Thoughts on UK and Value

[IronPyrites]

I have been thinking about how to position my IT portfolio for the coming year.

The uncertainty of Brexit has acted as a significant drag on the UK stock market which is still below the levels reached in 1999. Despite the recent run it is still relatively cheap when compared with the international markets.
Also over recent years growth and momentum investing have been much more successful strategies to follow with the Baille Gifford stable leading the pack.

However I have a feeling that the tide may be turning for a value approach.

With this in mind I have been looking at two UK small cap biased ITs managed by Aberforth who are dyed in the wool value fund managers and a UK mid cap fund managed by Andy Brough.

Aberforth Smaller Companies IT (ASL) has struggled with the value approach over the last year. NAV has gone down by 15% and similarly so has the share price. However the recently released yearly figures show that the first quarter was their worst performance ever but the last quarter was considerably better.
Picking good quality value companies may finally be starting to pay off.
ASL is on a discount of 8.8% which has been narrowing and pays a dividend of 2.6% (ex dividend in 2 days - 11th Feb).

The managers also manage a second IT fund – Aberforth Split Level Income Trust (ASIT). This IT has very similar constituents to ASL with 78% invested in UK smaller companies.
The split level structure means that the ordinary shares are effectively geared at around 40%. For this extra risk the dividend yield is 6.6%.
Also interestingly the discount has been widening since the start of the year and is now at 15%. Again they go ex dividend in 2 days (1.3% the bigger proportion in August).

I have added some ASIT to my portfolio.

For greater exposure to the UK mid caps I have also added Schroeder UK mid caps IT run by Andy Brough.
It is currently on a discount of 8.3% and with a dividend of 2.2%.
The fund is a mixture of UK growth and value.
Around 40%/12% in mid cap growth/value and 12%/15% small cap growth/value.
Here is a recent interview with him on PI World:
https://www.piworld.co.uk/2021/01/29/pi ... dy-brough/

Are others of a like mind? If not I might also be a contrarian investor

Regards
Iron

[scotia]

Ok - I'm in agreement with the rationality of your analysis - that the UK is undervalued, that value investment is due for a resurgence, and that smaller to mid cap UK company collective funds are likely to benefit. BUT - does rationality play a big factor in market movements? I think I'll just continue chiefly with global investments in the growth area, however I will top up on UK smaller companies and keep a careful lookout for what happens next.

[Euro17]

I agree with the favourable sentiment to UK midcaps, however, with regard to ASIT, it is anticipated that their next dividend will be cut in line with this dividend payment. This will give a dividend yield of about 3.9%. (from Citywire 26/1/21)

[stevensfo]

I sold out of ASL about three years ago, during a period when I wanted to reduce the number of holdings and do a bit of consolidation etc. ASL seemed to have gone nowhere and the dividend and charges made it an easy decision. So I sold ASL, but kept the Vanguard FTSE250 ETF (VMID).

So far, it seems to have been the correct decision, but time will tell.

Steve

[GrahamPlatt]

Just explain to me how this works; “The split level structure means that the ordinary shares are effectively geared at around 40%. .... Also interestingly the discount has been widening since the start of the year and is now at 15%.”

[simoan]

Hi Iron,

I've just taken a quick look at the latest reports of the ITs you mention. I'm actually in the market for an IT at the moment but it would need to hold some quality companies. Tbh I don't really like the look of the companies held in either of these ITs.

Both funds have far too many holdings IMHO - the Aberforth IT has 84 as of the last report. That just says to me that they have no investment focus at all and I'd not want to pay them a penny in fees on that basis. I realise there are a lot of IT's like this and people are attracted in by discounts which makes them a value trap in my eyes. I think if you're going to invest in any kind of managed fund (be it OEIC or IT) you want it managed by someone with a focus who has a plan. That's why I would only be interested in ITs that had less than 50 holdings, preferably nearer 40.

When a professional fund manager ends up holding 84 different companies you can only assume he doesn't really know what he's doing. What is the point of holding companies 51 to 84? I have no idea. Perhaps he can't sell them because the liquidity is not there.

Just my 2p.
All the best, Si

[IronPyrites]

Hi Si

As of December 2020 there were 70 companies held in ASIT.
The top 10 holdings which represent 40% of the portfolio.
The top 50 holdings represent around 90% of the portfolio.
So there is a weighting towards a smaller number of constituents that represent the NAV of the fund.

