360 view of the latest results from BRSA, THRG, IVPB, HGT
Want to know which market Ruffer thinks “…seems to be pricing in despair”? Ruffer’s Monthly Investment Report for January 2024 has the answer and so does the latest Weekly 360 round-up…
ByFrank Buhagiar•
Unanimity of the week
“Global asset markets started the year almost unanimously priced for a perfect soft landing…” Ruffer (RICA) Monthly Investment Report for January 2024 during which NAV declined 1.9%.
Greater rewards
Full-year results from BlackRock Sustainable American Income (BRSA). As Chair Alice Ryder explains NAV performance largely tracked the index: “…NAV…returned -5.6%…and the share price returned -8.1%…This compares with a fall of 5.0%…in the Russell 1000 Value Index, the Company’s reference index.” By contrast “…the S&P 500 Index was up by 4.5%…as a handful of mega-capitalisation technology stocks (most of which do not pay a dividend) enjoyed a boom from new artificial intelligence technologies and exceptionally strong performance.” In terms of performance drivers, the Chair adds that a “key driver for the underperformance was not owning Meta Platforms (Meta) which briefly entered the reference index. We did not hold a position in Meta because historically it did not meet our portfolio managers’ criteria of paying a dividend and also scores poorly from an ESG perspective. There were also headwinds for value stocks, our Investment Manager’s favoured style of investing…” The Chair points out though that “Alongside our investment objective of maximising long-term capital growth and income, we are investing across the breadth of the market in companies that capture sustainable shifts and are responsible businesses within their industry.”
And speaking of ESG: “…the Company has delivered a superior ESG score versus its reference index, as measured by MSCI, with an overall rating of AA. The Company has also delivered on its commitment to achieve a lower carbon emissions intensity than the reference index…” As for NAV performance, encouragingly this has picked up since year end: “…up to close of business on 31 January 2024, the Company’s NAV had increased by 9.2% compared with a rise of 8.3% in the reference index (both with dividends reinvested).” Looking ahead, the Chair had this to say: “Against a background of macroeconomic uncertainty and market volatility, our portfolio managers are of the view that an active approach to investing is likely to carry greater rewards. Additionally, our portfolio managers believe quality stocks with higher profitability, stronger balance sheets and stable earnings growth should outperform in an environment of persistent investor concerns over a mild recession in the US and other major developed economies. These are the fundamentals that our portfolio managers continue to favour within your Company’s portfolio.”
Winterflood notes: “Underperformance attributed to negative investor sentiment towards ESG funds and headwinds for value stocks. Biggest stock detractor was not owning Meta Platforms, which briefly entered the reference index, followed by overweight holdings in Baxter International and Fidelity National Information Services. Largest contributors were off-benchmark holdings in Microsoft, Shell and Novo Nordisk. Revenue return per share 3.67p, -4.4% YoY (FY22: 3.84p). DPS 8.0p (FY22: 8.0p), with the dividend partially paid from capital reserves.”
Truism of the week
“…in any given year there will be disappointments, and this year is no exception…” BlackRock Throgmorton Trust (THRG) Investment Manager’s Report.
Compelling value
BlackRock Throgmorton Trust (THRG) outperformed over the full year. Chairman Christopher Samuel has the numbers: “…the Company outperformed our benchmark index by 3.7% during the twelve months to 30 November 2023. Although it is disappointing that in absolute terms our Net Asset Value fell by 2.3% for the year under review, over the longer term, performance remains strong, with the Company’s NAV return outperforming the benchmark index by 17.0% over five years and by 72.4% over ten years. At the share price level, the outperformance was 29.0% and 95.8% over the same periods.” Unsurprising then that “Our Investment Manager’s fundamental philosophy remains unchanged, with a continued focus on financially strong companies with innovative business models and differentiated offerings which are capable of delivering sustained growth over time.”
Over to the investment manager for the outlook: “Looking ahead to 2024…the picture we see is one of a gradual recovery, and in our view this is not reflected in valuations of UK small and medium sized companies which we think offer compelling value in both absolute and relative terms. Indeed, the Company now possesses many companies on single digit price to earnings ratios, with double digit Free Cash Flow yields, but unlike so many archetypical ‘value’ sectors, have far superior growth prospects. As a result, the net market exposure of the Company is slowly increasing and is now around 106%, while the gross is c.114%.”
Note from Winterflood: “Share price TR -0.8%, as discount narrowed from 5.0% to 3.6%; 5.3m shares repurchased over FY for £29.8m. Revenue EPS 16.56p (FY22: 12.95p). DPS 14.75p (FY22: 11.1p). Net gearing 7.6% (FY22: 4.3%). Performance fee accrued of £2m…Short positions contributed in general, with short exposure representing 3.6% of market cap at year-end.”
JPMorgan is neutral: “In performance terms, THRG had a strong run of relative NAV outperformance in 2019-21 but had a weaker 2022. On a rolling five years basis THRG is still one of the better performers in the peer group in NAV TR terms and its strategy using a long/short book is a differentiating factor vs peers. This can add significant value, as seen with the software position in the prior financial year, but also gives THRG a different risk profile than the long only funds, but we think the manager has a track record of controlling the risks well. Overall we remain Neutral noting there are many other funds with good performance track records and also of a similar or larger size in market cap terms that trade on significantly wider discounts to NAV.”
Unwanted stat of the week
“The second consecutive year of losses for our benchmark reflects the significant negative sentiment that clouds UK and small and medium sized companies in particular. This is reflected in the fund flow data which shows November 2023 marked the 28th consecutive month of outflows in UK small and mid-caps. It is my view that this pervasive selling pressure has resulted in a significant mispricing within UK small and mid-caps.” BlackRock Throgmorton Trust (THRG) Investment Manager’s Report.
