Traders only, the buy and take profit from the chart and then wait for the next

buy signal which may or not be profitable.

All shares reverse with a breakout, all breakouts are not profitable.

Edinburgh Worldwide – “The opportunity is as exciting as ever”

• 13 February 2024
• QuotedData

Edinburgh Worldwide

Investment companies | Update   | 13 February 2024

“The opportunity is as exciting as ever”

As the rate of inflation continues its descent (barring a small bounce in the UK in December 2023) interest rates look likely to fall. Growth stocks have been recovering and Edinburgh Worldwide (EWI), the most growth-focused of the global smaller companies trusts (see pages 22 and 23) has seen a pickup in its relative performance.

Within the portfolio, valuations are relatively low, and history suggests that we are only at the beginning of what could be a significant period of outperformance.

EWI shareholders could benefit further as this should trigger a narrowing of EWI’s own wider than average discount (see page 27). At the same time, EWI’s managers say that the portfolio remains operationally resilient, technological transformation is continuing, and “the opportunity is as exciting as ever”. Reflecting this, team members have been adding to their EWI shareholdings.

Capital growth from entrepreneurial companies

EWI aims to achieve capital growth from a global portfolio of initially immature entrepreneurial companies, typically with a market capitalisation of less than $5bn at time of initial investment, which are believed to offer long-term (over at least five years) growth potential.

Fund profile

EWI is an investment trust which invests globally in a portfolio of listed and private companies. It aims to profit from a global portfolio of initially immature entrepreneurial companies, typically with a market capitalisation of less than US$5bn at the time of initial investment, which are believed to offer long-term growth potential.

Long-term growth potential

The board chooses to compare the trust’s performance to the S&P Global Small Cap Index (total return in sterling). However, the composition of the index has no bearing on the manager’s choice of stocks or position sizes. As evidence of this, the active share at the end of December 2023 was about 99% (relative to the S&P Global Small Cap Index.

To achieve a spread of risk, the portfolio should have between 75 and 125 holdings and have exposure to at least six countries and 15 industries. No more than 5% of the portfolio will be invested in a single security (at the time of acquisition).

The trust was launched in 1998 but did not adopt its current strategy until 31 January 2014.

EWI’s AIFM is Baillie Gifford & Co Limited, a wholly-owned subsidiary of Baillie Gifford & Co.

Douglas Brodie is the lead manager on the trust and its open-ended equivalent Global Discovery. He is supported by two deputy managers – Svetlana Viteva and Luke Ward – along with two analysts and two product specialists. Collectively, they make up the global discovery team within Baillie Gifford. Some more biographical details are provided on page 30.

The wider firm had £225.7bn of AUM at 31 December 2023 and the global discovery team was managing £2.3bn of that.

Exposure to unlisted securities

Up to 25% of the portfolio (at the time of investment) may be invested in unlisted securities (shareholders approved the increase from 15% to the current limit at the AGM in February 2022).

Up to 25% of the portfolio may be invested in unlisted securities.

At the end of December 2023, 23.9% of EWI’s portfolio was in unlisted securities, some of which are discussed from page 14 onwards. The board and the managers believe that for EWI to gain access to the most exciting immature entrepreneurial companies, increasingly it must have the flexibility to invest across private and listed companies. The reason being that technological advances have lowered the initial capital requirement needed to establish and scale many companies.

The quantum of funding available to promising private companies is considerable. Entrepreneurs may never need to turn to public markets for growth capital, instead choosing to use an IPO as a means to provide liquidity for backers once the business is large and mature.

The small company effect

As we have discussed in our previous notes, a key reason for making an allocation to smaller companies is that, while often perceived as being riskier and therefore more volatile, smaller companies tend to outperform larger companies over the longer term (this is sometimes referred to as the small company effect). This can be due to a variety of factors, but experience tells us that it is intrinsically easier for a smaller company to grow, perhaps doubling or quadrupling in size in a relatively small space of time, than it would be for a comparable much larger company.

