Gartmore Irish Growth Fund

Transcription

1 Investment Trust Review 17 August 21 Gartmore Irish Growth Fund 12 Months Ending Gartmore Irish Growth Fund (GIR) was established in 1995 to provide investment returns based upon the business-friendly tax regime, proactive government and favourable demographics within Ireland. Following the Irish government s willingness to address the current economic issues early and the sizable fallback in the price of Irish equities, the manager believes that many stocks offer the prospect of achieving attractive performance from here. During the past 12 months, GIR has outperformed the sterling-adjusted ISEQ index by 12.9% and 21.% in terms of price and NAV total return, respectively. And in its recent results, GIR has announced a year-on-year increase in the dividend of 19.7%, leading to nine consecutive years of dividend growth. Consolidated revenue reserves are significant in that they alone could sustain the 21 payment for over 13 years. Investment strategy Quoted Irish companies GIR invests in quoted companies that are either incorporated in, or derive the majority of their earnings from, the Republic of Ireland or Northern Ireland, or are listed on the ISEQ Index. The trust maintains a portfolio of c 4 investments and is managed using a bottom-up strategy. The manager is authorised to gear up to 25% of net assets, with a view to enhancing returns over the longer term, which is currently facilitated by the use of CFDs. Sector outlook: Potential for strong long-term growth The credit crunch saw investors shy away from peripheral European markets and, despite improvements in the economic outlook, the manager considers the Irish equity market remains oversold. However, in the short term concerns regarding the Greek rescue package, and the potentially contagious nature of a Greek default, continue to hang over emerging European markets. Valuation Total Share Return* (%) Total NAV Return* (%) Total Return ISEQ* (%) Total Return FTSE All- Share* (%) Total Return HGSC Ex- IC* (%) 1/8/ /8/8 (19.) (18.6) (35.2) (7.4) (2.8) 1/8/9 (13.4) (15.2) (28.9) (9.5) (9.5) 1/8/ Note: *12 month rolling discrete performance. Investment summary: Strong performance and growth prospects The discount has fallen from its 1-year high of 25.3% in April 29. At 12.8%, it is above its long-term averages of 12.3% and 9.2% over three and five years, respectively. As such, we believe GIR may be attractive to investors looking for a diversified exposure to the Irish economy and Irish-quoted companies. Price 62.5p Market Cap 41.6m AUM 48.4m NAV p* Discount to NAV 12.8%* NAV p** Discount to NAV 13.5%** Yield.2% * Adjusted for debt at market value and excluding income, as at 16 August 21. ** Adjusted for debt at market value and including income, as at 16 August 21. Share price/discount graph Sep/9 Nov/9 Jan/1 Mar/1 May/1 Jul/1 Aug/1 GIR LN Equity Discount 3-year cumulative performance graph Aug/7 Nov/7 Feb/8 May/8 Aug/8 Nov/8 Feb/9 May/9 Nov/9 May/1 Aug/1 IS EQ Index GIR LN Equity Share details Code GIR FULL AIC Sector Country Specialist: Europe Shares in issue 6.7m Price 52 week High Low Price 745.p 563.p NAV p p Analyst Matthew Read mread@edisoninvestmentresearch.co.uk 9 6 Gartmore Irish Growth Fund is a research client of Edison Investment Research Limited

2 2 Edison Investment Research Investment Trust Review Gartmore Irish Growth Fund 17 August 21 Exhibit 1: Trust at a glance Investment objective and fund background Gartmore Irish Growth Fund seeks to provide shareholders with long-term capital growth through investment in quoted companies that are either incorporated in the Republic of Ireland or Northern Ireland or, if elsewhere, derive the majority of their turnover or profits from the Republic of Ireland or Northern Ireland, or are listed on the ISEQ Index. Developments last quarter 6 August 21: Interim mgmt statement released. 3 August 21: Portfolio update released. 2 July 21: Annual report released. 