BASC, BUT, DIVI, SAIN, PCFT, CTY.

A 360 view of the latest results from BASC, BUT, DIVI, SAIN, PCFT, CTY

Other than the Houses of Parliament, where else can you find a Lord and a Sir? The latest Doceo Weekly 360 round-up of investment company results and broker commentary that’s where…

ByFrank Buhagiar

“Perhaps the Goldilocks thesis of a solid economy, markedly lower inflation, and lower interest rates that emerged in December will hold, but perhaps it will not. Perhaps the continued leadership of large-caps (8 of last 10 years) and extreme market concentration will hold, but perhaps it will not. We see the ‘perhaps not’ outcome of the above scenarios as having a higher probability than the market currently thinks.” Brown Advisory US Smaller Cos (BASC) Half-year Report.

We are unconvinced

Half-year Report from Brown Advisory US Smaller Cos (BASC). As Chairman Stephen White writes: “…NAV…per share rose from 1,431.9p to 1,459.2p, an increase of 1.9%. Having moved within a narrow trading range for much of the period, US equity markets moved ahead again in December as a result of comments made by the US Federal Reserve (the Fed) that the peak in interest rates had probably been seen. While the mega caps again led the advance, smaller companies also performed reasonably well and showed signs of returning investor interest. Over the period, the Company’s benchmark, the sterling adjusted Russell 2000 Total Return index, realised a gain of 7.8%. The underperformance of the Company’s NAV…arose largely in December. This followed a sudden inflow of funds into the more speculative, unprofitable and leveraged smaller company sector – an area which the Company prefers to avoid. Over the six months, the Company’s share price rose from 1,220.0 p to 1,292.5p, a gain of 5.9%.”

The portfolio manager adds: “The Company’s absolute returns were once again solid for the period despite meaningful market volatility…We added a number of new businesses to our portfolio in 2023, many of which are below our ultimate intended weight and therefore offer significant buying potential going forward. When combined with our legacy positions, we are well positioned to deploy cash across the portfolio and, more importantly, respond nimbly to market swings. We are unconvinced that the drivers behind December’s rally, despite it being a signal of improving investor sentiment and the extreme market concentration towards mega-caps, will hold indefinitely. As such, we believe that our current sector biases and capital deployment plan remain sound as we eagerly anticipate a return to small-cap market leadership, from which BASC will be well positioned to benefit in the long-term.”

Winterflood writes: “Going forward, the managers expect smaller companies to perform well if economy remains resilient, inflation decreases and interest rates fall. NAV outperformed benchmark since Brown Advisory appointment on 1 April 2021 (+1.0% vs +0.3%). No gearing deployed, but Board will consider should market conditions improve. Ongoing charges 1.03% (30 June 2023: 1.00%). Fund passed continuation vote at November 2023 AGM.”

Tale of the week

“…the tale of the man who’s found searching for his keys under the streetlight. When asked if that’s where he lost them he replies no, he lost them in the park, but this is where the light is.” Brunner Investment Trust (BUT) Portfolio Manager’s Review.

5th consecutive year of outperformance

Brunner (BUT) has only gone and done it again. Chair Carolan Dobson reveals all: “Brunner once again beat its benchmark over the year to 30 November 2023…NAV…per ordinary share total return (calculated on a net dividends reinvested basis with debt at fair value) was +8.7%, versus +5.5% for the composite benchmark (70% FTSE World Ex. UK / 30% FTSE All-Share). This marks the 5th consecutive year of outperformance of the benchmark…As we are only relatively small holders of the…stocks that led markets forward, the board is particularly happy to report this consistent progress to shareholders.” And the Chair believes “Brunner should be viewed as an ‘all weather global equity portfolio’…providing solid outperformance through a variety of market and macroeconomic conditions. The portfolio is constructed with a focus on high quality companies that are expected to perform well over the long term. The managers do not look to build a portfolio that will perform on a particular economic condition or trigger – rather they remain aware of these external factors and review how they might impact the individual companies within the portfolio.”

