There is some evidence that, in recent years, the rise of passive funds has caused investment managers to become increasingly concentrated, endeavouring to be considered active managers as opposed to ‘closet trackers’. The most active trusts tend to generate the highest levels of alpha, as we have often noted, and on average managers have been decreasing their number of holdings in the hope of achieving this. Academic support for taking this approach has been provided by Martin Cremers and Antti Petajisto, who have shown evidence that portfolios with higher ‘active share’ tend to beat their benchmark net of fees whereas the least active tend to match their benchmark index performance before fees, and under-perform after fees. In this article we assess how the trusts that have been increasing their concentration have performed in the most recent market corrections. We then assess the performance of the most concentrated trusts, including investors in both small and largecaps, through the COVID-19 crash, and compare how they have done relative to the broader investment trust universe and their peers. Our research shows that more concentrated funds are not necessarily more susceptible to underperformance in a falling market.
Companies: MNP MNL BAF FGT TIGT
Companies: MNP MNL BAF
J.K Galbraith’s comment has always seemed to me possibly the most egregiously misused quote in financial markets. It is seemingly a statement of the obvious, but what it is surely saying is that the future is inherently uncertain. To state that markets are discounting mechanisms is also not controversial, because it is making the same point. Nobody knows the future, not even readers of trustintelligence.co.uk, by definition the brightest and most discerning segment of society (and probably the bestlooking too). But when participating in the market we make an assessment of probabilities and then try to measure those against the assessment by the wider market. In this piece, we assess whether there may be a higher probability than the market currently assumes that later in 2020 we will see an equity market melt-up, ripping prices higher; and that this will not be a rational move, thus adding subsequent downside risks. We have looked at some alternative sources of returns which we believe could broadly participate in such a rally while at the same time ultimately serving as an (at least partial) hedge for portfolios. ‘Buy and hold’ is ingrained in the minds of most of us because of recency bias. Yet, among others, Christopher Cole of Artemis Capital1 has highlighted how anomalous this current epoch has been in generating consistent long-term asset price returns. Over time there have been numerous sustained periods in which a typical 60/40 portfolio has delivered poor or even negative longterm returns. With a significant proportion of global government issuance currently exhibiting negative yields, and UK gilts and US Treasuries not far behind, there is incredible duration risk in just allocating blankly to bonds; and this risk is likely also present (to a lesser extent) in your equity book if you invest in high-quality or high growth names. Perhaps it is no surprise then that Terry Smith of Fundsmith recently moved a proportion of his assets from bonds to a long/short equity fund.
Companies: RICA DIG DIG MNL BHMG BHGG BRWM BRWM KIT RICA
In the financial markets, the biggest winners from the crisis so far have – without a doubt – been the technology sectors. Software, hardware, ecommerce and related sectors have outperformed in the immediate aftermath (as we discussed in a recent strategy note). They also seem likely to benefit from some of the likely long-lasting changes to society that the crisis will forge. This is the latest episode in a long period of outperformance. Looking back over the past decade, technology-related companies have tended to perform like consumer staples or defensives on the downside, and like high growth discretionary stocks on the upside: an ideal combination from the investor’s point of view. But will this continue, and can it? In this piece we consider why technology-related stocks and sectors have been so successful and the dangers which could bring their run to an end.
Companies: PCT ATT JFJ MNL SMT
Manchester & London Investment Trust (MNL) aims to generate capital appreciation and a reasonable level of income. Managed by Mark Sheppard (who also controls M&M Investment Ltd, which owns over 50% of MNL’s shares) and Richard Morgan, the investment policy has seen a seismic shift since 2015. The investment process has become increasingly defined by a thesis the managers term ‘Long the Future’ (detailed under Portfolio). In essence, the managers’ conviction is that technological development is reaching a tipping point and that future economies will ultimately see machines exercising more economic power than labour. Therefore, MNL focusses on technology companies, using a highly concentrated approach. Over 90% of the portfolio is in the top 10 positions (as of 30/04/2020). The managers use derivatives (options, contracts for difference) to adjust the net equity exposure, ordinarily holding between an 80% and 120% net long position in equities and adjusting exposure tactically. Options are also written to manage stock-specific risk. These helped MNL to mitigate some of the significant market downside seen in Q1 2020 (as discussed under Performance). Share price and operational momentum are closely monitored, and share-price momentum is used to inform decisions around deployment of derivatives. An unusual additional feature of the trust is that every year shareholders with more than 2,500 shares (worth c. £15k as of 19/05/2020) are entered into a prize draw for centre-court seats at Wimbledon.
Companies: Manchester & London Investment Trust
Companies: PCT ATT JFJ MWY SMT MNL BBOX
The COVID-19 pandemic is far from over, but with March coming to a close we have perhaps seen the end of the first act. Most of the developed world is in various degrees of ‘lockdown’; anxiously watching poorly reported – and often poorly understood – numbers for indications that their government’s strategy is working. Meanwhile equity markets saw one of their worst ever quarters in Q1 2020, as whole swathes of the economy were shut down by government diktat. The speed with which the situation developed was remarkable; and it is fair to say that all managers would have been surprised, even if they had other reasons for being bearish. We take a look at how and why certain investment trusts have done well in absolute and relative terms amidst the carnage, and ask if the causes of the crisis can provide any indication how the situation might end, and which trusts might outperform.
Companies: BHGU BHMG RICA PSHD BGUK MWY USA BGEU SMT MNL ATT FGT TIGT
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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.