A long, long time ago, I can still remember how, that election had us all talking about sterling (well, some of us). Instead now we are hard put not to talk about mass dividend cuts, with Link Group estimating dividend cuts of 47% or more in the UK equity market. Way back in those distant epochs of early December 2019, we appeared to be approaching a greater degree of certainty about the shape of the future in the UK: an election was in the offing which promised to help resolve the outlook for our relationship with the EU and the rest of the world, and to clarify what kind of environment businesses would face going forward. At the time, GBP looked undervalued on the basis of the Economist’s ‘Big Mac’ index (a way of looking at the relative valuations of various currencies based upon the relative cost of a McDonald’s Big Mac in different countries). With signs that global investors’ positions in UK assets were starting to move towards normality from their previous large underweights, it seemed prudent to highlight that a rising currency could prove a headwind for dividend streams. With UK payout ratios (the proportion of earnings paid out as dividends) very elevated, and in general terms a roughly inverse relationship between UK corporate earnings and the strength of the currency, dividends funded by overseas earnings logically seemed somewhat vulnerable. Sure enough, following the general election we saw the GBPUSD rate move up to c. 1.35 in fairly rapid fashion (having traded below 1.30 since May 2019). Even so GBPUSD remained short of the ‘fair value’ level of c. 1.42 suggested by the ‘Big Mac’ index at the time, but there were certainly positive signals in sentiment surveys that suggested sterling was setting up for a more durable rally.
Companies: TIGT ASEI JCH CTY DIG SCF BRIG ASL
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
JPMorgan Claverhouse (JCH) invests solely in the UK equity market. The trust has an enviable track record of dividend growth which now stands at 47 consecutive years, and it is the only UK equity income ‘dividend hero’ (a trust which has raised its dividend every year for 20 or more years) to have achieved dividend growth ahead of inflation in every year of the past two decades. Managed by the highly experienced William Meadon and (since January 2018) Callum Abbot, the investment process emphasises a bottom-up stock-picking approach. When William took over the trust in 2012, he enacted a slight evolution in the strategy to make it more concentrated than it had been historically. The portfolio will typically hold between 60 and 80 stocks, and is currently at the lower end of that range. The managers remain bullish on the prospects for the UK market and this is reflected in the current gearing level. JCH is described by its managers as a ‘get rich slow’ strategy, aiming for consistency of outperformance with as few surprises as possible for investors. Certainly, the stock-picking approach has paid off for investors over the long term – JCH has outperformed in 70% of quarterly periods since William took the reins. The cumulative effect of this is that returns have been strong relative to the FTSE All-Share. The shares currently yield c. 3.8% and, with ample revenue reserves, the team are confident the fund can continue its track record of providing inflation-beating dividend increases in the coming years. The board has taken a more active approach to discount control in recent years, and JCH currently trades on a discount to NAV of 1.9%.
Companies: JPMorgan Claverhouse Investment Trst
It used to be said that in central London you were never more than six feet from a rat. Nowadays, the saying has been updated: you are never more than six feet from a Pret-aManger. Before Pret came McDonald’s, serving the same burgers in the same buns from London to Tokyo. Such was the ubiquitous nature of the fast food giant that in 1986 The Economist launched the ‘Big Mac Index’. Presently, this famous index of relative currency strength suggests sterling is seriously undervalued  . Sterling has certainly been weak since the 2016 Brexit referendum, and remains c.12% below its level on the day before the Brexit vote. Yet it has climbed c.8% from its lowest point in August (as of 26 November) as a no-deal Brexit appears to be off the table. We believe a more sustained rebound in the currency could be on the horizon – at least, assuming the Conservatives win the general election. This could be good news for those owning UK assets but, for UK companies with overseas earnings, it might make meeting and growing dividends more challenging. For UK large-caps in particular, a further rise in sterling could lead to dividend growth being weak, given the large proportion of those companies’ earnings are derived from overseas. Open-ended equity income funds will have no protection against this, but it is exactly the sort of environment where the closed-ended structure can shine. By being able to build up revenue reserves, investment trusts have the ability to build up a safety net against this sort of eventuality, as we discuss below.
