Diverse Income Trust Gervais Williams

Transcription

1 Gervais Williams Investec Perspective Conference 12 March 2014

2 Introductions Gervais Williams Fund Manager Gervais Williams currently manages the plc and The Investment Company plc, alongside the CF Miton UK Multi Cap Income Fund, CF Miton UK Smaller Companies Fund and PSigma Income Fund. He is also Managing Director of Miton Group plc. Gervais has been an equity portfolio manager since His career includes five years with Throgmorton Investment Management (later part of the Framlington Group), three years with Thornton Investment Management (part of Dresdner Bank) and 17 years with Gartmore Group Ltd where he was head of UK Small Companies investing in UK smaller companies and Irish equities. He won Investor of the Year awarded by Grant Thornton at their Quoted Company dinner in both 2009 and He has sat on two DTI committees on the quoted small cap sector, is a member of the AIM Advisory Council and recently joined the Board of Quoted Companies Alliance. Martin Turner Fund Manager Martin Turner joined Miton Group plc in May Prior to Miton, Martin has spent nearly 20 years in the City. He qualified as a Chartered Accountant with Arthur Andersen in 1995 before moving to Rothschild and in time on to Head of Pan European Mid and Small Caps Sales at Merrill Lynch. Following this, Martin was Head of Sales at Teathers/Landsbanki before taking the Head of Small/Mid Cap Equities role covering research, sales and trading at Collins Stewart. Martin and Gervais have worked closely since 2004, and their expertise and skills are expected to complement each other in seeking to deliver premium returns for their investors. 2

3 Investment trends are changing US Credit market debt % of nominal US GDP Debt and GDP grew broadly in balance before taking off around 1985 The credit boom has rewarded three investment strategies encouraging elevated levels of volatility greater focus on index stocks to deliver premium returns less interest in dividends given that capital gains can be so much larger The credit trends have now changed, and the market trends can be expected to change too Source: Illustration developed from data sources including Morgan Stanley Research, Bloomberg, International Monetary Fund Note: Liabilities exclude farm sector 3

4 High-beta stocks are no longer leading the market rises Performance of the FTSE All Share vs the FTSE Mining Index (31 Dec January 2014) There has been a natural assumption that the better the growth, the better the potential return Typically high beta sectors have outperformed rising markets FTSE All Share Index FTSE Mining Index The recovery in commodities after 2008 was assumed to give miners some of the best growth prospects Source: FE Analytics. Basis: Total Return, Bid to Bid. Rebased in Pounds Sterling. High-beta strategies have diverged from previous trends 4

5 Transactional strategies are coming under pressure Volume of FTSE 100 traded ( ) Asset prices tend to rise during credit booms This tends to favour speculative transactional strategies over those with lower volatility Equity market volumes scaled up significantly over the credit boom, enhancing market liquidity But now despite increasing sophistication of algorithmic trading and QE, market volumes have been reducing Source: Bloomberg 29/01/ /04/2013 Trading liquidity has declined despite rising markets 5

6 Emerging markets are proving problematic Developed vs Emerging market performance 31 December 2011 to 31 January 2014 BRIC growth potential naturally exceeds that of developed nations MSCI Emerging Markets Index MSCI World Index During the credit boom there were major allocations to BRIC economies But as credit boom/qe comes to an end the downside of this strategy is becoming obvious Sizable current account deficits mean that many emerging market currencies have been vulnerable Source: FE Analytics. Basis: Total Return, Bid to Bid. Rebased in Pounds Sterling. Governments of emerging market economies have been obliged to adopt policies that constrain domestic growth to offset their currency weakness 6

7 Important to recognise the scale of change Since booms are characterised by rising asset prices, strategies focused upon momentum, speculation and capital gain have come to predominate the financial sector Beyond the credit boom Successful speculation relies upon buying and selling at will, this is incompatible with the vast majority of stocks outside the largest 350 which are relatively illiquid Momentum strategies may favour volatility, but at times of austerity they lack resilience Given this perspective a post credit boom strategy will differ markedly from those popular during the boom...a turning point 7

8 Beyond the credit boom there s a growth hangover The US authorities have been amongst the most progressive in addressing the legacy issues of the credit boom Even so cumulative GDP growth in the US has been decidedly subnormal even at a time of sizable QE Multi-national companies find it harder to sustain growth when economic conditions are constrained Smallness now has the advantage given that their prospects are less dependent on the general economic climate compared to others Source: RBC Capital Markets: Investment Strategy Playbook March

