There was palpable shift in sentiment over the third quarter with the cautionary undertone perhaps best reflected by gold’s resurgence. Ongoing trade jockeying between the US and China did not help the mood and neither did the Argentine debt default in August. At the real economy level, manufacturing output has been trending lower across some of the major global economies.
Companies: AEMC BIOG SIGT IBT JEFI MHN MERI MTE PSHD RSE SIR FJV LTI MVI SEQI SOND SLI EGL SUPP VNH CSH VSL BRLA UTL ADAM SOHO GPM TPOU LEAF JRS JLEN SEC IGC MPO LIV INTU THRL
Woodford Patient Capital (WPCT) has a concentrated portfolio of early-stage unquoted and quoted companies, focused on technology and healthcare, with high return potential and high levels of stock-specific risk. It is managed by Neil Woodford, one of the most high-profile fund managers in the country. The trust does not pay a dividend. Neil focuses on picking businesses that he believes have the chance to be successful through the use of new technologies and in whose management teams he has faith. The trust is a pure stock-picking play, with the manager paying no heed to sector or geographic concentration. The drivers of the companies should be secular developments in their fields, and fundamentally global in scope. The portfolio has become highly concentrated, although position weightings are no longer being published since the open-ended Woodford Equity Income fund has been gated. Most of the portfolio is now in unquoted companies. Since launch in 2015, the NAV total return performance has been disappointing, with the trust losing 20%, while the FTSE All Share has returned 22.5% over the same period. Since June 2019, WPCT has been affected by the issues in the wider Woodford Investment Management (WIM) business that have led it to fall onto a discount of 45%. One of the fears is that the manager may have to sell unquoted stocks in the open-ended fund which are also held in WPCT, and if he is seen as a forced seller or if this is a disadvantageous time in the development of the companies, this could lead to mark downs to the trust’s NAV. We note that one potentially attractive feature for investors is that WPCT has no annual management fee. Although there is a performance fee, it won’t be payable until the NAV reaches 146p – an almost 50% uplift to its current level. This means that investors will only pay the 0.18% ongoing charges until that mark has been passed. The possibility of a change of manager has been discussed by the board, and so it is worth noting that these advantageous fee arrangements might not be retained should a new manager be appointed.
Companies: Schroder Uk Public Private Tst Plc
Woodford Patient Capital – Company update | Unite Group – Media speculation
Companies: Schroder Uk Public Private Tst Plc The UNITE Group Plc
Woodford Patient Capital – Company update | HgCapital Trust – Proposed fundraising |
Companies: Schroder Uk Public Private Tst Plc Hgcapital Trust
Fees in the fund management world are a hot topic, and average fees across collective investment funds around the world have seen relentless declines. According to research from Morningstar, the average asset-weighted fee for actively managed equity funds has fallen by 18% since 2013, compared with a 28% decline at passive funds.
Companies: JAM ATST SUPP JEO RIV
Woodford Patient Capital (WPCT) is a concentrated portfolio of early stage unquoted and quoted companies, focused on technology and healthcare, with high return potential and high levels of stock-specific risk. It is run by Neil Woodford, one of the most high-profile fund managers in the country. Whilst the trust has had its share of difficult periods, NAV returns in 2018 were strong, with the trust’s NAV up 7% while the FTSE All Share fell 9.5%. Undoubtedly the high level of unquoted assets held (66%) helped the trust outperform in a falling market. However, there were also valuation increases on some stocks which hit milestones, as well a successful IPO of Autolus - a major holding at 10.9% of NAV. On 1 March the trust announced it had agreed to purchase £72.9m of stock in unquoted companies held by the Woodford Equity Income Focus fund (WEIF) with new shares issued at NAV in a tap issue, and also received £6m to fund those companies from WEIF in the deal. This allows the trust to increase its exposure to stocks Neil thinks are some of the most promising in the portfolio: Atom Bank, Carrick Therapeutics, Cell Medica, RateSetter and Spin Memory. Prior to the announcement we spoke with the team to get an update on the progress of the portfolio companies, which we discuss in detail below. The team believe that there is scope for 2019 to be even better than 2018 in performance terms, with the portfolio companies largely at more mature, less risky stages of development and a number of significant milestones on the horizon, which we analyse later. Although the greatest contributor to performance in recent months since our last review has been Industrial Heat, written up by 357%, there have been interesting developments in other portfolio companies which could prove more significant in the longer run, such as with Oxford Nanopore (see portfolio section). Proton Partners’ listing on the NEX Exchange in February 2019 at a substantial uplift to WPCT’s initial investment could also prove to be a significant step for that company. The discount has narrowed since we first highlighted the trust, coming in to 12.8% from the wider range of 15-20% through much of 2018. WPCT has no annual management fee. Although there is a performance fee, after the March tap issue it won’t be payable until the NAV reaches 146p, a 50% uplift to its current level. This means that investors will only pay the 0.18% ongoing charges until that mark has been passed.
