The Results Round-Up – The Week’s Investment Trust Results

Which shareholders are being paid to wait for a lasting recovery in income stocks thanks to an 8.3% dividend yield? And UK small and medium-sized company valuations “remain incredibly attractive” according to one Chairman, but who said it? Find out in this week’s round-up.

By Frank Buhagiar

BlackRock Smaller Companies’ (BRSC) one inescapable truth

BRSCoutperformed its benchmark during the full year despite reporting a -3.6% decline in NAV per share for the year. That’s because the Deutsche Numis Smaller Companies plus AIM Index (excluding Investment Companies) fared worse, ending the period down -5.8%. As for share price total return, this almost finished the year in positive territory (-0.8%). Relative performance stacks up over the longer-term too. According to Chairman Ronald Gould’s full-year statement, £1,000 invested in BRSCon 28 February 2006 would have grown in value by +421.5% in NAV terms by 29 February 2024. That compares to just +150.7% had that £1,000 been instead invested in the ‘UK open-ended income sector median’.

What’s more, since year end the fund has recovered lost ground despite ‘continued and significant market volatility’ – NAV (as at 8 May 2024) is up +8.0%, once again beating the benchmark’s +7.8%. A thumbs up then for the strategy to weight the portfolio towards companies with well capitalised balance sheets and entrepreneurial management teams that are able to rapidly adapt their businesses to the shifting market dynamics. For those searching for the one inescapable truth, the investment managers have the answer – UK small and medium-sized company valuations remain incredibly attractive. Perhaps should have made it clear the one inescapable truth related to financial markets in this instance. The search for the truth goes on.

JPMorgan: “BRSC has underperformed the index TR since late 2021 but has partially reversed that underperformance in the past year. BRSC, like most of its peers, has a growth style bias which likely has been a significant factor in performance. We feel our Neutral recommendation for BRSC remains fair.”

abrdn Equity Income’s (AEI) dependable income

AEI’s NAV total return of +1.6% for the half year fell short of the FTSE All-Share Index’s +6.9%. Chair Sarika Patel puts the underperformance down to income stocks being overlooked in favour of growth companies during the latest half year. Encouragingly, towards the end of the period, a noticeable shift towards value names was observed which coincided with a recovery in our relative performance. Helpfully, investors are being paid to wait for a lasting recovery in income stocks – as at 31 March 2024, the shares were offering a dividend yield of 8.3%. And according to Patel, the yield is based around dependable income, always useful as a high proportion of the total return generated by UK equities over time has come from dividends.

In his outlook statement Portfolio Manager, Thomas Moore, managed to fit in a weather forecast, “we are now increasingly confident that the clouds that have existed for some time are now dissipating, with many of our holdings now delivering on the investment thesis we originally anticipated at the time of purchase.” Here’s to blues skies and sunnier days ahead.

Winterflood: “Largest sector exposures at period-end were Financials (36% of portfolio value), Energy (16%) and Industrials (11%). Net gearing at period-end was 12.5% (30 September 2023: 11.3%). Manager has re-focused portfolio positioning towards stocks where he sees potential for combination of dividend yield, dividend growth and valuation re-rating.”

Polar Capital Global Healthcare (PCGH) expecting more of the same

PCGH posted a double-digit NAV per share return for the latest half-year period. The +16.55% return for the six months under review easily beat the +9.56% clocked by the MSCI ACWI/Healthcare Index (total return in sterling with dividends reinvested). That means NAV per share is now up +95.3% since the fund was restructured in June 2017, once again comfortably ahead of the benchmark’s +81.88%. In their half-year review, the investment managers cite strong stock selection as the reason for the latest bout of outperformance.

And the investment managers are expecting more of the same. They believe the sector’s key growth drivers including innovation, emerging markets and artificial intelligence along with rising demand will continue to drive revenue and earnings growth, along with outperformance, in the years ahead.

Winterflood: “Discount narrowed slightly from 7.7% to 6.7%. Outperformance driven by stock selection. Over the period, exposure to healthcare facilities was reduced to take profits, while biotechnology exposure was increased.”

Baillie Gifford European Growth (BGEU) waiting for the love to return to Europe

BGEUput in a strong showing over the half year – NAV total return came in at +20.2% compared to a still impressive +14.9% from the FTSE Europe ex UK Index (sterling). The share price beat the index too, rising +18.5%. The Interim Management Report admits that, as with other growth investors, rapidly rising inflation and interest rates have been painful. But the managers have been proactive, getting rid of weak companies and capitalising on low valuations to pick up competitively advantaged ones. They’ve also taken the opportunity to add to long-term winners that are currently facing challenges, albeit temporary ones.

