Secular stagnation refers to the economic theory that growth will be persistently low for some time to come, due to an imbalance between savings and investment. If capital is saved rather than invested productive capacity lies idle, while the drag on consumption reduces demand in the economy. As a result GDP growth is reduced. As we have previously discussed, there is no historical evidence that GDP growth has a direct impact on stock market growth – in contradiction of the theorised linkage via earnings. However, in a world of secular stagnation in which there is a glut of savings, corporate earnings will be muted as demand for companies’ wares remains sluggish, which should negatively impact stock market growth. High rates of savings would also push equity valuations higher than they would otherwise be and thereby reduce future returns. Investors can respond to this situation in a number of ways. One is to try to find active strategies, which either seek to harness certain factors likely to boost returns or to generate high stockspecific alpha. In the first case this could mean looking to harness the small cap premium or to the emerging markets which should see greater earnings growth over the long run. It could also mean looking to the tech sector, where earnings are dependent more on secular changes within the economy than the growth rate of the economy. In the second case this would mean looking for highly active stock pickers who run concentrated portfolios and aim to pick the winning companies which can steal market share from competitors. We believe the investment trust universe is the perfect place to find such strategies, as the structure allows managers to focus on managing their strategy and not inflows and outflows, while being able to take exposure to relatively illiquid assets and harvest the premium for doing so. Another way of responding is to look for alternative assets which offer comparable or superior returns to the equity market as a whole. In our view, when we look at likely equity returns over the next ten years, some alternatives look compelling. In the below we sketch a rough idea of likely equity returns over the next decade and then introduce some trusts we think have the potential to generate similar returns from more predictable cash flows and potentially less volatile NAVs.
Companies: USF HICL NESF TRIG UKW NBLS
TRIG’s key differentiator to peers is its broad spread of asset geographies and technologies. As such, it might be considered a one-stop shop for the burgeoning renewable energy sector. As we discuss in the Portfolio section, TRIG has continued to invest overseas in building its portfolio. During 2019, 92% of new investments were in Sweden, France and Germany. This means that between 31/12/2018 and 31/03/2020, UK assets fell from 72% to 55%. COVID-19 has had a limited effect on the operations and build-out of the portfolio. However, the company recently announced that its independent power price forecasters have reduced their assumptions on (mainly shortterm) electricity prices; which, as we note in the Performance section, is likely to reduce the 30 June 2020 NAV by 5p (all things being equal). In terms of the dividend, it is worth noting that 74% of TRIG’s revenues through to 31 December 2024 (and in excess of 80% over the next two years) are fixed. Therefore, notwithstanding the lower power prices expected for 2020, TRIG’s projected dividend cash cover remains positive. Electricity generation in the quarter to 31 March 2020 was 22% above budget. In April, the board reaffirmed its dividend guidance of 6.76p for the year ending 31 December 2020. At the current premium of 13% to the 31 March 2020 adjusted NAV, the shares trade at a slight discount to the sector’s weighted average premium. When markets were experiencing significant volatility, the shares traded on a material discount to NAV for several days. In hindsight this was an opportunity that passed too quickly, and the shares have bounced back to a premium again.
Companies: Renewables Infrastructure Group
Bonds have traditionally been a core part of private client portfolios. Harry Markowitz is generally credited with developing and popularising the modern approach to investment diversification, as part of his doctoral thesis in 1952. Markowitz’s 60/40 equity/bond portfolio quickly became a staple of retail investor portfolios, and for many years equity and bond portfolios built around this basic concept have been highly successful for investors. The attractions were clear: aside from the solid income that bonds offer investors as a portfolio component portfolio, they also provided something of a hedge to equity exposure.