Award-winning
Half-year Report from Invesco Select Trust Balanced Risk Alloc Shs (IVPB). With four different share classes to report, it’s over to Chair Victoria Muir for a quick run through: “In net asset value (NAV) total return terms, with dividends reinvested, the UK Equity Share Portfolio returned +3.2%… compared with its benchmark, the FTSE All-Share Index total return of +1.6%. The top contributor to the NAV outperformance was strong stock selection in the consumer discretionary and consumer staples sectors…The Global Equity Income Share Portfolio returned +8.4% in NAV terms…compared with its benchmark, the MSCI World Index (£) total return over the period of +6.4%. The biggest stock contributors to the portfolio’s outperformance were Rolls-Royce, KKR & Co and Aker BP…The Balanced Risk Allocation Share Portfolio returned +2.7% in NAV terms…The portfolio’s benchmark, the Composite Benchmark Index returned +5.2%. Commodities especially, as well as equities, contributed positively to the portfolio’s performance, however, the government bond allocation negatively affected the overall performance of the portfolio, as interest rates were raised across the globe. The Managed Liquidity Share Portfolio had a total return of +2.5% based on NAV…The higher interest rate environment contributed positively to the portfolio’s income yield, although returns were tempered by the effect of increased yields on capital gains.”
As the Chair explains, going forward there may well be just one share class to report on if shareholders approve the Board’s restructuring plan: “…with demand from investors for larger, more liquid investment vehicles, your Board believes it could be increasingly challenging to market separately the Global Share Class and the UK Share Class in their current forms, with the structure potentially presenting an additional hurdle for those looking to invest. Your Board believes that the Global universe offers the broadest set of investment opportunities for equity investors whilst also providing diversification benefits for UK investors. Additionally, your Board has confidence in its award-winning Global Equity Income fund manager, Stephen Anness…Your Board believes his approach to be rigorous, differentiated and balanced. Under Stephen’s stewardship the Global Equity Income Share Portfolio has delivered strong, sector-leading NAV total return performance over both one- and three-year periods… Accordingly, your Board has concluded that it would be in the best interests of Shareholders as a whole to consolidate the UK Equity, Balanced Risk Allocation and Managed Liquidity share classes into the Global Share Class.”
Winterflood notes: “As announced on 14 December 2023, the fund has put forward restructuring proposals, with all share classes to be consolidated into IVPG plus introduction of enhanced dividend policy. IVPB and IVPM offered full cash exit and IVPU offered 15% tender offer. Circular and notice of GMs expected to be published imminently.”
Outlook of the week
“…the outlook for our asset class may be brighter than many recognise.” BlackRock Throgmorton Trust (THRG) Chairman statement.
High levels of recurring revenues
HgCapital (HGT) gave the market a sneak preview of its full-year numbers in a Q4 trading update. Broker Winterflood provides the following summary: “Estimated NAV per share 498.6p (net assets £2.3bn), +0.93% from 30 September; NAV TR +10.7% over year. Top 20 companies (77% of portfolio) saw LTM revenue and EBITDA growth of +25% and +28% respectively. Realisations of £343m for the year, including secondary sales from Hg Genesis 8 and Hg Saturn 3, and full exits of Transporeon and Commify; full and partial exits represented +25% uplift to carrying values at 31 December 2022. Investments of £71m made, including GTreasury, Nomadia, JTL, P&I and Howden. Allowing for transactions announced and not completed at end of 2023, outstanding commitments £808m (£1.0bn otherwise) vs £735m (£625m) available liquid resources, including £350m undrawn debt facility.”
Numis is a fan: “The NAV of 498.6p at December leads to a 10.7% total return over the year, up c.1% in the final quarter and 5.4% in H2. This reflects strong trading performance with revenue and EBITDA growth of 25% and 28%, respectively, as well as meaningful realisation activity which was in part offset by currency movements. We believe the realisation activity should be reassuring to investors, being both supportive to valuations and generating significant proceeds, with c.£295m expected once the recent transactions close in 2024. We believe it is impressive that c.50% of the portfolio (by proceeds) has been subject to transaction activity over the last two years, while there were 13 liquidity events since the start of 2023 which points to the quality of the portfolio. HgCapital Trust remains one of our favoured Investment Companies based on the strength of its track record, and the nature of the underlying portfolio companies which is focused on ‘dull’ technology in the Software-as-a-Service sector which benefits from high levels of recurring revenues, which we believe are attractive in an uncertain macro environment…”
So too is JPMorgan: “Although narrower than many of the peers, HGT has a portfolio invested in a sector that has delivered high earnings growth principally from software businesses with a high level of subscription based recurring revenues. HGT has also been consistently able to sell assets at premiums to NAV carrying values, including its most recently announced disposal of Argus Media in January 2024 and this gives us confidence in its valuations. We are Overweight.”
Liberum notes: “Underlying performance continues to be strong, reflected by the organic growth, while the high frequency of realisations (four between December 2023 and January 2024 and 13 since the beginning of 2023) in the face of a much tougher exit environment helped drive a c.11% narrowing in the discount in 2023. This was the main source of the 26% total share price return. The components of the share price return were 15% of discount narrowing, 9% from the NAV uplift at the year-end 2022 discount, and the 2% dividend yield. Given the tentatively improving macro backdrop and exit environment for PE, we think the sector’s prospects look broadly positive this year.”
Despair of the week
“For us, the UK appears anomalously undervalued while China now seems to be pricing in despair.” Ruffer (RICA) Monthly Investment Report for January 2024.