The investment managers think there’s more to come too. In their view Europe is unloved and because of that there is the chance to pick up resilient companies offering significant long-term upside on sale. According to the investment managers ,“it feels like a better time to be a long-term European growth investor than it has for several years.” Just need Europe to start feeling the love now.

Numis: “The fund provides exposure to fast-growing European companies, and also benefits from opportunities to invest in unquoted assets through the Baillie Gifford network, with a maximum allocation of 20% (currently c.10%). Style headwinds have dampened medium-term performance, and since Baillie Gifford took over management the fund has produced NAV total returns of 32.8% (6.5% pa), compared with 43.3% (8.2% pa) for the index.”

IF the current market strength continues, one way of trading would be to buy a 250 tracker. XMCX pays a variable yield of around 4% so if u wanted to lesson the risk u would need to pair trade it with a higher yielder, maybe property as the current values are nearer their low from their high. But as always best to DYOR as there are still plenty of other Trusts trading at above market yields.

FTSE 250 frenzy

Experts say these stocks can help Brits cash in as UK markets soar.
Story by Anne Ashworth

Suddenly, the UK’s economic mood is brighter – cheerful, even. Following what one analyst called a ‘resounding rebound’ in first-quarter output, global banks have raised their projections for the outlook.

This index is full of British businesses ‘trading at material discounts to their global peers’, as Simon Doherty, head of managed portfolio services at Quilter Cheviot, puts it.

The view that some of these companies may be ripe for takeover is gaining currency – thanks to the £34billion bid battle for mining giant Anglo American.

This appears to have highlighted the value of much cheaper, smaller businesses – without political baggage.

Flying the flag: The FTSE 250 is full of British businesses ‘trading at material discounts to their global peers’© Provided by This Is Money

There are many of these opportunities, companies that have been ‘hiding in plain sight’, according to Thomas Moore, manager of the Abrdn Equity Income Trust.

Stuart Clark, of Quilter Investors, highlights the FTSE 250’s rich mix of constituents. He says: ‘The index contains companies that have fallen on tougher times. But they own great assets or intellectual property which would be attractive to larger-sized competitors. The index also contains smaller companies that are successfully growing and would be appealing to larger firms that wish to accelerate their expansion.’

It’s kind of kept us in that Goldilocks place.

The FTSE 250 enthusiasm has been further fuelled by this month’s bid for engineering group John Wood. Its Lebanese suitor Sidara offered premium of 25pc above John Wood’s share price. This approach was rebuffed, but Sidara may return with a more generous figure.

Last month, cybersecurity group Darktrace was snapped up by the Chicago private equity firm Thoma Bravo, in a deal seen as foreshadowing more FTSE 250 ‘acquisition activity’.

The expectation that more promising UK plc players will succumb to overseas predators is disheartening.

But not all FTSE 250 names will face this fate and here are the routes to make the most of what seems to be their brighter future.

Shares

FTSE 250 frenzy: Experts say these stocks can help Brits cash in as UK markets soar© Provided by This Is Money

She says: ‘Moonpig has 65-70 per cent share of the UK and the Netherlands markets.’ This business, established in 2000, takes its name from founder Nick Jenkins’s hated schooldays nickname. Shares have risen by 16pc over the past year to 156p, but remain 63 per cent below their level of three years ago. Analysts at Deutsche have set a target of 180p.

Bell likes Rotork’s solid levels of growth and strong profit margins. She adds: ‘The company is built on an ethos of continual innovation, quality and reliability.’

Rotork shares are up 8pc this year to 336p, with some analysts now targeting 430p. Alexandra Jackson, manager of the Rathbone UK Opportunities fund, lists two of the potential winners in property.

‘This sector should be in the vanguard if rates are cut this summer,’ she says.

‘Sirius Real Estate owns business parks in Germany and the UK. The company is skilled at converting sub-optimal and under-utilised space for which there is strong demand.

.

‘Sirius has now delivered its 10th consecutive year of rent roll growth of 5 per cent-plus.’

Thanks to these attributes, the consensus of analysts rate Sirius Real Estate a ‘buy’.

