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
The Mercantile Investment Trust (MRC) looks to deliver long term capital growth from a portfolio of UK medium and smaller companies. Managed by Guy Anderson and Anthony Lynch, the trust typically consists of over 80 positions in various UK companies where the managers believe the wider market fails to sufficiently appreciate the long-term potential of the business. Performance was extremely strong in 2019, with NAV returns far outstripping the wider market and share prices doing even better, further aided by a narrowing in the discount to near parity to NAV. Excess returns in MRC share prices in 2019 were over 30% above those of the FTSE All-Share. Long-term returns have also been rewarding for investors. The managers operate a disciplined investment process focussing on the characteristics and advantages of a business, how these are presently valued and whether this represents an incorrect representation of its prospects, and what the operational momentum of the business is. MRC will generally focus on the mid-cap market, where the managers believe there are greater pricing inefficiencies and other structural advantages for active investors. As well as the active management benefit JPM hope to bring to this market, there is structural gearing in place which should benefit investors in rising markets, albeit increasing the downside potential in falling markets. With net assets of over £2bn, the trust has a very low OCF (ongoing charges figure) of only 0.45%. Despite its large size, the closed-ended structure helps Guy and Anthony to manage portfolio liquidity whilst continuing to look for the most attractive growth opportunities and to invest further down the market capitalisation spectrum. As part of the wider JP Morgan Asset Management team in London, there are significant benefits of scale and analytical resources available to the managers. The shares currently yield c. 2.5% and stand on a discount to NAV of c. 2.6% (as of 31/12/2019).
Companies: Mercantile Investment Trust
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
Mercantile (MRC) is a large and liquid investment trust, which invests in mid and small sized companies listed on the UK stock market. The trust is now managed by a triumvirate, having been managed by Martin Hudson since 1994, who was joined by Anthony Lynch since 2009, and finally Guy Anderson who joined the team in 2012. The portfolio has consistently had a tilt towards growth characteristics, but the strategy is flexible and the managers also consider valuations and move the portfolio significantly as the market environment changes. MRC has a track record of outperforming strongly in rising markets, historically aided by its structural gearing. On the other hand, it has suffered when markets reverse – for example it underperformed the index and sector in 2018. It is noteworthy that the manager’s net gearing has been coming down reflecting their caution, and is currently c 5%. The trust aims chiefly for capital growth, but also to grow the dividend in excess of inflation, which it has comfortably done over ten years; it currently yields 3%, well above the 2.2% average for the AIC UK All Companies sector. The discount of 9.5% has remained relatively persistent. The board has used buybacks in the past to tackle the discount when it widens out from current levels, although it has not tended to do so when markets are in “risk-off” mode. Last year, the board negotiated a cut to the management fee from 0.475% to 0.45% of market cap, which has helped make it the cheapest UK All Companies trust without a performance fee. The OCF (calculated on net assets) is 0.45%.
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
Mercantile is a large and liquid UK mid-cap focused investment trust, with net assets of just under £2bn. It buys companies with strong earnings outlooks and operating in favourable industry or economic environments, with a strong bias to growth rather than value. It has a track record of outperforming strongly in rising markets, although has suffered when markets reverse. After the Brexit referendum, the trust has been steadily tilting away from companies exposed to the UK consumer and towards those plugged into global supply chains. The trust aims chiefly for capital growth, but also to grow the dividend in excess of inflation, which it has comfortably done over ten years. The yield is 2.5%. It has been managed by Martin Hudson since 1994, and he was joined by Anthony Lynch in 2009 and Guy Anderson in 2012. In February, the manager agreed to cut the OCF from 0.475% to 0.45%, which figure makes it the cheapest UK All Companies trust without a performance fee. The discount of 9% is protected by a highly active buyback policy. The trust has tended to trade on a similar discount to the sector, although in recent months the trust has slipped out slightly despite performance being strong in absolute terms and relative to peers and sector. During the same period the discount on the average smaller companies trust has also been narrowing and is now tighter than the trust’s.
