The spice of life is variety. [It’s also a curry house in Glasgow, now sadly defunct.] Achieving variety by diversifying your assets has been an innate part of human risk management from time immemorial. Why else did the English Plantagenet kings maintain their claim to the French throne for so long? All investors, however, not just medieval royal families, have to consider how best to diversify the risks to which their wealth is exposed – whether they’re managing their own money or doing it professionally. For regulatory as well as theoretical and philosophical reasons, most UK investors actively seek portfolio diversification. Increasingly, as the advice industry becomes ever more regulated, advisers are making use of multi-asset, multi-manager products as a one-stop shop, especially as the asset management industry has become increasingly attuned to the opportunities and benefits of scale they can offer. Yet at this particular point in time, in an economic and financial environment unlike any we have experienced in the modern era, how exactly to achieve meaningful diversification is an increasingly difficult question. American economist Harry Markowitz is generally credited with developing and popularising the modern approach to 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. Over the last thirty years in particular, the risk parity model, pioneered by investor and philanthropist Ray Dalio and his Bridgewater All Weather hedge fund, has achieved enormous success. The targeted aim of this model is a more equal split of realised risk/volatility between asset classes, and it is built on a more sophisticated version of the staple equity/bond approach. The success of this diversified approach in providing superior returns while also dampening volatility can be seen from the historic returns. The graph below shows returns from a 60/40 portfolio in the US since 2003, rebased monthly. Returns are shown on a log scale to reduce recency bias.
Companies: BMPG RICA MIGO HAST SONG
Henderson Alternative Strategies (HAST) offers access to niche and specialist investments, which are otherwise hard to buy, aiming to outperform listed equity markets over the course of a cycle with lower volatility. James de Bunsen took over in 2014 as co-manager, shortly after the management of the trust was awarded to Henderson. James, and original co-manager Ian Barrass, who retired last year, then spent considerable time overhauling the portfolio and liquidating unwanted and unwise investments. The trust offers access to unlisted opportunities in the private equity, hedge fund and property space as well as more mainstream investments selected for their cheap valuations or idiosyncratic risk and return profile. Risk-adjusted returns have been on an upward curve, with the three-year Sharpe ratio on NAV top quartile for the AIC Flexible Investment sector, according to Morningstar data, and the trust used the diversification benefits of its wide universe to outperform equities strongly in the down year of 2018. The trust trades on a discount of 16%, having struggled to earn a re-rating despite the improved performance and new approach.
Companies: Henderson Alternative Strategis Trst
Henderson Alternative Strategies Trust (HAST) aims to provide a ‘one-stop shop’ for investors seeking to allocate to specialist and alternative assets. Following the retirement of co-manager Ian Barrass in June, HAST is now co-managed by James de Bunsen and Peter Webster. The trust’s focus on areas such as property and hedge funds, alongside specialist credit, private equity and emerging markets, among others, means it should be well placed to act as a source of less-correlated returns in times of mainstream equity market volatility. HAST’s NAV held up well in the market wobbles of Q118 and its move to more defensive positioning through the summer has so far stood it in good stead during the current sell-off in equity markets. Meanwhile, recent ‘buying on the dips’ in favoured holdings such as Worldwide Healthcare Trust and Polar Capital Global Financials will allow HAST to take full advantage of any recovery in sentiment.
Henderson Alternative Strategies Trust (HAST) has recently passed its three-yearly continuation vote, underlining investor confidence in the rebuilt portfolio of specialist and alternative funds. Medium-term NAV total returns are now in line with the informal annualised target of c 8% over rolling three-year periods, and in FY17 (to 30 September) all the underlying strategies – hedge funds, private equity, property, specialist sector and specialist geography – contributed positively to returns. In an environment of increased market volatility, the differentiated nature of many of the underlying assets could provide a source of diversification for investors, and a progressive dividend policy underpins the current yield of 1.8%.
Henderson Alternative Strategies Trust (‘HAST’) has delivered a share price total return of 19.8% for its financial year ending 30th September 2017. Over this period the discount has narrowed from 19.3% to 13.1%. Since the HAST financial year end the NAV has risen 2.4% and the discount has narrowed further to around 11%. In addition, the look through discount on the underlying portfolio is around 7-8%. HAST has a shareholder continuation vote at the end of this month, which we are confident will be passed by shareholders on the back of this strong performance. The continuation vote is repeated in three years’ time. Ordinary dividend of 4.75p, up 25% from last year puts the shares on an approx. 1.5% yield.
Henderson Alternative Strategies Trust (HAST) has continued in H217 to produce solid absolute returns from its portfolio of specialist and alternative funds investing in areas such as private equity, property, emerging markets and specialist credit. The three-year process of rebuilding the trust’s portfolio after its move to Janus Henderson was concluded nearly a year ago, and the managers are pleased with the progress made towards the informal target annualised return of 8%, measured over a three-year period. Share price returns over one year have kept pace with buoyant equity markets but with lower volatility, and over the same period HAST ranks third in its peer group for NAV total returns. The improved performance and a narrower discount may provide support as the trust approaches a three-yearly continuation vote in January 2018.
Henderson Alternative Strategies Trust (HAST) invests in a portfolio of specialist and alternative funds with the objective of beating longer-term global equity market returns. It allocates assets to five main types of strategy – hedge funds, private equity, property, specialist geography and specialist sector – focusing on funds that private investors would be unable or unlikely to access individually. After a three-year reconstruction process following its move to Henderson, the portfolio now represents the 30-40 best ideas of the investment team, and recent performance has improved dramatically. The trust has instituted a progressive dividend policy and also recently announced a special dividend.