Looking ahead, the portfolio managers’ eyes are very much fixed on the long term: “Changes to interest rates or our political leaders are unlikely to determine whether companies such as Microsoft or Diageo prosper or flounder. We are more focused on long-term trends which we believe come with more visibility. We know that society will inevitably age, that the population of India and Africa will continue to grow, that Japan’s will shrink. It seems probable the world will need more semiconductors, that people will travel more, that we will electrify our energy system to reduce carbon emissions. As we consistently aim to highlight, we prioritise thinking about the long term and we encourage our shareholders to share that vision. If you’re in…for the long haul, economic cycles are an inevitable part of life, not a reason to panic. We deliberately select businesses that we expect to continue to flourish, whatever the weather.”

JPMorgan writes: “BUT’s relative NAV performance has improved vs peers and it now ranks 2nd in the sector on the basis of five-year NAVTR, and 6/13 over the last year. This has been achieved despite the drag of a large UK allocation, with the UK underperforming the FTSE World, implying excellent stock selection…we believe that a 25% allocation (vs 30% weight in the compositie benchmark) to this market is too high in the context of a global fund, where a neutral rating would be 4%. We think investors who want a high UK exposure would generally prefer a combination of a UK equity focused trust and a global trust with a more global allocation closer to that of a typical global index. Although boasting a 52-year record of dividend increases, the payout could be more generous given the size of the reserves, with the yield of 1.9% not particularly exciting, though higher than many peers…While acknowledging the impressive performance, we prefer Global funds without a structural overweight to the UK.”

Quote of the week

“Investor Jim Grant once said: ‘to suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defence of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed. That’s always been the case. And it always will be the case. Every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow’. Brunner Investment Trust (BUT) Portfolio Manager’s Review.

Expected to become a tailwind

Half-year Report from Diverse Income (DIVI). According to Chairman Andrew Bell: “The Trust’s NAV total return was down 1.3% over the half year, in contrast with the total return of the Deutsche Numis All-Share, Index, (dominated by returns on the largest stocks) which rose by 1.6%, and that of the Peer Group which rose 0.3%. The share price total return was -2.2%, owing to a slight widening of the discount, from 6.2% at the end of May to 7.3% at the period end.” But as the Chair points out: “Whilst recent returns have been disappointing, they are atypical of shareholders’ experience since the Company listed in 2011. Over the twelve years and seven-month period since issue, the Trust’s NAV total return was 171.7%, and its share price total return 144.0%, which compares to 147.4% for the peer group and 92.5% for the Deutsche Numis, All-Share Index.”

As for the outlook: “…since late October, when there were tangible signs of the UK’s inflation performance improving (alleviating fears of a further series of interest rate rises), the ensuing market recovery has been led by smaller and mid-sized companies. If this trend continues, the Company’s exposure to smaller companies can be expected to become a tailwind and see better rewards in the coming year, on the back of improved earnings performance (as the cost and demand hurdles abate) and a greater willingness of investors to give credit for the fundamental performance of smaller companies.”

Numis notes: “Diverse Income (£258m market cap) is differentiated from its UK Equity Income peers by its strategy of investing across the market cap spectrum, rather than focusing on the FTSE 350. Given the nature of the portfolio investors should expect that performance will at times significantly diverge from index and peers, as the interims highlight and is reflected in weak relative performance for the last couple of years given the funds bias to smaller cap companies which have been weak largely on recessionary fears…Over the last five years, the fund has underperformed the Numis All Share, with NAV total returns of 11.6% (2.2% pa) compared to 22.7% (4.2% pa). That said, the longer-term track record remains intact generating NAV total returns of 171.7% (8.2% pa) versus 147.4% (7.4% pa) for the peer group and 92.5% (5.3% pa) for the Numis All Share index.”

Hysteria of the week

“During the past few years it seems that some parts of the media have become, for want of a better word, hysterical. Even the financial press, which used to be renowned for walking a line between dry and tedious, has often joined the fray of shouty headlines and breathless articles. This is understandable. Technology has disrupted the business models of traditional media channels. In a digital world, whoever conjures the most shocking headlines will gather the most clicks. And whoever accumulates the most clicks might be able to keep their jobs.” Scottish American (SAIN) Investment Manager’s review.

