Schroder Asia Pacific (SDP) offers access to a portfolio of high quality Asian companies selected for their long-term growth potential. The manager, Matthew Dobbs, tells us he is focused on finding the highest quality companies, in terms of both financials and corporate governance. He has constructed a portfolio of the most attractive stocks, bought when he thinks they are being undervalued by the market, with a long-term view and little attention paid to short-term market movements. As we discuss in the Performance section, the trust has an outstanding long-term track record, generating the best NAV total returns in the AIC Asia Pacific sector over ten years and top- quartile returns over five years. This has been driven by stock selection rather than country or sector positioning, in line with the manager’s intentions. SDP’s share trade on a 14% discount, having widened substantially after the coronavirus pandemic started to spread. The board views 10% as a target level, however it takes into consideration market conditions and the discounts of peers. Many of Matthew’s most successful stock picks have been in the new economy sectors of information technology and consumer discretionary. Although he is a thirty-year veteran of the market, Matthew has been early to latch on to some of the biggest winners in the market such as Tencent and Alibaba. As well as to his own judgement, this is testament to the benefit of having a team of almost forty analysts spread across six countries in Asia, working with local knowledge and with their ears to the ground of a rapidly changing continent.
Companies: Schroder Asiapacific Fund
Anyone who takes a strong interest in financial markets sometimes feels the pull of market timing. It is seductive to imagine yourself a canny trader, buying or selling positions just before the market shifts, trading investments daily and beating the herd with superior analysis and instincts. We can add to the existing research suggesting this is a bad idea, and that taking a long-term view of your investments is the way to go. We looked at investment trusts that have outperformed over the past ten years and ran monthly NAV returns. We then calculated how many months were responsible for their outperformance. In other words, how many months did you need to miss to have ended up with market performance or less, negating any benefit of choosing an active fund over a passive fund? The results were surprisingly low, suggesting that switching in and out of investment trusts is fraught with danger and a potential recipe for underperformance, and underlining the case for a long term approach.
Companies: SDV CTY SMT FGT MNP JMG SDP
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 JAI BEE SDV BRIG AAIF HFEL SCF SIGT BRFI IVPG CTY HINT JCH NAIT
Schroder AsiaPacific aims to generate long-term capital growth from a portfolio of emerging Asian equities. The trust has performed well in recent years, with top quintile returns over three and five-year periods; this has been helped by exposure to the technology and consumer discretionary sectors, which the manager, Matthew Dobbs, believes are benefitting from and shaping secular growth trends. Matthew has run the trust since it was launched in 1995, making him one of the most experienced fund managers in the UK and meaning he has worked through multiple market cycles. He draws on the research of a large team of analysts based on the ground across Asia. The trust has a dividend yield of 1.5% and has grown its dividend in recent years. The managers caution however that there is no guarantee of it being equalled, or increasing, given the fact that capital growth is the priority and revenue reserves relatively low. The trust’s discount has traded between 9% and 13% in recent years and currently sits around the middle of that range; the trust has not conducted buybacks since 2016 although the board does have the authority.
Emerging markets remain a highly attractive place to invest for the longer term, despite the difficult period for the region this year. We do not believe that the current travails amount to a broad-based crisis in the region. In fact, many of the recent headlines surrounding emerging markets are irrelevant to long-term investor as they are focused on small and insignificant markets. We believe the index has done poorly mainly thanks to specific issues with individual countries and regions rather thanks to global dynamics besetting the region, with the important exception of the confrontation between Trump and the Chinese on trade. In our view, investors in emerging markets need to hold their nerve rather than trying to wait and time the bottom before reinvesting.
Companies: JAI DGN SDP EMF BEE
Schroder AsiaPacific Fund has an excellent track record and is led by a highly-experienced manager in the form of veteran fund manager Matthew Dobbs, who has more than thirty five years’ experience in Asian equities. Matthew tries to ensure that he doesn’t pay “over the odds” for his stocks, and this focus on valuation gives the trust a more conservative feel when compared to its more extreme growth peers. In Matthew’s view, Asian investors tend to focus on higher growth stocks, which means lower growth stocks tend to be ‘chronically undervalued’. The trust aims to deliver total returns in excess of the MSCI All Countries Asia ex Japan Index, and has delivered superior returns to the benchmark in eight of the last ten calendar years, in the process delivering a cumulative return of 261.6%, during which time the index has delivered 146.5%. Matthew has demonstrated consistent outperformance in a range of different market conditions, although he marginally underperformed in 2013. Asian stock markets had another strong year during 2017. While Matthew does not believe that 2018 will be plain sailing with protectionism, rising interest rates in the US, and North Korea all kicking around as potential pitfalls, when we spoke to Matthew in March he told us that he had “never been more excited as a stockpicker”. In contrast to several more expensive trusts in the sector, dividends are not a focus for this trust. The manager stresses that dividends are a by-product of the investment process. At the current price, the dividend yields 1.3%. At the time of writing, the trust is trading at a 10.8% discount, marginally narrower than the one-year average of 11.08% and the 3-year average of 11.35%. The board actively pursues a discount control policy which aims to ensure that (in normal market conditions) the trust does not trade on a discount wider than 10% for any significant period.
