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Three trusts that could benefit from a ‘Brexit bounce’

09 October 2018

Winterflood Investment Trusts highlight three UK equity trusts that could benefit if a deal between the EU and UK government can be struck.

By Rob Langston,

News editor, FE Trustnet

Mark Barnett’s Perpetual Income and Growth, Aurora Investment Trust and Temple Bar are three closed-end strategies that could benefit from a ‘Brexit bounce’, according to Winterflood Investment Trusts.

As the Article 50 process nears its two-year deadline, expectations of a deal and the end to much uncertainty over the UK’s future relationship with the EU have grown.

Notwithstanding the lack of certainty, the UK equity market has performed strongly since the EU referendum, with the FTSE All Share index up by 24.51 per cent.

Performance of index since EU referendum

 

Source: FE Analytics

However, analysts at Winterflood Investment Trusts claim this can be partially explained by the weakness of sterling since the vote, benefiting companies with overseas earnings.

There has also been a dispersion of returns from different sectors during the post-referendum period.

“The UK market has become increasingly bifurcated with sectors such as oil & gas and basic materials having performed strongly, while sectors such as telecoms and consumer goods have struggled,” the analysts explained.

The lack of certainty over the Brexit negotiations has also coincided with many international and domestic investors avoiding UK stocks, while outflows from open-ended funds have also been witnessed.

“While the UK market has always historically traded at a P/E [price-to-earnings] discount to the US markets, that gap has widened since the beginning of 2016, arguably reflecting the lack of investor confidence in the UK,” the Winterflood analysts noted.

There have also been some contrasting fortunes in the UK equity investment trust sectors – according to Winterflood – with 21 strategies (or 68 per cent) in the UK All Companies and UK Equity Income sectors underperforming the FTSE All Share index in net asset value (NAV) terms since June 2016, including some discount moves over the period.

“The average discount on a market cap weighted basis for the UK All Companies and UK Equity Income sub-sectors was 7.8 per cent and 4.1 per cent respectively as at 22 June 2016, the day before the referendum, while it is now 8.4 per cent and 3.6 per cent,” they noted.

As such, Winterflood have highlighted several trusts below that could benefit from a ‘Brexit bounce’ should a deal be struck.


 

Perpetual Income and Growth

The first trust Winterflood is the £815m Perpetual Income and Growth Investment Trust, overseen by FE Alpha Manager Mark Barnett and Martin Walker.

The equity income trust targets capital growth and real growth in dividends over the medium-to-long term.

“The portfolio manager believes that the negative sentiment towards sterling and domestic companies since the EU referendum will continue to improve and maintains the portfolio’s UK domestic exposure,” according to the trust’s most recent factsheet.

“The manager remains convinced that, in a changing global environment, the interests of investors are best served by employing a well-tested investment process which is based on fundamental company analysis and a prudent approach to valuation

The fund’s largest exposure is to financial stocks, which represent 38 per cent of the portfolio, with healthcare and industrials representing around 14 per cent each.

Its largest individual holding is British American Tobacco – representing 5.4 per cent of the trust – followed by BP at 4.9 per cent.

The closed-ended fund is currently trading at a discount near to its 10-year wide levels (12.2 per cent versus 13.8 per cent).

Performance of trust vs sector & benchmark since referendum

 

Source: FE Analytics

Since the referendum, Perpetual Income and Growth has delivered a 2.36 per cent loss, compared with a 21.3 per cent gain for the average IT UK Equity Income peer, as the chart above shows.

It has a yield of 4.12 per cent, is 15 per cent geared and has ongoing charges of 0.7 per cent, according to data from the Association of Investment Companies (AIC).

 

Temple Bar Investment Trust

Another trust trading at a discount close to its 10-year high is the £814.5m Temple Bar, which is managed by another industry veteran – Alastair Mundy.

Unlike its peer above, the trust has performed strongly since the EU referendum – albeit lagging the FTSE All Share benchmark – delivering a 22.11 per cent total return.

The closed-ended fund aims to provide growth income and capital over the long term greater than the FTSE All Share index.

Temple Bar is currently trading at a 7.32 per cent discount not far off its 10-year high of 10.7 per cent.

The value style of investing preferred by Mundy has been out of favour for much of the post-financial crisis era underperforming the growth style.

However, the Winterflood analysts noted that “there seems to be no strong correlation between the value/growth bias of a fund and its performance since Brexit”.

Like Perpetual Income and Growth, its largest exposure is to financials – representing 23.9 per cent of the portfolio – and industrials (23.1 per cent).


 

Its top-10 holdings make up 50 per cent of the portfolio, with Capita representing 6.9 per cent of the portfolio. Other top holdings include GlaxoSmithKline (6.3 per cent), Royal Dutch Shell (6.2 per cent), HSBC (5.7 per cent), and BP (5.3 per cent).

Temple Bar is not geared, has a yield of 3.56 per cent and ongoing charges of 0.49 per cent.

 

Aurora Investment Trust

Winterflood’s final closed-ended strategy that could be due a ‘Brexit bounce’ is the five FE Crown-rated Aurora Investment Trust, overseen by Gary Channon.

A constituent of the IT UK All Companies sector, the trust also follows a value-based philosophy inspired by veteran investors such as Warren Buffett, Charlie Munger, Benjamin Graham and Phillip Fisher.

It aims to achieve long-term returns by investing in “high quality businesses run by honest and competent management purchased at prices that, even with low expectations, will deliver excellent returns”.

Manager Channon noted recently that UK equities are in the “cheaper zone” of its historical valuation suggesting that performance over the longer-term will be better than usual and – given its relative valuation to other developed markets – should also outperform.

“The reason the UK has got to this level of relative undervaluation is most likely the upcoming Brexit,” he noted. “It is the question we are most asked and ever since the referendum it has been the reason why many potential investors in Phoenix [Phoenix UK fund, which Channon also manages], especially from overseas who have decided not to invest.

“And yet the history of ‘known unknowns’ in the stock market would suggest that rather than being a reason to avoid investing, it is more likely to be a good reason to invest.”

He added: “There will at some point be some form of a Brexit deal or arrangement and we anticipate that the most likely effect will be a rise in UK equities.

“It’s not something we relish, yes, the fund will go up, but we are hunters of value, which at the level we seek is very hard at the best of times and gets harder in rising markets.”

Performance of trust vs sector & benchmark since referendum

 

Source: FE Analytics

The £116.4m trust has delivered a 34.65 per cent total return since the referendum, outperforming both the FTSE All Share benchmark and the average peer, as the chart above shows.

Aurora is currently trading at a premium to NAV of 3.76 per cent, is not geared and has ongoing charges of 0.54 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.