2020 has so far proven to be the latest episode in a long period of technology outperformance, as we observed in this article. 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. As a result the indices (and fund managers’ portfolios) are increasingly correlated to ‘big tech’. How do investors who want a diversified portfolio deal with this, and how can they introduce more diversification into their portfolios, without reducing the potential for growth? The first step, of course, is to use specialist funds to diversify one’s holdings of individual technology stocks. Allianz Technology Trust (ATT) and Polar Capital Technology Trust (PCT), for instance, are both run by tech specialist managers. But ATT differs from PCT in that the portfolio is significantly more concentrated and, at times, has greater exposure to mid-caps. This combination of features means that ATT can be more volatile and deviate from the benchmark to a greater extent, from time to time. Nonetheless over the last five years, these two aspects of ATT have paid off for its shareholders – having outperformed PCT by a total of 15% in NAV terms. While both trusts have delivered strong returns relative to their Dow Jones World Technology benchmark, both of their fortunes are also inextricably linked to big tech. If the biggest technology companies catch a cold, then the wider technology sector will likely catch it in the short term. At the same time, as we conclude in this article, there are good reasons why the quality characteristics which technology stocks display give them the potential to outperform for years to come. But nothing lasts forever and, while we wouldn’t bet against technology performing strongly in absolute terms over the medium term, it might be that sector leadership could pass elsewhere.
Companies: ATT PCT SMT BBH UKW IBT MHN IEM BERI MWY
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 MWY SMT MNL BBOX
To those who regularly invest in investment trusts, discounts can often be part of the opportunity. But to others, discounts are an extra complication, not to mention an extra risk. The last six weeks has probably strengthened the prejudices of both sides on the topic. The recent bout of volatility has – in our opinion – more clearly exposed both the advantages and the disadvantages of investment trusts. Our perspective is that discounts are like a drunk friend. They are fun to have around, but at times they let you down, often when it matters most. Ultimately, the investment trust sector is defined by its discounts. The NAV is what the manager delivers, which is the reason why most of our research is focussed on the NAV. Whereas the share price return reflects the NAV with an accelerant (or detractor) – represented by the change in discount over the respective holding period. Why discounts narrow or widen is a matter of continuing debate and, in most cases, comes down to very specific factors applicable to each trust. We would argue that – with the exception of very broad patterns or trends – past movements in discounts are significantly less repeatable than past NAV performance. Fundamentally this is why we believe it is more helpful to use historic investment trust NAV returns as a prism through which to judge the performance characteristics of a trust, rather than historic share price returns. On the other hand, there are ways to incorporate discount analysis into an evaluation of the opportunity presented by an investment trust at any given point in time. We feel that understanding the historic volatility of the discount is fundamental to the task of analysing a trust’s discount, and of defining factors that will influence it in the future. In this article we attempt to quantify the reasons for discount volatility, and point to trusts which offer significantly less discount downside from the current level.
Companies: PLI BHGU SMT RCP TIGT MWY RICA JAM BRWM
The aim of Mid Wynd International Investment Trust (MWY) is to grow investors’ real wealth by investing in a portfolio of high-quality stocks across the globe. The team, led by Simon Edelsten, Alex Illingworth and Rosanna Burcheri, take a long-term view to investing, identifying longterm ‘themes’ across the globe and anticipating how each will develop over the next three to five years. Detailed analysis is then conducted into each theme, before the team invest in those which they believe to be the long-term winners and losers. The portfolio normally consists of eight to ten themes, although there will be a number of themes outside the portfolio being analysed for potential inclusion. These are all regularly compared against each other through a correlation matrix, ensuring the trust is not overexposed to a particular trend. As of February 2020, online services (20.3%), automation (16.3%) and emerging market consumers (13.8%) make up the largest themes. Although it is by no means an absolute return fund, the strategy is designed to outperform during rising markets and to minimise downside during negative phases. The managers have achieved this since taking over the portfolio in 2014, as we discuss in the Performance section. The past three years have been particularly impressive. MWY has outperformed in both falling and rising markets, most notably in the recent market crash following the spread of the coronavirus pandemic. Due to the excellent performance, the trust has consistently traded at a premium over the past few years. We note that as the coronavirus pandemic has progressed, discounts have been volatile, but currently the trust is trading at a premium of 5.1%.
