A 360 view of the latest results from BBH, MUT, FCIT, MMIT, ATST, GRP, RCP, APAX
Want to know which investment company has generated a 7,800% cumulative total return over the last forty years? Answer in the latest round-up of investment company results and broker commentary…
By
Frank Buhagiar
08 Mar, 2024
Lost its shine of the week
“Anyone familiar with our factsheets will know that we find much joy in the boundless variety offered by the English language. However, the seeking of superlatives to describe the tendency of geopolitics and macroeconomics to throw obstacles into the path of investors lost its lustre long ago.” Bellevue Healthcare (BBH) Investment Manager’s Review.
There is no alternative
Bellevue Healthcare (BBH) Chairman Randeep Grewal gets straight down to performance in his full-year statement: “The total NAV return (i.e. including reinvestment of dividends) over the last financial year was -12.7%. The comparator index (the MSCI World Healthcare total return index in Sterling) produced a total return of -7.1% over the same period; thus, we underperformed by -5.6% over the year.” As the Chairman explains: “The portfolio continues to be exposed to US stocks, particularly in the small / mid-cap area…After a number of decades of falling interest rates, and low inflation expectations, the change in environment seen in the last year or so altered investor preferences and valuations for smaller companies and for those that have future promise or are waiting for inflexion points (whether they be a regulatory approval, widespread adoption, a move to profitability or another catalyst). Our portfolio companies often sit at the intersection of these different elements, so suffer disproportionately when there are headwinds – but hopefully benefit substantially with even a modest tailwind.”
The investment managers are sounding positive though: “Healthcare continues to be the secular growth story of our age.” Why? “Recession or not, there are ever more people and they are ageing. More and more countries are becoming developed economies and scientific progress continues to open up new avenues to relieve the burden of human suffering, raising expectations of what products and services will be available to this ever-greater number of people…The tools, products and services that are enabling the re-imagining of healthcare can be accessed through the public equity realm, creating a persuasive investment opportunity. The past few years may have been very challenging, but the fundamentals remain very attractive.”
Numis writes: “Bellevue Healthcare is managed via an unconstrained, high-conviction approach, with a concentrated portfolio of c.30 holdings of quoted global healthcare stocks…We would expect performance of the fund to deviate from the benchmark over short periods, given the SMID cap bias and concentrated portfolio, meaning the portfolio has little resemblance to the benchmark…Recent underperformance has challenged the fund’s track record, and since inception in December 2016, NAV total returns are 103% (10.3% pa), compared with a return of 127% (12.0% pa) for the MSCI World Healthcare index.”
JPMorgan is overweight: “BBH has traded at a mid-single digit discount to NAV since mid-2022. We think the discount would be wider but for the robust discount controls and these therefore clearly add value for shareholders. While the recent NAV performance has been disappointing relative to the index TR, we think the size focus is a large part of this and note the NAV TR has outperformed a small cap healthcare index. BBH remains differentiated, its managers have stuck to a consistent high conviction strategy and the company has attractive features in the form of the market cap linked fee and discount controls. BBH therefore remains our top pick of the general healthcare focused investment companies. We are Overweight.”
Strong momentum
Private equity vehicle Apax Global Alpha (APAX) posted a 4.1% Total NAV Return (6.1% constant currency) for the year. As Chairman Tim Breedon writes, that means “Over the past five years AGA (Apax) has delivered an average Total NAV Return of nearly 13% p.a. and returned more than €300m in dividends to shareholders. The NAV contribution from both the Debt and Private Equity portfolios against the more challenging economic backdrop of 2023 highlights the strength of the Company’s strategy. With investment activity in Private Equity ramping up in the second half of the year, there is strong momentum across the portfolio, with Apax’s focus on driving performance through operating value creation being well suited in current markets.”
Numis adds: “Performance was driven by earnings growth within the private equity portfolio, offset by lower valuation multiples and currency. Earnings growth of 18.0% was broadly in line with 2022 (18.5%), however revenue growth of 12.1% was notably below 2022 (21.5%). This largely reflects mixed trading across the portfolio, with some weakness in consumer facing companies on the back of softer demand.”
Jefferies is a buyer: “The relatively muted returns reflect the difficult environment for private equity investments during the year. However, looking forward, organic earnings growth continues at a healthy pace, while the portfolio remains primed for an uptick in exit activity. Capital returned via the dividend, in effect, pays shareholders to wait here.”
Liberum is a fan too: “We see good relative value in APAX’s shares, with the debt portfolio and 7.5% yield providing attractive differentiation to peers. While the PE portfolio has underperformed peers on returns since 2022, we note that at a 31% discount to NAV, the shares imply that the private equity portfolio is being valued at a c.43% discount, based on the PE portfolio’s 69% weight in GAV terms and illustratively applying 5% discounts to the debt and cash buckets. This seems too punitive, particularly in light of better momentum more recently.”
