March is traditionally considered ‘ISA season’, when UK investors focus on their annual ISA allowance and are encouraged to ‘use it or lose it’. As we highlighted in our article last year, investment trusts within ISAs are an excellent way to benefit from the power of compounding over the long term, without worrying about the tax consequences of whether you are receiving capital gains or dividend income. Our analysis last year showed that the top ten compounding trusts – since Personal Equity Plans or PEPs (the precursor to ISAs) were first introduced – come from a very wide range of asset classes. We determined that the distinguishing factors between them were manager skill and the unique ability, afforded by the structure, for investment trust managers to truly invest with a longer-term horizon than the open-ended competition.
Companies: UKW JCH JGGI ASEI CTY
Greencoat UK Wind (UKW) provides a pure investment exposure to UK wind farms, with the twin aims of delivering a high, RPI-linked income return for shareholders whilst maintaining capital value in real terms. These aims have been fully met so far. As we discuss in the Dividend section, the dividend forecast for next year is 7.1p, representing a compound annual growth of 18.3% since listing. NAV progression has also remained ahead of inflation, with growth of 22.1% against RPI over the same period of 17.4%. In share-price terms, shareholders have enjoyed a total return of 115.1% since launch to 31 December 2019. During 2019, the trust’s earnings were below budget thanks to wholesale power prices remaining below average last year and thanks also to lower power generation from the wind-farm portfolio. Even so, UKW’s dividend was well covered at 1.4x. The manager’s long-term expectation is 1.7x. UKW continues to grow, and now has gross assets of £2.44bn invested in 35 wind farms. Despite a competitive market, the manager has deployed around £800m of capital (invested and committed) over 2019, and is now becoming ‘utility scale’. UKW now provides around 1% of UK electricity generated. As we note in the Discount section, the publication of a bearish note on long-term electricity prices by Bloomberg New Energy Finance has caused a healthy reduction in the premiums across the sector, not to mention the recent market falls. UKW trades at a premium to the peer-group average, perhaps because of the higher investment returns so far delivered, the higher discount rate, and also because of its well-covered dividend.
Companies: Greencoat UK Wind
Inflation has been relatively tame for the past two decades, yet history suggests it would be unwise to reject the possibility of a damaging period of higher inflation out of hand. Central banks’ post-crisis quantitative easing policies have not led to the high inflation expected by some, but periods of high inflation in the past have been due to very different causes. When looking at the historical record, we see clear signs that the threat of inflation cannot be written off, and so taking out an insurance policy might be wise. Below we consider the potential sources of an inflationary shock to the global economy, and some assets and trusts that offer protection.
Companies: UKW RICA BREI BRWM
Bonds have traditionally been a core part of private client portfolios. Harry Markowitz is generally credited with developing and popularising the modern approach to investment diversification, as part of his doctoral thesis in 1952. Markowitz’s 60/40 equity/bond portfolio quickly became a staple of retail investor portfolios, and for many years equity and bond portfolios built around this basic concept have been highly successful for investors. The attractions were clear: aside from the solid income that bonds offer investors as a portfolio component portfolio, they also provided something of a hedge to equity exposure.
