With net assets worth north of £1bn at the time of writing, JPMorgan American Investment Trust (JAM) has long been the bellwether investment trust for exposure to North America, offering a core exposure to mainly large-cap stocks. JAM continues to offer this, but since 1 June 2019 has been using a new approach, with the portfolio being managed by two experienced individuals with very different styles – one growth (Timothy Parton) and one value (Jonathan Simon). Each manager contributes a highly concentrated portfolio of best ideas – at any one time between ten (minimum) and 20 (maximum) holdings. Each has a strong awareness of the other in a portfolio context, and the split between growth and value is expected to remain fairly evenly balanced over time. The year to date has clearly been a volatile one, with each manager facing different challenges. In the value portfolio, Jonathan has been using volatility to trade up in terms of quality. In the growth portfolio, Timothy has been trimming stocks in which the market has excessive optimism, but is finding lots of new ideas. As such, the growth portion of the portfolio is being allowed to run up to 54% (as at 30/06/2020), rather than being rebalanced. The unique feature of the strategy – combining concentrated growth and value portfolios – has meant that JAM has been more consistent and less volatile than peers over the past year. The trust underperformed during the market sell-off, but has rebounded more strongly so that it is outperforming peers and is only very marginally behind the S&P 500 since the team took over.
Companies: JPMorgan American Investment Trust
The COVID-19 related shutdown has seen the largest US companies extend their share price performance leadership even further, and they are generally assumed to be the winners from any changes to the economy. In part, this outperformance reflects increased certainty that these companies are the beneficiaries from a change in working practices and structural shifts in the economy, but this outperformance has been a longer-running trend. Investors with US equity exposure might be tempted to tilt in favour of strategies exposed to this trend, but tactical and strategic investment considerations are not necessarily always aligned.
Companies: JAM PCT ATT GVP
To those who regularly invest in investment trusts, discounts can often be part of the opportunity. But to others, discounts are an extra complication, not to mention an extra risk. The last six weeks has probably strengthened the prejudices of both sides on the topic. The recent bout of volatility has – in our opinion – more clearly exposed both the advantages and the disadvantages of investment trusts. Our perspective is that discounts are like a drunk friend. They are fun to have around, but at times they let you down, often when it matters most. Ultimately, the investment trust sector is defined by its discounts. The NAV is what the manager delivers, which is the reason why most of our research is focussed on the NAV. Whereas the share price return reflects the NAV with an accelerant (or detractor) – represented by the change in discount over the respective holding period. Why discounts narrow or widen is a matter of continuing debate and, in most cases, comes down to very specific factors applicable to each trust. We would argue that – with the exception of very broad patterns or trends – past movements in discounts are significantly less repeatable than past NAV performance. Fundamentally this is why we believe it is more helpful to use historic investment trust NAV returns as a prism through which to judge the performance characteristics of a trust, rather than historic share price returns. On the other hand, there are ways to incorporate discount analysis into an evaluation of the opportunity presented by an investment trust at any given point in time. We feel that understanding the historic volatility of the discount is fundamental to the task of analysing a trust’s discount, and of defining factors that will influence it in the future. In this article we attempt to quantify the reasons for discount volatility, and point to trusts which offer significantly less discount downside from the current level.
Companies: PLI BHGU SMT RCP TIGT MWY RICA JAM BRWM
Napoleon insisted he would rather have his generals be lucky than good. Increasingly, especially when investing in the US stock market, many investors opt for a passive fund, presumably viewing markets through the same prism that managers are really only ever lucky, as opposed to good. Yet many still choose active funds for a variety of reasons: a preferred investment style (or factor bias), or an alignment between the investor and the manager on the macroeconomic outlook are chief among them. For these investors, forming a view on when different styles are likely to perform, and on which macroeconomic environment we are likely to see is crucial. In this article we look at how different factor indices in North America have performed in different economic and market scenarios. We then examine which US-focussed trusts have offered the closest correlation to these factor indices in the recent past. Understanding the impact that broader economic trends have had on the performance of factors – and, by extension, on trusts that seem to operate in close alignment with those factors – can help us to understand and contextualise historic performance. It may also give us some insights on how to position for any anticipated future environment, although there can be no guarantee that historic patterns will repeat.