It is incredibly difficult to recognise entry points for markets or stocks: there is always a good reason for something to seem cheap but at the same time, a plausible cause for it to get cheaper. With threats of a trade war echoing in our ears and investors smarting from an unexpectedly tough first quarter, media attention has focused on the potential ‘buying opportunity’ in Asian equities, and against that backdrop we consider the outlook. As we show in the graph below, global stocks with the highest exposure to China have significantly underperformed since the start of March. Last month Trump announced tariffs on Chinese steel and aluminium and followed it up with wider tariffs in response to claimed Chinese intellectual property theft. After China announced its own tariffs in response, senior members of the Trump administration suggested the US might walk back their threats: commerce secretary Wilbur Ross said he expected the spat to end in negotiations, and newly-appointed director of the national economic council Larry Kudlow said that agreement may come before the tariffs are due to come into force in May. A weakening of the US position and an invitation to the negotiating table would be entirely in keeping with the past behaviour of the Trump administration. In January Trump was threatening to nuke North Korea on Twitter, yet now he is preparing to sit down and talk to its leader. It is a strategy he has followed in numerous areas: throw around threats, talk tough, and then negotiate back to a more reasonable mid-ground. However, there’s no guarantee that this time he won’t stick to his guns, and until a clear outcome emerges – volatility is likely to remain extreme.
Companies: SOI SDP AAIF IAT FCSS SST
With strong performance from most emerging markets, smaller companies and technology, 2017 will be remembered as the year that rewarded those investors willing to take some risk with their investments. Despite initial worries about political risk stemming from Brexit and upcoming European elections, equity markets in general soared. For the first time in recorded history the S&P 500 made gains in every month of the calendar year, the MSCI Emerging Markets Index ended the year up 30.55% (in sterling terms), while the Japanese Topix Index returned 22.23%.
Companies: IBT SMT JEO EMF SDP FAS BGS AJG
Schroder AsiaPacific Fund (SDP) invests in markets across the Asia Pacific region (excluding Japan) with the aim of achieving capital growth. Managed by Matthew Dobbs since launch in 1995, the trust is the largest and among the most liquid in its peer group. It has produced top-quartile NAV total returns over one, three and five years, also beating its benchmark MSCI AC Asia ex-Japan index over one, three, five and 10 years in both NAV and share price terms. In spite of this, it trades at a wider discount than the peer group average. The manager focuses on companies with visible earnings growth, strong management, sustainable cash flows and valuation support. While sector and geographical weightings are an output of stock selection, there is a significant allocation towards Greater China and the information technology sector. Reflecting the growing level of dividends from Asian companies, SDP has a yield of just over 1%.
Schroder AsiaPacific Fund (SDP) seeks to deliver capital growth by investing in companies in Asia, excluding Japan. The portfolio is managed by experienced manager Matthew Dobbs, whose focus is on stock selection. He is supported by a large Asia-based research team. Since the trust’s launch in 1995, Dobbs’s aim has been to build, monitor and manage a diverse portfolio of companies that exhibit visible earnings growth potential, sustainable returns and valuation support. Over most time periods, performance versus the benchmark has been positive.
Schroder AsiaPacific Fund (SDP) seeks to deliver long-term capital growth by investing in companies in Asia, excluding Japan. Since launch in 1995, the portfolio has been managed by Matthew Dobbs, who focuses on individual stock selection, with an awareness of macroeconomic factors. He is supported by a large research team based in Asia. There is a focus on companies with visible earnings growth, sustainable returns and valuation support. Over most time periods, the performance of the fund versus the benchmark has been positive.