9 Small caps have strongly outperformed, but can it last? Performance of FTSE 100, FTSE 350 and FTSE Small Cap (ex ITs) 31 January 2011 to 31 January 2014 Markets have generally delivered attractive returns over the last couple of years Mid caps have outperformed but small caps have done rather better over the second half of 2013 Can small caps continue to outperform or is this just a temporary blip? There s a temptation to assume that recent outperformance of small caps is just another opportunity to take profits FTSE Small Cap Index (ex IT) FTSE 250 FTSE 100 Source: FE Analytics. Basis: Total Return, Bid to Bid. Rebased in Pounds Sterling. 9

10 Small caps outperformed for decades prior to the boom return Performance of Numis Smaller Companies Index* v FTSE All Share , Prior to the credit boom, the rate of UK economic growth was also limited (due to inflationary and currency crises) Yet at time of economic challenge smaller companies outperformed considerably Micro cap stocks tended to outperform by an even wider margin The key advantage of smallness is the potential to deliver growth in spite of a weak economic trends With world economic growth slowing beyond the credit boom, we believe there are now good reasons to hold a full weighting of small/micro caps again Source: Numis Smaller Companies Index Q3 Review 2012 *Formerly Hoare Govett Smaller Companies Index The smallest stocks delivered the best performance prior to the credit boom 10

11 and there s greater price inefficiency down the size bands Sell side and buy side mainly focus on most liquid names FTSE Small Cap Index Average market cap m Average number of brokers providing research coverage Top 15 stocks in Index Bottom 15 stock in Index 52 3 Source: Bloomberg 10 October 2012 Typically sub- 100m market caps only covered by house broker or company funded research Many professional fund managers are underweight fledgling and the smaller AIM stocks The illiquidity of microcaps could lead to a disproportionate rise if professional investors reweighted into the sector Conclusion Price inefficiency in the smallest companies offers greater potential for adding value through stock selection 11

12 Yield stocks also have a long history of outperformance 1,000,000 Investment returns Cumulative return from low and high yielders within the top 100 UK stocks 100,000 10,000 1, High yield 10.9% per year Market index 9.5% per year Low yield 7.7% per year Source: Elroy Dimson, Paul Marsh & Mike London Business School. February ,922 30,379 4,711 Low yielding stocks tend to underperform - investors tend to overpay for growth High yielding stocks tend to outperform - low expectations are easier to beat Where the yield remains constant, the share price appreciates with dividend growth The Diverse Income strategy has the key aim of investing in income stocks with sustainable growth Income stocks with sustained dividend growth should continue to be well-placed to deliver attractive returns as they have in the past 12

13 Gearing (Debt/Equity) Although some dividend stocks may lack durability Cashflow to equity holders has been negative since 2003 Net Debt Since 2008, the dividend has been paid 100% out of debt Levels of gearing have been rising since 2005 with the exception of 2011 owing to equity issuance Source: Miton, R&A Share price of the relevant stock (3rd January st January 2014) Level of debt Source: FE Analytics Source: Miton, R&A Past performance is not a guide to future performance, the above figures are provided for illustrative purposes only and are calculated using a model containing information from more than one source. 13

14 Multi cap income stocks are reasonably plentiful Indices (excluding investment companies) No of stocks Dividend payers Dividend payers over 2% Dividend payers over 4% FTSE FTSE 250 ex IC FTSE Small Cap ex IC FTSE Fledging ex IC FTSE AIM All-Share Total Source: Cenkos Securities PLC, Thomson Datastream as at 17 February 2014 (data based on companies paying a dividend of 0.1% per annum or greater) 24 FTSE100 stocks yield over 4% But there are 112 stocks with over 4% yield outside of the FTSE100 Greater scope to select stocks with growth prospects and strong balance sheets from the wider universe Many smaller companies are underdistributing dividend after the credit boom Anticipate there is greater scope for sustained dividend growth from many smaller companies Ultimately the number of stocks with good and growing dividends could increase in time 14

15 The Diverse Income portfolio built from the bottom up Top 20 Holdings 1. Charles Taylor plc plc 2.0% 2. Randall & Quilter plc 2.0% 3. SQS Software Quality Systems 1.8% 4. Fairpoint Group plc 1.7% 5. Quindell Portfolio plc 1.7% 6. Bioventix plc 1.5% 7. Conviviality Retail plc 1.5% 8. Secure Trust Bank plc 1.5% 9. Safestyle UK plc 1.5% 10. CML Microsystems plc 1.4% 11. St. Ives plc 1.4% 12. FTSE 100 Put Option 1.4% 13. UK Mail Group 1.4% 14. Cable & Wireless Comms plc 1.3% 15. Lancashire Holdings Ltd 1.2% 16. Dairy Crest plc 1.2% 17. Interserve plc 1.2% 18. Huntsworth plc 1.2% 19. Novae Group plc 1.2% 20. Bloomsbury Publishing plc 1.2% A simple aim to invest for good and growing dividends No formal benchmark - index weightings can be ignored avoiding unwanted holdings Largest holdings are driven by: Scope for turnover growth Strength of balance sheet Level of conviction Scope for sustainable dividend growth Under-researched stocks often have greater scope for added value If others adopt the Diverse Income strategy then the limited liquidity of the smaller stocks may enhance their returns Source: Miton as at 31/01/

