In recent years smaller investment trusts have been under pressure. The demand for smaller vehicles has been reduced by two factors: the consolidation in the wealth management industry and the increasing prevalence of centralized buy lists used by DFMs and advisers. If a large amount of money is being managed to a model, then allocations can be impossible to deal into a small trust. Anecdotally, the lower limit of viable size for professionals has been rising. £200m is a more realistic cut off point than £100m, and even that is not enough for some. The lower charges and greater liquidity of larger vehicles also makes them more attractive in the current environment. The COVID-19 pandemic has unleashed forces which seem to be increasing this pressure. Lower demand for assets has been caused by concerns about market direction and worsening personal circumstances, reducing the ability or willingness to invest. This trend is visible in flat investment trust industry assets over the first half of 2020. In addition we see this trajectory in the widening of the average discount in the universe from c. 1.9% at the end of January to c. 8.6% by the end of June – even if certain assets seen as invulnerable to the crisis have bucked this trend. Wide discounts can bring the long-term viability of a vehicle into play. Whereas the lack of investment demand creates greater competition for capital, which could further starve the smallest trusts of attention. However there are many investors who do not have the same liquidity restrictions as large, consolidated wealth management businesses operating model portfolios or buy lists. These include wealth managers with greater discretion over which funds they can use for individual clients, and individual retail investors managing their own money. For them the 50% of investment trusts which have less than £200m in market cap offer a variety of opportunities, which their peers can’t or won’t access. While some smaller trusts follow similar strategies to larger trusts, others are clearly differentiated and offer a way to diversify asset exposure of sources of alpha. Moreover the pressures of the COVID-19 pandemic could lead to an alternative source of return: wind ups or mergers which close persistent discounts. There has been a spate of recent corporate actions which show that some boards are willing to take extreme action, including the merger of Perpetual Income & Growth and Murray Income. While these two trusts both have over £500m in net assets, we think the boards of some smaller trusts could be considering this approach. The board of the £24m JPMorgan Brazil has recommended that shareholders vote against continuation at its 17 September annual general meeting.
Companies: BRLA AIE BEE HOT AJOT MIGO CCJI
Henderson Opportunities Trust (HOT) invests in UK stocks across the market cap spectrum. Managed by James Henderson and Laura Foll (who also co-manage Lowland Investment Company and the Law Debenture Corporation), HOT has an unconstrained portfolio that differs markedly from peers and the team’s other funds, with c 70% invested outside the FTSE 350 index, and c 55% in AIM stocks. HOT seeks capital growth but also offers a growing dividend (current yield of 2.4%), paid quarterly from FY20. The managers see the trust as one that will sit beside a mainstream fund in a portfolio and bring diversity to the combined list of holdings, not for the sake of it but for real capital appreciation. While HOT’s long-term performance record is strong, its returns in FY19 suffered as lowly valued UK small-caps (particularly those listed on AIM) have been out of favour.
Companies: Henderson Opportunities Trust
In recent years active management has been under almost constant attack from the rise of passive funds. Yet threats often give rise to opportunities: we believe that complacency is always the real enemy, and so competition from passive funds can be seen as a positive development in the industry. Active managers have been forced to up their game, and as we discuss below, our research shows that the UK closedended universe has become significantly more active in response to the challenge of cheap passive products. Here we discuss this shifting landscape, its implications for investors and the varying measures for ‘activeness’ available to investors.
Companies: EWI SMT HOT ASEI
In our February article 'Sweet Treats', we launched our list of discount opportunities - trusts we felt had the potential to see their discounts close significantly and, in turn, supercharge investors' returns. Our list has had a good beginning to its life, with the majority seeing their discounts close slightly in the almost three months since, aided by a good period for the markets. The investment trust universe has seen its average price rise by 3.2% since 13 February, as the below graph shows. We can trace the rally in the market to the meeting of the Federal Reserve’s interest rate setting body, the FOMC, on the 20 March. Shortly after that meeting, global equity markets began their rise, as investors lowered their expectations for future interest rates.
Companies: ASCI HOT ASCI HOT RMMC OCI MHN TFG BEE
Henderson Opportunities Trust (HOT) aims to outperform the FTSE All Share by investing across the market cap spectrum. The portfolio of c.90 stocks is dominated by smaller companies, and over 60% is currently invested in AIM. Managers James Henderson and Laura Foll aim to hold stocks for three to five years on average, and lean strongly on company meetings to understand management teams and the potential of their businesses. James and Laura are also a keen supporter of IPOs, looking to back high-growth companies at very early stages. The trust has a strong track record of doing well in rising markets, and is heavily invested in high-growth technology stocks as well as industrials and consumer discretionary companies. It is consistently geared, although with the ability to reduce the gearing at short notice, which in our view means that it is a higher-risk play. The relatively small size of the portfolio is also of benefit in the smaller companies space, we think, as it means the managers can continue to invest in the smaller end of the market without having to own large percentages of the companies, which would then be hard to sell. The discount ballooned out beyond 20% following the EU referendum’s Brexit result of 2016, and is currently trading at around the 16% level, making it cheaper than all but one of its AIC UK Equity peers and cheaper than all but two AIC UK smaller company trusts.