For those who follow small caps there are some familiar names in the top 20 (50% of the portfolio):

Reach
Vesuvius
Brewin Dolphin Holdings
Morgan Advanced Materials
Bloomsbury Publishing
TI Fluid Systems
Wincanton
Redde Northgate
CMC Markets
Vistry Group
Paypoint
Forterra
Keller
Rathbone Brothers
STV
Vitec Group
Provident Financial
Essentra
Anglo Pacific Group
McKay Securities

A number of individual investors I know have large portfolios but its value is concentrated in a much smaller number of conviction stocks.
Not a style I adopt for individual shares mainly because I haven’t got the time or inclination to monitor more than a handful of stocks. However you could argue that a fund manager would have both the time and inclination so I am not overly concerned that they hold 70 stocks.

From their half yearly report:
https://documentscdn.financialexpress.n ... 566524.pdf

My bold

Accordingly, the upside today from a diversified portfolio of companies selected within a value investment philosophy is much greater than usual. In making this assertion, the Managers are acutely conscious of what ASLIT has endured to get to this point – both in the coronavirus afflicted year of 2020 and over longer periods, exposure to the value investment style has incurred an opportunity cost. However, the sanity check comes through considering the qualities of the underlying companies, which are well run, in command of their balance sheets and able to grow profitably from cycle to cycle. These viable businesses benefit from innovation and provide us with essential products and services – they merit higher valuations from the stockmarket. As 2019 and the final calendar quarter of 2020 showed, the scope for strong total returns is considerable. The Managers are optimistic about ASLIT’s prospects and have added meaningfully to their shareholdings through 2020.

This seems to fit with what I am looking for in an Investment Trust and at a discount of 15%.

Good luck in your IT search and please let us know what you find.

Best Regards
Iron

[simoan]

Hi Iron,

Yes, sorry, I see now you were asking for comments from like-minded people, not the likes of me. If you want exposure to value then there are some OK companies in the list. On the whole though, I'd question how many of those companies in the Top 20 are "well run and in control of their balance sheets" - there's a fair amount of debt overall and several recent dividend cutters. I don't take dividend cuts as a sign of a company being in control of its balance sheet tbh.

Anyway, I wish you well and hope the return to value happens. The only UK Small Cap IT I'd likely be interested in would be the Standard Life one but that also has too many holdings at just over 50. It also has too many holdings in the Top 10 that are already in my portfolio. The only UK biased IT I've found that I really like the look of so far is Troy Income & Growth. It's large cap and has around 40 holdings but with some international exposure and is more quality than value oriented.

All the best, Si

[IronPyrites]

Hi Graham

Just explain to me how this works; “The split level structure means that the ordinary shares are effectively geared at around 40%. .... Also interestingly the discount has been widening since the start of the year and is now at 15%.”

A relatively simple explanation is here:
https://citywire.co.uk/investment-trust ... s/a1212113

‘Splits’ get their name because they offer more than one share class to investors. That’s different from most investment trusts and companies which have just one class of ‘ordinary’ shares.
The idea behind splits is that while their share classes invest in the same assets, they can offer different amounts of capital growth and income to investors.
The most basic splits issue two share classes: one offering steady capital growth but no income; and one offering a mix of growth and income.
The first type is called the ‘zero dividend preference share’, or ‘zero’, for short.
As the name indicates, zeros don’t pay dividends but offer a predetermined level of capital growth over a fixed period of time, often seven years.
For example, in 2017 a new split launched to invest in UK smaller companies. It offered new zeros at 100 pence each which it intended to grow to 127.35p by 2024.
That’s equivalent to a ‘gross redemption yield’ or annual return of 3.5%.
It’s not a huge return and there are no dividends but as ‘preference’ shares the zeros will be at the front of the queue when the trust winds up and distributes its assets to investors. The return is fairly secure but not guaranteed.
Alongside the zeros are the ‘ordinary’ shares. These receive all the income from the trust’s investments, including the portion that would normally have gone to the zeros. As a result they can pay higher dividends than conventional trusts.
The ‘ordinary’ shares also get any capital growth left over once the zeros have received their share at wind-up.

Regards Iron

[scotia]

Hi Graham

Just explain to me how this works; “The split level structure means that the ordinary shares are effectively geared at around 40%. .... Also interestingly the discount has been widening since the start of the year and is now at 15%.”