Companies: UKW TRIG HICL SOND
The Renewables Infrastructure Group (TRIG) is a play on the burgeoning renewable energy sector. It differentiates itself from the other funds in the sector by being a non-specialist fund (wind, solar and battery storage so far) but with a remit to invest across the UK and in European countries where the directors and managers believe there is a stable renewable energy framework. Recently TRIG has announced a further extension of this policy, and the board is seeking shareholder approval to increase the proportion of assets the company can invest in Europe from 50% to 65%. TRIG invests in assets which offer attractive long-term cash flows, elements of which are linked to inflation. The aim of the company is to provide long-term, stable dividends for shareholders, with any surplus cash flows after debt amortisation being re-invested to help maintain the capital value of the investment portfolio. The current portfolio, when fully built out in 2020, will be represented by 71 projects, with net capacity of 1.5GW. This is equivalent to 1 million UK homes or 1% of the total electricity generated in the UK. Wind is currently the largest component of the portfolio (86% by value). However in the company’s recent announcement the managers state that to further diversify the portfolio they are considering investing in unsubsidised solar plants in Iberia, taking advantage of steeply declining capital costs and high solar resource. Solar provides a natural complement to wind technologies, given its peak electricity generation is during the summer months, while for wind peak generation occurs in the winter. The push to invest overseas has gathered pace over the last couple of years, and during the 2018 calendar year 77% of new investments by value were made outside the UK. For the six months to end-June 2019, the company has invested in five projects, all of which are overseas (in Sweden, France and Germany). In total, 45% of the portfolio is currently invested outside the UK, up from 28% at the end of 2018. TRIG has a progressive dividend policy. The company’s dividend has increased each year since launch, at an average compound annual rate of 1.8% pa. Every year the board sets a dividend target for the following year, payable in four equal installments. The current dividend target is 6.64p per share, equivalent to a yield of 5.1% at the current price and representing an increase of 2.2% from 2018. The company has delivered strong and consistent returns since inception. Over the past five years, it has outperformed the FTSE All Share index on a NAV total return basis, but with lower volatility. Since its initial public offering (IPO) in 2013 the company has delivered total shareholder returns of 10.4% per annum (to 30 June 2019). TRIG currently has long-term gearing of approximately 36% of portfolio enterprise value, all of which is all held at the project level. This is at the low end of the peer group. The longer-term debt is amortised over the life of each asset’s specific subsidy regime, which de-risks these assets over time (unsubsidised assets are not geared). The company continues to enjoy robust demand for its shares. Currently the share price premium over NAV is around 14%, a slight premium to the sector average premium of 12.7% (Source: Numis).
Over the past two decades, onshore wind power has prospered and now exceeds 12 GW in the UK. The termination of subsidies for new plants from 2017 onwards has cut investment. Instead, offshore wind power is the new ‘goto’ investment sector, as there has been a sea-change in costs. The key event was the 2017 auction for the development of the Hornsea Project Two and the Moray East fields, when 15-year contract for differences (CfDs) were awarded, at just £57.50p per MWh; this compares with the 2018 £100 per MWh target that had been set previously by the Government. In recent years, solar power has come of age. Total UK solar capacity now exceeds 12 GW. Inevitably, most solar farms are based in the Midlands or in the South, where irradiation levels exceed the UK average. A typical solar farm portfolio might include 50 sites with 8 MW of capacity per site. Despite the removal of subsidies for new solar plants, the prospects remain bright for new build, since costs have fallen appreciably in recent years. The levelised cost (LCOE) of solar power should fall below £70 per MWh. The UK’s first subsidy-free solar farm has been commissioned at Clay Hill in Milton Keynes. For many investors, REIFs offer an attractive means of securing exposure to the benefits of rising UK investment in these sectors, much of which is backed by long-term contracts delivering generally solid and secure returns. Our sector research focuses on 11 quoted REIFs, which mirror those selected by members of the Association of Investment Companies (AIC). The recently floated Aquila European Renewables fund is included, despite its declared policy not to invest in UK generation. Since May 2014, REIF returns have been solid, with total returns approaching 10% per year. As a group, their combined market capitalisation is ca.£7bn; the most valuable quoted funds are Greencoat UK Wind (£2.1bn) and The Renewables Infrastructure Group (£1.8bn). The sector premia over net asset valuations (NAVs) for most REIFs now lie in the 9%-19% range. The premium for Greencoat UK Wind, following its £375m gross fundraise, is ca.14%; The Renewables Infrastructure Group premium is similar. Targeted real dividend increases underpin the attractions, in particular, of wind and solar investments; major earnings shortfalls are low-risk, with little likelihood of a dividend cut. Prospective dividend yields for most REIFs currently lie in the range of 5.0%-6.0%. In terms of risk, future movements of interest rates could have a material impact on NAVs and, consequently, upon share price ratings. The precise effect will depend on the degree to which the discount rates moves relative to the riskfree rate. Regulatory amendments, subsidy changes and possible tax adjustments are also key risk factors with one company commenting that movements in long term power price forecasts are the most significant risk.