The star fund manager culture and its effect on open-ended fund industry has been the subject of debate for many years, frequently making headlines when a high profile manager leaves for pastures new. To try and address the problems associated with key man risk, many fund management groups have pushed the ‘team-based’ approach more in recent years in an effort to soften the blow if a lead manager does change fund management houses The idea being if a manager does depart, investors won’t feel the need to sell out of a fund because they know the team taking over will run it in a similar way. Given their structure of being closed-ended, investment trusts have traditionally been shielded by the effects of key-man risk. However a recent example of a high profile departure at River & Mercantile shows they are not immune. Rather than being swamped with outflows, the River & Mercantile UK Micro Cap Trust saw is share price fall 14.6% and its discount to net asset value (NAV) move from 16.2% premium to a 0.6% as investors hit the panic button after the announcement its lead manager, Philip Rodrigs, had left the group. For Nick Greenwood, manager of the Miton Global Opportunities trust, the large drops the trust has faced since Rodrigs’ departure, represent the risks that investment trusts with key managers can face when those managers leave. “If you have a key manager following, the price that the trusts trades at can be very different to its peers, meaning that if the manager leaves, the price can quickly fall either back into line or below the peer group,” he says. In its 2018 rebalancing of its model portfolio, Winterflood replaced the R&M UK Micro Cap Trust with the JP Morgan-managed Mercantile Investment Trust in the UK equities section of its portfolio for its mid and small cap exposure. Trading at a 9% discount at the time, it felt the Mercantile Investment Trust, which is managed by Guy Anderson, represented a better value opportunity (versus the premium the R&M UK Micro Cap was trading at the time). However after the events that unfolded since Rodrig’s departure, Simon Elliott, a research analyst at Winterflood Investment Trust, says the micro cap fund does offer value versus its nearest peers. He also believes there is a large opportunity in the micro cap segment of the UK market for a genuinely active manager to add considerable value through stock picking. “The fund’s assets of £102m are nearly only 10% below where the board has deemed it appropriate in the past to return capital at NAV,” he says. “It is feasible that the portfolio could generate sufficient growth within the next 12 months to warrant a third return of capital and we would expect this to act as a catalyst in narrowing the discount.” At the same time, while many in the past may have invested in the fund because of the previous manager, its new manager, George Ensor, knows the trust having been involved with its running since launch in December 2014. “As a key member of River and Mercantile’s equity team, Ensor has gained the respect of the team’s leadership and we were impressed with his knowledge of the stocks in the portfolio at a recent meeting,” says Elliott. “Whether this will translate into strong returns, both absolute and relative, will only be proven in time. “However he has a head start given his current knowledge of the portfolio and this is an important, high profile mandate for River and Mercantile, not least as its only listed collective to date.” Meanwhile Greenwood, who never held the fund, says things can work in the opposite way. Namely a badly performing trust can see its discount narrow if it gets taken over by new management. A most recent example of this would be the Aurora Investment Trust. Having been a serial underperformer in the IT UK All Companies sector, since Phoenix Asset Management took over the trust in January 2016 it has undergone a complete transformation under new manager Gary Channon. As such it has moved from a 17% discount in April to 2015 to currently trading at parity, with the trust ranked second article over one and three years. So the movements in discounts can work for and against investment trusts when a high profile manager departs. However what they are not subject to is large outflows thanks to their closed-ended structure meaning any incoming manager does not have to deal with a firesale of assets on day one. In the case of the R&M UK Micro Cap Trust, it would seem after all the negative headlines, many are realising the strength of the team that lay behind the key man and at its current 11.9% discount to NAV could be sensing a buying opportunity.
Companies: RMMC MIGO MRC ARR
Research Tree provides access to ongoing research coverage, media content and regulatory news on Mercantile Investment Trust.
We currently have 7 research reports from 1
Since the restrictions were lifted in mid-May, Belvoir has seen a surge in activity due to pent-up demand, resulting in June being a record breaking month for the group’s Newton Fallowell estate agency network in terms of instructions and sales and the financial Services division in terms of written income. Management have stated that with the positive impact of the stamp duty reductions still to take effect they are confident that the Group is well positioned to capitalise on the current market upturn and to take advantage of the opportunities arising from more challenging conditions. We have upgraded our PBT forecasts for FY 2020 to the level we forecast pre-COVID. We have also upgraded our target price from 169p to 233p and highlight that H1 2020 has demonstrated the resilience of the group, management’s ability to navigate difficult market conditions and the power of the franchise-led strategy.
Companies: Belvoir Group Plc
As expected, the quarter saw a sharp increase in loan impairments. However, one can wonder if the increase was not capped by the group’s willingness to keep its results afloat. Management’s downbeat guidance in terms of revenue recovery potential and cost reduction does not bode well as regards the group’s future credit loss absorption capacity.