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
“The single greatest edge an investor can have is a long-term orientation”, according to Seth Klarman, the American billionaire hedge fund investor. On the Hargreaves Lansdown platform the number of people with more than £1m in their ISA has increased from just three in 2012 to 168 today. However while this sounds very impressive, £1m doesn’t seem that fanciful given full historic contributions to PEPs and ISAs since 1987 would have added up to more than £291,000. We calculate that an investor would “only” have to have generated an IRR of 7.74% on every year’s subscription to have generated a seven-figure sum today. ISAs offer an excellent way to grow capital and benefit from compounding (that eighth “wonder of the world”) over the very long- term entirely free from the clutches of HMRC. Investments are tax neutral within the ISA wrapper, and in contrast to a SIPP, there is zero tax payable on the entire amount when capital or income is withdrawn. Another contrast to a SIPP is that there is no size limit – under current legislation an individual’s ISA can be as big as it gets. Whilst building an ISA pot of £1m is clearly a huge achievement, our analysis suggests that many investment trust managers would have delivered significantly more. There are around 48 trusts for which we have meaningful statistics going back to 1987 which have had broadly the same strategy and/or elements of the same management team over this time. Of these, an incredible 34 trusts would have delivered a total ISA value (share price returns net of fund fees, but before the ISA wrapper fees) of over £1m, if an individual had put their entire PEP / ISA subscriptions in the same trust every year.
Companies: SMT IIT JEO IEM JEO ICGT OCI SUPP ATST LWI FGT
Blackstone / GSO Loan Financing – Half-year report | CVC Credit Partners European Opportunities – Half-year report | Woodford Patient Capital– Half-year report and portfolio update | Real Estate Credit Investments – Proposed placing
Companies: BGLF CCPG SUPP RECI
Woodford Patient Capital – Portfolio update | Phaunos Timber – Asset realisation update | Honeycomb – Interims to 30 June 2018 | GCP Asset Backed Income – Interims to 30 June 2018
Companies: SUPP PTF HONY GABI GABI
At the latter stages of a bull market, enthusiasm can sometimes get the better of all of us. Investors always find ways to justify prices for companies at any stage in the cycle. To contrarians, the fact that the price of something has gone up tenfold doesn’t necessarily make it more attractive. However, momentum (as it is now called) is popularly touted as a sustainable investment strategy for the long term. Have the proponents of the ‘ever the greater fool’ theory had a re-brand? Within the world of investment trusts, ‘excessive optimism’ is more easily measured in terms of premiums to net asset value (NAV). This is particularly the case where the majority of a trust’s assets are themselves quoted. Of the 90 trusts (or investment companies) which currently stand on premiums, 55% have illiquid and/or unlisted assets representing greater than 50% of their portfolios. With these trusts, overenthusiasm is perhaps a little less easy to gauge – it is entirely possible that either valuations have moved on since the last official valuation, or that the board is being conservative in its valuations. Either way, each is likely to have its own story and a premium is not necessarily an indicator of excessive optimism. We list below the trusts which have greater than 50% of their assets in listed or publicly traded investments, yet trade at significant premiums. One of the common themes observable is that of strong relative performance over recent times. However, whether you are a contrarian or not (or a follower of momentum as a strategy), we believe that paying anything over a very modest premium is setting yourself up for a fall. Premiums are very rarely sustainable and tend to evaporate at inflection points, exacerbating a poor period of performance from a manager in absolute or relative terms. Indeed, the table below shows how quickly a premium can be eroded, with a corresponding effect on shareholder returns, irrespective of manager performance.