Strong

That’s how Chairman Lord Macpherson of Earl’s Court describes Scottish American’s (SAIN) full-year performance: “SAINTS delivered a strong absolute return over the year…net asset value total return…was 11.8%.” Despite this, “…SAINTS’ returns did not keep up with global equities (as measured by the total of return of the FTSE All-World Index in sterling terms) which returned 15.7% over 2023…” The Chairman highlights “…two principal reasons why SAINTS’ NAV return did not keep pace with the market, both of which relate to features which the Board regard as intrinsic strengths of SAINTS. The first is the nature of its equity portfolio, which is built for and has delivered dependability and growth in income and capital over the long term. Many of the large technology related companies which have dominated market returns over the year do not sit well with this approach, and so SAINTS has not owned them…The second reason relates to SAINTS’ diversification of assets and in particular to its property investments. These bring benefits in terms of diversifying sources of return, spreading risk and boosting revenues, but will not always keep pace with equities.”

In terms of outlook, the Chairman believes “Whether the landing is soft or hard, it is likely to be a year in which pricing power and balance sheet strength are of growing importance. At the same time, both the changing world and entrenched competitive advantages will continue to present opportunities for secular growth at the company level…As a Board, we believe a long-term approach based on investing globally for sustainable growth is the best route to achieving SAINTS’ aim of growing the dividend ahead of inflation over time. As we look ahead, we also take considerable comfort from the nature of SAINTS’ investments, and from the managers’ emphasis on quality, on dependability and on growth far out into the future…SAINTS has been working for individual investors for 150 years. It is built to help shareholders’ income keep pace with inflation, as well as providing capital growth. And it is built for resilience.”

Numis sees value: “Scottish American offers a differentiated approach to income, with the equity portfolio supplemented by a small allocation to bonds, infrastructure and property. The fund…looks to invest in income generating stocks, which also offer growth potential. The fund underperformed during the period, largely owing to underweight mega cap tech exposure, while the property and infrastructure assets were a drag on relative performance. That said, the fund’s long-term track record remains solid, with NAV total returns of 224% (12.5% pa) compared to 212% (12.0% pa) for the MSCI AC World in Sterling terms. The fund has historically traded on a premium, and has averaged a relatively tight discount of c.3% over the last year, however the shares have recently widened to a c.8% discount which we believe offers good value. We do not expect the changes in management team to have a significant impact on the approach, with James Dow remaining lead manager.”

While JPMorgan is staying neutral for now: “Although SAINTS has an impressive track record of dividend increases, it has a yield that is currently lower than the peer group average (2.8% vs 3.7%) and the dividend is now uncovered. The NAV TR has been ahead of the peer group average on a rolling five-year basis but behind the peer group average more recently if looking at rolling three- or one-year periods…In our view, the SAINTS strategy makes it differentiated from peers and also other Baillie Gifford-managed investment companies. It is clear SAINTS is taking a long-term view and aiming to deliver resilient performance in the long term. We like to see companies that are differentiated and that stick to strategies without unnecessary style drift but we also think in the shorter-term SAINTS may remain out of favour vs peers that have more attractive dividend yields in a sector where investors are clearly focused on income and in particular if its NAV TR continues to weaken vs peers. We remain Neutral.”

Illusion of the week

“There is a well-known pictorial illusion which, depending upon the viewer’s perspective, can look like a duck or a rabbit (Google ‘duck or rabbit’ to see). For much of the second half of 2023 this was what faced investors. Inflation rates were falling sharply, and interest rates had reached a plateau, but was the reason that higher rates were leading economies towards a recession (the hard landing fear) or that inflation had been more transitory than was diagnosed in 2022 so that its elimination did not require a recession and economies could rebound as it fell?” Diverse Income (DIVI) Chairman’s Statement.

Frustrating

That’s how Chair Simon Cordery describes Polar Capital Global Financials’ (PCFT) year: “2023 proved to be a most frustrating year for investors in the global financials sector. While we saw broad stock market improvements over the period, predominantly led by technology, the financials sector underperformed, following a few years of relative out-performance.” Over to the investment managers for the numbers: “…net asset value fell 2.9% while the benchmark index, the MSCI All Country World Financials Index, rose 0.3% and the MSCI All Country World Index rose 6%…Performance in the first half of the year was largely satisfactory but the second half was disappointing. While we had no holdings in Credit Suisse, First Republic Bank or Signature Bank and only a very small holding in Silicon Valley Bank (SVB) an overweight position in US banks was a headwind to performance…our bias to higher quality companies hurt performance as they lagged peers and our overweight position in defensive names towards the end of the year led to some underperformance on a sharp rotation and market rally.”