Companies: UKW TRIG HICL SOND
Whilst not everyone is yet declaring a “climate emergency”, most people now recognise that the global economy is not on a particularly sustainable trajectory. Recent news from Nestle – that they aim to be “net-zero” greenhouse gas emissions by 2050 - shows that what might have seemed a “fringe” idea a few years ago, is now mainstream. According to a 2018 YouGov survey, 62% of people believe Government are doing too little to prepare for and adapt to the impacts of climate change. 71% believe fossil fuel companies should help pay for damage caused by extreme weather events, and (perhaps of most immediate relevance to our readership) 62% of people are interested in a pension fund or financial institution that considers the environmental impact of the companies it invests in (Source: YouGov 2018). At the same time, consumers are increasingly aware of their buying power, and the influence it can have on companies’ corporate behaviour and supply chains. Allied to this, investors also recognise the effect their investing behaviour can have on companies they invest in. Increasingly, they look to the managers of the funds they invest in to engage with company management and see this as a mechanism by which positive change in investee companies can be brought to bear. Many established funds and ETFs offer “ethical”, “green” or another shade of socially responsible investment. However, these labels don’t in our view really reflect the full range of what is potentially on offer. We understand the broad concept as “ESG Investing” – environmental, social, governance. As a theme or concept it is clearly rising in popularity - Google searches for ‘ESG investing’ have risen rapidly over the past decade, with a compound annual growth rate of 73%, almost double that of ‘passive investing’ (42%). Many fund managers (or their marketing departments) have been jumping on the bandwagon, and ESG now features in many presentations where perhaps as recent ago as last year, there had never been any mention! Despite its apparent popularity, many investors do not have a fixed idea of what they really mean when they say they want funds with better ESG credentials. For example, some investors may mean that they want a very narrow focus in the types of companies they invest in – for example supporting renewable energy, and thereby generate strong returns but also help finance the shift to a less carbon intensive economy. Others may want to invest in companies which are leading the way in reducing (or actively addressing) the harmful effects of their business operations’ externalities, meaning that they are comfortable investing in companies and industries that pollute – but only if they are “getting their act together”, trying to reduce negative externalities, or are “best in class” in trying to minimise their negative effects. Others may want their fund managers to actively engage with company managements, and try to influence the strategic direction the company is taken on. Lastly, investors may only want to own companies with what they see as a correct gender-balance, or have policies which prevent child labour within their supply chains. There are many different ways of interpreting what ESG really means. The job of investors looking at ESG must be to find a fund or investment trust which is aligned with their own specific values, irrespective of the marketing document or industry sector it belongs to. We believe an increasing number of “mainstream” funds will be suitable for ESG investors, depending on what their requirements are. How, then, do investors find them?
Companies: IEM UKW MNP
Greencoat UK Wind (UKW) provides a pure investment exposure to UK wind farms, with the aim of delivering a high, RPI linked, income return for shareholders whilst maintaining capital value in real terms. We have recently launched an Environmental, Social & Governance (ESG) analysis section as part of our standard fund profiles. From an ESG perspective, UKW clearly ticks the “environment” box in that investing in UKW provides the long-term capital which enables an increase in renewable energy provision in the UK, and the shift to a lower carbon economy. The managers estimate UKW prevents over 1m tonnes of CO2 per annum from being emitted with thermal generation being the alternative. We calculate that this is equivalent to 0.8kg per share. Setting this into context, a flight from London to Milan emits 181kg of CO2 (Source: Atmosfair). A £10k investment in UKW is equivalent to 5.6 tonnes of CO2 “prevented” per year. In other respects, Greencoat as manager is clearly a keen proponent of ESG, and aware of its responsibilities therein. Greencoat were signatories to the UN-supported Principles for Responsible Investment (PRI) in 2016 and provides a lot of detail of how it incorporates ESG issues in its decision-making process and asset management. Wind is a resource that the UK has plenty of. In 2018 it was a significant contributor to the UK’s electricity supply – meeting 17% of the country’s total demand (renewables as a whole contributed 30%). As such, it is likely to remain one of the central planks of the UK’s strategy to achieve a lower carbon economy. Greencoat UK Wind (UKW) currently owns a portfolio of 35 wind farms around the UK, which together generate enough electricity to power 940,000 homes and is the largest renewable infrastructure fund listed on the LSE with net assets of £1.9bn. UKW remains amongst the best performing of the renewable infrastructure funds since it launched in 2013. Since launch, the company has delivered strong total returns comprising the 6p dividend, which has risen with RPI, and capital growth of 23.9%. In share price terms, shareholders have enjoyed a total return of 96.8% in just over six years. Despite the considerably lower volatility that the company exhibits, on a NAV total return basis UKW has outperformed the FTSE All Share Index total return since launch by over 30 percentage points. UKW’s main objective is to pay a high dividend to shareholders that is linked to inflation (RPI) and to preserve capital after taking inflation into account. The trust has a target for 2019 of 6.94p per share, representing a 2.66% increase over the prior year, and in line with RPI for December 2018. This year so far, UKW has paid two dividends totalling 3.47p which is in line with the target. Since launch (and based on the dividend target for 2019) the dividend has risen by 2.95% p.a., which compares to the retail prices index of 2.6% p.a. over the same period. At the current share price, the prospective yield is 5.0%. Around 50% of the company’s cashflows are directly index-linked, with the remainder being exposed to electricity prices. As such, electricity prices, which are assumed to have a correlation to inflation, affect UKW’s ability to grow the NAV by RPI in the long term. Given the high dividend cover of 1.7x on average, the company expects to be able to continue to grow the dividend by RPI on an annual basis over the long term. UKW has been growing strongly, and during 2019 so far has invested in excess of £600m funded from equity issuance and re-investing surplus cashflows supplemented by debt facilities. Net assets are now £1.9bn. Shareholders benefit from this growth in the form of a declining OCF, which has been coming down rapidly and through operational economies of scale within the business. As at the end of 2018, the OCF was 1.13%, a reduction from the 1.24% level at the end of 2017, and 1.46% at the time of initially listing. The published forecast OCF from the managers for 2019 was 1.08% at the beginning of the year. Many of the listed 'alternative income' funds continue to trade at significant premiums – and UKW is no exception on a current premium to NAV of 13%.