Companies: MAJE SUPP IBT SLPE ICGT IIT SEC JEO SYNC III
WPCT is a concentrated portfolio of early stage unquoted and quoted companies selected for their high return potential. The concentrated nature means there are high levels of stock-specific risk. It is run by Neil Woodford, one of the most successful fund managers in the country. While it is the first portfolio of its type he has managed, Neil has significant experience investing in early-stage companies over the decade prior to launching the trust. WPCT trades on a 10% discount following a disappointing start to its life, which has seen it lose 10% in NAV terms. There have been a number of high profile issues with individual stocks that have gathered headlines, and sentiment remains weak towards the trust, reflected in the discount. On the other hand, attribution analysis shows the trust’s holdings in unquoted stocks have been net gainers since launch, and there have been recent significant gains from the flotation of Autolus, both of which may indicate there is potential in the portfolio. The performance fee will not kick in until NAV has risen by around 50% from here, meaning that investors would only pay the 0.18% ongoing charges until that mark has been passed.
UK equities are among the most unloved investments globally, with domestic-facing stocks particularly out of favour. Valueorientated investors may be asking themselves if there is an opportunity here, or if the ‘Brexit discount’ is justified. The Bank of America Merrill Lynch fund manager’s survey of global allocators saw weightings to the UK reach a historic low in March, and the country has been one of the least favourite locations all year amongst respondents. James Goldstone, manager of the Invesco Perpetual Select UK Equity and Keystone trusts, tells us US investors are on a “buyer’s strike”. Amongst domestic investors the data shows a similar pattern: the Investment Association reports that the open-ended UK All Companies sector was the worst-selling in March, as it was in four other months of the past 12. The UK equity income sector was the worst-selling in two months over the same period. We examine a number of trusts which have managers who believe they may benefit from a resurgence of interest in stocks exposed to the UK domestic story.
Companies: ASIT HOT IVPU SUPP
Woodford Patient Capital is relatively diversified in terms of number of holdings (85), though concentrated when it comes to individual stocks - the top 10 holdings account for 62.46% of NAV. This is very much a bottom-up, growth-orientated approach with Neil’s aim being to invest in early stage/young companies and hold them for the long term. As such, while some of the portfolios holdings do feature in Neil’s highly-popular UK equity income funds, Woodford Patient Capital still only has 14% crossover with CF Woodford Equity Income. The reason behind launching the trust was that Neil and the team felt there are many exciting, disruptive companies in the UK with strong intellectual property, but historically few had been turned into commercial successes thanks to a lack of appropriate capital investment. As such, the investment strategy revolves around finding early stage/early growth companies and, by providing long-term ‘patient’ capital, helping those businesses fulfill their potential. The portfolio is run with no reference to a benchmark, with the process heavily reliant on the team’s own fundamental company research. Also, given the trust’s investment objective and therefore the type of companies it invests in, a cornerstone of the process is to meet and closely work with company management to try and help drive shareholder value. The manager invests in companies where he believes there is significant potential upside, usually through proprietary intellectual property, and often invests alongside experienced players in this field such as IP Group, Allied Minds and Imperial Innovations. This process is borne out in the types of companies the trust holds, as a significant portion of the portfolio is in unquoted stocks. Despite the long-term growth focus, however, the trust also includes a significant weighting toward mid/large cap companies. From a sector point of view, the trust is heavily biased towards healthcare/biotech companies. Indeed, healthcare makes up 66.14% of the portfolio, with the next largest sector exposures being financials at 26.77% and technology which has doubled from 7.12% to 14.77%. As with Neil’s highly popular equity income funds, Woodford Patient Capital has next to no exposure to commodity-related stocks.