Companies: TRIG UKW NESF FSFL AERS GSF GRP SEIT USF
TRIG – Renewables Infrastructure Group – Acquisition | INPP – International Public Partnerships – Portfolio update
Companies: Renewables Infrastructure Group International Public Partnerships
Fundraising showed signs of picking up this month, and the focus was very much on the renewables sector. First of all there was Renewables Infrastructure Group, which launched a placing programme and an initial fundraising early in the month, targeting up to £170m. It ended up raising just over £300m, having received applications for nearly three times as many shares as were originally available, in an upsized and scaled back issuance. Greencoat Renewables also announced and completed a placing which raised EUR 148m, around 40% more than the target. Another indication of interest in this sector was John Laing Environmental Assets successfully placing around 22m of its shares that were being sold by The John Laing Pension Trust. Finally, with regard to news in this sector, the close of the US Solar Fund* IPO had to be put back after just falling short of its target by the original closing date – closing is now expected to take place on 10 April.
Companies: TRIG BBOX UKW GRP ALF ELTA ESP FAIR BCPT BREI HTCF MERI UKCM
Renewables Infrastructure Group – Results of fundraising | Gore Street Energy Storage – Q4 2018 NAV and business update |
Companies: Renewables Infrastructure Group Gore Street Energy Storage Fund PLC
The Renewables Infrastructure Group (TRIG) differentiates itself from its competitors in the listed renewable infrastructure universe in that it aims to provide a diversified exposure to renewable energy assets. TRIG owns different technologies (wind, solar, battery storage) across several countries (UK, Republic of Ireland, France, Sweden). As a whole, these assets offer long-term cashflows, elements of which are linked to inflation. As has proved to be the case during 2018, the diversification benefits of having a broad portfolio – smoothing cashflows and reducing risks to specific factors – have started to prove themselves. TRIG is a c.£1.5bn Guernsey-domiciled company, listed on the LSE and a member of the FTSE 250. It has investments in 63 assets in four different regulatory zones, with an aggregate capacity of 1,323MW - enough electricity for the equivalent of around 700,000 UK homes, or 0.6% of the electricity generated in the UK. We understand that this is equivalent to around 550,000 tons of CO2 saved per year. Currently the company has the majority of its exposure to wind farms, which represents 85% of the portfolio by value when fully built out. Of this, c.5% is invested in wind farms located offshore which the company is now seeking a mandate to increase exposure past the existing 20% limit. At launch, solar made up only 10% of the company’s assets, but now constitutes 14%. Over 2018 TRIG increased its geographic diversification with investments in the Republic of Ireland, France and Sweden. In January 2017, 17% of TRIG portfolio was invested outside the UK. This had increased to 38% by March 2019. Investing in more assets outside the UK has the benefit of contributing towards the company’s diversification of weather systems, regulations and electricity markets, whilst offering mitigation against localised risks. TRIG’s dividend has increased each year from launch at an average compound annual rate of 1.8% pa. Each year the board set a dividend target for the following year, payable in four equal installments. The current dividend target is 6.64p per share, equivalent to a yield at the current price of 5.6% and representing an increase of 2.2% from 2018. In NAV total return terms, the company has performed in-line with the peer group, but is outperforming the FTSE All Share index on a total return basis since launch, with considerably less volatility. Since its initial public offer (to 31st December 2018), the company has delivered NAV total returns of 7.8% per annum. This figure doesn’t include the uplift to NAV from the recent extension of the assumed life of the wind farm assets. In share price terms it has performed better. The company currently has long-term gearing of approximately 