More Trust news

A 360 view of the latest results from EOT, JGGI, MWY, RICA, UKW, MYI
According to Murray International’s investment managers, what “evolves without its delusions and the psychological baggage of false entitlement”? Answer in Part 2 of this week’s round-up of investment company results and broker commentary…

By
Frank Buhagiar

Part two

Evolution of the week
“Unburdened by aging demographics, excessive systemic debt and free to benefit from prudent, long-term orthodox economics, the Developing World evolves without its delusions and the psychological baggage of false entitlement.” Murray International (MYI) Investment Manager’s Report.

We expect them to deliver
European Opportunities Trust (EOT) outperformed over the half year courtesy of a 4.3% NAV total return and 7.7% share price total return, both comfortably ahead of the 3.5% posted by the MSCI Europe Index. Chair Matthew Dobbs writes: “The six months under review saw the Company modestly outperform its Benchmark, initiate a 25% tender offer that was completed in January and continue to buy back shares in accordance with the Board’s discount management policy. The portfolio’s outperformance can be attributed to stock selection.” The Chair expects more of the same: “Looking ahead, our Investment Manager anticipates that the earnings growth of the portfolio in 2024 will be superior to that of the Benchmark, providing a solid foundation for continued relative outperformance.”

The investment manager sounds positive too: “The outlook for the portfolio is, we think, improving. Our portfolio is less exposed to weaker consumer demand and the risk of higher input costs. The extent to which the portfolio delivers is much less macro related, and more driven by individual companies crystalising their transformational opportunities. Concluding successful clinical trials, continued innovation, resiliency of business models, and geographic expansion are some of the outcomes that we anticipate from our investee companies this year. These companies have the necessary ingredients for success: we expect them to deliver.”

Winterflood points out: “Managers expect portfolio company earnings growth of +10% YoY for 2023, compared with +2% for MSCI Europe Index.”

Lesson of the week
“What’s the lesson of the last couple of years? Some would say ‘HODL’ (Hold on for dear life), ignore the noise, have a long time horizon. We take a different lesson. 2022 gave a taste of what the new regime might look like. The illusion of diversification hurt portfolios with stocks and bonds positively correlated whilst falling, many alternatives were just duration in disguise. It’s no longer conjecture that conventional portfolios are insufficiently protected and diversified.” Ruffer (RICA) Investment Manager’s Report.

Exposed to a number of long-term trends
Another half-year report, another outperformer to report, this time JPMorgan Global Growth & Income (JGGI). Over to Chairman Tristan Hillgarth “…our strong performance continued over the six months to 31st December 2023, with the Company ending the period comfortably ahead of its benchmark, the MSCI AC World Index (in sterling terms)…The total return on the Company’s net assets was +9.2%, compared with the Benchmark return of +7.0%. The return to shareholders over the same period was +10.0%. It is particularly gratifying to note that the drivers of this strong performance were broadly-based across many sectors and stocks, which illustrates the consistency of the Portfolio Managers’ disciplined approach to stock selection and overall management of the portfolio. This consistency – and the skills of the Company’s Portfolio Managers – are further demonstrated by the Company’s long-term track record…The Board is very pleased that the Company has delivered returns in excess of the Benchmark over the three, five and 10-year periods ended 31st December 2023.”

Looking ahead, the investment managers are cautious: “…we believe near-term macroeconomic uncertainties remain elevated. In our view, European industrial production has entered a prolonged decline and consumer and business confidence readings in Europe and the US are signalling a contraction ahead. We therefore remain cautious about the outlook for global growth and believe market expectations of increasing profit margins are unrealistic and headed for disappointment…In sum, the Company remains exposed to a number of long-term trends which will drive market gains over time, while also being well-positioned to cope with any adverse near-term macro developments. But whatever market conditions we encounter, we will continue our search for companies that offer superior quality earnings and growth which outpaces the market, at similar or lower valuations. We still see many opportunities to acquire such companies across our broad investment universe, so we are confident our process and philosophy can keep on delivering excess returns to shareholders.”

Numis is impressed: “The fund has built a strong following with retail investors helped by its yield (4% of opening NAV) and the record of outperformance. The outperformance was particularly impressive in 2023 given market performance was driven by a small number of US tech stocks, and the approach seeks to combine ideas in both ‘growth’ and ‘value’ styles. The fund has grown substantially in recent years, through consolidation, tap issuance and strong performance. The fund has seen rollovers from Scottish IT and JPMorgan Elect, while a merger with JPMorgan Multi-Asset has been proposed. The fund now has the size and trading liquidity to attract a range of investors, with a market cap of c.£2.4bn. It is one of few funds that has retained a premium rating in recent years and during 2023 it was the largest issuer amongst the conventional equity ICs…This trend of issuance has continued, and earlier this month JGGI raised a further £34.5m through a placing and retail offer.”

Phrase of the week
“We seem to live in a world of the ‘dog that didn’t bark’. That phrase, used by Sherlock Holmes in a short story called Silver Blaze, rather accurately sums up the relative silence that has followed the very dramatic rise in global interest rates.” Mid Wynd International (MWY) Chairman Statement.

