Investment Trust Dividends

Doceo results wrap


The Results Round-Up – the week’s Investment Trust results
Which fund has generated a 33% NAV total return since its December 2020 IPO? And which funds are gearing up to take advantage of compelling valuations? Find out in this week’s round-up.

By
Frank Buhagiar

Fidelity Asian Values’ (FAS) contrarian approach

FAS reported a -2.4% NAV total return for the half year. That compares to the MSCI All Countries Asia ex Japan Small Cap Index’s +3.6% sterling return. According to the Portfolio Manager’s Review, it wasn’t stock selection that led to the shortfall: “Our stock selection continued to contribute positively to the Company’s relative performance.” Instead, “our market selection was a drag against a backdrop of continued divergence in country performance. Since our investment process can lead us to take contrarian positions in undervalued businesses, our combined exposure to China and Hong Kong was close to its historical high. China and Hong Kong continue to underperform and have dragged down the Company’s relative returns compared to the Index.”

The Portfolio Managers don’t appear overly concerned: “Although our value style has underperformed the growth style in recent years, we believe this headwind should, at some point, become a tailwind. Small cap value stocks are currently trading at close to all-time high discounts relative to both their large cap and their small cap growth counterparts. Value stocks also generate superior earnings growth over time compared to growth stocks and provide better cash returns, in terms of dividends.”

Winterflood: “Share price TR -2.5% as discount widened slightly from 5.3% to 5.7%”.

Scottish Oriental Smaller Companies Trust’s (SST) managers are excited

SST comfortably outperformed over the half year – NAV per share increased 8.3% compared to a 6.8% rise for the MSCI AC Asia ex Japan Small Cap Index. And it sounds like the investment managers are expecting more of the same: “We are excited about the portfolio’s prospects, given the solid balance sheets of the portfolio’s holdings, their strong growth potential and attractive valuations.”

Winterflood: “Key contributing geographies were India and Taiwan, while Indonesia and Hong Kong detracted. The managers expect portfolio companies to emerge with increased market share once the operating environment improves.”

Global Opportunities (GOT) primed for the great unwind

GOT reported that its 1.7% NAV increase for the year failed to keep pace with the 15.7% generated by FTSE All-World Total Return Index. Thing is, the FTSE All-World Index is not GOT’s benchmark. In fact, GOT hasn’t GOT a benchmark at all. According to Chairman Cahal Dowds: “The Company has no stated benchmark against which it seeks to outperform. Its objective is to achieve real long-term total return through investing in undervalued global securities.” But as Executive Director Dr Sandy Nairn explains, “as the year progressed, markets took the view that falling inflation would lead to interest rate declines and that the equity party could recommence”. GOT is having none of it though “We do not subscribe to the view that the post ‘Global Financial Crisis’ world can be recreated.”

“The fiscal arithmetic is such that limits on the extent to which governments can sustain growth are now very real. Indeed, history suggests that fiscal retrenchment will be required at some point soon. Rather than a rosy economic environment ahead, the storm clouds look to be gathering.The portfolio remains positioned to take advantage of the ‘great unwind’ when it comes whilst both protecting investors and providing some upside at the same time. It is a difficult period since patience is one of the hardest virtues to sustain. However, in our view the evidence is still overwhelming that great caution is required.”

JPMorgan: “The poor relative NAV performance vs the equity market of 2023 should probably be viewed alongside the strong relative performance GOT delivered in 2022. A large holding in cash in both years will have been a factor, holding back returns in 2023 and insulating the portfolio from the decline in markets in 2022.”

Downing Renewables & Infrastructure (DORE) up a third

DORE posted a 3.5% NAV total return for the year. That brings the NAV total return since IPO in December 2020 up to 33%. Chairman Hugh Little “is pleased that during the period DORE continued to build significantly on its key objective of diversification by geography, technology, revenue, and project stage, namely through its investments in electricity grids and grid stability infrastructure projects in Sweden and the UK, and with the Company’s first Icelandic hydropower acquisition.” The investment manager meanwhile homed in on profitability, “the underlying portfolio has enjoyed a 26% jump in operating profit compared to the previous year.”

Liberum: “NAV growth levers are limited, in our view, and the yield is relatively unattractive, reducing total return potential.”

Winterflood: sees “an attractive entry point, with the fund screening cheap at a discount of 36% vs the peer average of 29%. We reiterate DORE in our recommendations list.”

Impax Environmental Markets (IEM), gearing up

IEM reported a 4.5% NAV total return for the year, which Portfolio manager Jon Forster believes validates the fund’s investment thesis: “IEM is founded on the belief that amid rising environmental challenges, companies enabling the cleaner and more efficient delivery of basic needs – such as power, water and food, or mitigating environmental risks like pollution, and climate change – will grow earnings faster than the global economy over the long term. This basic investment thesis remains firmly intact.”

The portfolio manager goes on to point out that “Compelling valuations were a key driver in the decision to refinance and increase gearing, with the upside potential more than sufficient to compensate for an increase in the overall cost of debt. Looking forward, we remain positive, based on the more favourable market outlook for mid and small caps, the strong long-term drivers of Environmental Markets and the attractive portfolio valuation.”

Numis: “The results highlight a period of relative underperformance for Impax Environmental versus the MSCI AC World index, although we caveat that the majority of the underperformance came from not holding the Magnificent Seven – given that a minimum 50% of revenues need to be derived from environmental sectors. We believe that following a period of underperformance it can be an interesting time to invest in a manager with a strong longer-term record and a clearly defined approach that has been out of favour, particularly as the shares have suffered a derating.”

JPMorgan: “We think a turnaround in relative NAV performance is required for an improvement to the rating in the near term but as a package we also think IEM remains a high-quality fund which is a good option for investors seeking exposure to environmental themes in equity markets.”

Mercantile (MRC) gears up too

MRC’s Portfolio’s Managers may well believe this has been a testing year for the UK market but you wouldn’t know it going by the fund’s full-year performance – NAV total return came in at +4.5% (debt at par value) compared to the benchmark’s +1.8%. One year’s outperformance does not maketh a summer, but perhaps 10 years does – over the 10 years ended 31 January 2024, MRC’s average annualised return stands at +6.1% per annum on a net asset total return par value basis. The benchmark’s average annual return is +4.5%.

If the fund’s gearing levels are anything to go by, the portfolio managers are confident for the future: “Despite the UK market trading at a steep discount to both its own history and relative to other developed markets portfolio companies have, for the most part, been performing well at an operational level. Notwithstanding the obvious geopolitical risks that surround us, we are excited by the investment opportunities that this combination of low valuations, improving economic indicators, and strong performing portfolio companies yields.” All of which helps explain, “our elevated level of gearing, which at the date of this report is approximately 15%. This is the highest level of gearing that we have applied in over a decade, which hopefully demonstrates most clearly our assessment of the opportunity before us.”

Numis: “Mercantile (£1.7bn market cap) is the largest fund within its peer group, focussed on UK mid/small cap companies, and benefits from a low fee structure. The fund has a strong track record, outperforming its benchmark over one, three, five and ten years and we believe that Mercantile is an attractive core holding for investors seeking exposure to this sector.”


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