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Ramsdens has reported a strong set of trading results in the last twelve months to March 2020. COVID lockdown has led to store closures, which will lead to weaker trading over the following months. However, Ramsdens has a very solid balance sheet, is diversified and is well positioned to re-open stores and continue its growth. We use an 8x multiple on last 12 months to March 2020 earnings as a reflection of a normalised earnings base which reduces our target price to 162p from 180p. At this target price Ramsdens would trade on a CY20 P/B of 1.5x. This target price offers 15% upside and we re-iterate BUY.
AFH interim results have shown resilience in a tough period. Revenues grew by 5% yoy and Adj. EPS is up 8% yoy. We reduce our FY20 EPS forecast by 8% to reflect the wider market falls and slower new business due to the lockdown. This reduction in earnings is significantly less than peers, highlighting the defensive nature of the business and the prudent temporary cost measures being introduced in FY20. The improved FCF of the business should lead to a re-rating, particularly as AFH now trades on 9.3x CY20 P/E, a significant discount to peers. Our reduced target price of 524p implies 81% upside. Re-iterate BUY.
Companies: AFH Financial Group
Aside from its FY 19 earnings presentation, British Land has adopted a more cautious anticipation about Offices in the City of London. We share this pessimism and have been surprised by the recent share’s bump. The latter is the opportunity to turn negative, again, and update our divestment case.
Companies: British Land Company
ULR’s finals were in line with on EPRA NAV and earnings a little better than expected. Valuations remain stable and full rent collection has been achieved for the current quarter. We see fundamental quality and resilience in the (now expanded) portfolio – ULR has already invested nearly £100m in the first two months of the new year following the £136m equity raise. We make no material changes to forecasts. Current valuation points to an 7%+ annualised return, with upside remaining from deployment of funding headroom, active management and potential for valuations to improve.
Companies: Urban Logistics REIT
Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
Companies: AGY ARBB ARIX DNL GDR NSF PCA PIN PHNX PHP RE/ RECI STX SCE SIXH TRX SHED VTA
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: AGR CSH ESP DIGS IHR LXI PHP RESI SIR SUPR THRL SOHO BBOX SHED WHR
Today’s FY update reports that the decisive action taken at the outset of the COVID crisis has protected returns. Revenues held up through to the May year end. Aided by cost savings, adj. EBITDA is expected to be 20% ahead. We expect a more modest final dividend to protect the capital surplus. Additional savings have been outlined, which we overlay on a conservative “flat market/fewer new clients” scenario for FY21e – where we hope outperformance is possible. Updating EPS forecasts: FY20e +25%, FY21e -10% and FY22e -7%; also incorporating the Hurley Partners acquisition (+8%). We consider MW a high quality core holding with long term potential.
Companies: Mattioli Woods
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
Companies: AEWU CREI CSH BOOT INL HLCL THRL SUPR RESI RGL DIGS GR1T SOHO PHP BOXE ASLI UTG AGR UAI BLND UANC CAL SHED CWD WHR EPIC WKP GRI YEW HMSO PCA INTU NRR
Tetragon Financial Group (TFG, Tetragon) achieved a 13.6% NAV/share total return and a 13.4% ROE in FY19, in line with its long-term target of 10–15%. The main driver of Tetragon’s performance was its asset management business (TFG Asset Management), which comprises managers with a total AUM attributable to Tetragon of US$27.4bn and generated an EBITDA of US$59.5m in FY19 (up 51% y-o-y). The late-2019 investment activity left Tetragon with a relatively low net cash position (4.1% of NAV at end-April). The shares trade at a three-year average discount to NAV of 44% (currently at 62.7%), which is relatively wide compared to peers given the company’s track record of delivering a 16% NAV TR pa over the last 10 years. The recent market sell-off has so far resulted in a 5.1% decrease in NAV (ytd to end-April 2020).
Companies: Tetragon Financial Group
The Merchants Trust (MRCH) is managed by Simon Gergel at Allianz Global Investors (AllianzGI). Aiming to continue to provide a high and growing level of income, he is adjusting the trust's portfolio in the wake of dividend cuts sparked by the negative economic effects of COVID-19. If there is an income shortfall in this financial year, MRCH is well positioned to maintain its dividend, with revenue reserves of more than 1x the last annual payment. It has not been an easy period for value managers over the last decade as growth stocks have led the charge; however, Gergel has outperformed the UK market over this period in both NAV and share price terms. The board reduced MRCH's gearing in late January 2020, which was opportune timing ahead of the recent significant stock market weakness.