Companies: Lloyds Banking Group
What’s new: Purplebricks Group results for the year to 30 April 2020, show the Australian and US units as discontinued; but include the Canadian unit sold for C$60.5m (i.e. £35m) in July. Investors will focus on the UK unit which revealed:
11% fall in UK revenue to £80.5m (FY19: £90.1m), as the number of instructions fell 23% (impacted by early Covid uncertainty and lockdown), but the average revenue per instruction “ARPI” rose 12% to £1,394;
UK gross profit margin improved to 64.1% (FY19: 63.0%);
UK marketing costs to revenue improved to 25.6% (FY19: 29.6%);
Spend on Digital capacity pushed UK operating costs 32% to £26.2m (FY19: £19.9m), as new management team pursued initiatives which are being “delivered at pace with significant opportunity for further innovation.”
UK adjusted EBITDA fell 53% to £4.8m (FY19: £10.2m).
Companies: Purplebricks Group Plc
For this Monthly, we are delighted that Rooney Nimmo and 24Haymarket have allowed us to reproduce a recent report they jointly published, entitled An analysis of UK exits (2015-2019), which provides a granular analysis by sector of the activity in our dynamic private companies world. We hope you find the insights of interest.
Companies: AVO AGY ARBB ARIX CLIG ICGT NSF PCA PIN PXC PHP RECI SCE TRX SHED VTA
The group continued to opportunistically take advantage of its CIB division’s performance to front-load pending credit losses. The third quarter should mark the beginning of a normalisation in the revenue mix and the cost of risk assuming no change in the macro-economic scenario retained by the group.
S4 Capital has announced the merger of Orca Pacific with Mighty Hive. Orca Pacific is a full-service Amazon agency and boutique consultancy based out of Seattle, which builds on the existing Amazon relationship of the group. The combination with Mighty Hive creates an end to end eCommerce offering encompassing retail management, advertising and content on the Amazon platform. Orca has a blue chip client list including Reebok, Uni-Ball, Mars, OshKosh BGosh, Godiva, Del Monte and Kenroy Home. We view Orca Pacific as an ideal merger partner with MightyHive, while we also see potential to align with the creative capabilities of MediaMonks. No financial details were disclosed, though we believe the transaction would have been structured consistent with the 50/50 cash/equity structure used by S4 Capital. The group recently raised £116m to fund the cash element of its M&A strategy. S4 Capital will release interims on 9th September followed by a Capital Markets Day. We await the outcome of two pitches for Whopper accounts before updating our forecasts. We retain our Buy rating and 375p price target.
Companies: S4 Capital
European Metals Holdings today announce that a support and financing agreement with EIT InnoEnergy, the principal facilitator and organiser of the European Battery Alliance has been agreed. This agreement is to help progress at the large Cinovec Lithium project in the Czech Republic, a JV for which has just been set up between European Metals Holdings and the large Czech utilities Group CEZ to fully fund the project through Feasibility and to a construction decision.
Goldplat today provides an update on its Q4 2020 and the end of its financial year (FY2020). Despite the best efforts of COVID Goldplat has had an excellent year. Overall business units in Ghana and South Africa have seen an increase in profit levels, and losses have been stemmed from the Kilimapesa mine in Kenya which is now on care-and-maintenance. Cash at the end of June was £3.2m.
Digitalbox is an AIM-quoted digital publishing company, currently owning two distinct digital media assets and with a scalable platform to grow through acquisition. This morning the group has provided a trading update for the six month period to 30 June 2020. H1 2020E revenue is reported to be flat against the prior period on a comparative basis at c.£1.0m, reflecting increased audience volumes being offset by the well-publicised fall off in digital advertising pricing. However, despite this present backdrop, H1 2020E adj. PBT is anticipated ahead of management's expectations due to a strong margin performance in the period; this driven by changes made to improve operational efficiencies. Encouragingly, as at 30 June, the cash balance has increased by £0.6m to £1.2m.
With this morning's announcement, NBB has confirmed that the thorough overhaul of the company in recent years has continued to bear fruit notwithstanding the pandemic. Notably, the news that the company has been EBITDA positive in H1 is a tribute to the proactive actions taken by the management in (1) building new businesses which now make up more than half of the group, and which continue to progress, (2) taking out significant costs, and (3) developing tailored solutions for clients which incorporate all of the separate business strands as required. We view the achievement in a particularly positive light since the market for Executive Search has been challenging as a result of the global Covid situation.
Companies: GDP NBB DBOX
The Bankers Investment Trust (BNKR) has continued to deliver on its twin objectives of long-term capital and income growth, rebounding strongly from the global market declines of Q120 and declaring increased dividends for H120 despite the difficult backdrop for corporate earnings. Coming into 2020, manager Alex Crooke had positioned the trust relatively cautiously with a net cash position of c 3%, which he put to work during the sell-off, boosting the portfolio’s long-term total return potential. At the half year the board reiterated its intention to increase BNKR’s FY20 total dividend by c 3%, using reserves as necessary, which would secure a record-equalling 54th consecutive year of dividend growth for the trust’s shareholders.