It is intrinsically easier for a smaller company to double or quadruple in size.

Many reasons for the small company effect are often cited, including a tendency towards greater nimbleness (smaller companies tend to have less-complex structures that might otherwise prove a barrier to innovation) and a greater range of opportunities due to their size (larger companies are more likely to have to exclude a range of opportunities that are not sufficiently large to meaningfully impact their performance). It is also true that smaller companies are more likely to be in less mature industries where new products are naturally creating new demand and these companies are able to benefit from lower competitive pressures in a market that is naturally expanding. Although there are exceptions, larger companies tend to be in more mature industries where growth can be harder to come by, particularly if a significant element of this has to come from taking market share from competitors.

It is easier to grow in a new industry that is creating its own demand.

Figure 1 illustrates the performance of global small caps versus global large caps over the last 20 years. It shows that, while there have been distinct periods where global small caps have been out of favour and have underperformed global large caps, these tend to give way to periods of recovery with small caps providing strong outperformance.

As inflation in developed markets peaked some time ago and interest rates now appear to be on a path of retrenchment, growth stocks whose valuations were disproportionately affected by rising interest rates look set to benefit from a strong re-rating from the relatively low valuations that these stocks are trading at versus their own history.

Small cap equities look very cheap versus their history.

As Figure 2 illustrates, global small caps have tended to trade at a marked premium to global equities as a whole (arguably reflecting their superior growth prospects) but, despite valuations edging up over the last 18 months, small caps still look attractive (a current P/E of 21.1x versus a five-year average of 26.9x), while large caps are close to their longer-term average (a current P/E of 20.7x versus a five-year average 20.3x). We reiterate or view that, when coupled with EWI’s own wider than average discount (see Figure 38 on page 27), this still represents an attractive entry point for the long-term investor.

As Figure 33 on page 23 illustrates, EWI’s focus is on small-cap growth stocks and, while the performance of small cap growth versus small-cap value appears to have stabilised recently (see Figure 3), it is clear that small-cap growth suffered heavily from the rotation out of growth into value that began in late 2020. As explained above, we think that small cap growth is well positioned for a recovery from this nadir.

The impact of generative AI

The release of Chat GPT-4 in March 2023 jumpstarted a period of mania in markets for anything related to artificial intelligence (AI), which led to a remarkable run of outperformance for the ‘magnificent seven’ mega-cap tech stocks with exposure to the theme: Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla. These stocks were collectively up 80% over the year, while the remaining 493 stocks that make up the S&P 500 index were relatively flat at around 5%.

The release of Chat GPT-4 started a period of AI-related mania in markets.

Generative AI has been an incredibly hot topic and, as markets have settled after this initial sprint, EWI’s managers have been doing a lot of work reflecting on its impact – looking not just at primary effects but also second order impacts. For example, within the portfolio, Upwork is becoming more profitable as it is getting paid to find AI talent, while CyberArk has been doing well as cybersecurity has moved up most businesses’ agendas. As a result, EWI’s managers have evolved their thinking, and this has given rise to some portfolio changes.

Hardware 2.0

Traditionally, hardware and software have been seen as very different businesses that require different skill sets and have significantly different drivers and revenue streams. For decades, software – aided by higher IP and greater defensive moats – is where the bulk of value-adding innovations have arisen.

The lines between hardware and software are becoming blurred.

Hardware, in comparison, has been a much more commoditised business. The industry innovated, but with competition limiting the ability of the industry to expand margins, it has tended to be the case that software businesses have built on hardware’s development successes and captured a disproportionate amount of the value added. Microsoft was always touted as a better investment than IBM, for example. However, because of the impact of AI on the development of software, all of this is changing and the lines between software and hardware development are increasingly being blurred.

Increasingly, value-creating innovation has been coming through on the hardware side.