Over the past two decades, onshore wind power has prospered and now exceeds 12 GW in the UK. The termination of subsidies for new plants from 2017 onwards has cut investment. Instead, offshore wind power is the new ‘goto’ investment sector, as there has been a sea-change in costs. The key event was the 2017 auction for the development of the Hornsea Project Two and the Moray East fields, when 15-year contract for differences (CfDs) were awarded, at just £57.50p per MWh; this compares with the 2018 £100 per MWh target that had been set previously by the Government. In recent years, solar power has come of age. Total UK solar capacity now exceeds 12 GW. Inevitably, most solar farms are based in the Midlands or in the South, where irradiation levels exceed the UK average. A typical solar farm portfolio might include 50 sites with 8 MW of capacity per site. Despite the removal of subsidies for new solar plants, the prospects remain bright for new build, since costs have fallen appreciably in recent years. The levelised cost (LCOE) of solar power should fall below £70 per MWh. The UK’s first subsidy-free solar farm has been commissioned at Clay Hill in Milton Keynes. For many investors, REIFs offer an attractive means of securing exposure to the benefits of rising UK investment in these sectors, much of which is backed by long-term contracts delivering generally solid and secure returns. Our sector research focuses on 11 quoted REIFs, which mirror those selected by members of the Association of Investment Companies (AIC). The recently floated Aquila European Renewables fund is included, despite its declared policy not to invest in UK generation. Since May 2014, REIF returns have been solid, with total returns approaching 10% per year. As a group, their combined market capitalisation is ca.£7bn; the most valuable quoted funds are Greencoat UK Wind (£2.1bn) and The Renewables Infrastructure Group (£1.8bn). The sector premia over net asset valuations (NAVs) for most REIFs now lie in the 9%-19% range. The premium for Greencoat UK Wind, following its £375m gross fundraise, is ca.14%; The Renewables Infrastructure Group premium is similar. Targeted real dividend increases underpin the attractions, in particular, of wind and solar investments; major earnings shortfalls are low-risk, with little likelihood of a dividend cut. Prospective dividend yields for most REIFs currently lie in the range of 5.0%-6.0%. In terms of risk, future movements of interest rates could have a material impact on NAVs and, consequently, upon share price ratings. The precise effect will depend on the degree to which the discount rates moves relative to the riskfree rate. Regulatory amendments, subsidy changes and possible tax adjustments are also key risk factors with one company commenting that movements in long term power price forecasts are the most significant risk.