Skin in the game of the week
“…our colleagues in our Manager also have significant ‘skin in the game’, with interests in approximately £18 million RIT shares at the year end, reinforcing the close alignment with shareholders’ interests.” RIT Capital Partners (RCP) Chairman Statement.
A more idiosyncratic phase
Final results from RIT Capital Partners (RCP). Chairman Sir James Leigh-Pemberton has the numbers: “Our net asset value per share finished the year at 2,426 pence, representing a total return (including dividends) of 3.2%, lagging our investment hurdles of CPI+3%, which was up 7.0%, and the MSCI ACWI (50% sterling) which rose 18.4%.” Nevertheless “This brings our 10-year performance to 109%, a more than doubling of shareholders’ capital over the period.” As the Chairman explains: “Our investment portfolio is structured around three core pillars of quoted equities, private investments, and uncorrelated strategies. During 2023, the portfolio saw good performance from quoted equities, driven primarily by our successful single stock selection and exposure to Japan. Uncorrelated strategies also made a positive contribution, helped by the outperformance of our credit managers, as well as our investments in carbon credits. However, the value of our private investments softened, reflecting lower valuations of external funds carried over from the fourth quarter of 2022 and our carefully considered revaluation of our direct investments.”
The investment managers add: “Although the percentage allocation across our three pillars may see modest variations over shorter periods of time, our portfolio construction and risk management principles aim to provide shareholders with a diversified portfolio that delivers long-term capital appreciation on an attractive risk-adjusted basis…As the market enters a more idiosyncratic phase, we recognise that careful stock picking and asset selection exercised within our robust risk management framework, will be key to delivering performance.
Comment from Winterflood: “The long-term track record is clearly strong (share price TR +10.6% p.a. and NAV TR +10.5% p.a. since IPO in 1988), and in our view the team is one of the most competent in the sector. Questions have been asked in recent years around the quality of the private allocation, particularly with respect to the presence of venture within a capital preservation vehicle. These results do not dispel the notion that performance from this allocation will remain subdued until IPO markets re-open. Once they do, the portfolio is likely to benefit from its exposure to prime IPO candidates, including Stripe and Databricks. In all, we would be relatively surprised to see the discount hover around the thirties for a prolonged period…noting that the fund traded on a sustained premium in the not-too-distant past.”
Numis sees value: “RIT Capital shares are trading at a c.28% discount to NAV, which we believe offers significant value. We believe the board and management team have been active in addressing some of the issues raised by shareholders, including communication and marketing, and we also believe the active buyback is highly valued by shareholders. We believe that the key for the discount to narrow will be a period of sustained strong NAV performance and activity in the private assets, which will hopefully both provide comfort on valuations and reduce the overall private exposure. The manager has highlighted some interesting areas to generate returns through stock picking/asset selection, in areas such as mid/small cap equities, event-driven equity and value equities, as well as corporate credit markets. Investors will be looking for these to feed through into performance.”
JPMorgan is positive too: “In market cap terms RCP is the largest constituent of the AIC Flexible Investment sector (£2.6bn) and one of its highest quality constituents in terms of management. RCP also has an investment objective which emphasises long-term capital protection and a long-term history of greater participation in market upside vs market downside. We see no reason to change our Overweight recommendation.”
Disciplined allocation of capital
Full-year stats at Greencoat Renewables (GRP) included: “Net cash generation of €196.7 million…(2022: €215.0 million)…delivering gross dividend cover of 2.7x…(2022: 3.2x) with cash revenues increasing by 15% from €330.6 million to €379.2million” and “NAV per share of 112.1 cents (2022: 112.4 cents).” Non-executive Chairman Ronan Murphy adds some colour: “…another positive year for the Company, with continued strong cash generation underpinning dividend cover and providing long-term support for our reinvestment strategy. In deploying more than €500 million into four new assets, we have further diversified the portfolio and increased our generation capacity to 1.5GW across six European markets. Proactive revenue management has enabled us to deliver a number of power purchase agreements confirming that the Company is delivering on its strategy of maintaining a high contracted revenue mix. Despite the continued presence of macro-economic headwinds, the opportunity and investment case for renewables remains strong. The Company remains wholly committed to the disciplined allocation of capital and, with a highly cash generative and pan European portfolio, is well positioned to continue to play a critical role in energy transition, whilst delivering attractive low risk returns for shareholders.”