Companies: GVP BRNA PCT JAM
Last year we published a number of studies showing that investment trust managers were counteracting the rise of passive vehicles by further concentrating their portfolios and using the advantages of the closed-end structure such as gearing and the ability to pay income from capital more aggressively. New analysis from the team at Kepler shows that that over the past five years, trusts which have seen the greatest reduction in number of stocks in portfolios have generated the highest levels of alpha. Similarly those trusts which reduced their turnover the most have generated a higher alpha compared with those which haven’t. This corroborates the academic literature on the subject. In our view this finding is a strong indicator of the future direction for investment trusts in combating the threat from passives. In this article we dive into the data, which shows that having more active portfolios has delivered strong benefits for shareholders. We also consider the reasons why the investment trust universe remains a place that active managers can outperform. Finally we highlight three trusts that have most recently taken decisive steps to become significantly more active.
Companies: MNP MNKS HNE MRC FSV JAM
From 1 January 2019 wealth managers have been required to provide a full breakdown of the costs borne by a portfolio, as measured by the Key Information Document Reduction in Yield (KID RIY) figure. This includes any underlying fees from collectives. As most of us know, performance after fees is what really counts. So we continue to believe that, while shining a light on costs is entirely right, changes in investment behaviour that are driven solely by cost will do little for investor returns over the long run. That said, the new KID RIY measure does not, in our view, properly represent the reality of future costs. This is not least because it includes interest charges and performance fees incurred historically. Neither of these helps comparability between trusts. Gearing should enhance returns over the long term, and performance fees are (usually) earned only after an investor has benefited from their investment in performance terms. Using either measure as an indicator of future costs is clearly flawed. The ongoing charges (OCF) figure is our preferred statistic, and in our view most representative. Nevertheless, while the AIC has guidelines on how the OCF is calculated, calculation methodologies do vary. This is also the case with KID RIYs, which are meant to be the industry gold standard, but in many cases significant variations in methodology still exist.
Companies: HNE JAM IVI
For six months now, JPMorgan American (JAM) has had a new team behind it. In general portfolio terms, the change has not been revolutionary. However, in other ways, there have been very meaningful changes. Since June, two highly regarded individuals (Jonathan Simon and Timothy Parton) within JPM’s US Equity team have been investing JAM’s large cap assets. What sets them and the new set-up apart, is that one is a specialist value investor, whilst the other is a specialist growth investor. Each manager has discretion when it comes to holdings, but with a strong awareness of the other in a portfolio context. The split between growth and value is expected to remain fairly evenly balanced over time, but they do have the option to strategically tilt between the styles. They have each been tasked with managing a highly concentrated portfolio of between ten and 20 stocks, meaning JAM’s large cap portfolio can constitute between 20 and 40 stocks at any one time. In reality, the large cap portion will typically be around 40 names. This is highly concentrated by traditional portfolio standards, and means the large cap portion of JAM has the lowest number of portfolio holdings in the North America investment trust sub-sector. Gearing is expected to be a feature of JAM, but it is tactically employed, rather than being structural. Deploying gearing is driven by both the board and manager. In October 2018, the range agreed between the board and manager was set at 0%, plus or minus 2%. In November 2019, gearing was reintroduced in the portfolio. With the US equity market seemingly so hard for active managers to beat, Timothy and Jonathan’s specialist and concentrated approach has paid off – with the strategy having historically outperformed the benchmark as well as investment trust and open-ended peer group averages. It is clearly early days yet, with only six months having elapsed, but so far they are marginally underperforming the benchmark on a sterling total return basis.