Companies: SCF JCH BRIG CLIG ASEI
JPMorgan Claverhouse (JCH) invests in predominantly large cap UK companies, with a focus on those that provide consistent and growing dividends. The trust aims to outperform its benchmark index, the FTSE All-Share, by 2% a year. The duo utilise a bottom up stock picking approach, and place an emphasis on understanding the value, quality and momentum characteristics of a company before making an investment decision. The portfolio holds between 60-80 stocks, reflecting a change in strategy made in 2012, with the managers having been encouraged to adopt a more ‘high conviction’ approach. As such, the managers are not afraid to run their winners, and subject to risk controls, have conviction positions in the portfolio. This is illustrated through the top ten holdings making up over 45% of the portfolio. The trust has a strong track record of outperformance, and since the change of strategy seven years ago JCH has generated NAV returns of 101.2%. This is considerably more than the FTSE All Share (69.8%) and the AIC (90.8%) and IA peer groups (73.8%). In more recent times, the performance has been subject to the volatility of the market, especially in Q4 2018. Since then however, the trust has rallied and has returned close to 14% year to date. The trust has a solid dividend history. Currently yielding 3.9%, the trust’s 2018 dividend represented the 46th successive year of growth and was a 5.8% increase over the previous year. Furthermore, the trust has exceptionally strong revenue reserves, and the most recent dividend was covered close to 1.3x by revenue reserves. Over the past year the trust has traded on an average discount of 0.9%, considerably narrower than the AIC sector one-year average discount of 5.4%. With this said, and in common with many other UK-focused trusts, the discount has widened somewhat over the past couple months and currently sits at 4.5%.
In January we introduced a new quantitative rating system for investment trusts. Our ratings look at NAV total return performance. They are, we believe, the first quantitative rating for closed-ended funds to do so and thereby capture the performance of the management team rather than the noisier share price movements. Our ratings aim to identify the top performers for capital growth and for income. We have designed the quants to identify those trusts which have added the greatest alpha to their benchmarks and which have displayed an attractive balance between performance in rising and falling markets. For the income ratings, we have set out to identify those trusts which have managed to generate a high yield while growing their dividends and without sacrificing capital growth. We have scored all AIC trusts on our selected metrics and awarded the top twenty in each category our growth or income ratings. We believe our ratings highlight those trusts which have displayed the most highly attractive characteristics for investors in the recent past. Pleasingly, since we launched the list the trusts have done well on average, outperforming their benchmarks significantly – particularly the capital growth trusts We will rebalance the ratings at the end of 2019, but here we give an update on the performance of the trusts we have rated and the key factors affecting performance.
Companies: FGT SLS IPU BEE JCH
Today, we introduce our investment trust ratings. According to the quantitative screens we have selected in an attempt to highlight the best performers in the closed-ended universe, the trusts discussed here have been the best in their classes over the last five years. We have selected trusts using two different sets of criteria, aiming to identify the top performers for capital growth and for achieving a high and growing income. There are many rating systems for open-ended funds, but no quantitative-based system for investment trusts that is available to the average investor. While we cannot identify trusts which will perform well in the future – past outperformance is no guide to future out-performance – we hope these ratings will highlight the outstanding performers in the closed-ended universe and those managers who have best used the advantages of investment trusts to generate alpha. We are trying to reward consistent and long-term outperformance, and so we have decided to look over a five-year period. All data is as of the end of December 2018, sourced from Morningstar and JPMorgan Cazenove. We have looked at NAV total return performance and discount value has not been considered: the aim is to identify those trusts which have performed the best rather than highlight bargains.
Companies: IPU FAS ATR JEO FEV FGT THRG SEC PAC BRSC IAT HNE MIGO TRY JMG DIVI SLS BGS SDP JETI SOI BCI MRC TIGT EDIN JAGI BEE SDV BRIG AAIF HFEL SCF SIGT BRFI IVPG CTY HINT JCH NAIT
Income has for a long time been top priority for British investors, stripped of the traditional source of income that a savings account once represented by a decade of negligible interest rates. But with bonds in a parlous state and the wheels finally coming off the buy-to-let bubble, the range of options available is increasingly narrow. Equities have for some time now been the beneficiary of this search for yield and equity income funds have done very well on the back of this, attracting huge inflows. However, as we have highlighted in the past, many of them are investing in just a small range of companies and those companies are themselves increasingly stretching for yield - putting this refuge for the income seeker on somewhat thin ice. With all this behind us, and mounting uncertainty about the current rally in front of us, where then is a sensible place to find it?
Companies: JCH IVI EDIN BRIG IVPU SOI BEE
Last year saw investment trusts soar in popularity among both retail investors and wealth managers. Statistics from the AIC show that during 2017, independent financial advisors bought £990m-worth of investment trusts through platforms. That was 46% more than in 2016, and 41% more than the previous record of £704m in 2015. This increased demand has shown itself in the average discount across the investment trust universe, which has narrowed markedly, as shown in the chart below.