Grainger is the UK’s largest private landlord and also the largest name in build-to-rent developments. Jackson likes its low-risk business model, its balance sheet that can withstand a 50 per cent fall in house prices, and its plan to double earnings per share by 2026. Again, analysts rate Grainger as a buy.

Moore’s property pick is OneSavings Bank, the UK’s biggest professional buy-to-let lender which is also benefiting from the nation’s increased dependence on the private rental sector.

Funds

The simplest way to get broad exposure to the index is via a tracker fund such as the Vanguard FTSE 250 ETF (exchange traded fund). But if you are looking for a longer-term option, Quilter Cheviot’s Doherty points to the Janus Henderson UK Smaller Companies fund.

He says: ‘This fund invests in the likes of Bellway, the housebuilder, and Mitchells & Butlers, the pub operator. These businesses should do well as the UK emerges from recession, interest rates are reduced – and consumer confidence returns following the cost of living crisis.’

Let’s hope for such an outcome.

The only UK funds that have managed to beat the global market

15 May 2024

FE Analytics shows that 21 UK funds have outperformed the MSCI AC World index over three years.

By Gary Jackson

Head of editorial, FE fundinfo

The global equity market has been powered higher by surging US stocks but research by Trustnet shows a handful of UK funds are outperforming them over the past three years.

UK equities have been out of favour among investors for an extended period and, as the chart below shows, the FTSE All Share has underperformed the MSCI AC World index over the past three years (although this has started to narrow more recently).

For active managers, beating global equities – with its high weighting to the efficient US market – is no mean feat. The average fund in the IA Global sector is more than 10 percentage points behind the MSCI AC World (its most common benchmark) while the IA UK Equity Income and IA UK All Companies sectors are also nowhere near the index.

Performance of sectors and indices over 3yrs

Source: FE Analytics

However, there are some funds in the two main UK equity sectors that have made a higher return than the global stock market over this period: FE Analytics shows that 21 out of the 300 funds with a sufficient track record – or 7% – have done this.

Martin Walker and Bethany Shard’s Invesco UK Opportunities fund has made the highest three-year return, posting a gain of 45.3% and beating the MSCI AC World index by 13.6 percentage points in the process.

The £1.3bn fund has a value approach with Walker and Shard looking for companies with attractive earnings potential that isn’t recognised by the rest of the market. This tends to lead them to UK large-caps with strong international businesses; among the fund’s top holdings are the likes of Shell, BP, AstraZeneca, Unilever and Imperial Brands.

In their latest update, the managers said: “Despite the caution engendered by macro views, we remain optimistic at the medium- to long-term outlook for UK equities – particularly on a relative basis – as the value factor increases in importance. We expect an increased focus on cash generation in UK equities and the low starting point for valuation will combine to overcome inertia in relative performance.

“We believe that over the next 10 years, in an environment of higher interest rates and higher inflation than we have experienced since the global financial crisis, value as a factor will be more important. An environment that is different calls for equity exposure that is different. And sector exposures in the UK are very different to other global equity markets. The FTSE All Share index offers low correlation to US markets, but still has scale, breadth and depth of companies.”

Signs of these can be seen in the below table, which shows the 21 IA UK All Companies and IA UK Equity Income funds that have made a higher return than the MSCI AC World over the past three years.

Source: FE Analytics. Total return in sterling between 10 May 2021 and 10 May 2024

Many of the funds in the above table take a value approach to investing with Man GLG Income, BNY Mellon UK Income, Man GLG Undervalued Assets, Schroder Income, JOHCM UK Dynamic, Ninety One UK Special Situations and UBS UK Equity Income being among them.

Although value investing has continued to underperform growth in 2024 – the MSCI AC World Growth index is up 11.8% while MSCI AC World Value gained 8.9% – the UK stock market has been catching up with its international peers.

The FTSE 100 has reached a record high, as investors overcome the aversion that has been in place since 2016 and take another look at UK stocks – and UK value is outperforming UK growth.

The recent outperformance of the UK is apparent when we look at the number of funds outperforming the MSCI AC World index since the start of the year: 69, or 22% of the 311 with a long enough track record.

This compares with just one fund beating global equities on a five-year view (Artemis UK Select).