Companies: Mid Wynd International Investment Trust
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
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
All leaderships come to an end at some point. With investment trusts, however, it is rarely the electorate (aka shareholders) who initiate the change in manager. In some cases it is the board. In others, it is the management company itself recognising the need for a new manager, and replacing them before the board feels the need for more decisive action. A change instigated by the board will often result in a transformative outcome for a trust, perhaps with a change in management house as well as personnel. Changes proposed by the management company itself can be just as transformative, but can also be subtler. The aims are always the same: to improve performance for shareholders, and to stimulate demand to bring in the discount, or grow the trust through share issuance. Last week witnessed one of the more dramatic changes of manager in recent years. On 29 November Baillie Gifford effectively took control of the portfolio of European Investment Trust, one of the last remaining value trusts in the sector. The mandate being awarded to Baillie Gifford (the pre-eminent growth investment house) represents a significant change for shareholders, and comes after several years of a growth bull run. Time will only tell whether the board’s decisive (and dramatic) switching of horses will prove correct. In this article we reveal the results of a detailed analysis on how effective past manager changes have been for investment trusts.
Companies: JAM BRNA BRIG MWY
nvestors are increasingly turning to global funds. We suggest that concerns around Brexit are most likely leading investors to seek diversification overseas. In terms of retail sales the global sector has been comfortably the most popular among investors over the past few quarters. In 2018 global funds had close to twice the level of retail sales of any other sector, as can be seen in the chart below. A similar trend has emerged in the investment trust sphere, where the average discount within the 16-strong AIC Global sector sits at 4.7%. Only North America trades at a narrower average. While Brexit may be the cause of this increased appetite, diversifying overseas is a sensible strategy in all economic environments; although investors typically still overweight their own market, a tendency known as ‘home bias’. The AIC Global sector consists of a diverse collection of trusts, which are suitable for a range of different investment purposes. In this paper, we consider the diversification benefits of investing in overseas equities and the options available in the sector. As well as scrutinising each option, we aim to explore which trusts offer genuine diversification.
Companies: SMT MNP MNKS MWY
Mid Wynd (MWY) aims to identify companies which can generate long term growth whilst keeping a sharp eye on protecting investors’wealth during negative periods. Managers Simon Edelsten, Alex Illingworth and Rosanna Burcheri, look for longer term growth areas around the world and companies that can invest and grow in value even when economies are dull. They group these ideas into broad industry themes and then ensure they have spread investments between different themes with different drivers and also stocks exposed to this growth which trade on attractive valuations, often less well-known companies. The portfolio normally consists of eight to ten themes, although the manager will have themes on the back burner that aren’t being used. Each theme has an upper limit of 25% of NAV, each carefully compared to one another through a correlation matrix to ensure that the trust is not over exposed to a particular trend. As of August 2019, healthcare costs (17.2%), online services (17.1%) and emerging market consumer (15.6%) make up the largest themes. With the benchmark as the MSCI AC World Index, the managers aim to outperform over the long term by profiting during rising markets, and then protecting capital where possible when markets fall. The aim of protecting capital is a key and consistent aspect of the trust and, according to the managers, since inception the trust has outperformed more in months when the market has fallen than when we have seen rising markets (61% vs 58%). According to data from Morningstar, the trust has delivered NAV total returns of 121.8% since the managers took to the helm of the portfolio in May of 2014, compared to a return of 90.5% and 91.5% respectively from the MSCI AC World index and the IT Global sector average. As such, the trust sits in the top quartile of the AIC Global peer group for generating alpha (4.03) over that period, this measurement - which shows the returns the managers have added beyond the underlying movements of the index - a testament to the success of their risk management processes. Over the past few years the trust has consistently traded at a premium and this became even more pronounced towards the end of 2018, as investors looked increasingly for a ‘safe haven’. In December, the trust reached a premium as high as 7%, but this has since narrowed and currently the trust is trading on a premium of 3.8%.
Mid Wynd (MWY) aims to grow real wealth through investing in high-quality stocks across the world. The managers, Simon Edelsten, Alex Illingworth and Rosanna Burcheri, take a long-term perspective, looking to invest in companies which have relatively low business risk (and low leverage), high barriers to entry and strong secular growth - regardless of the short-term economic environment. They aim to find these companies by first identifying themes which the managers believe have long-term tailwinds. The team then draw up a roadmap for each theme establishing how it is expected to develop over the next few years, and only then research which companies exposed to that theme have the best investment characteristics. The portfolio will normally consist of 8-10 themes, each having an upper limit of 25% of NAV. The themes are compared across a correlation matrix, helping to ensure that the trust is not over exposed to a particular trend. At the time of writing, healthcare costs (17.6%), online services (16.0%) and automation (14.9%) make up the largest themes. The objective of the trust is to outperform the MSCI AC World Index, and the managers believe this is most easily accomplished by profiting during rising markets, and then protecting capital when markets fall. The aim of protecting capital is a key and consistent aspect of the trust and, according to the managers, since inception the trust has outperformed more in falling markets than in rising markets (67% vs 51%). Since inception the team have a downside capture ratio of 85.5%, and upside capture of 108.6% (source: Artemis, inception to end November 2018). Since May 2014, the trust has delivered a NAV return of 77.1%, compared to a return of 61.3% and 70% respectively from the MSCI AC World index and the IT Global sector average. As such, the trust sits in the top quartile of the AIC Global peer group for generating alpha (2.63) over that time, and has a Sharpe ratio in the top three of the peer group, a testament to the success of the teams’ risk management processes. Over the past few years the trust has consistently traded at a premium and this became even more pronounced towards the end of 2018, as investors looked increasingly for a ‘safe haven’. In December, the trust reached a premium as high as 7%, but this has since narrowed and currently the trust is trading on a premium of 3.2%.