1 July 21: Portfolio update released. Forthcoming Capital structure Fund details AGM September 21 Total expense ratio 1.6% Group Gartmore Investment Limited Results June 211 Gearing See pg 7 Manager Gervais Williams Year end 31 March Annual mgmt fee See pg 7 Address Gartmore House, 8 Fenchurch Place, Dividend paid September Performance fee None London EC3M 4PB Launch date 1995 Trust life See pg 7 Phone Wind-up date See pg 7 Loan facilities See pg 7 Dividend policy and history One dividend paid annually in September. Share buyback policy and history Renewed annually, the trust has authority to purchase up to 14.99%, and allot up to 1% of issued share capital. DPS (p) Sep/9 Nov/9 Jan/1 Mar/1 May/1 Jul/ Ordinary Dividends Special Dividends Number of shares ('s) Total cost ( m) Shareholder base (as at 11 May 21) Geographic distribution of portfolio (as at 3 July 21) Davy Clients (15.4%) East Riding Pension (11.5%) JPMorgan Asset Mgmt (8.8%) 167 Cap Ptnrs Clients (6.8%) L&G Inv Mgmt Clients (4.1%) Ireland (92.3%) Cash and other net assets (7.7%) Goodbody Clients (3.8%) Other (49.6%) Portfolio composition (as at 3 July 21) Portfolio composition (as at 31 January 21) Greencore Group (8.2%) Irish Continental Group (7.3%) Andor Technology (7.2%) Origin Enterprises (5.7%) Total Produce (5.5%) Aer Lingus (5.5%) Paddy Power (4.1%) Norkom Group (4.%) United Drug (3.9%) Worldspreads Group (3.9%) Other Quoted (37.1%) Cash and other net assets (7.7%) Smurfit Kappa Group (9.8%) Total Produce (7.6%) Irish Continental Group (7.%) Norkom Group (6.3%) Greencore Group (6.3%) Andor Technology (6.3%) Origin Enterprises (5.%) Glanbia (4.8%) Fyffes (4.8%) Ryanair Holdings (3.7%) Other Quoted (31.1%) Cash and other net assets (7.3%) Source: Gartmore Irish Growth Fund/Edison Investment Research

3 3 Edison Investment Research Investment Trust Review Gartmore Irish Growth Fund 17 August 21 Exhibit 2: Trust holdings at a glance Greencore Group Code: GNC LN Market Cap: 215.7m GNC LN Equity IS EQ Index Div Yield (trailing 12 m ths) 5.63% Food Producers/Food Products UK FULL Headquartered in Dublin and listed on both the Irish and London Stock Exchanges, Greencore Group (GNC) is a manufacturer of convenience foods and ingredients that employs c 8, people and has manufacturing sites in the UK, Ireland, Holland and the US. The GNC holding reflects the manager s current liking for manufacturing businesses, and their view that an increased preference for eating at home will benefit GNC. Irish Continental Group Code: ICGC LN Market Cap: 298.8m ICGC LN Equity IS EQ Index Div Yield (trailing 12 m ths) 6.62% Travel & Leisure/Travel & Tourism UK FULL Irish Continental Group s (ICG) principal activities are the transportation of passengers, cars, freight and container freight on routes between Ireland, the UK and Continental Europe. ICG also operates container terminals in Belfast and Dublin. The manager considers ICG has a strong balance sheet, provides good income, and that increasing ferry traffic and a lack of plans to build new terminals will allow ICG to continue to grow income. Andor Technology Code: AND LN Market Cap: 96.5m AND LN Equity IS EQ Index Div Yield (trailing 12 m ths) N/A Electronic & Electrical Eqmt/Elec Eq UK AIM Based in Belfast and listed on the London Stock Exchange, Andor Technology s core business is the development and manufacture of high performance digital cameras. Andor was set up out of Queens s University, Belfast, in 1989 and now employs over 2 people across 15 offices worldwide. The holding reflects the manager s view that IT and technology industries have the potential to offer good long-term growth prospects. Origin Enterprises Code: OGN LN Market Cap: 264.m OGN LN Equity IS EQ Index Div Yield (trailing 12 m ths) 3.8% Food Producers/Farming & Fishing UK AIM Headquartered in Dublin, Ireland, and listed on both the Irish and London Stock Exchanges, Origin Enterprises (OGN), is an agrinutritions and food company. The agri-nutrition division has operations in the UK, Ireland, Poland and Norway through