Comment from Winterflood: “GRP has delivered results in line with our expectations, with net cash generation down -8.5% over 2023 driven by power prices falling from their extreme highs seen in 2022, with the majority of the near-term negative impacts on cash flow mitigated by a high contracted revenue base. Positively, GRP notes good progress on its asset recycling programme, and we are seeing signs of improved liquidity in the market this year, with disposals being key for the fund to ease its current debt burden. Overall, while GRP is currently well positioned from a revenue perspective, with 77% of revenue contracted over the next three years providing support for its target dividend coverage of 2.1x, it currently has the highest aggregate gearing in the Renewable Energy Infrastructure sector at 51% of GAV, and the lowest weighted average maturity of term debt at 3.7 years. In addition, the fund is not screening particularly cheap on a discount basis (22% vs. sector average 24%), and hence we see better value elsewhere in the sector.”
Liberum is positive though: “The strong dividend cover and cash generation in what is a highly contracted revenue model (c.83% of cash flows in 2024) highlights the strength of the portfolio…Gearing, after the four acquisitions in the period was c.51% which is above the 40% long-term assumption but below the mandate limit of 60%. GRP’s use of structural fund-level debt means it is subject to refinancing risk but the risk to valuations is low with IRRs assuming a medium-term cost of debt at c.4.5% (vs current weighted average cost of debt 2.9%) and no refinancing on structural fund-level debt due until October 2025. While the dividend yield lags peers (7.1% vs 7.8% sector average), we view the prudent levered discount rate, exceptional cash cover and high levels of long-term contracted revenue as attractive.”
Jefferies is a fan too: “GRP’s valuation assumptions remain conservative, while cash generation continues to be highly robust, given the degree of contracted revenue, so providing a clear path to reducing gearing.”
Craving of the week
“What we crave, more than anything else, is a bottom-up stock-driven market environment where operationally superior companies outperform poorer ones.” Bellevue Healthcare (BBH) Investment Manager’s Review.
The Company has prospered
Half-year Report from Murray Income (MUT). As Chair Peter Tait writes: “…NAV…per share (with debt at fair value) increased by 4.5%…as compared to the rise of 5.2% in the FTSE All-Share Index…both figures in total return terms. The fair value of the Company’s long-term debt was adversely affected by interest rate movements…which weighed on the Company’s NAV return. The share price total return was 6.2% following a narrowing of the discount from 8.2% to 6.9%.”
Looking ahead, the Chair thinks “…the UK market now looks very cheap compared to its own history and to international markets…” Furthermore, “The anticipation of falling UK interest rates later this calendar year could attract the attention of potential investors, particularly given the appealing combination of a market dividend yield of 4.0% and forecast dividend and earnings growth in 2024, according to a Bloomberg consensus of estimates in January, of 9.2% and 10.1%, respectively, despite the lacklustre outlook for overall economic growth.” And “From a Murray Income shareholder perspective, your starting point is a higher yield of 4.6%, and the shares standing on a 9.5% discount to net asset value…The potential, therefore, for positive returns from owning the Company’s shares is encouraging…Markets can be blown off-course by many exogenous factors…But the Company has prospered over the years through multiple economic, social and political crises. There are many good reasons to believe that it will continue to thrive…”
Investec is a buyer: “The manager focuses on the identification of high-quality companies with robust balance sheets and strong and predictable cash flows that trade on attractive valuations. In a world obsessed with short-term performance, over five years, Murray Income is ranked 8th out of an extended peer group of 90 UK equity income open and closed-end funds. Well documented headwinds, including indiscriminate selling of UK equities have resulted in valuations at a significant discount to historical levels and global equities, and this provides a significant margin of safety. Meanwhile, the discount of Murray Income is close to its widest level for several years, which appears harsh given the performance record. We maintain our Buy recommendation.”
Our active approach
Annual Report from emerging markets investor Mobius Investment Trust (MMIT). In their review, the investment managers were clearly in a reflective mood: “Reflecting on 2023, and the five-year trajectory since MMIT’s inception, the pervasive theme of persistent uncertainty remains a hallmark of our journey…Amidst the challenges facing emerging markets in 2023, MMIT returned 8.5% over the reporting period, outperforming the MSCI EM Mid Cap Index Net TR (GBP) by almost 6.0%. MMIT continued to lead the peer group since inception to the period end, with a return of 49.5%. This performance reflects the strategy’s resilience and adept navigation of uncertainties, and reinforces our commitment to delivering value to our investors.” As for the year just gone, “Strong performance was driven by robust company fundamentals, as well as more broadly by an upturn in the semiconductor industry and cooling global inflation.” And the outlook? “…we believe our active approach to optimising the portfolio, adding high-conviction, asset light ideas and maintaining diversification across geographies and sectors positions us well.”
