The Results Round-Up – The Week’s Investment Trust Results
Diverse Income’s track record of delivery remains intact; Temple Bar’s value investing approach continues to pay off; Riverstone Energy hedges its bets by staying balanced; Baillie Gifford US Growth reveals a key quality of a successful investment; while it’s been all go at The Partners Group Private Equity.
By Frank Buhagiar•23 Aug
Diverse Income (DIVI) and Flat Tyres
DIVI’s+15.4% adjusted NAV total return for the year pretty much in line with the Deutsche Numis All-Share’s +15.6%. That means DIVI’s track record of outperformance remains intact – from launch in April 2011 to 31 May 2024, adjusted NAV total return was +219.9% compared to the index’s +119.0%. As the name suggests, income, a key aim and, here too, DIVI has delivered – 4.25p per share was paid out in dividends, an increase on the previous year’s 4.05p. As a result, “The Trust has maintained an unbroken good and growing dividend record.” Despite this, the fund’s annual voluntary redemption opportunity saw a big uptake from shareholders: +25.8% of the total equity was offered for redemption. Because of this, a redemption pool was established for redeeming shareholders.
Chairman, Andrew Bell, believes there is underlying value on offer, particularly “if both substance and perceptions of the UK economy sustainably improve”. Bell goes on to point out, however, that “Nobody rings a bell at the market top but nor do they sound the gong at the low point. So, this is not a forecast of better times but an observation that a bad attitude is like a flat tyre – you cannot go anywhere until you change it, and it is hard to dispute that UK investors have been pessimistic in recent years.” Encouragingly, based on the UK stock market’s recent improved performance after a prolonged de-rating, particularly for small caps, Bell notes the Manager is “more upbeat.” Perhaps, the flat tyre has already been changed, although no one told the market as the shares were largely, well, flat on the day of the results.
JPMorgan: “DIVI trades at a wider than average discount vs the AIC UK Equity Income peer group but in line with the average discount for the AIC UK Smaller Companies peer group suggesting the size focus of the portfolio is part of what drives the rating. We remain Neutral.”
Temple Bar (TMPL), Raising the Bar
TMPL’s +13.1% NAV per share total return almost double the FTSE All-Share’s +7.4% for the half year. Chairman, Richard Wyatt, believes the strong showing is down to stock selection as well as a favourable market backdrop for the investment manager’s “value investing approach.” The strong half-year performance, no one-off either: over one- and three-years NAV per share/shareholder total returns stand at +22.9%/+33.9% and +21.8%/+36.7% respectively – all comfortably above the FTSE All-Share’s +13.0%/+23.9%.
The investment managers think there could be more to come as they believe the fund’s portfolio of stocks continues to look very undervalued. As for how undervalued, look no further than the aggregate valuation of TMPL’s portfolio which stands at around just 8x this year’s expected earnings. That low valuation, perhaps justifiable if you take a dim view of UK economic prospects. But the managers point out that “it is important to remember that we buy companies and not economies. The companies in which the Trust is invested mostly generate the majority of their profits from overseas and are sound, conservatively run businesses with good balance sheets and capable management teams.” Market liked what it heard – shares ticked up a tad higher on results day.
Winterflood: “Managers expect UK market returns to continue to be driven by M&A activity and companies buying back their own shares. They think the TMPL portfolio continues to look ‘very undervalued’.”
Riverstone Energy (RSE), Staying Balanced
RSE’s conventional energy investments stood out in the latest half-year period. Along with a US$200 million tender, they contributed positively towards a +6% NAV per share increase for the period. Chairman, Richard Horlick, believes conventional assets “are benefiting from the broad recognition that the transition to renewable energy will require an integrated approach, using conventional fuels as well as renewables to avoid overexposure to any one source of energy and ensure consistency of supply. This means conventional energy still holds, and will continue to hold, substantial value for some time yet.”
