The Mercantile Investment Trust (MRC) looks to deliver long-term capital growth from a portfolio of UK medium-sized and smaller companies. Managed by Guy Anderson and Anthony Lynch, the trust typically consists of around 80 positions in various UK companies where the managers believe the wider market fails to sufficiently appreciate the long-term potential of the business. As we discuss under Portfolio, MRC is very much focused on the UK mid-cap market, with Guy and Anthony believing lower levels of broker coverage offer structural advantages to active investors. The managers operate a disciplined investment process focusing on the characteristics and advantages of a business, how these are presently valued, and what the operational momentum of the business is. At present the managers believe that, amidst the ongoing economic challenges, there remain significant opportunities for a number of companies that are not being accurately reflected by their valuations. Long-term returns have been strong, with a significant contribution over the previous ten financial years from stock-picking, as we discuss under Performance. The Discount has narrowed in recent weeks to c. 2.3% (as at 06/11/2020), as share prices caught up to NAV gains in recent months. More recent returns have remained strong, but the perceived sensitivity to political developments of UK mid caps has, in recent years, seen a degree of mean reversion in relative returns. MRC shareholders benefit from economies of scale, with an OCF of only 0.44%. Despite MRC’s 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.
Companies: Mercantile Investment Trust
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).
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 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
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Although 2020 will probably go down in history as one of the most challenging years experienced during our lifetime, it will also likely be chronicled as one of the best years for the recognition and appreciation of science. As we entered 2020, the COVID-19 pandemic was in its infancy. However, it rapidly evolved through the exponential rise in infections and mortality globally. Much has been achieved during the past 12 months in the fight against COVID-19, but, as we enter 2021, there are considerable concerns about the emergence of a mutant version of the virus and the second wave that we are now facing.
Companies: AVO ARBB ARIX BBGI CLIG DNL FLTA ICGT OCI PCA PIN PHP RECI STX SCE TRX SHED VTA YEW
What’s new: Ahead of the publication of the Group’s interims results for the six months to 31 December 2020, CLIG has released a detailed trading update which reveals:
Group consolidated FuM of US$11.0 billion (£8.0 billion), which is twice the FuM of US$5.5 billion (£4.4 billion) at the Group’s year end on 30 June 2020;
The merger with Karpus Management Inc ("KMI") added c US$3.6 billion from 1 October 2020;
Investment performance across CLIG’s investment strategies was “strong”, following “significant discount narrowing” and “good NAV performance”;
Rebalancing of client portfolios resulted in US$ 290 million of net outflows.
Companies: City of London Investment Group PLC
Secure Trust Bank’s (STB) pre-close update confirms the upbeat trends evident in its Q3 update in November. The strong lending rebound continued into Q4, loan repayment holidays are at low levels, and the balance sheet has remained robust and liquid. STB reiterated that its FY20 PBT would be well ahead of £9.7m (we forecast £13.0m). However, the new COVID-19 restrictions introduced in December 2020 have affected consumer loan demand into 2021, as well as the Motor Finance business. Management expects to be better placed to disclose its outlook for FY21 when STB’s FY20 results are released on 25 March. Our forecasts (FY21 PBT £31.6m, ROE 9.1%) and fair value (1,756p per share) remain unchanged.
Companies: Secure Trust Bank Plc
Finals (9mths to Sep-20) are in line with expectations. Recurring fee income from 3rd party AuM (incl. PRSR) ensured solid profitability. The balance sheet is well resourced with £26m to develop seed assets. With a positive outlook following the launch of the £1bn JV with EQT, we see accelerating returns over the medium term. PRSR is also on track to materially complete the initial 5,200 portfolio this year. Sigma trades below our 200p+/share intrinsic valuation – which attributes no value to AuM growth, which is a strategic priority.
Companies: Sigma Capital Group plc
Allied Minds has announced that Joe Pignato has decided to step down as CEO and from the board with immediate effect. However, he will continue to support the company as CFO for an interim period as the board continues its search for a permanent CFO. As part of a streamlining process, Allied Minds will now become a board-led company with no immediate intention to appoint a new CEO. The chairman and NEDs (experienced VCs and private company investors) will represent Allied Minds on portfolio company boards (including Federated Wireless, BridgeComm and Spin Memory) with an intention to accelerate realisations where possible.
Companies: Allied Minds PLC
Sirius Real Estate has been a stand-out performer within the UK listed commercial real estate sector over the last three years, delivering a total shareholder return of 107%. The shares also offer a valuable portfolio diversifier for investors, with a geographic focus on Germany, and a focus on pro
Companies: Sirius Real Estate Limited
Pacific Horizon (PHI) generated a very impressive uplift in its NAV over the course of 2020. This reflects its focus on growth, and technology and biotech stocks in particular. These performed well as we attempted to adjust to life under the pandemic, thereby accelerating a number of structural trends. PHI provided an NAV total return of 86.1%, which eclipsed the return on the MSCI AC Asia Pacific ex Japan of 21.2%, the broader MSCI AC World of 12.7% and the average of its Asia Pacific sector peer group of 25.3%. PHI is the top-performing trust in this sector by a significant margin. Despite this stellar growth, PHI’s manager is not resting on his laurels. Emerging Asia still remains a high-growth and underresearched region, and he continues to focus on those themes he expects to do well over the next five years. For example, EV continues to be a significant theme and the manager has been increasing exposure to the commodities needed to deliver a greener future, but which the world is structurally short of, following long-term underinvestment.