Investment trusts are often the structure of choice during booming markets. The ability to gear, plus the investment freedom of a closed-ended structure allow skilled managers to capitalise on rising share prices. However, the same has not necessarily been true on the way down, as leverage exaggerates losses and discounts widen. This has often been a time to buy, with market volatility providing a chance to buy into good trusts at knockdown rates. Cherry Reynard asks, has the market rout since the start of the year produced any opportunities for value-hunters? There are 28 trusts that have seen their discounts widen by more than 5%* since the start of the year. This appears a mild reaction to the market sell-off. The FTSE 100 was down 7.5% over the same period. Peter Walls, manager of the Unicorn Mastertrust (a fund of investment trusts), said this first bout of volatility, triggered by expectations of higher interest rates in the US, passed much of the sector by unnoticed: “There was some intra-day volatility in some of the more highly geared, specialist funds. Some of the trusts that had enjoyed strong demand from self-directed investors also proved volatile – Fidelity China, Scottish Mortgage and F&C Global Smaller Companies. However, those hoping to pick up cheap opportunities were disappointed.” There were a number of reasons why investment trusts didn’t exhibit panic selling. Notably, companies proved active in buying back shares. Scottish Mortgage, for example, bought back 3,000,000 ordinary shares at a price of 449.34p at the start of March. Walls added: “The boards are aware that discount volatility is not great for shareholders and did their best to manage discounts through this time.” However, while the rout itself did not throw up any conspicuous bargains, it did exaggerate some existing trends among some familiar investment trusts. The first is the weakness of the infrastructure trusts. There were seven infrastructure trusts among those trusts that saw the greatest discount widening over the period. In some cases, the moves were extreme - GCP Infrastructure saw a 9.4% move, while HICL saw an 8.0% move. 3i Infrastructure and John Laing Infrastructure moved from a long-standing premium to a small discount. Infrastructure trusts have long been seen as a ‘bond proxy’ investment and as such, might be expected to suffer on the prospect of rising rates. However, as Walls points out, there were also other factors at work. Concerns over the collapse of Carillion and an increasingly aggressive stance from the Labour Party on PFI have weighed heavily on investors. This has unquestionably led to better value, with discounts at multi-year highs. The question for investors is whether the rising interest rate environment is reflected in current prices, or whether any further inflation shocks could send prices lower still. Simon Moore, senior investment manager at Seven Investment Management (7IM) believes a more fertile ground may be the UK Equity income sector, where sentiment has been dented by Brexit concerns. He says: “There are three investment trusts which stick out where their price has fallen significantly over the last three months. All of these have Neil Woodford/ Mark Barnett connections (make of that what you will): Edinburgh Investment Trust, Perpetual Income & Growth and Woodford Patient Capital. “These have a few UK small caps that have been in trouble, arguably nothing to do with the market sell-off, but each manager have been vocal supporters of UK listed companies despite obvious global pessimism on UK equities post-Brexit referendum. If they are right - and their judgement calls have often been right in the past - then these funds could be rerated.” Moore points out that both managers have styles that will go in and out of favour. Certainly, all three trusts have moved down a long way. Patient Capital has seen its share price total return dip 10.7% and its discount widen 5.4%. Edinburgh Investment Trust hasn’t seen a significant change in its discount, which is hovering around 9%, but its shares are down 8.6%. It is a similar situation with Perpetual Income & Growth, where the shares are down 7.7%, but the discount remains at around 9.5%. Moore says: “It is worth remembering that Patient Capital is a very different fund to either Edinburgh Investment Trust or Perpetual Income and Growth and is not for the faint hearted. Given the nature of some of the companies it invests in, there may well be more ups and downs to come. But the clue is in the name - investors who can afford to be patient may well be rewarded over the long-term." Walls sounds a note of caution, saying that some of the classic equity income type stocks favoured by these two managers are still seeing a difficult time. Some of the outsourcing groups, for example, remain out of favour with