33% of portfolio enterprise value, all of which is all held at the project level. The company does sometimes have additional short-term borrowings at the fund level under its Revolving Acquisition Facility (RAF), currently £222m drawn. TRIG’s fund-raising to repay the RAF is in progress which, along with the proceeds from a refinancing of some project investments is intended to repay the RAF. Assuming this is successful, overall gearing is estimated to be c. 35% of portfolio enterprise value, which is at the low end of the peer group. The longer-term debt is amortised over the life of each asset’s specific subsidy regime, which de-risks these assets over time. TRIG has two managers who work together to achieve the company’s aims: InfraRed Capital Partners, which is responsible for the financial management, sourcing and executing of new investments; and Renewable Energy Systems (RES), which has a dedicated team of more than 40 providing portfolio-level operations management. The company has enjoyed robust demand for its shares, and according to data from Numis has traded on an average premium to NAV over the last year of 4.4%. At the current premium of c 5%, the shares trade at a discount to the sector average premium of c 9%.
Renewables Infrastructure Group – Fundraising prospectus and circular
TRIG – Renewables Infrastructure Group – February 2019 NAV and asset | BBOX – Tritax Big Box – Finals to 31 December 2018 | SIR – Secure Income REIT – Finals to 31 December 2018 | FSFL – Foresight Solar – Finals to 31 December 2018
Companies: TRIG BBOX SIR FSFL
Many investors think ISA investing is all about sticking equities away for the long term and forgetting about them. However, we think there are good reasons for allocating to alternative income-generating assets in your ISA, even for those concerned with longterm capital growth. We think that many investors don’t fully appreciate the benefit of reducing the volatility on a portfolio. When thinking about long-term returns, the tendency is to think of the average return in the long run as what you will get, and to think of volatility as a measure of the mark to market “discomfort” along the way. However, this ignores the devastating effect of sequencing risk, and the fact that a particular average annual return can be consistent with negative eventual outcomes. Adding uncorrelated assets, such as alternative income funds, to your portfolio can massively reduce the risk of a terrible investment outcome, and, as we shall see, without necessarily reducing the expected return. This is certainly true when you consider how favourably the returns of these alternative income funds compare to those from equities in recent years, another fact we think is under-appreciated, and which sets them apart from traditional diversifiers such as high-quality bonds. There is no guarantee that future return patterns represent the past, of course. With respect to the alternative income funds we consider below, there are specific risks to capital which have to be considered. However, we think that there is a way to use these trusts taking these risks into consideration. The re-investment of the income from these trusts, reliable in the short term, gives the investor the opportunity to “pound-cost-average” their investment in equities when they look cheap, or reinvest in the same high yielding alternative assets. We consider how this might work below, and look at a range of alternative income funds that might be suitable.
Companies: TRIG UKW HICL NBLS MGCI
CATCo Reinsurance Opportunities – Recommended orderly run-off | HICL Infrastructure – Update to 28 February 2019 | Renewables Infrastructure Group – Acquisition | Woodford Patient Capital – Listing, acquisitions and share issuance |
Companies: TRIG SUPP HICL
TRIG – Renewables Infrastructure Group – Finals to 31 December 2018
Pershing Square Holdings – Q3 2018 shareholder letter | Renewables Infrastructure Group – Results of fundraising | Hipgnosis Songs – Acquisition | Riverstone Energy – Tender offer results
Companies: PSHD TRIG RSE
Research Tree provides access to ongoing research coverage, media content and regulatory news on Renewables Infrastructure Group.