EWI’s managers observe that we are now seeing much more value-creating innovation coming through on the hardware side and they expect this trend to continue. They cite the example of 3D printers, where they say that the applications of this potentially game changing technology are being driven by the technological limits of both the hardware and software but, with software development evolving, the opportunities increasingly hinge on the capabilities of the hardware. However, whereas previously hardware and software tended to be separate businesses, to maintain a competitive advantage the two need to progress in tandem.

To capitalise on Hardware 2.0, EWI’s managers are allocating towards earlier stage companies that the market is struggling to value.

EWI’s managers say that the big question is, how do they capitalise on opportunities in the evolving hardware landscape in the market? They say that they are allocating away from more mature businesses (for example, Axon Enterprise and CyberArk) and reallocating to earlier stage growth companies (for example, Oxford Nanopore and Transmedics). They argue that the market is not yet extending its horizon far enough to value these earlier-stage hardware-orientated companies properly, which is creating an opportunity for longer-term investors such as EWI.

In the private company space – the managers have also been moving more towards holdings that are hardware-focused for the same reason, as well as those that are a key part of the AI toolset. For example, they see satellite connectivity (think SpaceX) as a game changer for AI as systems such as SpaceX’s Starlink network will allow AI to be used anywhere, with the myriad of benefits this could bring.

EWI’s managers point out that this is where the trust’s closed end structure comes into its own as many of these investments are not suitable for inclusion in an open-ended fund but EWI’s structure allows it to arbitrage this market inefficiency.

Philosophy and process

The philosophy that drives the construction of EWI’s portfolio is common to other Baillie Gifford trusts and is based on the manager’s observation of the asymmetry of returns. Only a few stocks have the ability to become global leaders in their fields and sustain that position. The rewards that accrue to them are considerable. By contrast, most companies will struggle to outperform and, as is especially the case with the younger, more immature companies that EWI focuses on, quite a few will fail. It is important that investors in EWI understand this.

Tools and technology have levelled the playing field. Advances such as the internet, cloud computing and online payments are enabling even relatively small businesses to scale fast and address a global market. If the market is global, differences in country and regional macroeconomic and political environments are much less relevant.

A true stock-picking portfolio

EWI, therefore, represents a true stock-picking portfolio, constructed without reference to index weights or to reflect the views of an asset allocation committee. The portfolio has a bias to technology, but as the managers point out, technology is everywhere.

The managers are not compelled to sell good companies on market cap grounds

Potential investments should typically have a market cap of no more than $5bn at the time of initial investment. Nevertheless, the emphasis is on identifying the winners and running with them and EWI may end up with holdings in far larger companies. EWI can act as an incubator of companies that grow to become large enough to be included in Baillie Gifford’s larger-cap strategies and identify up and coming disrupters. However, they can retain exposure to these; the managers are not compelled to sell good companies on market cap grounds.

Only a few stocks have the ability to become global leaders in their fields and sustain that position

This is not a venture portfolio – the managers tend not to consider companies less than $300m–$400m in size – but these are relatively immature companies on the frontiers of change. The uncertain outlook for these businesses makes it hard for the market to value them properly. This is especially true for those companies that are expected to become significantly profitable some years in the future. The managers believe that most of these stocks are poorly understood and that creates the space for bottom-up research to add value. The universe is vast – perhaps 30,000 companies – but most of these will not have the characteristic traits that they are looking for and some entire sectors are not a fit.

The sector is full of companies that are small and will stay that way

The managers seek to assess the potential of the business model and the risk that it does not succeed. Companies need to have a scalable business model and a clear competitive advantage. Credibility of management is very important as is an alignment between the interest of management and investors. Only a very small number of stocks fit their criteria. The sector is full of companies that are small and will stay that way.