Sticking with the investment managers for the outlook: “Financials are a play on a soft landing, as illustrated by the sharp jump in US bank shares on the more dovish language used by Federal Reserve Chair Jerome Powell in December when he left interest rates on hold and indicated the era of rises was over…if actions follow words, a more accommodative policy will reduce the tail risk of a sharper downturn in the shorter term. Consequently, we are constructive on the outlook for the sector as the policy reduces many of the concerns around the US banking system with regard to the unrealised losses on securities portfolios and the potential for increased loan losses…Underlying operating performance is good and will be underpinned at much higher levels unless interest rates return to the levels seen two plus years ago. Consequently, we remain very constructive on the outlook for returns from the sector over the coming year.”

Numis is a fan: “The fund is managed by a strong and experienced team who use their sector expertise to give access to specialist areas of the market that more generalist investors may find hard to analyse. Exposure is broader than traditional banks, including exposure to payment systems and insurers. We note that John Yakas retired in June last year, but we believe that the fund is in safe hands under Nick Brind and George Barrow, whilst the team has been bolstered by Tom Dorner joining. Since the fund’s reconstruction in April 2020, PCFT has returned 68.8% on a NAV total return basis, as compared to 67.7% for the MSCI ACWI Financials. We believe the fund is an attractive holding for exposure to financials. Polar Capital Global Financials is currently trading on a 9% discount to NAV.”

Just because of the week

“…just because something is important doesn’t mean it is valuable…” Brunner Investment Trust (BUT) Portfolio Manager’s Review.

Attractively valued

City of London (CTY) Chairman Sir Laurie Magnus CBE gets straight to the point with his half-year statement: “City of London achieved a 6.5% net asset value total return during the six months to 31 December 2023 against a backdrop of falling inflation and market expectations that interest rates have peaked.” That’s a better outcome than the index: “The UK equity market returned 5.2%, as measured by the FTSE All-Share Index, with medium-sized and small companies slightly outperforming larger peers.” As for the fund’s performance drivers: “Stock and sector selection contributed by 171 bps. The underweight positions in pharmaceuticals and AstraZeneca were respectively the biggest sector and stock contributors. The second biggest sector impact arose from being overweight in real estate investment trusts, with Land Securities a notable stock contributor…Other notable stock contributors were 3i, whose main asset is its shareholding in Action, a fast-growing discount retailer in Europe, and Round Hill Music Royalties Fund, which was taken over.”

The Chairman goes on to say: “UK equities remain attractively valued relative to overseas equivalents. This has encouraged further takeovers of UK companies by private equity firms and foreign businesses, including the acquisition of Round Hill Music Royalties Fund from the Company’s portfolio. There has subsequently been a bid in January 2024 for Wincanton, another of City of London’s investee companies, from a large French private company. More takeovers can be expected while the discounted value of UK equities relative to global peers persists. Although the prospect of political change in the UK may weigh on equity valuations until after the general election, the compelling dividend yields from many companies effectively ‘pay investors to hold on’ and should help to mitigate the downside risks of current uncertainties.”

Numis sounds positive: “We continue to view City of London IT as a solid option for investors seeking income from UK equities. Job Curtis has managed the fund since 1991 and his track record over the past 10 years is strong, with NAV total returns of 72% (5.6% pa) compared to 66% (5.2% pa) for the FTSE All Share…The fund pays a yield of 5.2% compared to an average of 4.4% for the sector and the fund has increased its dividend every year since 1967 – and it has significant distributable reserves to continue this (revenue and capital reserves). The fund is the largest within its peer group, with net assets of £2.0bn and shareholders benefit from a low ongoing charges ratio of 0.37%, which will reduce following the fee reduction to 0.30% pa (from 0.325% pa). It is interesting to see the secondary listing in New Zealand being delisted, historically UK Listed Investment Companies have been an attractive tax-efficient way for New Zealand based investors to invest internationally, and secondary listing were popular, although less so in recent years as we expect NZ investors may now have a wider range of options available.”

Stat of the week

“A study by Hendrik Bessembinder, a finance professor at Arizona State University, found that half of all wealth generation by US stocks between 1926 and 2019 came from fewer than 100 stocks: a tiny fraction of the overall universe.” Brunner Investment Trust (BUT) Portfolio Manager’s Review.