Keystone (KIT) aims to generate long-term total returns through investment in primarily UK equities. Managed since April 2017 by James Goldstone, KIT typically invests on an all-cap basis. The manager seeks to identify companies where investor sentiment is unjustly negative and there exists a catalyst to a valuation re-rating. KIT typically offers a greater yield than much of its peer group. Dividend generation is considered important by the manager because he views this as evidence of alignment of management and shareholder interests, as well as capital discipline. Presently KIT yields c. 4.7% on a historic dividend basis. The board moved in 2019 to introduce a quarterly dividend. The current environment may present challenges to maintaining this level of dividend, but revenue reserves remain in place to potentially help mitigate any shortfall in portfolio revenue. Currently trading on a discount of c. 12.7% (as of 20/04/2020), KIT is trading at a wider discount to both its own historic average and the wider sector. The board has been supportive, with significant buybacks earlier in 2020 and capacity for further buybacks. Presently the portfolio remains overweight UK domestic earners, but the manager has consciously adopted a ‘barbell’ approach to relative risk positioning with regards to potential environments, with different positions that should benefit in either inflationary or deflationary environments including a significant allocation to gold mining companies. He believes he has identified stocks which are attractive on their own merits, but particularly so in a divergent range of economic results. On balance, however, the portfolio remains tilted slightly towards an inflationary environment, with the manager believing extraordinary policy stimulus measures will ultimately have this result.
Companies: Keystone Investment Trust
This time last year the team at Kepler Trust Intelligence (KTI) chose their personal ‘top picks’ within the investment trust universe for 2019. The aim was for each member of the team to choose the trust they believed would perform best from an investor’s point of view; i.e. in share price terms rather than NAV. Any trust could be selected, regardless of whether it was equity-focused or not. Overall the year was a prosperous one for those brave enough to hang on throughout. The MSCI World Index (in sterling terms) rose by 22.4%, with the US the best-performing major market. The S&P 500 rose by 26.4%, while the FTSE 100 and FTSE 250 were up by 17.3% and 28.9% respectively. The DAX and MSCI Emerging and EURO STOXX 50 also increased. In terms of currencies the pound sterling ended the year roughly where it started relative to the dollar. This has masked what has actually been quite a volatile period for both currencies. The same pattern has been seen with sterling versus the yen, which started the year at around 140 and has ended at a similar level, around 143. What may surprise some investors is that sterling has appreciated relative to the euro by 5.9%; once more not without volatility, and with much of the gain coming in the second half of the year.
Companies: KIT STS AJOT TRG MWY
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: KIT HNE JAM IVI
Keystone (KIT) is managed by James Goldstone, who aims to generate long-term total returns with a valuation-based approach to buying UK equities. James aims to identify companies which are undervalued due to investor sentiment or past troubles and hold them while their valuations revert to fairer levels. The attention he pays to the dividends on his portfolio companies, due to the implications they have for cash generation, management discipline and concerns for shareholders, means the yield tends to be higher than the typical growth fund. It is currently yielding 3.6%, which compares to the 4% average for the AIC UK Equity Income sector, despite the trust not specifically aiming for income. The trust has moved to a quarterly dividend, starting from the second half of the 2019 financial year, making it potentially more attractive to income investors. James, who took over the portfolio in April 2017, believes the major area of undervaluation in the market since he took over has been and continues to be in companies with UK domestic earnings. In his view, the valuations on companies dependent on the UK economy have become irrational due to ongoing uncertainty around the terms of our exit from the EU and the economic consequences. He has balanced this exposure to UK earnings with positions in international earners which are undervalued for different reasons, for example oil and gas companies. Just under 7% of the trust is also invested in gold mining companies, predominantly listed in North America, which should offer downside protection. He also holds a weighting in mid and small-cap growth companies, which he believes more than justify their current multiples. The weighting to UK earnings has meant the trust has underperformed in recent years, as any resolution to the Brexit negotiations has been postponed and the uncertainty prolonged. The trust now languishes on one of the widest discounts in the sector at 13%. James believes that when investors’ attention returns to fundamentals, there is significant outperformance potential in the portfolio.
It is almost three years since the UK voted to leave the EU. It seems like it might possibly happen, although we wouldn’t want to make any more precise predictions than that. The political picture still remains cloudy, and it would be a brave investor who made a decision based on these tea leaves. However, the ending of the article 50 period is a good moment to take stock and get a clearer picture of what has actually happened to the UK market since June 2016. Amidst the noise and, at times, the panic, global markets and to a lesser extent UK equities have actually made strong gains. Despite this, UK valuations, as a result of the apocalyptic headlines surrounding this never-ending fiasco, remain at rock bottom in relative terms - which makes this an interesting time to look past the headlines and discover what’s really going on.