Companies: Merchants Trust
MJ Hudson has confirmed that it expects to achieve profits in line with expectations for FY20E. This is a good result linked to new client wins during the COVID-19 disruption and timely cost management. Whilst much of the group's activities are proving resilient, uncertainty remains and in line with most of the peer group, MJ Hudson is withdrawing guidance for FY21E. We similarly withdraw our FY21E forecasts until visibility improves, moving our rating to Under Review. Meanwhile, the shares are now down 30% since their pre-COVID-19 highs, which is beyond that seen at outsourcing peers (Sanne, JTC). Whilst COVID-19 is presenting challenges for many businesses, we believe that: 1) the structural growth drivers in alternatives that underpin MJ Hudson's growth will continue to remain highly relevant, and 2) its strong balance sheet gives it a relative advantage.
Companies: MJ Hudson Group
The positive market movements (£19.5bn) offset the net outflows of £1.3bn. The adjusted operating profit before tax reached £1,149m, down 21.9% yoy. The insurer benefited less from longevity assumption changes (£126m vs. £441m in 2018) in the Heritage business and the lower Asset Management fees margin (38bp vs. 40 bp in 2018) in the Savings and Asset Management one. The current context has led to a decrease in the Solvency II ratio by 10%, but the capital position remains resilient at 166%.
Mattioli Woods has issued a trading update around the impact of the ongoing COVID-19 pandemic. We are reassured to hear that trading for the first 9m of FY20e (to Feb-20) was in line with expectations. There is likely to be a revenue impact, from falling asset prices and limits to normal business activity, however, it is not possible to quantify this just yet. A number of proactive measures are being taken to adjust the cost base to mitigate the short term impact, including reduced senior management team/variable compensation. We would highlight that c.55% of MW’s revenue is not linked to the value of client assets, providing a degree of insulation to asset prices. We make no forecast changes at this stage, but will monitor events and make any adjustments when there is greater certainty
In the past month the group has made significant progress in pivoting its business away from its traditional face-to-face model. Although lending levels remain appropriately subdued, it has achieved an impressive collections performance, with its largest business running at about 90% of pre-lockdown levels. This, combined with the group’s high risk-adjusted margins has enabled it to generate £3m of FCF in the first three weeks of April, taking its net cash position to £38.7m as of 21 April. This strong financial position, combined with the group’s innovative approach to product development puts it in an extremely strong position to serve its clients and win share when the current government restrictions are eventually lifted. Reflecting this positive outlook we reiterate our BUY rating.
Companies: Non-Standard Finance
In this note, we analyze the indebtedness of 35 international E&Ps publicly listed in the UK, Canada, Norway, Sweden and the USA. For each company, we look at (1) cash position, (2) level and nature of debt (including covenants), (3) debt service and principal repayment framework and (4) Brent price required from April to YE20 to meet all the obligations and keep cash positions intact. We also estimate YE20 cash if Brent were to average US$20/bbl from April to YE20. While the oil demand and oil price collapse are of unprecedented historical proportions and the opportunities to cut costs much more limited than in 2014, most companies (with a few exceptions) entered the crisis in much better position than six years ago, with stronger balance sheets and often already extended debt maturities. In addition, this time around, many E&Ps have already been deleveraging for 1-2 years and are not caught in the middle of large developments that cannot be halted. The previous crisis also showed that debt providers could relax debt covenants for a certain period as long as interest and principal repayment obligations were met. This implies that as long as operations are not interrupted and counterparties keep paying their bills (Kurdistan), the storm can be weathered by most for a few quarters.
With (1) Brent price of about US$50/bbl in 1Q20, (2) reduced capex programmes, (3) material hedging programmes covering a large proportion of FY20 production at higher prices and (4) limited principal repayments in 2020, we find that most companies can meet all their costs and obligations in 2020 at Brent prices below US$40/bbl and often below US$35/bbl) from April until YE20 and keep their cash intact, allowing them to remain solvent at much lower prices for some time. In particular, Maha Energy and SDX Energy are cash neutral at about US$20/bbl. When factoring the divestment of Uganda, Tullow needs only US$9/bbl to maintain its YE20 cash equal to YE19. Canacol Energy, Diversified Gas and Oil, Independent Oil & Gas, Orca Exploration, Serica Energy and Wentworth Resources are gas stories not really exposed to oil prices and Africa Oil has hedged 95% of its FY20 production at over US$65/bbl.
Companies: AKERBP AOI CNE CNE DGOC EGY ENOG ENQ GENL GKP GPRK GTE HUR IOG JSE KOS LUPE MAHAA OKEA ORC.B PEN PHAR PMO PTAL PXT RRE SDX SEPL TETY TGL TLW TXP WRL