Companies: ATST JCH WTAN
JPMorgan Claverhouse invests in income-generating UK companies with a focus on those that provide consistent and growing dividends. The fund aims to outperform its benchmark index, the FTSE All-Share, by 2% a year. Since the strategy review in 2012, the managers have continued to pursue a more ‘high conviction’ approach, running their winners and keeping stocks as they become more expensive as long as earnings growth continues. The portfolio of 66 stocks is built through a bottom up, stock picking approach with macro and economic views having little influence over investment decisions. William looks for companies trading at low valuations with strong balance sheets and high cashflow generation. This index agnostic approach is reflected in the trust’s correlation to the market, which shows the trust has the highest R-squared of all open- and closed-ended UK equity income funds. Last year saw the trust raise the dividend for the 45th successive year, up 13% over the previous year, and this means that the trust is part of the AIC’s ‘dividend heroes’ selection. Being a stock picker, William believes that the current volatility across in global markets can be used to the benefit of shareholders, enabling him to pick up more of the shares he likes at lower prices. UK companies in particular have faced a huge amount of pessimism, and William points to numerous political events causing this uncertainty, with Brexit’s constant presence as a major feature.
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Litigation Capital Management (LCM) is an alternative asset manager specialising in disputes financing, with its main operations in Australia and the UK. The company provides funding for litigation in exchange for a share of any settlement and has built a strong track record of supporting winning c
Companies: Litigation Capital Management Ltd
Mondelez International has announced that it has appointed MediaMonks to manage global technology infrastructure, global websites and content production for North America, Latin America and AMEA. We believe this account win by S4 Capital further vindicates the unitary structure and integrated offer of the group as Mondelez initially worked with MightyHive before broadening the scope of this relationship to encompass MediaMonks. S4 Capital describes the account as a Whopper, indicating that it will generate revenues of over $20m when the account is fully transitioned. We will update our forecasts for the account win at the next financial newsflow from the group. We currently forecast LFL Gross Profit growth of +26% for FY21 and believe the Mondelez win will further accelerate this. We raise our target price to 500p (was 475p) and retain our Buy recommendation.
Companies: S4 Capital plc
Liontrust has delivered in line interims, however AuM growth since the HY point drives higher earnings estimates. In H1, net inflows remained strong despite the backdrop and, alongside performance, contributed to 28% AuM growth. Post-period, performance momentum has boosted AuM by a further 5% to £28.1bn, plus the completion of Architas. Together, this results in a step up in the run rate. We update our forecasts for higher than expected AuM driving a +5% upgrade to FY21e EPS and +10-13% in outer years. We do not forecast scaling in Architas or Global which could prompt further upgrades, reducing the 15x FY22e PER.
Companies: Liontrust Asset Management PLC
President Trump likes to project himself as a highly successful businessman, but surprisingly little is known about his true financial position. Various articles, including a 2016 in-depth analysis by The Wall Street Journal, have speculated about his income and asset base. All sorts of claims and counter-claims have been made about his wealth – by Trump himself, pitching his fortune at some $9bn, and by journalist Timothy O'Brien, suggesting that it is as “low” as $150m-$250m. It is doubtful whether we shall ever know the truth, but we can use Trump’s UK corporate filings to gain an insight into his businesses in Scotland.
Companies: AVO ARBB ARIX CLIG DNL FLTA ICGT PCA PIN PHP RECI STX SCE TRX SHED VTA YEW
Today’s $2.3m framework agreement with an existing Tier 1 global customer is further validation of Clareti’s competitive advantage, of its ability to land and expand and, logically, is the augury of incremental revenues ahead. Gresham continues to gain market share in the critical Tier 1 space and we expect this to show in a resumption of revenue growth next year. Trading on forward Clareti recurring revenues of c. 4.1x, we see significant upside.
Companies: Gresham House
Today's news & views, plus announcements from Capita, JD Wetherspoon, HarbourVest Global Private Equity, Walker Crips Group, Randall & Quilter*, Michelmersh Brick, LoopUp, Schroders British Opportunities Trust and Baillie Gifford UK Growth Trust.
Companies: Randall & Quilter Investment Holdings Ltd.
The COVID-19 pandemic has accelerated trends in online retailing, to the benefit of the European logistics market, in which Tritax EuroBox (EBOX) is a leading player. Demand for logistics space is growing exponentially, while supply of existing and new stock is depleted. This dynamic is even more acute in prime locations close to heavily populated conurbations and prolonged rental growth is forecast. EBOX has amassed a portfolio of big box facilities located in major logistics hotspots across Europe. Numerous value-add opportunities also exist within the portfolio, including development and asset management projects. One of the key differentiators of EBOX to its peers is its exclusive ties with established logistics developers. Through the relationships, EBOX has access to and first right of refusal over a pipeline of development assets worth €2bn.