All leaderships come to an end at some point. With investment trusts, however, it is rarely the electorate (aka shareholders) who initiate the change in manager. In some cases it is the board. In others, it is the management company itself recognising the need for a new manager, and replacing them before the board feels the need for more decisive action. A change instigated by the board will often result in a transformative outcome for a trust, perhaps with a change in management house as well as personnel. Changes proposed by the management company itself can be just as transformative, but can also be subtler. The aims are always the same: to improve performance for shareholders, and to stimulate demand to bring in the discount, or grow the trust through share issuance. Last week witnessed one of the more dramatic changes of manager in recent years. On 29 November Baillie Gifford effectively took control of the portfolio of European Investment Trust, one of the last remaining value trusts in the sector. The mandate being awarded to Baillie Gifford (the pre-eminent growth investment house) represents a significant change for shareholders, and comes after several years of a growth bull run. Time will only tell whether the board’s decisive (and dramatic) switching of horses will prove correct. In this article we reveal the results of a detailed analysis on how effective past manager changes have been for investment trusts.
Companies: JAM BRNA BRIG MWY
2018 saw the first negative calendar year for the S&P 500 and the Dow Jones since 2008 and, despite a subsequent rally, sentiment remains divided between those who believe the US market has more room to run, and those who think the longest bull market in history will soon come screeching to a halt. Instinctively, it feels like a correction must be due and, indeed, a recent survey of Kepler Trust Intelligence readers showed the majority feel that there are choppy waters ahead. Among those who felt that the outlook was negative, the concern raised most often was the impact of any escalation in the ‘trade-war’ talk between China and the United States, while the national ‘black dog’ that is Britain’s constant companion – Brexit – continues to weigh on investor spirits closer to home. However, there are many other indicators which suggest the bull market could continue, making this a difficult time for investors wondering which way to jump. Against this confusing backdrop we look at three different scenarios for the US over the next year, and identify a number of trusts which are positioned well for each.
Companies: USA ATT GVP JUSC BRNA IBT JAM TPOU
From 31 May, JPM American’s (JAM) large-cap portfolio will reflect the best growth and value ideas from the “Equity Focus” team in New York. As such, JAM’s new portfolio will be significantly more concentrated. To some extent, this change reflects an extension of the portfolio changes which were made in 2017, encouraging the previous manager to increase concentration in the portfolio, but also to run winners longer. JAM is one of few trusts focused on North America to have outperformed the benchmark over the short, medium and longer term. However, given the board has been consistently buying shares back, it has taken a proactive move to make the trust more interesting and/or relevant to today’s investment trust buyer by modifying the strategy. The key changes to the portfolio will be that each stock will reflect the best ideas from two co-managers who have worked together for over 20 years, and together run JP Morgan’s Equity Focus Strategy, who each have very different growth and value stock selection styles respectively. The split between growth and value is expected to remain fairly evenly balanced over time, but never more than a 60:40 tilt either way. Each manager has ultimate decision-making authority over their stocks in the portfolio, but at all times must have between 10 (minimum) and 20 (maximum) holdings at any one time. Position sizes are related entirely down to conviction levels, rather than any other considerations (benchmark constituent etc). Importantly, both managers in the past worked alongside and contributed to the management of JAM as a closed-end vehicle, and so the ins-and-outs of trusts, boards and the subtleties of managing a trust versus an open-ended fund. In other respects, JAM remains the same in terms of it’s objective, and positioning. The trust aims to achieve capital growth, and is expected to provide a 'core' exposure to North American equities. Since 2011 (when the JPMorgan Equity Focus SICAV launched), JAM’s previous manager outperformed peers, but marginally lagged the S&P 500. It is noteworthy that the new strategy has outperformed both, and without any gearing. The historic performance shows that the new strategy represents an evolution rather than a revolution to the returns that shareholders have come to expect from the trust.
Fees in the fund management world are a hot topic, and average fees across collective investment funds around the world have seen relentless declines. According to research from Morningstar, the average asset-weighted fee for actively managed equity funds has fallen by 18% since 2013, compared with a 28% decline at passive funds.
Companies: JAM ATST SUPP JEO RIV
Over the last few years, fees and costs have become a lightning rod in the investment world, attracting the scrutiny of regulators, the media and the public alike. Investment trusts, with their independent boards acting partly on the views of shareholders, have been quick to respond. We review the changing fee landscape among investment trusts in 2018 through proprietary analysis, and discuss those which boards have done most to reduce costs for investors.
