Investment trusts on sale
The investment companies sector has many constituents trading at steep discounts to their net asset value (NAV).
Many of the widest discounts do indicate poor performance, or reflect a sector or style that is currently out of favour for a reason, although a number of consistent performers appear unduly overlooked by the market.
They include JPMorgan Smaller Companies (JMI), the capital growth-focused portfolio guided with aplomb by Georgina Brittain and Katen Patel trading at a 21.2% discount, the Mike Prentis-managed BlackRock Smaller Companies (BRSC) on a 19.5% discount and Henderson Smaller Companies (HSL) on a 14.7% discount.
Elsewhere, Templeton Emerging Markets (TEM) trades on a near-14% discount that may entice value seekers. It is now over a year since Carlos Hardenberg took over from Mark Mobius. The new lead manager has moved to diversify away from the mega-caps, reducing the concentration in the largest holdings and adding frontier market exposure. These changes are beginning to pay off and are not yet reflected in the share price.
Brunner to rebound
One situation that has caught our eye is the The Brunner Investment Trust (BUT), a concentrated global equity portfolio aiming to generate long-term growth in capital and income. The fund boasts 44 consecutive years of dividend growth.
A 16.9% discount to NAV looks a buying opportunity, since this trust has a reassuring focus on high quality growth franchises trading at attractive valuations. The discount partly reflects Brunner’s structural gearing; it has two debentures which make the cost of its debt relatively high, although the discount should narrow as the debt reaches maturity.
Brunner was launched in 1927 to manage the wealth of the Brunner family. Today it is 29.1%-owned by the family and managed solely by Lucy MacDonald, who has a significant amount of her pension invested in the trust.
Macdonald runs a book of high-quality global stocks designed to outperform the benchmark index of 50% FTSE All-Share and 50% FTSE All-World ex-UK Index over the long-term and has been reducing UK exposure. ‘Having more overseas means that we have diversified the sources of income for the trust,’ says the manager, pointing out that due to the plunge in sterling, the dividend is better covered.
‘We’re now a highly concentrated, conviction portfolio,’ says MacDonald, who says the number of holdings ‘has come down in waves’ from the 100s in 2005 to 76 holdings at the end of October 2016. MacDonald invests in a spread of high-quality growth names operating in different sectors and countries.
She favours large, well-financed businesses with global reach, pricing power and also corporate liquidity, by which she means ‘the bank balance to either pay dividends, buy back shares or buy other companies’.
‘We do have a bit of a focus on consumer stocks, healthcare and technology and some of these names have become more expensive, but I don’t think there’s too much valuation risk in healthcare.’
In the tech space, ‘we have decent exposure to Accenture (ACN:NYSE),’ says the manager referring to the consulting and outsourcing services provider. ‘Accenture benefits from large business transformation projects as the world goes online,’ she explains.
‘We also have exposure to Microsoft (MSFT:NDQ) where growth is accelerating because of the growth of its cloud business, Azure.’ A strong recent contributor, she welcomes Microsoft’s payment of a healthy dividend – ‘it is a signal of Microsoft being an adult company rather than being ex-growth’ – and says the tech titan continues to perform well driven by the cloud computing business.
Another good portfolio performer is TGS Nopec Geophysical (TGS:OL), a Norway-based geophysical consulting and contracting services provider. Positive third quarter revenue growth of 17% beat consensus forecasts. The company has a strong order book and should continue to do well as the oil services cycle recovers.
Brunner continues to hold Nielsen (NLSN:NYSE), whose media analytics allow customers to assess the value generated by their advertising spend.
Some profits have been taken on sports products powerhouse Adidas (ADSGn:F) following a nice recovery. ‘Its competitive position versus Nike has improved and it is seeing market share gains in the US and China,’ remarks MacDonald.
Other interesting holdings include Amphenol Corp (APH:NYSE), a US-listed electronic component manufacturer MacDonald believes can generate double-digit sales growth by increasing market share and completing acquisitions.
Another prized holding is Priceline (PCLN:NDQ), the travel website operator which is seeing off Expedia (EXPE:NDQ). ‘There’s no dividend but it does provide structural growth,’ says MacDonald, ‘as only 60% of travel around the world is booked online.’
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