Over the last few years, fees and costs have become a lightning rod in the investment world, attracting the scrutiny of regulators, the media and the public alike. Investment trusts, with their independent boards acting partly on the views of shareholders, have been quick to respond. We review the changing fee landscape among investment trusts in 2018 through proprietary analysis, and discuss those which boards have done most to reduce costs for investors.
Companies: PCT SMT HSL CTY JAM IPU MWY LWI
Mid Wynd International is a core global equity offering which aims to grow wealth steadily throughout the cycle, all the while avoiding the downside during tough times. Fund managers Simon Edelsten, Alex Illingworth and Rosanna Burcheri, apply a rigorous valuation-driven investment process to create a reasonably concentrated portfolio of global equities arranged around themes. Secular growth areas account for a large proportion of the trust’s impetus, principally due to the bias towards technological and healthcare companies. The team seek to balance the associated risk of these sectors with some deep value opportunities -companies that would be impossible to recreate at the current valuation. Managing the exposure to downside risk is an important feature for the trust. As such, themes, sectors, regions and individual stocks are all subject to exposure limits – and a correlation matrix is used to manage the exposure to themes which are correlated with one another. Additionally, the “safety box” of deep value stocks is designed to hedge risks in the portfolio or wider markets. The trust has delivered NAV total returns of 94.3% since the managers took over in May 2014, outperforming the MSCI AC World index, which has returned 75.5% over the same period, and the Morningstar Global sector (91.5%) by a small margin. The trust has also compared well against the much larger IA Global peer group of open-ended funds.
Research Tree provides access to ongoing research coverage, media content and regulatory news on Mid Wynd International Investment Trust.
We currently have 12 research reports from 1
Cenkos’s first half results demonstrated the benefits of its flexible operating model and strength of its client relationships. While challenges related to COVID-19 are set to continue, Cenkos’s focus is on growth companies and its fund-raising year-to-date has had a greater emphasis on corporates financing M&A and growth opportunities rather than for defensive purposes. This should prove more sustainable although, as always, the timing of transactions in the encouraging pipeline reported remains uncertain.
Companies: Cenkos Securities plc
Following on quickly from its impressive full year results, these interim results confirm that our confidence for growth in the Program Management business was not misplaced.Contracted Premium increased 95% YoY (and 12% ahead of December 2019) to $925m –a stone's throw away from the $1bn 2020 guidance set in 2018. At the same time, Gross Written Premium (GWP) grew 42.6% to £247.2m, resulting in Economic EBITDA turning positive, at £0.8m compared to a loss of £0.3m in 1H19
Companies: Randall & Quilter Investment Holdings Ltd.
Primary Health Properties (LON:PHP) is a real estate investment trust (REIT) that holds a portfolio of 510 primary health facilities in the UK (92% of the portfolio by value) and Ireland (8%). The business model is to manage the properties for rental income and to grow the portfolio over time. The
Companies: PHP PP51 PHPRF
Record’s Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.
Companies: Record plc
Cenkos Securities plc has terminated coverage of Record Plc. Our previous recommendation (BUY) and forecasts can no longer be relied upon.
Please contact Cenkos for further information.
What’s new: Today’s trading update reveals 17% rise in assets under management (AuM), double digit revenue growth, and an increasing operating margin as the business scales. The outlook is positive. Highlights are:
12.6% rise in 1H Group Revenues to £11.0m (1H last year: £9.7m);
21.9% rise in 1H adj operating profit to £5.0m (1H last year: £4.1m);
17.4% rise over 6 months in AUM to £7.8bn on 30 September 2020,
n.b. From 31 March 2020 the WMA balanced index rose 11.6% to 4510;
- Market movements added 12.5% to AUM (i.e. Tatton outperformed WMA);
- 1H net inflows of £328.1bn were 4.9% of opening AUM (i.e. c 10% annualised net inflows);
3.0% rise in Paradigm Mortgage Services member firms to 1,591
2.5% rise in Paradigm Consulting member firms
Interims will be announced on Wednesday, 18 November 2020
Companies: Tatton Asset Management Plc
Tatton has reported an in-line H1 financial performance: revenue totalled £11.0m (vs N+1Se £10.9m) and £5.0m adj. EBIT (50% N+1S FY21e). AuM grew by 3.4% to £7.8bn as net inflows continued throughout H1 (+£328m) – a positive performance given the backdrop. Paradigm, particularly in Mortgages, has been resilient post-lockdown. Having delivered 50% of our earnings forecast for FY21e, there is potential for upside. However, we leave our forecasts unchanged and a margin for safety as we remain alive to potential external risks/volatility.