Matt Britzman, equity analyst at Hargreaves Lansdown, said: “Investors are finally starting to look at UK businesses and see reasons to be optimistic. The Bank of England held rates steady earlier in the week but hinted at rate cuts to come. Meanwhile, economic growth came in better than expected, but crucially not too much better to drive up fears it could cause inflation to spike. This comes on the cusp of major UK banks reporting over the past couple of weeks and there was a huge array of optimism from management teams around the outlook for the UK.

“Many will look at this run and assume it has no legs, UK investors have been beaten down too many times in the past. UK bulls will argue it’s been long overdue, with the market suffering from a hefty valuation discount to global peers for some time.”

Time for a patriotic punt on the UK stock market?

UK equities hit an all-time high this week but there’s plenty of petrol in the tank to continue fuelling this rally.

By Emma Wallis

News editor, Trustnet

The UK equity market hit fresh highs this week and while no-one wants to get in at the top of any market, there are many reasons to believe that this rally might only just be getting started.

With the benefit of hindsight, we would all have boosted our domestic equity holdings months ago, but some investment professionals think now still seems like a relatively opportune moment to get in on the action.

While many catalysts have converged to produce the recent rally (including an improvement in economic data, imminent rate cuts and voracious share buybacks) there are plenty more irons in the fire yet to make an impact.

FTSE 100 and FTSE All Share vs MSCI ACWI, year-to-date

Source: FE Analytics

One factor that could really move the dial would be inflows.

As Artemis Income’s Nick Shenton pointed out, the UK stock market has “been making all-time highs on a total return basis for a while [but] it’s not doing so from an extended position where it’s widely owned or the shares don’t [offer] value. We think it bodes quite well that it’s starting to make all-time highs without the aid of international investors coming back to the UK market, or even domestic investors”.

Meanwhile, private investors continue to pull money out of UK equity funds, channelling it instead into passively-managed global and US equity funds. Asset managers are bullish about the prospects for US large-cap stocks and European equities but not the poor old UK. Even wealth managers such as Coutts are turning their back on the UK – at precisely the wrong time, in my view.

The UK government is doing its best to stem the tide of outflows, launching the British ISA which is not expected to move the needle massively, but is a step in the right direction. It proves there is political will to take action to support the stock market, which is why Man Group’s Henry Dixon called the British ISA announcement in the spring Budget “a faint line in the sand moment”.

Jack Barrat, who co-manages Man GLG Undervalued Assets with Dixon, said the chancellor’s call for UK pension funds to disclose their allocations to domestic equities should give the stock market more “sunlight” and “greater attention”.

If the government were to go one step further and abolish stamp duty, that could encourage investors back into the stock market.

Valuations remain attractive despite this year’s gains, as the chart below shows.

Marcus Weyerer, senior ETF investment strategist, EMEA at Franklin Templeton, said: “With a price-to-book ratio of less than 2.0, UK equities are currently trading at a discount of more than 50% compared to US equities. Additionally, in terms of forward price-to-earnings, they are closely aligned with emerging market levels. Furthermore, the UK has long been considered a haven for income investors, and it currently boasts a dividend yield of 3.8%.”

Cheap valuations in a cheap currency have sparked a “frenzy” of merger and acquisition (M&A) activity, according to James Lowen, manager of JOHCM UK Equity Income. 5 of his 60 holdings have been approached by bidders this year alone.

There has been a dearth of initial public offerings (IPOs) but if valuations were to surge, British companies might become more confident about going public here.

And if valuations better reflected what public companies are worth, management teams might be less eager to move their listings to the US.

A pickup in IPOs would create a virtuous circle, according to Graham Ashby, a UK all-cap fund manager at Schroders. “History clearly shows that increased UK IPO activity typically corresponds with a short-term peak in the equity market – witness the high levels of IPO activity in 2008 and 2021, compared with current depressed levels,” he said.

Meanwhile, companies themselves are cognisant of the value in their own cheap shares, so have been buying them back in droves. Buybacks – along with companies being taken out by foreign acquirers or moving their listings abroad – are gradually shrinking the size of the UK equity market.

Ashby observed that “less supply when demand may be set to increase” could eventually drive up prices. Quoting Warren Buffett’s maxim of being greedy when others are fearful, he concluded: “It may be time to get greedy.”

The overall cheapness of the UK market masks the fact that some of the UK’s largest stocks already appear expensive, Lowen warned. The seven “expensive defensives” (AstraZeneca, GSK, Diageo, Unilever, LSEG, British American Tobacco and RELX) look overvalued and comprise a fifth of the FTSE 100, which represents “a big danger lurking under the surface” for passive investors.