Bearing fruit
Can Mid Wynd International (MWY) make it a hat trick of half-year outperformers? Yes, it can, at least on a share price total return basis. Chairman Russell Napier has the numbers: “The Company’s share price rose 9.7%, on a total-return basis (with dividends assumed to be re-invested). This compares to a total return from the MSCI All Country World Index (GBP) of 7.0%…NAV…per share rose 6.8% on a total-return basis.” As the Chairman explains: “Our new investment manager, Lazard Asset Management Limited…assumed responsibility for the management of our assets with effect from 1 October 2023. The approach of the new Manager is bearing fruit and the total return from our investments has marginally outperformed our comparator index for the three months ended 31 December 2023, albeit covering a very short period. On a total-return basis, during this period, the Company’s share price rose 6.5%, compared with a 6.3% rise in the comparator index. The NAV increased by 6.8% during this time.”

The Chair goes on to remind investors that “Mid Wynd invests in companies and not economies. The balance sheet of any company can be radically different from that of the economy in which it operates. It can sell products and/or services the demand for which remains resilient in even the toughest of economic circumstances. In selecting our investee companies our Manager looks for companies that can continue to generate high returns on invested capital even in more difficult economic climes. As long as they can continue to do so and we have not paid too much to own the shares these companies are particularly well placed to weather any coming economic storm and, over the long term, produce good total returns for investors. Total returns from global equities have been driven by a rise in the US stockmarket and from a select band of US listed equities, known to some as ‘the magnificent seven’, and the rise in our NAV, in-line with the comparator index, since Lazard re-organised the portfolio is reassuring.”

Comment from Numis: “The interim results are Mid Wynd’s first under the stewardship of Lazard… The managers have put their stamp on the portfolio, retaining just six positions that were in the portfolio prior to the manager change. The portfolio now comprises c.40 businesses the managers believe will generate consistently high returns on capital, possess sustainable competitive advantages and can outperform by delivering consistently high financial productivity for longer than the market expects. They are differentiated from other quality growth approaches through ensuring the sources of competitive advantage are widely diversified, including brands and technology, as well as other factors such as scale, strong position in niche industries, providing critical low-cost components or regulation.”

Call of the week
“Our Investment Manager said in the interim report this time last year: ‘we go into the year set up for an uncomfortable ride’. They were right. It was.” Ruffer (RICA) Chairman Statement

Dangerously benign
Half-year Report from Ruffer (RICA). As Chairman Christopher Russell writes: “…NAV…total return (NAV TR) per share for the six months to 31 December 2023 was +0.6%, and share price total return +0.3%.” That means “…the twelve-month numbers were -6.2% and -10.6% respectively – the worst twelve calendar month returns in the history of RICL…” And something of an outlier, as “Over any other annualised calendar year period to 31 December 2023 since inception…NAV TR has been positive. Since inception of the Company in 2004, the annualised NAV TR to end-December 2023 was 7.0%.” But as the Chairman explains: “Whatever the absolute return numbers, the pattern of returns has remained important to portfolios which contain RICL shares…the RICL portfolio has continued to contribute diversification characteristics which have eluded conventional portfolios. This pattern of returns has not only provided diversifying offset for multi-assets portfolios which contain RICL shares but has continued to offer long-term asset returns comparable to those of competitive long duration assets but at a lower level of volatility.”

And despite the difficult year, the trust is sticking to its guns: “While 2023 was the year in which the financial hurricane failed to materialise and RICL suffered from the offsets in protecting asset returns, today markets are more vulnerable and the offsets are cheaper than a year ago. Inflation volatility remains a core concern and expectations which are priced into longer duration assets are dangerously benign. Ruffer continues to believe that tighter liquidity conditions present a significant risk to markets and it is too early to declare the soft landing that is implied in forward rates and current valuations.”

Winterflood writes: “The largest detractor from performance was the protective positioning, including credit protections, index puts and VIX exposures. Equities contributed positively, helped by small holdings in Amazon and Meta. Over H2 2023, credit and volatility protections detracted. Equities were the single largest contributor in the period, while Oil exposure was also positive. As at 31 December, the portfolio had 11% allocated to Inflation strategies, 64% to Protection Strategies and Cash, and 25% to Growth.”

Cost of the week
“In an ‘all weather’ portfolio, when one prepares for a hurricane but the barometer sets ‘fair’, the aftermath sees only the cost of the insurance premium on the house which was not blown away.” Ruffer (RICA) Chairman Statement.

Over £1 billion of dividends
Full-year numbers from Greencoat UK Wind (UKW). Chair Lucinda Riches writes: “I’m pleased to present the results of another significant year for the company. With investment of £821 million into Dalquhandy, London Array, South Kyle and Kype Muir Extension wind farms, our portfolio has surpassed 2GW of net generating capacity. We remain one of the largest owners of wind farms in the UK. We are proud to have generated approximately 1.5% of the UK’s electricity demand last year, and the portfolio was generating enough electricity to power 2.3 million homes and avoid approximately 2.5 million tonnes of CO2 emissions through the displacement of thermal generation by the end of 2023.”