Henderson Opportunities Trust aims to outperform the FTSE All Share by investing across the market cap spectrum. The portfolio of c.100 stocks is dominated by smaller companies, and over 50% is currently invested in AIM. Manager James Henderson aims to hold stocks for three to five years on average and leans heavily on company meetings to understand management teams and the potential in their businesses. He is also a keen supporter of IPOs, looking to back high growth companies at very early stages. The trust has tended to do well in rising markets, and is heavily invested in high-growth technology stocks as well as industrials and consumer discretionary companies. It is consistently geared, although with the ability to reduce the gearing at short notice. The discount ballooned out beyond 20% following the referendum result of 2016, and is trading at around 18%, although the trust has traded on a premium in recent history.
UK equities are among the most unloved investments globally, with domestic-facing stocks particularly out of favour. Valueorientated investors may be asking themselves if there is an opportunity here, or if the ‘Brexit discount’ is justified. The Bank of America Merrill Lynch fund manager’s survey of global allocators saw weightings to the UK reach a historic low in March, and the country has been one of the least favourite locations all year amongst respondents. James Goldstone, manager of the Invesco Perpetual Select UK Equity and Keystone trusts, tells us US investors are on a “buyer’s strike”. Amongst domestic investors the data shows a similar pattern: the Investment Association reports that the open-ended UK All Companies sector was the worst-selling in March, as it was in four other months of the past 12. The UK equity income sector was the worst-selling in two months over the same period. We examine a number of trusts which have managers who believe they may benefit from a resurgence of interest in stocks exposed to the UK domestic story.
Companies: ASIT HOT IVPU SUPP
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Cenkos’s first half results demonstrated the benefits of its flexible operating model and strength of its client relationships. While challenges related to COVID-19 are set to continue, Cenkos’s focus is on growth companies and its fund-raising year-to-date has had a greater emphasis on corporates financing M&A and growth opportunities rather than for defensive purposes. This should prove more sustainable although, as always, the timing of transactions in the encouraging pipeline reported remains uncertain.
Companies: Cenkos Securities plc
Avation is a lessor of 46 commercial aircraft to a diversified airline client base. This morning, the group has released results for the 12-months to 30 June 2020, which illustrate the challenges faced by its customer base as a result of Covid-19, as well as the corrective actions taken by the Board that have resulted in profitability being maintained in the year as a whole. Loan repayment deferrals of c.$24.4m were obtained in the period, in comparison to $13.1m short-term rent deferrals being granted to airline customers and thus emphasising management's focus on liquidity during an unprecedented period for global airlines. Avation again reports that it is currently reviewing alternatives in relation to the 6.5% senior notes due in May 2021. Whilst at this point our forecasts remain under review, and near term challenges remain across the industry, we believe that demand for aircraft from lessors such as Avation will increase in time as a result of airlines being even more reliant upon aircraft leasing firms due to the retirement of older aircraft during 2020 in combination with much weaker balance sheets that are unable to support direct aircraft purchases.
Companies: Avation PLC
Record’s Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.
Companies: Record plc
Primary Health Properties (LON:PHP) is a real estate investment trust (REIT) that holds a portfolio of 510 primary health facilities in the UK (92% of the portfolio by value) and Ireland (8%). The business model is to manage the properties for rental income and to grow the portfolio over time. The
Companies: PHP PP51 PHPRF
What’s new: Today’s trading update reveals 17% rise in assets under management (AuM), double digit revenue growth, and an increasing operating margin as the business scales. The outlook is positive. Highlights are:
12.6% rise in 1H Group Revenues to £11.0m (1H last year: £9.7m);
21.9% rise in 1H adj operating profit to £5.0m (1H last year: £4.1m);
17.4% rise over 6 months in AUM to £7.8bn on 30 September 2020,
n.b. From 31 March 2020 the WMA balanced index rose 11.6% to 4510;
- Market movements added 12.5% to AUM (i.e. Tatton outperformed WMA);
- 1H net inflows of £328.1bn were 4.9% of opening AUM (i.e. c 10% annualised net inflows);
3.0% rise in Paradigm Mortgage Services member firms to 1,591
2.5% rise in Paradigm Consulting member firms
Interims will be announced on Wednesday, 18 November 2020
Companies: Tatton Asset Management Plc
In another upbeat update, GHT has confirmed that the business is tracking in line, in turn being driven by strong traction with key customer, ANZ. Here, new sales have driven a 20% increase in contracted customer revenue to >£11m in FY21. As a strategic partner (deeply involved with GHT in bringing new Clareti banking services to market) this extra investment is very encouraging, as it’s indicative of these services‘ strong future potential. Also announced today – GHT state that its transition to a recurring subscription model (commenced just two years ago) is now complete and that ARR now stands at £11.9m, ~+16% annualised organic growth since FY20 y/e. In a tough new business environment, we view this as a highly credible performance. It’s also worth noting that management reference remaining pipeline opportunities, these would further benefit strong forwards visibility – already £22.4m for FY21. Given this – and also as sign of confidence – today we reinstate FY21 forecasts. We look for a reacceleration in top-line growth: +16% y/y to £28.7m at a Group level, in turn driven by c.+24% organic growth in Clareti, to £20m. For valuation – with Clareti still in its relative infancy – we continue to view a sales multiple as most appropriate. Here, we note that peers typically trade in a 5-7x range vs. GHT at 4x our FY21 estimate. This suggests 25-75% upside to fair value for this disruptive company, with a multi-year growth opportunity still ahead.