EWI’s evergreen structure is an advantage

To deliver transformational growth, a business needs to have a culture of innovation which allows it to identify and solve problems for their customers. It often helps if they are starting with a clean sheet of paper rather than simultaneously managing the decline of an incumbent business. EWI is often a provider of growth capital and, in some instances, this could be before a company is revenue generating (as is the case with many of the trust’s healthcare investments, for example). For the companies, EWI’s evergreen structure is an advantage. It means that they can think long-term without having to be bound to the normal 10-year cycle of private equity LP funds.

Generally, the managers are not keen on situations where a number of companies are competing in the same niche, unless they can demonstrate differentiated propositions, each with their own edge. This is true of the trust’s oncology-focused stocks, for example.

EWI’s board and managers take their stewardship role seriously. However, the company will not seek to influence the strategic direction of the companies that it invests in.

EWI may end up holding a significant stake in a business (Baillie Gifford has informal caps on the size of the stakes held across all funds), especially early in a business’s life. However, the managers are mindful of the daily liquidity in listed stocks and factors that into position sizes. A typical new position will start life in the portfolio as a 0.5%–1.5% position. Where the risks associated with the business model are binary, the position size will be smaller.

Flawed investment cases trigger a sale

Sales are triggered once it is clear that the investment case is flawed. M&A activity is also a source of involuntary sales – often companies end up being taken over for less than the managers think they could be worth. In addition, positions will be re-evaluated and may be sold if the managers feel that the upside is limited.

Not a positive chart if u were looking to buy.

– M&A impetus meant the biotechnology and healthcare sectors shone during a decent end to 2023 for investment companies, according to the monthly winners and losers list from QuotedData on Monday.

QuotedData said that “over USD30 billion worth of takeovers” in December helped support the health and biotech sector, noting the Nasdaq biotechnology index surged 12% that month.

Elsewhere, supportive US economic data, featuring more robust jobs growth than expected and little inflation surprise, aided ‘soft-landing’ hope also supported investment firms.

Globalworth Real Estate Investments Ltd was among the best performers in a decent month for property in December. Overall, though, it was a “lacklustre” year for the sector, amid inflation and interest rates worries, QuotedData said.

“While there were plenty of financial headlines over 2023, inflation was still the main influence on markets. Rates of inflation are well below their 2022 peaks, but it was only towards the end of October 2023 that it became clear that interest rates had peaked,” the research house said.

Also struggling last year were firms exposed to China, typified by a difficult month in December, amid a tepid economic outlook for the Asian super-power.

QuotedData added: “Despite the uncertainty that prevailed for much of 2023, it was a strong year for the global equity market, with the MSCI all countries world index ending up 20% higher than it started. The big driver of this was [artificial intelligence], the catalyst for the rise of the ‘magnificent 7’  the seven largest US tech companies which drove the broader US market over the year.

“Going into 2024, there are questions as to whether the hype around AI will be sustained, will economies tip into recession, and what impact will elections have.”

The following were the best and worst performing London-listed investment companies in December, excluding trusts with market capitalisations below GBP15 million:

Five best performing funds in NAV terms with % change:

Biotech Growth Trust PLC 15.7

Chelverton UK Dividend Trust PLC 15.3

Bellevue Healthcare Trust PLC 15.1

International Biotechnology Trust PLC 14.7

RTW Biotech Opportunities Ltd 14.4

Five worst performing funds in NAV terms with % change:

JPMorgan China Growth & Income PLC (5.1)

Baillie Gifford China Growth Trust PLC (4.2)

abrdn China Investment Co Ltd (4.0)

Henderson Far East Income Ltd (2.6)

Fidelity China Special Situations PLC (1.4)

Five best performing funds in price terms with % change:

Crystal Amber Fund Ltd 24.2

Globalworth Real Estate Investments 22.3

Bellevue Healthcare 22.0

Triple Point Energy Transition PLC 19.3

Petershill Partners PLC 18.6

Five worst performing funds in price terms with % change:

Livermore Investments Group Ltd (11.0)

Macau Property Opportunities Fund Ltd (9.0)