Companies: Bankers Investment Trust
Today's update highlights that despite the Covid-19 outbreak and UK/IRE lockdown, which has affected trading, Duke has continued to collect cash royalties from most of its royalty partners. Short-term alternative payment terms have been agreed with those partners hardest hit, to support them to periods where royalties can be fully recouped. Therefore the 61% fall in p/b from 1.3 (at 20 Feb) to 0.5 today, appears overdone.
Companies: Duke Royalty
Primary Health Properties (LON:PHP) recently announced interim results for the period to June 30, 2020. The company reported net rental income of £64.8mln, up 20.4% versus H1 2019. Net profit was up 29.0% at £36.0mln (European Public Real-estate Association earnings measure). Dividend per share for
Companies: Primary Health Properties
Worldwide Healthcare Trust (WWH) is celebrating its 25th anniversary. Managed by Sven Borho and Trevor Polischuk at OrbiMed, the trust has an enviable absolute and relative performance track record. The managers remain very constructive on the prospects for the global healthcare sector, suggesting that while President Trump has once again focused on the issue of US drug pricing, his ‘bark is worse than his bite’, and his efforts are a negotiating ploy to get the healthcare industry to the table to discuss reforms. They highlight minimal disruptions at the US Food and Drug Administration (FDA) as a result of the coronavirus, and expect an uptick in industry mergers and acquisitions (M&A) in H220 and beyond.
Companies: Worldwide Healthcare Trust
The group’s earnings surprise was driven by goodwill impairments. On the negative side, management upgraded, albeit slightly, its full-year loan impairments guidance and warns about revenue and CET1 pressure. It also reckoned that the tensions between the US and China will impact the group.
The Brunner Investment Trust (BUT) is now managed by Matthew Tillett at Allianz Global Investors (AllianzGI), who worked closely with his predecessor Lucy Macdonald as co-manager on the fund for four years, with a particular focus on income generation. He is able to draw on the well-resourced investment team at AllianzGI, including BUT’s new deputy managers Jeremy Kent and Marcus Morris-Eyton. Tillett says BUT offers a balance between growth and income, having provided investors with consistent capital appreciation over the long term, pays an attractive yield and has a distinguished record of 48 years of consecutive annual dividend increases. He believes we are in an exciting part of the cycle, where there are extremely interesting investment opportunities for those with a disciplined approach.
Companies: Brunner Investment Trust
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: AGY ARBB ARIX BUR CMH CLIG DNL HAYD NSF PCA PIN PXC PHP RE/ RECI SCE SHED VTA
PetroTal (PTAL LN/TAL CN)C; Target price £0.45: 1Q20 results/Bretaña expected to restart in July – 1Q20 financials are in line with expectations and 1Q20 production had been reported previously. At the end of 1Q20, current trade and other payables had been reduced to ~US$45 mm compared to ~US$55 mm at YE19. Most importantly. PetroTal continues to expect the Bretaña field to be re-opened this month. The contingent liability with Petroperu is estimated at US$25 mm at the current oil price and the company has entered into a financial swap for 0.46 mmbbl of oil with an ICE Brent reference price of US $40.58/bbl to cover the upcoming sale by Petroperu at the Bayovar port. This is a recovery story that we continue to like. It offers a combination of value, production and cash flow growth and reserves upside. We anticipate that the imminent reopening of the field with be an important catalyst to the share price.
i3 Energy (I3E LN): Reveals takeover target in Canada | Maha Energy (MAHA-A SS): Production update | Aker BB (AKERBP NO): 2Q20 update in Norway | Energy (RRE LN): Recommended offer by Viaro Energy | Spirit Energy: Dry hole in Norway | Enwell Energy (ENW LN): Ukraine update | JKX Oil & Gas (JKX LN): 2Q20 update in Ukraine and Russia | Pharos Energy (PHAR LN): Operating update in Egypt and Vietnam | Sound Energy (SOU LN)C: Terms of Moroccan licence renegotiated | Tethys Oil (TETY SS): June production in Oman | Victoria Oil & Gas (VOG LN): Gas sales contract with ENEO in Cameroon terminated
EVENTS TO WATCH NEXT WEEK
14/07/2020: Aker BP (AKERBP NO) – 2Q20 results
15/07/2020: Premier Oil (PMO LN) – 1H20 update
13-17/07/2020: GeoPark (GPRK US) – 2Q20 update
Companies: I3E MAHAA JKX PHAR EQNR AKERBP ENI HUR PTAL REP RRE SOU TPL VOG OMV