investors. Much will depend on whether investors come to believe in the ‘value’ trade, where this type of stock will revert to more normal valuations. The other sector to see some change in ratings among the recent volatility has been the technology and media sector. Of course, this comes after a lengthy expansion in the technology sector, with companies such as Facebook, Amazon and Netflix leading markets higher for much of 2017. Walls says: “A couple of the technology trusts, such as Polar Technology Trust and the Allianz Technology Trust have moved to a small discount. I wouldn’t say they look like bargains.” Walls suggests that some sectors where there should have been bargains – such as UK smaller companies – have not seen any real movement in aggregate and are certainly ‘not exciting for value-minded investors’. That said, some are certainly cheaper than they were: Chelverton Growth trust has taken a hit, for example. The other weak trust has been the River & Mercantile UK Micro Cap, though this dropped following the departure of manager Philip Rodrigs over a ‘conduct issue’. Overall, most trusts have held up well since the start of the year. This reflects well on the sector, which appears to have grown better at managing market downturns. There are opportunities, but these have arisen from issues idiosyncratic to each sector rather than market volatility as a whole
Companies: SMT EDIN PLI SUPP PCT ATT RMMC
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Trading in the royalty partner portfolio over Q1/21 shows a material rebound from May, which has been sustained to date, as the portfolio as a whole returns to more normalised trading. Consequently, Duke's cash receipts, while down 20% YoY currently, are set to step up in H2/21 as forbearance measures largely expire and deferred royalties realised. This bodes well for a rebound in earnings and a return to cash paid dividends. A share price down over 55% since Feb 20, standing at p/book of 0.56x H1/20A's NAV p/s thus appears overdone. We await further clarity on the portfolio before reissuing forecasts, thus leave our recommendation U/R.
Companies: Duke Royalty
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
What’s new: Purplebricks Group results for the year to 30 April 2020, show the Australian and US units as discontinued; but include the Canadian unit sold for C$60.5m (i.e. £35m) in July. Investors will focus on the UK unit which revealed:
11% fall in UK revenue to £80.5m (FY19: £90.1m), as the number of instructions fell 23% (impacted by early Covid uncertainty and lockdown), but the average revenue per instruction “ARPI” rose 12% to £1,394;
UK gross profit margin improved to 64.1% (FY19: 63.0%);
UK marketing costs to revenue improved to 25.6% (FY19: 29.6%);
Spend on Digital capacity pushed UK operating costs 32% to £26.2m (FY19: £19.9m), as new management team pursued initiatives which are being “delivered at pace with significant opportunity for further innovation.”
UK adjusted EBITDA fell 53% to £4.8m (FY19: £10.2m).
Companies: Purplebricks Group Plc
For this Monthly, we are delighted that Rooney Nimmo and 24Haymarket have allowed us to reproduce a recent report they jointly published, entitled An analysis of UK exits (2015-2019), which provides a granular analysis by sector of the activity in our dynamic private companies world. We hope you find the insights of interest.
Companies: AVO AGY ARBB ARIX CLIG ICGT NSF PCA PIN PXC PHP RECI SCE TRX SHED VTA
H1 20 operating profit declined by 12% to £1,225m and the COVID-19 claims impact was £165m. Cash remittances from business units to the group was only £150m. The insurer said that it will focus on the UK, Ireland and Canada, which means an exit from other European and Asian markets. The Board has declared a second interim dividend in respect of the 2019 financial year of 6p/share and will inform shareholders about the 2019 final dividend in Q4 20.
Companies: Aviva Plc
Since the restrictions were lifted in mid-May, Belvoir has seen a surge in activity due to pent-up demand, resulting in June being a record breaking month for the group’s Newton Fallowell estate agency network in terms of instructions and sales and the financial Services division in terms of written income. Management have stated that with the positive impact of the stamp duty reductions still to take effect they are confident that the Group is well positioned to capitalise on the current market upturn and to take advantage of the opportunities arising from more challenging conditions. We have upgraded our PBT forecasts for FY 2020 to the level we forecast pre-COVID. We have also upgraded our target price from 169p to 233p and highlight that H1 2020 has demonstrated the resilience of the group, management’s ability to navigate difficult market conditions and the power of the franchise-led strategy.