ANGLE plc (AGL.L): Acceptance of FDA submission | Feedback plc (FDBK.L*): Partnership agreement | Open Orphan (ORPH.L): Human Challenge Study Model contract with UK Government
Companies: AGL FDBK ORPH
The interims confirmed that Covid-19 was minimally disruptive operationally in H1 20 and, ironically, may have improved both of R&Q’s divisions’ mediumterm trading outlooks. As the pandemic and other industry events have generated significant losses for insurers, they have created the current ‘hardening’ market driving demand for Legacy and Program Management.
There was an eclectic mix of property companies to feature in the top price movers for September. Top of the tree was private rented sector and residential development specialist Sigma Capital Group, with a 34.2% rise. The group launched a £1bn joint venture with EQT Real Estate, the real estate platform of global investment firm EQT, to deliver 3,000 private rental homes in Greater London. Micro-cap investor Panther Securities also hit double-digit gains, while Macau Property Opportunities saw an uplift in its share price after announcing debt refinancing and a disposal. CLS Holdings, the investor in offices in Germany, France and the UK, continued to see a recovery in its share price – which has risen 15.1% in the last three months. Off the back of solid results, Berlin residential landlord Phoenix Spree Deutschland saw its share price gain 7.2%. Schroder REIT’s share price rose 6.6% in the month as it embarked on a share buyback programme, while Irish commercial property investor Yew Grove REIT also saw positive shareholder reaction to amending its investment strategy to increase its target loan to value ratio to 40%.
Companies: SUPR DIGS CRC PSDL ASEI TPON RLE UKCM BREI BCPT RGL SIR SLI TOWN CAL
Life sciences is one of Mercia’s areas of focus and investment expertise. Seven of Mercia’s top 20 holdings at 31 March 2020 were in life sciences, valued at £29m in aggregate or 33% of total portfolio value (all of which had originated through Mercia’s third-party managed funds), with another c 40 earlier-stage life sciences investments across its third-party managed funds. COVID-19 has accelerated the opportunity for a new generation of novel and recombinant vaccines. This explosion of potential new treatments will require new diagnostics and bio-manufacturing support to scale supply once they are approved. These are areas where Mercia is already invested.
Companies: Mercia Asset Management PLC
The most pleasing aspect of Tatton’s trading update for the six months ending 30 Sep 2020 (H1 2021) was how robust its fundamental offering to clients (financial advisers) has proven to be in highly uncertain market conditions. It continued to attract strong net inflows into its asset management business while also growing its base of IFA consulting and mortgage services clients. The prospect of beating our previous FY21 forecasts looks promising. Longerterm growth prospects also look strong. We do, however, remain wary of the potential impact of further large market dips. For now, we maintain our fundamental valuation of 300p per share but see room for significant upside on that mark if Tatton continues to deliver.
NextEnergy Solar Fund has low operating costs, low finance costs and has consistently delivered generation outperformance. We estimate that it can sustain its current level of dividend with an electricity price well below today’s price. The shares show the lowest NAV premium of all the UK renewable yieldcos and the highest yield.
Companies: Nextenergy Solar Fund
It was a remarkable second quarter with global markets staging the sort of comeback few would have thought plausible, at the end of March. With some countries still battling the first wave of infection and others seemingly headed to a second, not to mention what happens when governments start to remove direct stimulus measures, uncertainty still abounds.
Companies: NCYF EGL NAIT NAIT THRG GCP IGC HHI JLEN PCT VNH ASLI IBT HRI CSH SIGT
Secure Trust Bank (STB) reported H120 PBT of £5.1m (vs £18.1m a year ago) and a 3.0% ROE. Income grew 4% y-o-y, but impairments almost doubled, and payment holiday charges also hurt. STB notes that since the lockdown ended, business has been rebounding. Its robust capital (CET 13.5%), business model and proven agility allow it to react to the changing lending environment. STB currently trades on a P/BV of 0.49x, reflecting sentiment more than fundamentals given its profitability track record and successful model. Our fair value estimate is 1,704p per share, down from 2,428p..
Companies: Secure Trust Bank Plc