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Litigation Capital Management has announced FY20 results with gross profit up 7% to A$21.7m and PBT of A$9.2m, slightly behind expectations albeit the Group had already flagged that delays to 3 cases during the year would result in resolutions in FY21, thereby impacting FY20 results. That said, excellent strategic progress through the year and good news flow as well as increasing scale suggests more value to come. Reiterate buy
Companies: Litigation Capital Management Ltd.
To achieve YoY revenue growth over H1/20A despite the challenges of Covid-19 and its impact on the travel sector is testament to Equals' resilience and increasing focus on B2B and International payments services. While weaker gross profit and EBITDA margins have impacted profitability in H1/20, we see potential for an earnings recovery in H2/20 given cost reduction measures currently being undertaken. This should lead Equals to cash breakeven in Q4/20 and FCF positive by early FY21.
Companies: Equals Group Plc
FY20A results largely reflect a period prior to the Covid-19 lockdown, yet show Duke entering a more challenging FY21E with momentum. Yesterday's trading update demonstrated another notable rise in quarterly cash receipts for Q2/21, as royalty partner trading continues to improve. As some partners' forbearance measures will expire this month, Q3/21 receipts should continue this upwardly momentum. This opens the door to a return to cash dividends at some future point. Today, Duke also confirms it is now seeking new royalty partners, alongside follow-ons.
Companies: Duke Royalty
Sigma Capital (“Sigma”) has partnered with global alternatives manager EQT to deliver and manage a £1bn GDV private-rented sector (“PRS”) housing fund focused on Greater London. EQT will invest £300m equity, complemented by debt (including a Homes England facility), to build 3,000 homes in 5 years. Sigma will generate fee income as development manager, a recurring fee income stream from managing completed assets, as well as participation in returns via a minority co-investment (£16m) and a profit share. We estimate that the fee income alone is worth £45m to Sigma in the first five years: 50% of the current market cap. Crucially, this is a step up in AuM bringing a high quality long-term recurring earnings stream. We will reforecast following interim results (expected tomorrow) to provide full context.
Companies: Sigma Capital Group Plc
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
Companies: AVO ARBB ARIX CLIG DNL GDR ICGT NSF PCA PIN PXC PHP RECI STX SCE TRX SHED VTA YEW
Interim results demonstrate YoY growth and a resilient outcome that has exceeded management's expectations from the start of the Covid-19 pandemic. This is testament to the degree of recurring revenue generated across the business. FY21 trading looks to be more challenging, as notably lower new insurance sales post-lockdown will translate into lower premium income. A number of organic opportunities are being worked on to fill the shortfall. Rising UK redundancies and their impact on policyholder retentions creates great uncertainty, hence our forecasts remain withdrawn and recommendation remains Under Review.
Companies: Personal Group Holdings Plc
In line interim results to 30 June 2020 show the strength of this business amid a difficult environment. This is the first step in what should be an exciting growth trajectory toward a larger, scaled up business with high recurring revenues and ownership of the full supply chain in the personal injury and clinical negligence market for clients requiring long-term, risk-adjusted returns. We reiterate our TP of 50p, noting further upside potential as acquisitions are completed.
Companies: Frenkel Topping Group Plc
In June, faced with the task of replacing its longstanding portfolio manager, Alistair Mundy, Temple Bar Investment Trust’s (TMPL’s) board reiterated its commitment to a value style of investing. The board has now opted to hand the management contract to Nick Purves and Ian Lance of RWC Partners, two managers with considerable experience of managing income portfolios using a value-style approach. Value investing, where managers buy stocks that are valued more cheaply than market averages – based on measures such as price/earnings, price/book and yield – is deeply out of favour. The RWC team says that value stocks have never looked more unloved in the 30- odd years that they have been managing money. In their view, this makes it imperative that TMPL investors keep faith with the strategy and it also means this is an attractive entry point for new investors. One important change, however, is a cut to TMPL’s dividend to a level that the RWC team believes will be more sustainable.