Companies: PCT SMT HSL CTY JAM IPU MWY LWI
JPM American (JAM) is one of few trusts focused on North America to have outperformed the benchmark over the short, medium and longer term. As we have discussed in previous research on the sector, we found that only 17% of US managers outperform their benchmark over five years, and within our IA/AIC combined sector, only 25% have outperformed the S&P 500. JAM’s chief aim is to achieve capital growth rather than a higher income, and the managers set their stall clearly as a ‘core’ exposure to North American equities. In addition, they are able to opportunistically harness the growth characteristics of small-caps through a separately managed sub-portfolio. There are currently 62 stocks in the portfolio which, at nearly £1bn, is large and has ample liquidity for larger investors. The team emphasises that the companies they prefer are generally global businesses, which happen to be headquartered and run from the US. As we touch upon in our recent research on the effects of Donald Trump’s presidency, the US has in the past been an exceptionally good place to run businesses from and, managed correctly over the long term, proved fertile ground on which companies have been able to thrive and grow.
Two years after the shock election of Donald Trump and with the US mid-term elections approaching on 6 November, we thought it a good time to strip out all the noise and bluster and assess what the Trump administration has really meant for US markets and the trusts that invest in them. We can identify two key policy moves Trump has achieved as President: tax reforms and trade tariffs. Each has significant ramifications for certain sectors and trusts, some good and some bad. The long-term effects are still in the balance, with the midterms a crucial fork in the road. Since Trump was inaugurated as president, the landscape of the US market has arguably transformed, with greater optimism around the near-term prospects for equities and greater pessimism around international relations. We take a look at how trusts have positioned themselves vis-à-vis these trends. “I promised the American people a big, beautiful tax cut for Christmas. With final passage of this legislation, that is exactly what they are getting.” Arguably the most significant piece of Trumpian legislation for the economy and the stock market was his wide-ranging tax reform introduced at the end of December 2017. This included cutting n the corporate tax rate from 35% to 21% and a dramatic change to the current model of taxation, in particular the taxation of US corporations’ foreign subsidiaries.
Companies: IBT USA BRNA ATT JAM JUS GVP GVP
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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
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
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.
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.
Companies: Tatton Asset Management Plc
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.
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
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
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.
Secure Trust Bank (STB) reported H120 PBT of £5.1m (vs £18.1m a year ago) and a 3.0% ROE. Income grew 4% y-o-y, but impairments almost doubled, and payment holiday charges also hurt. STB notes that since the lockdown ended, business has been rebounding. Its robust capital (CET 13.5%), business model and proven agility allow it to react to the changing lending environment. STB currently trades on a P/BV of 0.49x, reflecting sentiment more than fundamentals given its profitability track record and successful model. Our fair value estimate is 1,704p per share, down from 2,428p..
Companies: Secure Trust Bank Plc
Litigation Capital Management has announced FY20 results with gross profit up 7% to A$21.7m and PBT of A$9.2m, slightly behind expectations albeit the Group had already flagged that delays to 3 cases during the year would result in resolutions in FY21, thereby impacting FY20 results. That said, excellent strategic progress through the year and good news flow as well as increasing scale suggests more value to come. Reiterate buy
Companies: Litigation Capital Management Ltd
There was an eclectic mix of property companies to feature in the top price movers for September. Top of the tree was private rented sector and residential development specialist Sigma Capital Group, with a 34.2% rise. The group launched a £1bn joint venture with EQT Real Estate, the real estate platform of global investment firm EQT, to deliver 3,000 private rental homes in Greater London. Micro-cap investor Panther Securities also hit double-digit gains, while Macau Property Opportunities saw an uplift in its share price after announcing debt refinancing and a disposal. CLS Holdings, the investor in offices in Germany, France and the UK, continued to see a recovery in its share price – which has risen 15.1% in the last three months. Off the back of solid results, Berlin residential landlord Phoenix Spree Deutschland saw its share price gain 7.2%. Schroder REIT’s share price rose 6.6% in the month as it embarked on a share buyback programme, while Irish commercial property investor Yew Grove REIT also saw positive shareholder reaction to amending its investment strategy to increase its target loan to value ratio to 40%.
Companies: SUPR DIGS CRC PSDL ASEI TPON RLE UKCM BREI BCPT RGL SIR SLI TOWN CAL