Henderson Alternative Strategies Trust (HAST, formerly Henderson Value Trust) has been reconstructed into a portfolio of specialist and alternative funds. The managers have focused on private equity, hedge funds, property and specialist sector and geographical funds that individual investors are unable or unlikely to access. The aim is to achieve returns in excess of those from global equities on a three-year view, but with limited correlation to equity markets. The reconstruction is beginning to show through in performance, and over 12 months the trust has outperformed its informal composite benchmark and the FTSE All-Share. The discount remains wide at c 19%, reflecting a difficult history and a climate of investor risk aversion, but has scope to narrow should the performance upturn be sustained.
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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.
AFH interim results have shown resilience in a tough period. Revenues grew by 5% yoy and Adj. EPS is up 8% yoy. We reduce our FY20 EPS forecast by 8% to reflect the wider market falls and slower new business due to the lockdown. This reduction in earnings is significantly less than peers, highlighting the defensive nature of the business and the prudent temporary cost measures being introduced in FY20. The improved FCF of the business should lead to a re-rating, particularly as AFH now trades on 9.3x CY20 P/E, a significant discount to peers. Our reduced target price of 524p implies 81% upside. Re-iterate BUY.
Companies: AFH Financial Group
Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
Companies: AGY ARBB ARIX DNL GDR NSF PCA PIN PHNX PHP RE/ RECI STX SCE SIXH TRX SHED VTA
Aside from its FY 19 earnings presentation, British Land has adopted a more cautious anticipation about Offices in the City of London. We share this pessimism and have been surprised by the recent share’s bump. The latter is the opportunity to turn negative, again, and update our divestment case.
Companies: British Land Company
ULR’s finals were in line with on EPRA NAV and earnings a little better than expected. Valuations remain stable and full rent collection has been achieved for the current quarter. We see fundamental quality and resilience in the (now expanded) portfolio – ULR has already invested nearly £100m in the first two months of the new year following the £136m equity raise. We make no material changes to forecasts. Current valuation points to an 7%+ annualised return, with upside remaining from deployment of funding headroom, active management and potential for valuations to improve.
Companies: Urban Logistics REIT
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
Today’s FY update reports that the decisive action taken at the outset of the COVID crisis has protected returns. Revenues held up through to the May year end. Aided by cost savings, adj. EBITDA is expected to be 20% ahead. We expect a more modest final dividend to protect the capital surplus. Additional savings have been outlined, which we overlay on a conservative “flat market/fewer new clients” scenario for FY21e – where we hope outperformance is possible. Updating EPS forecasts: FY20e +25%, FY21e -10% and FY22e -7%; also incorporating the Hurley Partners acquisition (+8%). We consider MW a high quality core holding with long term potential.
Companies: Mattioli Woods
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
Tetragon Financial Group (TFG, Tetragon) achieved a 13.6% NAV/share total return and a 13.4% ROE in FY19, in line with its long-term target of 10–15%. The main driver of Tetragon’s performance was its asset management business (TFG Asset Management), which comprises managers with a total AUM attributable to Tetragon of US$27.4bn and generated an EBITDA of US$59.5m in FY19 (up 51% y-o-y). The late-2019 investment activity left Tetragon with a relatively low net cash position (4.1% of NAV at end-April). The shares trade at a three-year average discount to NAV of 44% (currently at 62.7%), which is relatively wide compared to peers given the company’s track record of delivering a 16% NAV TR pa over the last 10 years. The recent market sell-off has so far resulted in a 5.1% decrease in NAV (ytd to end-April 2020).
Companies: Tetragon Financial Group
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
MJ Hudson has confirmed that it expects to achieve profits in line with expectations for FY20E. This is a good result linked to new client wins during the COVID-19 disruption and timely cost management. Whilst much of the group's activities are proving resilient, uncertainty remains and in line with most of the peer group, MJ Hudson is withdrawing guidance for FY21E. We similarly withdraw our FY21E forecasts until visibility improves, moving our rating to Under Review. Meanwhile, the shares are now down 30% since their pre-COVID-19 highs, which is beyond that seen at outsourcing peers (Sanne, JTC). Whilst COVID-19 is presenting challenges for many businesses, we believe that: 1) the structural growth drivers in alternatives that underpin MJ Hudson's growth will continue to remain highly relevant, and 2) its strong balance sheet gives it a relative advantage.
Companies: MJ Hudson Group
The positive market movements (£19.5bn) offset the net outflows of £1.3bn. The adjusted operating profit before tax reached £1,149m, down 21.9% yoy. The insurer benefited less from longevity assumption changes (£126m vs. £441m in 2018) in the Heritage business and the lower Asset Management fees margin (38bp vs. 40 bp in 2018) in the Savings and Asset Management one. The current context has led to a decrease in the Solvency II ratio by 10%, but the capital position remains resilient at 166%.
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
In the past month the group has made significant progress in pivoting its business away from its traditional face-to-face model. Although lending levels remain appropriately subdued, it has achieved an impressive collections performance, with its largest business running at about 90% of pre-lockdown levels. This, combined with the group’s high risk-adjusted margins has enabled it to generate £3m of FCF in the first three weeks of April, taking its net cash position to £38.7m as of 21 April. This strong financial position, combined with the group’s innovative approach to product development puts it in an extremely strong position to serve its clients and win share when the current government restrictions are eventually lifted. Reflecting this positive outlook we reiterate our BUY rating.
Companies: Non-Standard Finance
The COVID-19-related crisis further increases the top-line pressure. However, the quarter showed ongoing efficiency gains and, above all, management’s cost of risk guidance stood significantly below our stress test based projections.
Companies: Lloyds Banking Group