which it provides feed ingredients, integrated agronomy services, crop nutrition and marine proteins, and oils. The food division has operations in both Ireland and Italy. Total Produce Code: TOT LN Market Cap: 15.3m TOT LN Equity IS EQ Index Source: Thomson Datastream/Edison Investment Research Div Yield (trailing 12 m ths) 5.3% Food & Drg Ret/Food Ret & Whslrs UK AIM Headquartered in Dundalk, Ireland, and listed on both the Irish and London Stock Exchanges, Total Produce (TOT), is a supplier of fresh produce with a strong European presence. TOT has interests in growing, sourcing, importing, packaging, distributing and marketing over 2 lines of fresh fruits, vegetables and flowers. TOT operates out of 19 facilities spread across 19 countries.

4 4 Edison Investment Research Investment Trust Review Gartmore Irish Growth Fund 17 August 21 Fund profile The fund was launched in June 1995, as the Natwest Irish Smaller Companies Investment Trust. It changed its name to Gartmore Irish Smaller Companies Investment Trust in January 1997, before adopting the current name in March 2. Gartmore Irish Growth Fund is unique in that it is the only UK-registered investment trust with a primary focus on Irish-quoted companies. Gervais Williams, head of Gartmore s UK Smaller Companies team, has managed GIR since launch and is now supported by the experience and resources of Gartmore s UK Smaller Companies team. GIR s board considers that there is no unique benchmark that is appropriate as, by the nature of the company s investment policy, there is no benchmark closely connected with the make up of the portfolio. Instead the trust s performance is evaluated with reference to four different benchmarks: the ISEQ Index; the FTSE All-Share Index; the Hoare Govett Smaller Companies Index (ex Investment Companies); and the FTSE Europe ex UK Index. GIR has outperformed all of these indices, in terms of both price and NAV total return, since launch. A successful tender offer was completed in October 29 with 2.8m shares repurchased and cancelled at a cost of 2.4m. The fund manager: Gervais Williams Manager s view The manager considers that before 28, Ireland had provided investors with many years of attractive returns, but the credit crunch and subsequent loss of interest in peripheral markets saw the ISEQ fall sharply. The manager considers that, while Ireland is not a big economy, it is distinctly different from its peers and still offers very fertile ground for growing and developing international businesses. The manager considers that the prospects for Ireland over the medium to long term are strong and the investment case remains sound. Ireland offers very attractive demographics and, unlike the majority of western economies, has a falling dependency ratio. Ireland has a very competitive corporate tax rate and, despite pressure on budget deficits, there is a political consensus that low corporation tax must be maintained. This is bolstered by a growing awareness that incorporating in Ireland can have a significant impact on a corporation s tax bill. Entering the downturn early, Irish companies initially hoarded labour but once the extent of the downturn became apparent, aggressive cuts in staff levels and other costs have been made to maintain competitiveness. 15% cost reductions are not uncommon. Ireland s exports have been resilient. Key Irish industries such as IT, pharmaceuticals and financial services have either been largely unaffected by, or proven resilient to, destocking cycles that have seen exports fall sharply elsewhere. Asset allocation Investment process The investment manager applies a universal active investment approach when selecting stocks, to under and overweight, using the following five questions as screens: 1) Is the company s submarket in a period of expansion? If so, there are prospects for natural growth. 2) Does the company have strong market franchises/market positions? This aids growth and allows cost increases to be passed through to customers.