Other areas such as banks, insurers, miners and small-caps offer greater opportunities. That is why Lowen believes actively-managed strategies that can deviate away from the FTSE 100 index’s largest names would be a better way to play the UK recovery.

Five funds even outperformed the MSCI ACWI by more than 5% (Invesco UK Opportunities, BNY Mellon UK Income, UBS UK Equity Income, Invesco FTSE RAFI UK 100 UCITS ETF and Ninety One UK Special Situations).

This is no mean feat, dominated as the global index is by the US, which has outperformed the UK mightily.

If these fund managers can surpass global equities during a period where the UK has been a laggard, what might they be capable of at the helm of a more buoyant opportunity set?

The simple act of saving £1 a day could build a savings pot over time

Social media is full of ‘savings challenges’, urging people to push up the value of their nest eggs by doing everything from stuffing envelopes with money to having ‘no spend days’. But for those planning to make the most of a tax-free savings allowance in an Isa, the simple act of putting away £1 a day could build a healthy savings pot over time.

By putting £30.42 a month (the equivalent of £1 a day) away in an Isa with a 5% growth rate, you would have more than £2,000 in five years, more than £4,700 after 10 years and in excess of £18,000 in 25 years. If you invested your Isa money and it grew faster, perhaps at 7% a year on average, you would have £5,265 after 10 years and £24,642 after 25.

What happens to £1 a day when you just add time

(Picture: Bestinvest)

Slow and steady wins the race (Picture: Getty Images)

On the other hand, £1 a day in an Isa is a far more achievable goal, and the graph above shows how your cash could add up. ‘The first £1 you invest will always be the most valuable one, as it has the longest time to grow from an acorn into an oak tree,’ adds Jason.

Be aware though, that with investing, there’s always a chance you might actually get back less than you put in. Investing means the value of your investments will go up and down depending on how well the underlying stock markets are doing; if the stock markets go up then so will the value of your investment, and vice versa.

Bex and Jake Spiller used their Lifestime Isas to buy a three-bed semi-detached house in Kent – and were grateful for the government bonus which helped them to buy. Under-40s can put up to £4,000 a year into a Lisa until they are 50, receiving a government top-up of 25%.

‘My parents passed away when I was young and I didn’t have any inheritance or anything like that, so it was really nice to have that little bit of extra help,’ Bex says of the Lisa. ‘I just wish we’d had one for the five or so years we had been saving before that.’

A Lifetime Isa could net you a £50,000 deposit over 10 years, assuming an investment growth of five per cent per annum

(Picture: AJ Bell)

Everyone can save £20,000 a year into an Isa and allow this to grow tax-free, but of course, putting aside more than £1,666 a month is often (to say the least) unrealistic.

Jason Hollands, managing director at DIY investment group BestInvest, says that even £1 a day is enough to put yourself on track to have a healthy nest egg in months or years to come.

‘The key thing is to stay the course,’ he says. ‘Steadily saving and investing, even modest amounts of money, can really clock up over time as you make gains not just on the amounts originally saved but further growth on the past gains too – this is called “compound growth” and Albert Einstein described famously it as “the most powerful force in the universe.”’

The above list excludes the Watch List Trusts that are the highest from their recent lows.

Risk/Reward

The Trusts the market considers, for whatever reasons, were the Trusts worth buying first and are already up from their lows. If u buy now and the market reverses u could lose some of your hard earned. If u buy only for the yield that matters little.

The remaining Trusts, some of which are starting to go up are the second liners which the market considered were the least best prospects, u know the market is a fickle beast so not a reason not to buy in itself, especially if u like the belt and braces approach

A high yield and a Trust trading at a discount to NAV.

As always best to DYOR as there may be a reason why the Trust hasn’t moved off their low.

CMPI is the control share so u can monitor if your Trust is outperforming the market or underperforming on a week to week basis.

When any of the Watch List shares releases news, I will copy to the blog to assist us in our research.

DYOR as some information may already be out of date and Property Trusts that only quote NTAV’s are not included in the above list.

The Independent

Land Securities sees end in sight for property slump as losses nearly halve.

Story by Holly Williams

Land Sec financials© PA Archive

Commercial property giant Land Securities has seen its annual profits almost halve and said there were signs that the correction in the market was coming to an end.