Companies: Belvoir Group Plc
Vacancy strongly increased in Q2 20. LTV surpassed the 50% mark on 30 June 2020 due to strong value destruction in H1 20. Hammerson announced a £550m cash capital increase coupled with a disposal of £270m. Its ex-post pro forma net debt should be £2.2bn, i.e. LTV of 42% on a proportionate basis. Too high?
Companies: Hammerson Plc
We believe now is an interesting time to invest in Northgate, with a new executive board and a capable management team in place who have already delivered progress on an ongoing turnaround as we await a full strategic review. The group now has a clear and well communicated capital allocation strategy in place and improved earnings quality, in our view. We believe that the growth opportunity in the UK, the value of the Spanish business and the progress made to date with the turnaround are not being reflected in the share price, which is currently 15.9% below book value (414p per share in FY19A rising to 468p in FY22E). We use a variety of valuation methods including P/B, SOTP, DDM and DCF modelling and arrive at an average implied share price of 450p, 29.0% above the current share price.
Companies: Redde Northgate Plc
Today's update highlights that despite the Covid-19 outbreak and UK/IRE lockdown, which has affected trading, Duke has continued to collect cash royalties from most of its royalty partners. Short-term alternative payment terms have been agreed with those partners hardest hit, to support them to periods where royalties can be fully recouped. Therefore the 61% fall in p/b from 1.3 (at 20 Feb) to 0.5 today, appears overdone.
The group’s earnings surprise was driven by goodwill impairments. On the negative side, management upgraded, albeit slightly, its full-year loan impairments guidance and warns about revenue and CET1 pressure. It also reckoned that the tensions between the US and China will impact the group.
Companies: HSBC Holdings Plc
The Law Debenture Corporation (LWDB) has reported another strong set of results for its independent professional services (IPS) business in H120, with EPS growth remaining in the target mid- to high single-digit range despite a more challenging economic backdrop. With the trust’s largely UK investment portfolio having been hit by the widespread stock market sell-off in February and March, IPS has provided a larger than average contribution to revenue returns. This means fund managers James Henderson and Laura Foll can continue to search for attractive total return opportunities in a broad range of sectors, while maintaining LWDB’s focus on both capital appreciation and above-inflation dividend growth.
Companies: Law Debenture Corporation
As expected, the quarter saw a sharp increase in loan impairments. However, one can wonder if the increase was not capped by the group’s willingness to keep its results afloat. Management’s downbeat guidance in terms of revenue recovery potential and cost reduction does not bode well as regards the group’s future credit loss absorption capacity.
Companies: Lloyds Banking Group Plc
Despite challenging market conditions, Picton’s Q121 DPS was well-covered by EPRA earnings and robust portfolio capital values. Combined with low gearing, NAV per share was just 1.3% lower versus Q420 and including DPS paid, the NAV total return was -0.6%. With encouraging rent collection data continuing and the lockdown easing, we have reinstated our estimates and look for the quarterly DPS run-rate to increase in H221.
Companies: Picton Property Income Ltd.
The scaling of Duke's royalty portfolio was progressing as expected up to March 2020, with record cash receipts that month. Due to Covid-19 and the UK's economic shutdown, macro conditions have worsened and become highly uncertain. This is likely to see some royalty partners' future cash royalties decline, which in turn, will negatively impact FV's in the FY20E results. Duke's high margin and cash generative nature ensures it is well placed to trade through these challenges. Given the degree of uncertainty in outlook, we remove forecasts and put our recommendation Under Review and await further clarity on the portfolio.
Raven’s positive trading update was reassuringly robust, despite ongoing uncertainty regarding the long-term impact of Covid-19 on the Russian market. We believe that kind of performance deserves attention, although we plan to reinstate detailed forecasts post (a) the General Meeting scheduled for 31 July, which will decide upon proposals designed to create a simplified capital structure (outlined below) and (b) the interim results due in August.
Companies: Raven Property Group Ltd.