant discount to peers and historic levels of 12.5x. We reiterate our BUY rating and DCF based target price of 152p, implying 52% upside.
Companies: Premier Miton Group
The Renewables Infrastructure Group - £120m capital raise
Marwyn Value Investors - Proposed share acquisition by manager and crystallisation of carried interest
DP Aircraft I - 5% ownership stake in Norwegian
Companies: Renewables Infrastructure Group Marwyn Value Investors
In this note, we analyze the indebtedness of 35 international E&Ps publicly listed in the UK, Canada, Norway, Sweden and the USA. For each company, we look at (1) cash position, (2) level and nature of debt (including covenants), (3) debt service and principal repayment framework and (4) Brent price required from April to YE20 to meet all the obligations and keep cash positions intact. We also estimate YE20 cash if Brent were to average US$20/bbl from April to YE20. While the oil demand and oil price collapse are of unprecedented historical proportions and the opportunities to cut costs much more limited than in 2014, most companies (with a few exceptions) entered the crisis in much better position than six years ago, with stronger balance sheets and often already extended debt maturities. In addition, this time around, many E&Ps have already been deleveraging for 1-2 years and are not caught in the middle of large developments that cannot be halted. The previous crisis also showed that debt providers could relax debt covenants for a certain period as long as interest and principal repayment obligations were met. This implies that as long as operations are not interrupted and counterparties keep paying their bills (Kurdistan), the storm can be weathered by most for a few quarters.
With (1) Brent price of about US$50/bbl in 1Q20, (2) reduced capex programmes, (3) material hedging programmes covering a large proportion of FY20 production at higher prices and (4) limited principal repayments in 2020, we find that most companies can meet all their costs and obligations in 2020 at Brent prices below US$40/bbl and often below US$35/bbl) from April until YE20 and keep their cash intact, allowing them to remain solvent at much lower prices for some time. In particular, Maha Energy and SDX Energy are cash neutral at about US$20/bbl. When factoring the divestment of Uganda, Tullow needs only US$9/bbl to maintain its YE20 cash equal to YE19. Canacol Energy, Diversified Gas and Oil, Independent Oil & Gas, Orca Exploration, Serica Energy and Wentworth Resources are gas stories not really exposed to oil prices and Africa Oil has hedged 95% of its FY20 production at over US$65/bbl.
Companies: AKERBP AOI CNE CNE DGOC EGY ENOG ENQ GENL GKP GPRK GTE HUR IOG JSE KOS LUPE MAHAA OKEA ORC.B PEN PHAR PMO PTAL PXT RRE SDX SEPL TETY TGL TLW TXP WRL
Despite the disruption caused by COVID, Harworth has continued to make good progress across each business area. Liquidity has also been enhanced with an increase in the RCF announced at the end of April.
Companies: Harworth Group
Companies: AVO AGY ARBB ARIX BUR CMH CLIG DNL GDR HAYD PCA PIN PHP RE/ RECI RMDL STX SHED VTA
There has been much comment on the fact that equity markets in the US and Europe have been shrinking for some years now, certainly in terms of the number of quoted companies, if not in total market capitalisation (MCap). This paper has been written with the assistance of the Quoted Companies Alliance (QCA) and focuses on the evidence for such in the London market and, in particular, that for smaller and midcap companies. It assesses that evidence and considers explanations. Finally, we ask why it matters, and assuming that it does, what practical steps can be taken to reverse the trend. Successful public markets have been a key part of the United Kingdom’s economic success for generations, even centuries, and we should not allow them to wither on the vine.
Companies: AVO AGY ARBB ARIX ASAI DNL GDR HAYD NSF PCA PIN PXC PHP RE/ RECI RMDL STX SCE TRX TON SHED VTA
We believe RECI’s 21% discount to NAV reflects a reduction in investors’ confidence, reflecting the uncertain outlook, security values and potential impairments. When considering if this discount is excessive, we note i) a relatively low-risk profile, ii) strong liquidity means RECI can optimise recovery returns, iii) restructuring is a core competency, iv) realised losses to date are just 2.1p, v) bond valuations are expected by RECI to be repaid at par, but priced at 17% below par, and vi) borrowers have been injecting equity into their deals. The stable 3p 4Q dividend and unchanged policy show confidence and re-investment returns rising.
Companies: Real Estate Credit Investments
The Merchants Trust (MRCH) is managed by Simon Gergel at Allianz Global Investors (AllianzGI). Aiming to continue to provide a high and growing level of income, he is adjusting the trust's portfolio in the wake of dividend cuts sparked by the negative economic effects of COVID-19. If there is an income shortfall in this financial year, MRCH is well positioned to maintain its dividend, with revenue reserves of more than 1x the last annual payment. It has not been an easy period for value managers over the last decade as growth stocks have led the charge; however, Gergel has outperformed the UK market over this period in both NAV and share price terms. The board reduced MRCH's gearing in late January 2020, which was opportune timing ahead of the recent significant stock market weakness.
Companies: Merchants Trust
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
Trading Update – Showing Resilence
Companies: Manolete Partners
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
AFH Financial released an AGM statement suggesting that trading for FY20 remains in line with expectations. In the first four months of FY20 AFH has continued to see inflows at Q4’19 levels. The company also expects to see continued consolidation and a growing need for financial planning. Although the current market uncertainty has hit the industry, we believe that AFH is less affected than others by market movements due to its protection broking revenues and initial advice fees totalling 40% of revenues. We leave our forecasts and TP unchanged. These show AFH trading on 10.8x FY20 P/E falling to 9.7x in FY21, and yielding 2.8% rising to 3.1%. BUY.
Companies: AFH Financial Group
Given the substantial share price decline for Ramsdens in the last month, following clear risks to near term earnings, we revisit the group’s valuation and suggest a potential impact to earnings from the COVID-19 related lockdown. The analysis shows that Ramsdens has a solid balance sheet with a number of clear valuation supports and will be able to withstand the extreme conditions that are likely to occur over the coming months. We use an 8x multiple on FY20 earnings as a reflection of a normalised earnings base which reduces our target price to 180p from 258p. At this target price Ramsdens would trade on a FY21 P/B of 1.6x and yield 4.5%. This target price offers 114% upside and we retain BUY.
Mattioli Woods has issued a trading update around the impact of the ongoing COVID-19 pandemic. We are reassured to hear that trading for the first 9m of FY20e (to Feb-20) was in line with expectations. There is likely to be a revenue impact, from falling asset prices and limits to normal business activity, however, it is not possible to quantify this just yet. A number of proactive measures are being taken to adjust the cost base to mitigate the short term impact, including reduced senior management team/variable compensation. We would highlight that c.55% of MW’s revenue is not linked to the value of client assets, providing a degree of insulation to asset prices. We make no forecast changes at this stage, but will monitor events and make any adjustments when there is greater certainty
Companies: Mattioli Woods