Companies: TRIG UKW NESF FSFL AERS GSF GRP SEIT USF
Greencoat UK Wind – Results of fundraising | Oakley Capital – Investment in Inspired
Companies: Greencoat UK Wind Oakley Capital Investments
Impact Healthcare REIT – Results of fundraising | Hipgnosis Songs – Acquisition | Greencoat UK Wind – Fundraising prospectus and timetable | Triple Point Social Housing – Response to BEST regulatory announcement
Companies: IHR SOND UKW SOHO
Greencoat UK Wind – Share issuance programme and initial fundraising | UK Commercial Property – Q1 2019 NAV and dividend
Companies: Greencoat UK Wind UK Commercial Property Trust
Fundraising showed signs of picking up this month, and the focus was very much on the renewables sector. First of all there was Renewables Infrastructure Group, which launched a placing programme and an initial fundraising early in the month, targeting up to £170m. It ended up raising just over £300m, having received applications for nearly three times as many shares as were originally available, in an upsized and scaled back issuance. Greencoat Renewables also announced and completed a placing which raised EUR 148m, around 40% more than the target. Another indication of interest in this sector was John Laing Environmental Assets successfully placing around 22m of its shares that were being sold by The John Laing Pension Trust. Finally, with regard to news in this sector, the close of the US Solar Fund* IPO had to be put back after just falling short of its target by the original closing date – closing is now expected to take place on 10 April.
Companies: TRIG BBOX UKW GRP ALF ELTA ESP FAIR BCPT BREI HTCF MERI UKCM
Many investors think ISA investing is all about sticking equities away for the long term and forgetting about them. However, we think there are good reasons for allocating to alternative income-generating assets in your ISA, even for those concerned with longterm capital growth. We think that many investors don’t fully appreciate the benefit of reducing the volatility on a portfolio. When thinking about long-term returns, the tendency is to think of the average return in the long run as what you will get, and to think of volatility as a measure of the mark to market “discomfort” along the way. However, this ignores the devastating effect of sequencing risk, and the fact that a particular average annual return can be consistent with negative eventual outcomes. Adding uncorrelated assets, such as alternative income funds, to your portfolio can massively reduce the risk of a terrible investment outcome, and, as we shall see, without necessarily reducing the expected return. This is certainly true when you consider how favourably the returns of these alternative income funds compare to those from equities in recent years, another fact we think is under-appreciated, and which sets them apart from traditional diversifiers such as high-quality bonds. There is no guarantee that future return patterns represent the past, of course. With respect to the alternative income funds we consider below, there are specific risks to capital which have to be considered. However, we think that there is a way to use these trusts taking these risks into consideration. The re-investment of the income from these trusts, reliable in the short term, gives the investor the opportunity to “pound-cost-average” their investment in equities when they look cheap, or reinvest in the same high yielding alternative assets. We consider how this might work below, and look at a range of alternative income funds that might be suitable.
Companies: TRIG UKW HICL NBLS MGCI
Greencoat UK Wind – Finals to 31 December 2018 | Tetragon – Finals to 31 December 2018 | RM Secured Direct Lending – Proposed fundraising | Electra Private Equity – Dividend declaration
Companies: UKW TFG RMDL ELTA
Greencoat UK Wind’s (UKW) aim is to provide investors with an annual dividend that increases in line with RPI inflation (target of 6.94p for 2019, a yield of 5.1%) while preserving the real value of the NAV in the long term through reinvestment of excess cashflow and the use of portfolio gearing. So far it has delivered on all of its promises since launch in 2013. UKW is now the largest listed renewable infrastructure fund, with net assets of in excess of £1.7bn (after the recent placing). Investment activity this year has continued apace, with £452m invested so far in 2019. This will bring the total portfolio to c. £2.3bn in size by the end of March. The managers expect to be able to benefit from scale, both in operational terms, but also in terms of acquisitions and financing. The OCF last year fell to 1.13% (from 2017’s 1.24% and 1.46% at listing) and is forecast to be 1.08% after the recent placing. The portfolio will shortly constitute investments (in whole or in part) in 34 operating UK wind farms around the country. These assets represent a net generating capacity of 950MW, enough to power c.900,000 homes. As such, the portfolio has geographic diversification around the UK, not to mention diversification by turbine manufacturer and by units – the company will own (or has interests in) a total of 715 turbines by the end of March. UKW buys only operating wind farms in the UK. UKW has unequivocally been a strong performer since it launched. The NAV total return (i.e. with dividends reinvested) since launch has been 8.3% pa. Despite the considerably lower volatility that the company exhibits, on a NAV total return basis UKW has outperformed both the FTSE All Share Index total return since launch, and peers in the listed renewable infrastructure sector. Around 50% of the company’s cashflows are directly index-linked, with the remainder being exposed to electricity prices. As such, electricity prices, which are assumed to have a correlation to inflation, affect UKW’s ability to grow NAV by RPI in the long term. Given the high dividend cover of 1.7x on average, the company expects to grow the dividend by RPI on an annual basis over the long term. Currently the trust has £400m of longer-term fixed rate borrowing, with a weighted average cost of 3.08% and remaining term of 5.6 years. The trust has an additional £394m of shorter-term gearing drawn down, equivalent to 34% of gross assets. Together the average interest cost is 2.76%. Over the medium term, the team expects total gearing to be between 20% and 30% of total assets. Many of the listed 'alternative income' funds continue to trade at significant premiums – and Greencoat is no exception on a current premium to NAV of 13%.