16 Diverse portfolio is spread over the full market FTSE 100 Put Option 1.4% Irish / Other 0.5% ISDX exchange 1.5% Cash 2.7% FTSE Fledgling 6.4% FTSE AIM FTSE % 37.9% Around one third of the portfolio in mid and large cap stocks Around one third in AIM stocks Around one third in all other stocks including Small Cap and Fledgling FTSE Small Cap Index 18.9% 21.0% FTSE 250 Source: Miton as at 31/01/2014 Few pharmaceutical, oil and utilities and no major consumer stables and tobacco 1.4% of the fund in a FTSE 100 Put Option. Were markets to gap down, then the value of the Put could rise to account for 5% or even more of the portfolio 16

17 Performance % The strategy differs from most others total return performance DIT FTSE All Share IT UK Growth & Income Source: FE Analytics 28/04/ /01/2014. Basis: Total Return, Bid to bid in Pounds Sterling. An ability to invest in both large and small stocks extends the investment universe Index weightings largely ignored investment fundamentals drive stock selection Many above-average performers drive return avoids valuation risk of potential knock-out winners Heavy representation of under-researched stocks takes full advantage of active management Many investors are underweight these assets upside potential enhanced by limited capacity 17

18 and offers diversification benefits too Fund volatility A multi cap income strategy has an opportunity to deliver a different kind of diversification More stock diversification small positions with around 120 holdings Wider range of sectors few oil, utilities and pharmaceutical and no tobacco holdings Source: Cenkos/Morningstar 30/11/ /11/2013 Representation in nascent areas outside the larger indices internet gaming and mobile applications Minimises stock specific risk and emerging market exposure 18

19 Conclusions Market trends no longer favouring high-beta, transactional and EM strategies Renewed investor appetite for yield stocks, especially those with good and growing dividends diversification via multi cap stock picking These trends have been reflected in premium performance and sub-normal volatility over recent years Scope for the favourable trends to persist for an extended period 19

20 Awards 2012 Investment Company Of The Year Awards Winner Best New Issue, plc 2010 Money Observer Investment Trust Awards Winner Best UK Smaller Companies Trust, Gartmore Growth Opportunities plc 2010 What Investment Magazine Awards Winner Best UK Investment Trust, Gartmore Growth Opportunities plc 2010 Moneywise Investment Trust Awards Highly Commended in the UK Smaller Companies Sector, Gartmore Growth Opportunities plc 2010 Quoted Company Awards Investor of the Year, Gervais Williams 2009 Investment Trust of the Year Award Winner UK Smaller Companies Sector, Gartmore Growth Opportunities plc 2009 Moneywise Investment Trust Awards Highly Commended in the UK Smaller Companies Sector, Gartmore Growth Opportunities plc 2009 Moneywise Investment Trust Awards Winner Gartmore Investment Trust Group of the Year 20

21 Stock selection is driven by five factors Green or Red for the following five factors Decent prospects for rising turnover? Can margin be sustained or improved? Can the management team make decisions that we feel will build real intrinsic value? How much financial headroom is there in the balance sheet? Are there low expectations in the share price? With a wider investment universe there is much greater scope to select for those with growing sales and cashflow, and better balance sheets 21

22 Important information Past performance is not a guide to future returns. The value of investments and any income may fluctuate and investors may not get back the full amount invested. The views expressed are those of the fund manager at the time of writing and are subject to change without notice. They are not necessarily the views of Miton and do not constitute investment advice. Whilst Miton has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. Whilst Miton has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment. Before investing you should read the Trust s listing particulars which will exclusively form the basis of any investment. Potential investors resident outside of the UK must satisfy themselves that they are eligible to apply for and hold the relevant Investment. Net Asset Value (NAV) performance is not linked to share price performance, and shareholders may realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital. Miton is a trading name of Miton Asset Management Limited which is authorised and regulated by the Financial Conduct Authority and is registered in England No with its registered office at Duke Street, Reading, Berkshire, RG1 4RU. MFP14/94 22