5 5 Edison Investment Research Investment Trust Review Gartmore Irish Growth Fund 17 August 21 3) What is the calibre of management? How well does it understand its business, the economic environment it operates in and the cycle? 4) Is there sufficient allowance for risk, ie is there adequate cash, or other headroom, on the balance sheet? 5) Is there some ambiguity about the company s prospects? This creates the opportunity for superior analysis to establish appropriate valuations that differ from those of the market. Overview GIR has a main portfolio and a trading subsidiary, Gartmore Irish Smaller Companies Investment Limited, which the manager uses to target absolute returns under a broad range of market conditions. The overall portfolio is a diversified pool of 31 equity investment and seven CFD positions. The top 1 equity holdings, inclusive of CFD exposures, account for 55.3% of adjusted gross assets. Cash accounts for 7.7% of assets, while the remaining 21 equity investments, inclusive of CFD exposures, account for 37.1%. As displayed in Exhibit 3, GIR s asset allocations vary significantly from those of the FTSE All-Share index, partly reflecting the fact that GIR does not have a unique benchmark and that the FTSE All-Share is one of four benchmarks used for performance evaluation. However, the scale of the deviations also reflects the actively-managed nature of the trust. Underweights Relative to the FTSE All-Share, GIR is underweight resources, financials, cyclical consumer goods and information technology. These underweights are in cyclical sectors, but GIR is also underweight utilities and non-cyclical services, which are defensive sectors. Overweights Relative to the FTSE All-Share, GIR is overweight cyclical services, general industrials and basic industries with allocations circa 2.5x, 2.7x and 4.3x the allocations of the FTSE All-Share. All of these overweights are in cyclical sectors and, as such, would benefit from an uplift in Irish economic activity. However, GIR is also overweight non-cyclical consumer goods, with an allocation 1.9x the FTSE All-Share allocation, which is a defensive sector. Exhibit 3: Sector allocations, as at 3 July 21 Note: CFDs are split into both a notional asset (the value of the share) and a notional liability (the cost of the share). Assets are allocated to the relevant sector. Liabilities are included in cash and other net current assets. Trust weight (%) FTSE All-Share weight (%) Trust active weight (%) Trust weight/ benchmark weight Non-Cyclical Consumer Goods Cyclical Services General Industrials Basic Industries Information Technology. 1.2 (1.2). Non-Cyclical Services (1.3).81 Cyclical Consumer Goods. 3.5 (3.5). Utilities. 3.8 (3.8). Financials (11.3).53 Resources (25.5).7 Cash and other net current assets N/A Total... Source: Gartmore Irish Growth Fund/Edison Investment Research Current portfolio positioning As Exhibit 3 illustrates, when compared to the FTSE All-Share, GIR s portfolio is overweight defensive sectors and predominantly underweight cyclical sectors, so has a more defensive allocation than the FTSE All-Share.