Companies: Temple Bar Investment Trust
The impressive full year 2019 results included some eye-catching numbers, including a record PBT of £40.1m (nearly 3x FY18 @ £14.3m), £620m of reserves acquired over 16 legacy deals, and $842m of (estimated) Contracted Premium in the Program business – on track to breach $1bn in FY20 as previously guided and $1.5bn-$2bn in 2022-2023.
Companies: Randall & Quilter Investment Holdings Ltd.
As anticipated, Record has confirmed a material uplift in AUME following the rebound in financial markets from April. We upgrade FY21E forecast EPS by +18%, with higher staff costs offsetting some of the benefit. We expect AUME growth to be more modest from herein. While no performance fees have been recognised over Q1/21 and will be harder to achieve due to Covid-19, any future recognition would have a materially positive impact on earnings. Covid has temporarily paused new client wins, but we expect further additions to come as conditions improve.
Companies: Record Plc
City of London has announced its full-year results for FY’20. As previously indicated, over a volatile year, FUM grew to $5.51bn. This led to a 4% increase in fee income to £33.3m. With cost control excellent, as usual, this led to a 9% increase in operating profits to £11.6m. Earnings were impacted by exceptional costs for the Karpus transaction and losses on the seed investments in the new REIT strategies, and fell 19% to £7.37m. The final dividend was increased from 18p to 20p, giving 30p for the full year. This leaves cover ahead of the target cover over a rolling five-year period of 1.2x.
Companies: City of London Investment Group Plc
Trident Royalties Plc (AIM: TRR) has, this morning, announced the acquisition of a 1.5% Net Smelter Royalty (NSR) over the resourcestage Lake Rebecca Gold Project located in the highly prospective Eastern Goldfields province in Western Australia. The royalty package is being acquired from a private seller for a total consideration of A$8.0 million (c. US$5.63 million), comprising of A$7.0 million in cash and A$1.0 million in new ordinary shares in Trident. The acquisition is Trident’s fifth overall and its third gold deal. As per strategic guidance the company is moving fast assembling a diversified portfolio with a paying cashflow stream from iron ore and copper production and several strategic gold royalties with the potential for near term revenues. The market is paying attention with TRR shares up 49.8% since its IPO on AIM in June this year. There is clearly more to come with c. US$7.5 million of uncommitted cash as well as the potential for debt funding and the ability to use equity as acquisition consideration. The Lake Rebecca Gold Project operated and wholly owned by Apollo Consolidated (ASX: AOP), is located 150km ENE of Kalgoorlie in the Eastern Goldfields Province of the Yilgarn Craton. The Project, envisaged as a simple open pit operation, is close to existing gold infrastructure namely Saracen Mineral Holdings Limited’s (ASX: SAR) Carosue Dam Operation whose processing plant is in the process of being upgraded to increase throughput to 3.2 Mtpa.
Companies: Trident Royalties Plc
HSBC’s future should be clarified as soon as the US and China come back to the negotiation table. This will not happen before the US elections are over. In the meantime, HSBC will continue to be instrumentalised and its share price will remain under pressure.
Companies: HSBC Holdings Plc
Randall & Quilter has undergone a transformation over the last two years; simplifying its operating model, releasing cash, and developing an exciting Live (Program Management) business which promises to provide a key balance for its core Legacy business in terms of earnings visibility, capital use, and cash generation. The company's interim results reported several key milestones in both areas, notably the largest ever Legacy acquisition and significant future Gross Written Premiums for Program Management. An announcement which exuded optimism highlighted the potential for current year profitability to be strong and, possibly, ahead of expectations. Longer term growth is likely to come from a more balanced combination of Legacy and Program Management earnings with the potential for greater cash generation. Accordingly, consensus forecasts for adjusted 2018 EPS have increased by over 30.0% while both distribution and Net Tangible Assets per share moved higher.
FY20 Interim results