Numis is interested: “We note Mark Mobius’ retirement from Mobius Capital Partners…We believe that Mark Mobius’ departure, whilst high-profile, should not be a cause for concern for investors…There will be no change in investment approach, in which the manager seeks to buy companies at a discount to intrinsic value; and to catalyse a re-rating through active engagement. We believe Mobius IT is an interesting fund for investors seeking exposure to mid and small caps within Emerging Markets. The portfolio is concentrated, comprising of 20-30 holdings (currently 27) across emerging and frontier markets which bears little resemblance to the index (98% active share). As a result, we would expect performance to deviate from the market over short periods.”
Pleasant surprise of the week
“2023 was a surprisingly positive year for financial markets…” Alliance Trust (ATST) Chairman Statement.
Strong
How Chair Dean Buckley described Alliance Trust’s (ATST) full-year returns: “In a volatile market environment, Alliance Trust reported strong returns, outperforming the MSCI ACWI and most of its peers in the Association of Investment Companies (’AIC’) Global Sector.” As for the numbers “…NAV…Total Return of 21.6% was significantly higher than the 15.3% return from our benchmark, the MSCI All Country World Index (’MSCI ACWI’)…These results extend the Company’s long-term track record of attractive outright gains and relative performance. In a highly concentrated market, it was reassuring to note that the driver of the Company’s outperformance in 2023, was the broadly-based, skilled stock picking approach, rather than the result of any significant style, country, or sector biases.” What’s more: “…this year also marks the 57th consecutive annual dividend increase, a track record which is one of the longest in the investment trust industry, and one which the Board is confident can be extended well…”
And the Chair believes there’s more to come: “…every market environment produces winners and losers, and we are confident that our diversified but highly selective approach to stock picking will continue to add value for shareholders.” That’s because: “Alliance Trust’s innovative multi-manager investment strategy has already demonstrated strong performance through a variety of market conditions and the Board believes it can continue to build on that track record in the coming years.” Comment from the investment manager: “In 2023, our fund managers demonstrated that, collectively, they can add significant value despite a challenging macroeconomic backdrop. We remain confident that they can continue to do well by selectively investing in companies with strong fundamentals rather than following short-term trends that often drive indices. We, in turn, will continue to dynamically manage the stock pickers and their allocations in the light of evolving market conditions to ensure the portfolio strikes a comfortable balance between reward and risk. They will seek the rewards; we will manage risk.”
Numis points out: “Alliance Trust’s target for the equity portfolio is to outperform the MSCI AC World index by 2% pa (net of costs) over rolling three-year periods. Over the last three years, the fund has delivered a NAV total return of 39% (11.6% pa), outperforming the MSCI AC World index, which returned 35% (10.4% pa) over the same period although slightly underperforming its targeted performance level. We believe the concept of investing in the top 20 stock picks from a range of leading managers via a low-cost vehicle is appealing and note the improved recent performance of the fund.”
Our long-term focus
Annual Report from F&C Investment Trust (FCIT). As Chair Beatrice Hollond writes: “The Company produced a strong NAV total return in absolute terms of +11.3% but underperformed the total return from our benchmark of +15.1%…Following a challenging year for markets in 2022 when we had delivered the strongest shareholder return amongst our peer group of global investment companies, in 2023 our return slightly lagged those peers…We delivered strong absolute performance from most of our underlying strategies, most notably European equities, but under exposure relative to our benchmark index to some of the very largest stocks in the market in several of our US and global strategies led to modest underperformance against our benchmark index within our listed equity portfolio. Meanwhile, our private equity holdings, in aggregate, lost value over the year and produced returns well behind those of listed equivalents.”
The Chair continues: “There remains uncertainty with respect to the near term economic and political outlook and we expect an element of volatility in both bond and equity markets as inflation and interest rate expectations adjust over 2024 and as investors assess the implications of fast-evolving trends in AI and technology. Nonetheless, we remain confident that our long-term focus and diversified approach will continue to serve shareholders well in terms of pursuit of our objective of delivering growth in capital and income.”
Numis notes: “The results to December show a period of decent absolute (11.3%), but relative underperformance versus the benchmark (15.1%) as a bias towards value stocks at the start of the year, and strong performance of mega-cap tech were a drag, as well as the private equity portfolio, which delivered negative returns. F&C IT (£5.0bn market cap) has a more diversified portfolio than its peers and is differentiated by its private exposure. The fund’s track record under Paul Niven (since June 2014) is solid, returning 191.6% (11.6% pa) during his tenure, slightly lagging the FTSE AllWorld total return of 200.8% (11.9% pa).”
Performance stat of the week
“Although it is not our primary comparator index, since the FTSE 100 index was launched in 1984 your Company has delivered a cumulative total return of approximately double the return of this index, with a gain of over 7,800% over the forty-year period, equivalent to 11.6% total return per annum.” F&C Investment Trust (FCIT) Chairman Chair Beatrice Hollond.