As for returns: “With the final dividend for the year, our investors will have received over £1 billion of dividends since listing. With our continuing strong cash flow and dividend cover, we can confidently target a dividend of 10p per share with respect to 2024, extending our track record of attractive dividends and returns. We are now delivering net returns to investors of 10% on NAV, and we remain confident in our ability to continue to meet our objectives of dividend growth in line with RPI and capital preservation in real terms.”

Jefferies is a buyer: “2023 was a year in which UKW’s operating model was once again tested, withstanding declining power prices and low wind resource to still produce over 2x dividend cover. This offers the fund significant capital allocation flexibility, even before any potential disposals.”

So too is Liberum: “The results were solid given the very difficult environment in 2023 with discount rates increasing throughout the year at the same time as lower wind speeds and low wind prevalence cut into cash generation. Nevertheless, a dividend cover of 2.1x was achieved which we think is excellent and it is expected to remain strong over the next five years at >2x, which gives capital allocation optionality. £19.9m of the £100m share buyback has been completed as at 27 February 2024 and should provide technical support to the shares…Sensitivity to changes in inflation rates, power prices etc. have increased in 2023 but remain overall sensible. At the same time, the asset manager projects total NAV returns for 2024 of 10% which compensates investors well for the relatively moderate risks in the investment. We remain BUYers of the fund with a TP of 170p.”

And Numis: “With a meaningful market position in the UK wind segment and a robust total return outlook, we continue to view the current share price of 135.2p (18% discount to 31 December NAV) and prospective 7.4% yield as attractive and would expect the market to be comforted by the power price stress testing on earnings, and market position of the fleet delivering – 1.5% of UKs electricity demand.”

And Investec: “Whilst forward power prices have reduced materially over recent months, forecast cash generation and dividend cover remains strong. UKW expects to generate surplus cashflow in excess of £1bn over the next five years, which provides the Board and Manager with flexibility and options in respect of capital allocation and the ability to reinvest into new assets, increase share buybacks and/or pay down debt. We reiterate our Buy recommendation.”

And JPMorgan: “We like UKW’s simple model that is unchanged since IPO and its peer group leading disclosure on its power price assumptions. We remain Overweight.”

Naivety of the week
“Deep down, do global equity markets really believe speculative excesses accumulated over decades can be painlessly erased by simply reigniting credit growth? Such naivety beggars belief.” Murray International (MYI) Investment Manager’s Report.

More tangible variables
Annual Report from Murray International Trust (MYI). Chair Virginia Holmes writes: “…NAV posted a total return for the year (i.e. with net income reinvested) of 8.6%. Although the Company does not use a benchmark, it is worth noting that over the same period the UK Retail Prices Index rose 5.2% and the Reference Index (the FTSE All World TR Index) increased 15.7%. The share price posted a lower total return of 1.1% (2022: 20.6%), reflecting a widening in the discount to NAV. Revenue return per share generated from the Company’s portfolio amounted to 12.1p for the year (2022: 12.0p…enabling the ongoing improvement in the total level of dividend. The Manager’s investment focus continues to emphasise both geographical and sector diversification across a broad range of quality companies in order to deliver both income and capital growth. Such characteristics tend not to be represented in more concentrated indices where fashionable growth stocks are inclined to dominate.”

The Chair believes: “Trying to make sense of financial markets is difficult even at the best of times. Contradictions invariably present themselves…It is not surprising that attempts to predict the future are so often doomed to failure. The outlook for your Company is rooted in the more tangible variables of corporate fundamentals. This means identifying the key drivers of businesses across a broad and diversified range of sectors, focusing on key concepts such as positive cash flows, robust earnings, growing dividends and strong balance sheets, and then investing from a ‘bottom up’ basis, in good quality, growing companies that are held for the long term to maximise potential positive upside. Through the vagaries of numerous business cycles, global catastrophes and financial market dislocations this investment style has served the Company well. Despite mounting global uncertainties…the Manager remains deeply committed to the Company’s investment strategy, believing such a proven investment process will continue to identify appropriate opportunities to deliver the Company’s objectives.”

Numis adds: “Martin Connaghan and Samantha Fitzpatrick were appointed as co-PMs when Bruce’s retirement was announced in August 2023. We note that both have significant experience and have managed global equity portfolios for over 15 years…We note that the new managers are well engrained in the investment process, however naturally they will want to put their own stamp on the portfolio once Bruce retires. Ultimately, time will tell if they are able to execute on the strategy, but we believe that the ‘quality growth’ investment approach will perform well if economic conditions remain uncertain and rates remain elevated. The shares currently trade on a c.11% discount to NAV, close to the widest that it has traded over the last decade. We believe that the discount in part reflects Bruce’s pending retirement, coupled with recent disappointing performance.”

Interpretations of the week
“Whilst economic fundamentals generally tend to reflect reality, global financial fundamentals are always open to a variety of interpretations.” Murray International Trust (MYI) Chairman Statement.