ICG-Longbow Senior Secured UK Property Debt Investments Ltd (8.1)

CQS Natural Resources Growth & Income PLC (7.8)

JPMorgan China Growth & Income PLC (7.1)

Source: QuotedData. Full details at http://www.quoteddata.com

Thursday 15 February

Alternative Income REIT PLC ex-dividend payment date
Aquila European Renewables PLC ex-dividend payment date
Balanced Commercial Property Trust Ltd ex-dividend payment date
BioPharma Credit PLC ex-dividend payment date
Gabelli Merger Plus+ Trust PLC ex-dividend payment date
GCP Asset Backed Income Fund Ltd ex-dividend payment date
Greencoat UK Wind PLC ex-dividend payment date
Henderson Opportunities Trust PLC ex-dividend payment date
ICG Enterprise Trust PLC ex-dividend payment date
Impax Environmental Markets PLC ex-dividend payment date
Invesco Perpetual UK Smaller Cos IT PLC ex-dividend payment date
Invesco Select Trust PLC Global Equity Income dividend payment date
JPMorgan European Growth & Income PLC ex-dividend payment date
Murray Income Trust PLC ex-dividend payment date
NextEnergy Solar Fund Ltd ex-dividend payment date
Pershing Square Holdings Ltd ex-dividend payment date
PRS REIT PLC ex-dividend payment date
Schroder UK Mid Cap Fund PLC ex-dividend payment date
Troy Income & Growth Trust PLC ex-dividend payment date
UK Commercial Property REIT Ltd ex-dividend payment date

Now clearly NESF has continued its long term trend, after the santa rally.

The trust goes xd this Thursday for 2.09p a share, where the trend

indicates it may fall more than the dividend.

If u buy after the xd date u may get more shares for hard earned,

so more future dividends.

Decisions, decisions, I’ve already made my decision as I’ve bought

for the dividend to re-invest in the portfolio.

Needs to bounce from here, otherwise things are going to get

worse before they get better.

Warehouse REIT plc

Warehouse REIT completes two disposals totalling £13.4 million, 3.7% ahead of book value

Warehouse REIT, the multi-let industrial warehouse investor, announces the disposal of two assets in separate transactions for a total consideration of £13.4 million. The combined price is 3.7% ahead of the September 2023 book value and reflects an average net initial yield of 5.3%.

The sales comprise:

·      Warrington South Industrial Estate, a 106,000 sq ft single-let asset acquired in 2019, where we delivered a ten-year lease renewal in 2020; sold for a total consideration £11.6 million; and

·      Pellon Lane, a 20,000 sq ft multi-let asset in Halifax acquired in 2017, where we have successfully secured new lettings or renewals on nearly all the available space since acquisition; sold for £1.8 million. 

These transactions bring total sales since 1 April 2023 to £53.0 million, demonstrating good progress against our commitment to continued capital recycling. Proceeds from the sales will be used to pay down debt, supporting future earnings. 

Simon Hope, Warehouse REIT commented: “Strengthening our balance sheet and earnings position by releasing capital from assets which are low yielding or where we have successfully executed our business plan is a key priority for us. As these disposals show, we continue to evaluate all opportunities to do that. 

“While the investment market remains subdued, we have sold into pockets of demand, above book value, enabling us to crystallise value for shareholders and increase the portfolio weighting to multi-let assets where we see the most attractive opportunities.”

The portfolio has three positions TENT, LBOW and ADIG

bought to make a capital gains to re-invest in dividend

paying Trusts.

When these positions unwind most probably one at a loss

and one at a profit, one around break even, the blog will

return to it’s knitting of investing in Trusts that pay a ‘secure’ dividend.

Obviously buying GRID did not meet the blogs criteria

so therefore was a big mistake to make.

But we are where we are, they have stated they want to return

to the dividend list, so will have to watch and wait.

The fcast for the end of 2024 remains earned dividends of 8k

but the target may now not be met.