Companies: Pacific Horizon Investment Trust
Further media reports that Dr Martens, the British Boot brand is planning an IPO on the LSE. It is currently owned by PE group, Permira who is expected to sell down its stake at the IPO. March 2020 YE the group had revenues of £672m and EBITDA of £184m. Deal size TBC. Upon Admission to AIM, Nightcap will acquire The London Cocktail Club Limited (the "London Cocktail Club"), which is an award winning independent operator of ten individually themed cocktail bars in nine London locations and one location in Bristol. Offer TBC Due mid Jan. HSS Hire Group, HSS.L transfer from Main to Aim. Mkt Cap c. £70m. Recently raised £52.6m. Leading supplier of tool and equipment for hire in the United Kingdom and Ireland and has provided equipment hire services in the United Kingdom for more than 60 years, primarily focusing on the B2B market. Due 14 Jan. VH Global Sustainable Energy Opportunities plc, a closed-ended investment Company focused on making sustainable energy infrastructure investments, today announces intends to launch an initial public offering of shares on the Official List (Premium) of the Main Market of the London Stock Exchange. Due by Early Feb.
Companies: IUG CBP KAT APP RST DIS NICL BOKU CNIC HE1
Vietnam Enterprise Investments (VEIL) is the largest and longest-established Vietnamese equities closed-end fund. The last quarter of 2019 and most of 2020 marked a period of portfolio repositioning for the fund. The team sold 14 holdings, and bought two, making the portfolio more focused (28 stocks at end 2020 versus 41 at end Q319) but better balanced by market cap as well as domestic and international business exposure. Over H220 the performance has picked up, with NAV total return of 28% versus 24% for the VN Index, after marginally lagging the benchmark over the past three years. The trust is well positioned for longer-term investors looking for an exposure to the fast-growing Vietnamese economy via a relatively large and liquid listed equities vehicle.
Companies: Vietnam Enterprise Investments
Volta Finance (VTA) posted a 5.7% decrease in NAV in 2020, recovering from the initial 32.4% drop in March. This was mainly supported by CLO equity tranches posting solid monthly returns in November and December 2020 at +11.0% and 9.7%, respectively. Volta had anticipated a downturn for some time and repositioned its portfolio into CLO equity over the last two years. During the early-2020 market turmoil, Volta’s manager focused on securing liquidity by fully deleveraging the portfolio and implementing cost-cutting initiatives. In December, Volta introduced a dividend policy to pay 8% of its NAV (in line with historical yields), which currently implies a prospective 9.2% yield on the share price.
Companies: Volta Finance
Acorn Income Fund was launched in February 1999, and has a split capital structure with both Ordinary shares which receive a high level of income, during last year dividends of 23p were paid representing an increase of 10.6% on 2019 and offer a flat yield of 7.3%. It also has Zero Dividend Preference shares (ZDPs) which mature next February and offer a GRY of 5.9%. To mirror the two classes in the capital structure, the portfolio also has two distinct pools of assets; with 70%-80% being invested in UK Small Companies being managed by Unicorn Asset Management and the balance of 20%-30% invested in an income portfolio, predominately Corporate Bonds which is managed by Premier Miton Investors. This two pronged approach has enabled the trust to generate a strong total return for Ordinary shareholders of 213% over the past decade with annualised total return of 12.1%. The recent strong annualised dividend growth of 10.8% over the past five years and the current discount of 14.9% on the Ordinary shares offers an attractive entry point.
Companies: Acorn Income Fund
Martin Currie Global Portfolio Trust’s (MNP’s) manager Zehrid Osmani reports that his ongoing focus on long-term structural, sustainable business models was beneficial for the fund’s performance during the coronavirus-led market sell-off in Q120, with portfolio companies undertaking measures to protect their brand equity. He is encouraged by a general increase in investor awareness of environmental, social and governance (ESG) issues, an area of research that Martin Currie has focused on for several years, as he believes that ESG improvements can lead to higher total returns for shareholders. MNP’s performance has improved since the appointment of Osmani in October 2018, and its NAV is now ahead of its benchmark over the last one, three, five and 10 years.
Companies: Martin Currie Global Portfolio Trust
Redde Northgate has come through the COVID crisis in very good shape so far. We expect minimal impact on the former Northgate business from “lockdown 2.0”, a strong recovery in profits and a re-rating as normality returns and Redde reverts to mean. We could see further useful earnings upside from acquisitions such as Nationwide and revenue synergies not yet included. The Group is transforming itself into a mobility business which is higher returning, more diversified and has sustainable compounding growth prospects.
Companies: Redde Northgate PLC
AuM grew by +43% (+16% organic) to £29.4bn in Q3. Investment performance was strong (+£2.5bn) as COVID vaccine news propelled markets. Net inflows were maintained qoq (£792m). Sustainable was the stand out performer (+24%). AuM has broken through £30bn post-period end. Better than expected AuM drives +3% FY21e EPS and +5% in outer years. Continued distribution efforts in Sustainable, Global Equity and Multi-Asset funds stands to catalyse earnings. Alongside flow momentum, 12x FY22e PER is not reflecting this upside.
Companies: Liontrust Asset Management PLC
Pacific Horizon (PHI) generated a very impressive uplift in its NAV over the course of 2020. This reflects its focus on growth, and technology and biotechnology stocks in particular. These performed well as we attempted to adjust to life under the pandemic, thereby accelerating a number of structural trends. PHI provided an NAV total return of 86.1%, which eclipsed the return on the MSCI AC Asia Pacific ex Japan index of 21.2%, the broader MSCI AC World of 12.7% and the average of its Asia Pacific sector peer group (see page 23) of 25.3%. PHI is the topperforming trust in this sector by a significant margin. Despite this stellar growth, PHI’s manager is not resting on his laurels. Emerging Asia still remains a high-growth and underresearched region, and he continues to focus on those themes he expects to do well over the next five years. For example, companies exposed to the growth in electric vehicles (EV) continue to be a significant theme. The manager has been increasing exposure to the commodities needed to deliver a greener future, but which the world is structurally short of, following long-term underinvestment.