Research Tree provides access to ongoing research coverage, media content and regulatory news on Greencoat UK Wind.
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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
Accelerating activity in to FY21
Companies: Manolete Partners
With a new CEO, Amanda Blanc, Aviva’s shareholders could dream of a possible change in the group’s strategy, with a more focused insurance business. The new Chief has an opportunity to take painful decisions in a year where no one will require a high operating performance.
Companies: Aviva Plc
The Native Antigen Company (“NAC”) has been acquired by LGC for up to £18.0m – with the ongoing COVID pandemic highlighting the value of knowledge and execution in the infectious diseases space. Mercia invested in NAC via both its balance sheet and 3rd party funds. The exit represents a strong return for both sources of capital, validating complete connected capital to optimise value creation. For the balance sheet stake, the £5.2m proceeds represent a £2.5m gain on realisation (c.1.5% of our FY21e NAVps). Final Results will be announced next week, when we will review our forecasts. The shares are currently trading at a 45% discount to NAV (which is 20% cash). Today’s exit demonstrates justification for a much narrower discount, if not a premium, to conservative carrying values.
Companies: Mercia Technologies
Trading Well in Tough Market
Companies: Palace Capital
HgCapital Trust’s (HGT) 12-month NAV TR to end-March 2020 was a solid 13.8% despite the COVID-19 market downturn in March 2020 (ytd NAV performance since end-December 2019 was a 6.2% decline). The coverage ratio reached a historically low level (13% vs three-year average of 53%) after HGT notably increased its investment activity and commitments in Q120. However, a significant part of these new commitments will not be drawn in the near term. The board continues to review its future funding arrangements and may also opt out of a new investment without penalty across all funds. HGT’s portfolio focus is on the resilient software and technology sector and the manager expects a limited direct earnings impact on its portfolio from the COVID-19 pandemic.
Companies: Hgcapital Trust
Hot on the heels of the Architas acquisition – announced 1st July, Liontrust has issued in line final results (£38.1m adj. PBT vs £38.3m consensus, 24p second interim dividend). An accompanying trading update also confirms that AuM bounced back in Q1 as markets recovered and net inflows were sustained at a record £971m for the quarter. The Architas acquisition – once completed later this year – stands to drive Liontrust through the £25bn AuM mark and bolster the existing multi-asset product offering and wider appeal to the current client base. As joint corporate broker, we have withdrawn forecasts pending the approval of the acquisition at the forthcoming general meeting.
Companies: Liontrust Asset Management
Hipgnosis Songs Fund (SONG LN) has today announced a trading update for the full year ending 31 March 2020. The unaudited NAV has risen 13% YoY to 116.7p, up 14.3% since the last published NAV of 102.2p as at 10 January 2020. This represents a like for like valuation uplift of 11.4%. All equity has been fully deployed and shareholder approval has been sought to increase net debt from 20% to 30%. Revenue is strong with £64.7m generating an EPS of 10.7p (more than 2x the annual 5p dividend target). NAV growth has been driven by revenue statements which were up 2%, and an increase in streaming growth rate assumptions by the independent valuers. The portfolio comprises 54 catalogues, with 13,291 individual songs, now valued at £757m which was acquired at purchase price of £697m on an acquisition multiple of 13.9x – now valued on 15.0x historical earnings.