6 6 Edison Investment Research Investment Trust Review Gartmore Irish Growth Fund 17 August 21 Sep/9 Nov/9 Top holdings The sterling-adjusted ISEQ index has risen 2.%, on a total return basis, in the last 12 months. As Exhibit 4 shows, nine of GIR s top 1 holdings have outperformed the ISEQ index during this period. Considering GIR s other benchmarks, six, seven and six of GIR s top 1 holdings on a total return basis have outperformed the FTSE All-Share, the FTSE Europe Ex-UK and Hoare Govett Smaller Companies Ex-Investment Companies respectively. Exhibit 4: 1 largest equity holdings as at 3 July 21 Note: ISEQ Index one-year performance to 1 August 21 (sterling adjusted) +2.%. Holding % One year total return price performance (%) Performance relative to ISEQ Index (%) Greencore Group Irish Continental Group Andor Technology Origin Enterprises (1.6) Total Produce Aer Lingus Paddy Power Norkom Group United Drug Worldspreads Group Total 55.3 Source: Gartmore Irish Growth Fund/Edison Investment Research Recent performance Exhibit 5: Investment trust performance Price, NAV & ISEQ total return performance 1 year rebased Price, NAV & ISEQ total return performance (%) Jan/1 Mar/1 May/1 Jul/1 ISEQ Index GIR LN Equity GIR NAV Source: Thomson Datastream/Edison Investment Research Aug/1 1 m 3 m 6 m 1 y 3 y 5 y 1y Price Performance NAV Performance ISEQ Performance As Exhibit 5 illustrates, GIR has provided shareholders with a consistently strong performance. Relative to the sterling-adjusted ISEQ index (ISEQ), GIR has outperformed in terms of price total return, over all of time horizons provided with the exception of the six-month time horizon. In terms of NAV total return performance, GIR has outperformed the ISEQ over all of the time horizons provided. Exhibit 6 illustrates GIR s share price and NAV total return performance relative to all four of its benchmarks. Exhibit 6: Share price and NAV total return performance (sterling adjusted), relative to benchmarks 1 month 3 months 6 months 1 year 3 years 5 years 1 years Price relative to ISEQ (.3) NAV relative to ISEQ Price relative to FTSE All-Share (1.7) (5.9) (1.8) (3.6) (18.7) (17.1) NAV relative to FTSE All-Share (.3) (4.5) (4.2) +4.5 (14.4) (.7) Price relative to FTSE World Ex-UK +.3 (5.3) (7.) +3.4 (17.4) (25.7) NAV relative to FTSE World Ex-UK +1.6 (3.9) (.4) (13.1) (9.4) Price rel. to HG Smaller Co s Ex-IC (1.) (6.3) (14.) (5.7) (15.6) (3.1) NAV rel. to HG Smaller Co s Ex-IC +.3 (4.8) (7.4) +2.5 (11.3) (13.8) Source: Thomson Datastream/Edison Investment Research

7 7 Edison Investment Research Investment Trust Review Gartmore Irish Growth Fund 17 August 21 Discount Exhibit 7: Discount over three years Aug/7 Oct/7 Dec/7 Feb/8 Apr/8 Jun/8 Aug/8 Oct/8 Dec/8 Feb/9 Apr/9 Jun/9 Aug/1 Source: Thomson Datastream/Edison Investment Research GIR has the authority, renewed annually, to allot up to 1% or make market purchases of up to 14.99% of issued share capital, which provides the manager with a mechanism to influence the discount. Consequently, as Exhibit 1 illustrates, the trust is active in the market for its own shares with 4.1m shares repurchased during the last 12 months at a cost of 28.8m. It should be noted that these figures are exceptional as they include repurchases undertaken as part of the tender offer, which was completed in October 29. As Exhibit 7 illustrates, the last three years have seen the discount gradually widen and its volatility increase. This widening and volatility increase, particularly apparent since September 28, arguably reflected the prevailing financial climate with the discount reaching its 1-year high of 25.3% in April 29. Between April and November 29 the discount narrowed and the volatility decreased but between November 29 and January 21 the discount widened, reflecting ongoing concerns regarding the Irish banking sector. Recent volatility arguably reflects concerns surrounding the impact of an emerging European market default. At 12.8% the discount is above its longer-term averages of 12.3% over three years and 9.2% over five years. Capital structure GIR is a conventional investment trust having only one class of equity share in issue 25p ords. The manager can gear up to 25% of the group s net assets and, for this purpose, previously had a bank borrowing facility with Ulster Bank. This facility could not be renewed on commercially acceptable terms, so the board has authorised the use of CFDs as an alternative means of gearing. The use of CFDs is subject to the limits used when the loan facility was in use. The AIC currently calculates that GIR is ungeared. However, this does not take into account the effects of synthetic gearing that occurs with instruments such as CFDs. The management fee, calculated monthly in arrears, is at a rate of 1.