Not that RSE is putting all its eggs in the fossil fuel basket. It also holds a decarbonisation and energy transition portfolio, although this segment “has been more exposed to valuation pressures and macroeconomic impacts.” The investment managers, however, remain “committed to maintaining a balanced portfolio, combining value-generative investments in conventional energy with growth investments in decarbonisation and transition assets, where long-term trends offer significant opportunities.” Portfolio not the only thing balanced. So too, sellers and buyers of the fund – shares were unchanged following the numbers.
JPMorgan: “Taking out the cash and listed holdings at NAV implies a discount of 125% on the remaining unlisted holdings. Although high portfolio concentration represents a risk, the implied discount on the unlisted assets seems hard to justify in fundamental terms. We are Overweight.”
Numis: “The majority of the portfolio is in conventional energy assets, 63% of net assets, and an active M&A environment is promising for potential realisation events which will be key to crystallising value from the shares. We estimate a NAV adjusted for listeds and currency to be $16.18/£12.97, leaving the shares on a c.36% discount, which we believe offers significant value. The implied discount widens further to c.43%, when excluding cash of $94m (c.22% of net assets).”
Baillie Gifford US Growth (USA) on What Makes a Successful Investment
USA’s +32.9% share price return for the year comfortably ahead of the S&P 500’s +24.8% (sterling terms), although NAV was a more pedestrian +16.2%. The investment managers highlight improving financial metrics across the portfolio companies: at year end, two thirds (67%) of underlying companies were generating positive cash flow/positive earnings per share (EPS) compared to 48% a year earlier. The improved profitability didn’t come at the expense of growth, though: the 18%+ median revenue growth rate seen during the year, significantly above that of the S&P 500. “This dual achievement – maintaining strong growth while enhancing profitability – is a testament to the quality and adaptability of our chosen companies.”
And adaptability is what the investment managers believe is key to a successful investment. For while the US “remains a fertile hunting ground for growth investors” with no shortage of leading businesses to invest in, the fund aims to identify and hold exceptional companies for the long term, “thereby capturing the unique upside that such companies offer.” But to continue to flourish over the long term, a company has to be able to adapt. “In our experience, one of the key features that unites such firms is adaptability. To endure and thrive over the long term, businesses must be able to respond effectively to changing market circumstances and technological paradigms.” Sounds like good advice for investors. Share price barely budged on the day – investors focusing on the long term too, it seems.
Numis: “The focus on high growth companies, in line with Baillie Gifford’s typical approach, means that the portfolio looks very different to any index. As a result, we would expect periods of significant out and underperformance versus the benchmark, which has been demonstrated since launch, and as the managers stress, investors need a long-term investment horizon.”
Partners Group Private Equity (PEY) on a Roll
PEY had a busy first half. The private equity investor adopted a new capital allocation policy; the investment manager met more than three quarters of shareholders by value; and, if that wasn’t enough, there’s even been a name change – so long Princess, hello Partners! Good to see all that activity didn’t impact performance – NAV total return came in at +4.1% for the first half, an improvement on H1 2023’s +3.5% and broadly in line with the peer group.
Encouraging words in Chairman Peter McKellar’s outlook statement too. For despite ongoing macroeconomic and geopolitical headwinds, there are signs of a more supportive environment for mergers & acquisitions: listed indices are rising; lending availability is improving; sentiment is ticking higher; and interest rates are coming down. All of which is feeding through to higher realisation and investment activity. “As we move through the remainder of 2024 and into 2025, the Investment Manager is more confident this increase in activity, sentiment and underlying earnings will translate into valuation uplifts and increased exits and new investments for the Company.” Second half of the year could be just as busy for the Partners as the first then. Time will tell. Investors appear to be taking a breather for now though – share price largely flat on the news.
Numis: “We believe that the buyback policy is well-defined and believe that positive steps have been taken by the Chair Peter McKellar to improve governance and engagement with shareholders.”
Jefferies: “The fund’s largest holding – PCI Pharma Services – is now seen as a near-term exit opportunity. The manager’s execution of this could be key to NAV performance, but more crucially, to initiating share buybacks under the capital allocation policy.”