Companies: Tritax EuroBox Plc
Palace Capital’s (PCA) H121 performance was robust and ahead of our central expectations. We have slightly increased FY21 earnings forecasts and introduced FY22–23 estimates, with growth driven by Hudson Quarter completion, on track for March 2021. Significant additional reversionary potential and development/refurbishment represent significant value creation potential.
Companies: Palace Capital plc
Today's news & views, plus announcements from KGF, MRO, UU, BAB, BRW, FUTR, GNS, HICL, LIO, AEXG, FUL, KWS
Companies: AEX GNS HICL
Alliance Trust (ATST) underwent a major overhaul three and a half years ago, refocusing on its global equity portfolio. Non-core parts of the company have been sold and overheads slashed. Today, the trust’s assets are managed by nine of the world’s best stock pickers. Investing sustainably is a strong theme within the fund, but the manager, Willis Towers Watson, seeks to blend managers with different styles so that the trust is not beholden to any particular fashion in markets.
Companies: Alliance Trust
Murray Income Trust’s (MUT) recent combination with Perpetual Income and Growth Investment Trust (PLI) has doubled the trust’s assets under management to £1.1bn and is expected to deliver a substantial fee reduction to investors. MUT invests in a diversified portfolio of mainly UK equities and aims to provide a high and growing income, combined with capital growth. It has achieved these objectives, having just delivered its 47th consecutive year of increasing annual dividends, while also outperforming its benchmark (a broad UK stock market index) and most of its peers over both the short and longer term. Manager Charles Luke’s success – even in the current climate, which has been characterised by widespread dividend cuts – confirms his conviction that ‘quality, sustainable and growing income is out there, if you know where to look’. He intends to maintain his research-intensive search for resilient companies capable of growing future earnings and dividends over time.
Companies: Murray Income Trust
NextEnergy Solar Fund’s interims show continued generation outperformance, driving a NAV rise from 98.4p in June to 99.6p in September. Pricing was also ahead with power sales contracting adding £5.4m of benefit in the period. The company continues to benefit from efficient financing which we believe, along with low operating costs, gives it a cash cushion protecting the dividend. The shares offer the lowest NAV premium and highest yield of the UK renewable yieldcos.
Companies: Nextenergy Solar Fund
Standard Life UK Smaller Companies (SLS) manager Harry Nimmo is very bullish on the outlook for UK small-cap stocks, with the proviso that Brexit presents a near-term risk. He notes that despite current challenges due to the coronavirus, many companies are trading above expectations and there are now only a handful of SLS’s portfolio companies that are not paying dividends. The manager is comfortable with the trust’s ability to maintain its own dividend payments and is hopeful its valuation will improve given its very strong performance record. SLS’s NAV has outperformed its benchmark over the last one, three, five and 10 years; however, Nimmo cautions that given the trust’s focus on quality businesses, if there is a cyclical recovery in the UK market with a ‘dash for trash’, SLS is likely to underperform during this period.
Companies: Standard Life UK Small Co's Tst
Aberdeen Asian Income Fund (AAIF) has recovered well from the widespread market sell-off driven by the coronavirus pandemic, although its focus on quality stocks with attractive dividends has held back returns relative to the broad Asian index, which is increasingly dominated by non-yielding Chinese internet companies. Portfolio manager Yoojeong Oh says the team has ridden the technology wave differently, with exposure to semiconductor companies that are supporting the cloud-based boom in working from home, as well as e-commerce stocks in high-yielding markets like Taiwan, and firms that benefit from green stimulus in Europe. While gearing (currently c 8%) was a drag in the March market falls, keeping it steady has helped boost returns in the recovery, and the fund is on track to deliver a 13th consecutive year of dividend growth, partly supported by reserves it has built up over the past decade.
Companies: Aberdeen Asian Income Fund
1H’21 results cover the depths of the initial market impact of COVID-19. We note the 4.7% fall in EPRA NTA and the effect of the dividend rebasing announced some months prior. There are no negative surprises. The focus on regional offices is a positive. There are other positives that we consider to be important, namely the ongoing contractual performance of the leisure asset tenants and lengthening of leases there, and the continuing encouraging residential sales (and small letting) at the mixed-use development of PCA’s newly created Hudson Quarter, York. Here, we see just one of PCA’s initiatives to unlock value and deliver attractive returns.