A relatively simple explanation is here:
https://citywire.co.uk/investment-trust ... s/a1212113

‘Splits’ get their name because they offer more than one share class to investors. That’s different from most investment trusts and companies which have just one class of ‘ordinary’ shares.
The idea behind splits is that while their share classes invest in the same assets, they can offer different amounts of capital growth and income to investors.
The most basic splits issue two share classes: one offering steady capital growth but no income; and one offering a mix of growth and income.
The first type is called the ‘zero dividend preference share’, or ‘zero’, for short.
As the name indicates, zeros don’t pay dividends but offer a predetermined level of capital growth over a fixed period of time, often seven years.
For example, in 2017 a new split launched to invest in UK smaller companies. It offered new zeros at 100 pence each which it intended to grow to 127.35p by 2024.
That’s equivalent to a ‘gross redemption yield’ or annual return of 3.5%.
It’s not a huge return and there are no dividends but as ‘preference’ shares the zeros will be at the front of the queue when the trust winds up and distributes its assets to investors. The return is fairly secure but not guaranteed.
Alongside the zeros are the ‘ordinary’ shares. These receive all the income from the trust’s investments, including the portion that would normally have gone to the zeros. As a result they can pay higher dividends than conventional trusts.
The ‘ordinary’ shares also get any capital growth left over once the zeros have received their share at wind-up.

Regards Iron

I'll pick out the comment

"It’s not a huge return and there are no dividends but as ‘preference’ shares the zeros will be at the front of the queue when the trust winds up and distributes its assets to investors. The return is fairly secure but not guaranteed."

About 20 years ago there was a major scandal involving Spilt Capital Shares - and lots of investors lost a lot of money - even after an FSA "rescue" scheme. I remember getting out of a small split-cap investment before the crash. I have never been back.
There are many write-ups on the web as to what happened - e.g. http://news.bbc.co.uk/1/hi/business/4465039.stm

[Adamski]

Could consider BGUK, if you wanted growth style in a UK fund. Value has been out of fashion so long, will it ever come back!? BGUK performance since March low seems quite consistent. 2% premium, 1.3% dividend, 14% 1yr return. All looks good.

[simoan]

Could consider BGUK, if you wanted growth style in a UK fund. Value has been out of fashion so long, will it ever come back!? BGUK performance since March low seems quite consistent. 2% premium, 1.3% dividend, 14% 1yr return. All looks good.

I assume you're addressing me because this Baillie Gifford fund looks about as far from a UK Value IT as it is possible to get! I like the fact it has only 43 holdings (as of 31st October 2020) but it's not really what I'm looking for.

FWLIW I started a holding in Troy Income & Growth yesterday as it offers some growth and quality income (yield 2.7% based on 1.96p dividend for FY21). I like that they have already churned the portfolio and were very active in dumping big oil, banks and property holdings last year and re-invested the funds into higher quality companies. This reduced the natural yield and they cut the dividend as a consequence. There's no way I'd have invested in it 12 months ago with the likes of Lloyds, BP and RDSB in the fund. I also like the fact it has a discount control mechanism. It will sit nicely alongside Finsbury Growth & Income in a boring part of my SIPP!

All the best, Si

[OLTB]

Evening all

Just as an aside on the above topic and previous comments, John Baron has introduced the Aberforth Split Level Income (ASIT) IT into his ‘Summer’ portfolio today. This was funded by reducing the exposure in the Blackrock Throgmorton IT that had grown well since its introduction.

Cheers, OLTB.

[Arborbridge]

Could consider BGUK, if you wanted growth style in a UK fund. Value has been out of fashion so long, will it ever come back!? BGUK performance since March low seems quite consistent. 2% premium, 1.3% dividend, 14% 1yr return. All looks good.

I assume you're addressing me because this Baillie Gifford fund looks about as far from a UK Value IT as it is possible to get! I like the fact it has only 43 holdings (as of 31st October 2020) but it's not really what I'm looking for.

FWLIW I started a holding in Troy Income & Growth yesterday as it offers some growth and quality income (yield 2.7% based on 1.96p dividend for FY21). I like that they have already churned the portfolio and were very active in dumping big oil, banks and property holdings last year and re-invested the funds into higher quality companies. This reduced the natural yield and they cut the dividend as a consequence. There's no way I'd have invested in it 12 months ago with the likes of Lloyds, BP and RDSB in the fund. I also like the fact it has a discount control mechanism. It will sit nicely alongside Finsbury Growth & Income in a boring part of my SIPP!

All the best, Si

Very boring compared with FGT