Companies: Hipgnosis Songs Fund Ld
Ground Rents Income Fund (GRIO) has today released its interim results for the period ending 31 March 2020. The fully diluted NAV is 110.1p down marginally from previous NAV of 111.3p as at 30 September 2019 year-end. This valuation included a material valuation uncertainty clause as a result of the COVID-19 pandemic, which has subsequently been removed since the period end for long dated ground rent valuations given the defensive nature of the income streams and continued market/transactional activity. The latest valuation represented a decrease on a like for like basis of £0.36 million or -0.3%. Two Interim dividends were paid during the six-month period ending 31 March totalling 1.98p, and a further dividend of 0.99p has been declared today (ex 16 July / payable 10 August). Dividend cover excluding the non-recurring litigation costs on Beetham Tower was 90%. Assuming a full year dividend of c4p this puts the shares on a flat yield of 4.9% and a discount of 26%.
Companies: Ground Rents Income Fund
Numis’ update for Q320 was positive, reflecting both the need for equity funding in the market and the strength of the group’s franchise as well as its ability to deal with current operating constraints. Subject to the market background in its final quarter, we now expect Numis to achieve a full-year result in line with or ahead of the high end of our previous scenario range.
Companies: Numis Corporation
Equals' FY19A results confirm another year of strong, double-digit revenue and adj EBITDA growth. The move to a B2B focused offering continues to progress and looks well timed in view of Covid-19's impact on overseas travel. While the pandemic impacted Q2/20E trading early on, we note June KPI's indicate a positive rebound. Given the continued uncertainty as to Covid's full impact upon FY20E trading, we refrain from reissuing forecasts and thus leave our recommendation under review.
Companies: Equals Group
ICGT, the 39-year listed private equity (PE) investor, has delivered a total NAV return of 178% over 10 years (comparable FTSE All Share return 61%). Since Intermediate Capital became the manager in 2016, ICGT has earned mid-teen p.a. underlying returns every year. This has been achieved by leveraging the attractive PE market with incremental manager synergies. It has a concentrated portfolio of “high-conviction” investments (19% p.a. average returns over five years, 42% of portfolio, defensive growth focus) and a diversified third-party PE funds book. ICGT manages over-commitment tightly. The 33% discount to NAV is above peers.
Companies: ICG Enterprise Trust
In parallel with its H120 interim results, Mercia has announced the acquisition of NVM’s VCT business for up to £25m in cash and equity, funded by a £30m placing at 25p per share (a 22% discount). Subject to shareholder approval, the acquisition increases AUM to £760m and moves Mercia towards being the UK’s number one regional investor. The deal expands Mercia’s shareholder register, further dilutes existing major shareholders and means Mercia should be profitable before fair value adjustments, closer to its target of an evergreen model (c £1bn AUM). In its H120 results, Mercia’s direct investment portfolio increased to £102.0m, with £11.1m of cash invested in 16 companies and a fair value uplift of £3.2m. Mercia has £17.8m of unrestricted balance sheet cash (pre-placing) and the shares continue to trade at a significant discount to NAV.
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
Companies: AEWU CREI CSH BOOT INL HLCL THRL SUPR RESI RGL DIGS GR1T SOHO PHP BOXE ASLI UTG AGR UAI BLND UANC CAL SHED CWD WHR EPIC WKP GRI YEW HMSO PCA INTU NRR
Tatton passed the March 2020 market-crash stress-test with flying colours. Financial advisers continued to trust it with their clients’ money – net fund inflows were £86m in March (just under the FY20 average of £94m pm) – at a time when many funds saw record outflows. Over FY20 Tatton recorded £1.1bn of inflows, and despite the market bottom nearly coinciding with the 31-Mar year-end, AUM closed 10% above FY19 on £6.7bn. Revenue grew 22% to £21.4m; adjusted operating profit was up 24% to £9.1m; PAT jumped 72% from £4.9m to £8.4m; and full-year dividend increased 14% from 8.4p to 9.6p, a yield of 3.3%. Tatton remains debt-free with £12.8m of net cash.
Companies: Tatton Asset Management