% per year of total assets less current liabilities. There is no performance fee and the management contract can be terminated at 12 months notice by either side. The total expense ratio (TER) was 1.6% for the year ended 31 March 21 (1.5% for the year ended 31 March 29). As illustrated in Exhibit 8, GIR s TER as estimated by the AIC ranks first out of three when compared to its peers. Although GIR does not have a fixed life, a resolution to allow the company to continue in existence as an investment trust is put, by way of an ordinary resolution, to shareholders every three years. Shareholders approved the continuation vote in 28. The next vote will be at the 211 AGM. Dividend policy and record GIR s investment objective is to provide shareholders with capital growth. There is no specific requirement to provide income and, accordingly, there is no explicit dividend policy. However,

8 8 Edison Investment Research Investment Trust Review Gartmore Irish Growth Fund 17 August 21 assuming adequate profitability and revenue reserves, one dividend is paid annually in September of each year. While there is no explicit commitment to grow the dividend, since its launch in 1996 GIR has maintained or increased its dividend every year except 1997 and It should be noted that in the latter case GIR cut its dividend to zero, where it remained for four years until it recommenced paying a dividend in 22. With its recent results announcement, and a proposed dividend of 1.52p, GIR will provide year-on-year dividend growth of 19.7% as well as nine consecutive years of dividend growth, as is illustrated in Exhibit 1. After payment of the 21 ordinary dividend, we estimate that GIR will have, at the group level, revenue reserves equal to 13.5x the ordinary dividend and, at the company level, 6.7x the ordinary dividend. As such, we expect that GIR will not only retain the capacity to smooth dividends going forward but remains in a strong position to provide further dividend growth. In terms of expense allocation, transaction costs relating to the purchase and sale of non-current assets, ie those in the main portfolio, are charged to the capital account. Management fees, administrative expenses, interest payable, other fees and expenses as well as transaction costs relating to the purchase and sale of short-term investments, ie those held in the trading subsidiary, are charged fully to the revenue account. This allocation reflects GIR s investment mandate, which aims to provide capital growth and offers capital some protection. Peer group comparison As Exhibit 8 illustrates, the AIC sector Country Specialist: Europe is a relatively small peer group. There are only three constituents and while they all invest in European or Eurasian countries, outside the UK their investment objectives and geographical focus are markedly different. Of the three, GIR is the only trust that can be considered to be investing in a modern, western European economy with transparent accounting standards. Within this peer group GIR ranks second over the one-, threeand five-year periods when considering share price total return. Exhibit 8: Country specialists: Europe sector, as at 1 August 21 Company Share price total return on Total 1 year 3 year 5 year Expense Ratio (Disc)/ Prem Net Gearing ( no gearing) 5 Year Dividend Growth (%) Sector average N/A 1.87 (1.4) 98 N/A. Gartmore Irish Growth (16.7) JPMorgan Russian Securities (8.5) N/A N/A Ukraine Opportunity N/A 3.63 (64.6) 94 N/A N/A Source: The Association of Investment Companies The board Div yield All directors are non-executive and independent of the investment manager. The majority are Irish businessmen and contribute their knowledge of the region. They are Harry Sheridan (chairman), Robin Baillie, Gavin Caldwell, William Cotter, Richard Milliken and Patrick Cunneen (directors). EDISON INVESTMENT RESEARCH LIMITED Edison is Europe s leading investment research company. It has won industry recognition, with awards in both the UK and internationally. The team of more than 5 includes over 3 analysts supported by a department of supervisory analysts, editors and assistants. Edison writes on more than 25 companies across every sector and works directly with corporates, investment banks, brokers and fund managers. Edison s research is read by major institutional investors in the UK and abroad, as well as by the private client broker and international investor communities. Edison was founded in 23 and is authorised and regulated by the Financial Services Authority ( DISCLAIMER Copyright 21 Edison Investment Research Limited. All rights reserved. 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