Companies: Gresham House
ANGLE plc (AGL.L): Acceptance of FDA submission | Feedback plc (FDBK.L*): Partnership agreement | Open Orphan (ORPH.L): Human Challenge Study Model contract with UK Government
Companies: AGL FDBK ORPH
As expected following the US banks’ releases, Barclays’ third quarter results saw a sharp reduction in provisions build-up while the emergence of delinquencies has been delayed by the State’s supporting measures. Management continues to expect a reduction in the cost of risk next year. It remains to be seen if this guidance is capable of withstanding new lockdowns or a no-deal Brexit.
Companies: Barclays PLC
Following on quickly from its impressive full year results, these interim results confirm that our confidence for growth in the Program Management business was not misplaced.Contracted Premium increased 95% YoY (and 12% ahead of December 2019) to $925m –a stone's throw away from the $1bn 2020 guidance set in 2018. At the same time, Gross Written Premium (GWP) grew 42.6% to £247.2m, resulting in Economic EBITDA turning positive, at £0.8m compared to a loss of £0.3m in 1H19
Companies: Randall & Quilter Investment Holdings Ltd.
Agronomics has announced it has conditionally raised £10.0m gross from an equity issue at a price of 6.0p, which represents a 6.8% premium to the most recently reported NAV per share of 5.62p. Assuming the company's post-raise cash balance is £8.15m, after repaying a £1.9m bridging facility, we estimate the new NAV per share to be c5.7p. We see significant potential in the cultivated meat sector and believe Agronomics is well positioned to support this developing sector and generate strong returns from these investments. We see upside in Agronomics' portfolio and have today initiated coverage with a Buy recommendation.
Companies: Agronomics Limited
The most pleasing aspect of Tatton’s trading update for the six months ending 30 Sep 2020 (H1 2021) was how robust its fundamental offering to clients (financial advisers) has proven to be in highly uncertain market conditions. It continued to attract strong net inflows into its asset management business while also growing its base of IFA consulting and mortgage services clients. The prospect of beating our previous FY21 forecasts looks promising. Longerterm growth prospects also look strong. We do, however, remain wary of the potential impact of further large market dips. For now, we maintain our fundamental valuation of 300p per share but see room for significant upside on that mark if Tatton continues to deliver.
Tatton has reported an in-line H1 financial performance: revenue totalled £11.0m (vs N+1Se £10.9m) and £5.0m adj. EBIT (50% N+1S FY21e). AuM grew by 3.4% to £7.8bn as net inflows continued throughout H1 (+£328m) – a positive performance given the backdrop. Paradigm, particularly in Mortgages, has been resilient post-lockdown. Having delivered 50% of our earnings forecast for FY21e, there is potential for upside. However, we leave our forecasts unchanged and a margin for safety as we remain alive to potential external risks/volatility.
The interims confirmed that Covid-19 was minimally disruptive operationally in H1 20 and, ironically, may have improved both of R&Q’s divisions’ mediumterm trading outlooks. As the pandemic and other industry events have generated significant losses for insurers, they have created the current ‘hardening’ market driving demand for Legacy and Program Management.
Cenkos Securities plc has terminated coverage of Record Plc. Our previous recommendation (BUY) and forecasts can no longer be relied upon.
Please contact Cenkos for further information.
Agronomics is an investment company building a portfolio of investments in the developing alternative protein sector. The company is focused on early stage investments, offering attractive valuations and significant upside potential. Importantly, we believe Agronomics represents an opportunity for public investors to gain access to early stage private companies, which might not otherwise be available. We expect the cultivated meat sector to be driven by a number of global mega trends that will increase public awareness of the issues the sector is aiming to overcome. We see strong upside in Agronomics' existing portfolio and initiate coverage with a Buy recommendation.