Companies: IPU MRC KIT ASL IVI
Keystone invests mainly in UK companies, aiming to maximise total return through a value-based strategy focused on cash flow and dividends. The new manager, James Goldstone, has largely completed the transition of the portfolio he took over in April 2017, which has seen the trust maintain its thematic exposure to undervalued UK earnings, but take up new positions in the banking sector among others and sell down its tobacco and healthcare exposure. James has also hedged the core exposure to UK earnings with dollar earners and growth companies that he believes more than justify their current multiples. The trust languishes on one of the widest discounts in the sector at 11%, largely due to UK domestic earners being out of favour and the board not buying back shares in recent years. Dividends are a key ingredient to the stock selection process, and the trust yields 3.4%, not far off the 3.9% average for a UK Equity Income fund, although it sits in the UK All Companies sector.
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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.
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
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
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
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
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
In this note, we analyze the indebtedness of 35 international E&Ps publicly listed in the UK, Canada, Norway, Sweden and the USA. For each company, we look at (1) cash position, (2) level and nature of debt (including covenants), (3) debt service and principal repayment framework and (4) Brent price required from April to YE20 to meet all the obligations and keep cash positions intact. We also estimate YE20 cash if Brent were to average US$20/bbl from April to YE20. While the oil demand and oil price collapse are of unprecedented historical proportions and the opportunities to cut costs much more limited than in 2014, most companies (with a few exceptions) entered the crisis in much better position than six years ago, with stronger balance sheets and often already extended debt maturities. In addition, this time around, many E&Ps have already been deleveraging for 1-2 years and are not caught in the middle of large developments that cannot be halted. The previous crisis also showed that debt providers could relax debt covenants for a certain period as long as interest and principal repayment obligations were met. This implies that as long as operations are not interrupted and counterparties keep paying their bills (Kurdistan), the storm can be weathered by most for a few quarters.
With (1) Brent price of about US$50/bbl in 1Q20, (2) reduced capex programmes, (3) material hedging programmes covering a large proportion of FY20 production at higher prices and (4) limited principal repayments in 2020, we find that most companies can meet all their costs and obligations in 2020 at Brent prices below US$40/bbl and often below US$35/bbl) from April until YE20 and keep their cash intact, allowing them to remain solvent at much lower prices for some time. In particular, Maha Energy and SDX Energy are cash neutral at about US$20/bbl. When factoring the divestment of Uganda, Tullow needs only US$9/bbl to maintain its YE20 cash equal to YE19. Canacol Energy, Diversified Gas and Oil, Independent Oil & Gas, Orca Exploration, Serica Energy and Wentworth Resources are gas stories not really exposed to oil prices and Africa Oil has hedged 95% of its FY20 production at over US$65/bbl.
Companies: AKERBP AOI CNE CNE DGOC EGY ENOG ENQ GENL GKP GPRK GTE HUR IOG JSE KOS LUPE MAHAA OKEA ORC.B PEN PHAR PMO PTAL PXT RRE SDX SEPL TETY TGL TLW TXP WRL
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%.
Today's news & views, plus announcements from VOD, POLY, SMDS, BLND, BYG, WEIR, DC, SNR, SHI, INTU, IHR, CNC, ARE, INCE
Companies: INTU SHI INCE
U+I’s post-close trading update confirms c. £16m of development and trading gains for FY20, which includes Harwell. This is broadly in line with our revised expectations. Proactive steps are being taken to preserve liquidity in the short-term, including suspending the final dividend and stopping all non-essential spend. Positively, benefits of the cost saving programme will now be realised 12 months early. The balance sheet is strong, with ample liquidity; covenant levels are a long way off. Management’s time is being spent repositioning teams to be ready when restrictions are lifted, when there will be a renewed focus on the short-to-medium term value gain opportunities, of which there are plenty. The shares currently trade at 59% spot discount to our updated NAV forecasts, vs the UK sector at a 9% discount. We leave our recently lowered 180p target price unchanged and continue to see upside from here.
Companies: U&I Group
Recent news: On 21 April CLIG’s 3Q trading update to 31 March 2020, revealed:
27% fall in Funds Under Management (“FUM”) from US$6.0bn to US$4.4bn
- with weaker Sterling, FUM in £ fell 20% from £4.5bn to £3.6bn.
In 3Q, while Diversification CEF strategies (Opportunistic Value and Developed funds) had net inflows of US$25m, the Group’s Emerging Market Funds had net outflows US$68m
The Group has an active pipeline across all its major CEF offerings with increased interest in the Diversification CEF strategies
Post COVID-19, income to FuM remains unchanged at c. 75 bps of FuM
Companies: City Of London Investment Group
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
Smaller companies are usually a problematic area to invest in during significant downturns or recessions; and the sharp fall in 2020 hasn’t been an exception. In this article we assess the performance of smaller companies trusts throughout the pandemic, while identifying the factors that have differentiated the winners from the losers. This includes the impact that cash, market cap exposure, sector allocation, revenue exposure and growth or value biases have had, with some surprising results. We also ask whether now is an attractive time to invest in smaller companies, highlighting the trusts which stand out to us…
Companies: THRG GHE MINI RMMC ASIT ASL MTE TRG BRSC DSM
We wrote on 7 May, about the shape of the music global industry following the publication of the IFPI 2019 report. Taking a deeper dive into this report we examine the prospects of further growth in streaming numbers as the nonwestern markets come online.
Companies: Hipgnosis Songs Fund