Seneca Global Income & Growth outperforms strongly
Seneca Global Income & Growth Trust (SIGT) has announced its annual results for the year ended 30 April 2017. During the period, the trust provided an NAV total return of +19.6% and share price total return of +20.7%, both of which significantly outperformed its Libor+3% benchmark. The chairman’s statement also highlights that SIGT’s returns have been less volatile than the broader UK equity market. It says that its annualised volatility was 9.7% compared with 12.6% for the All-Share Index.
Certain changes proposed to the Investment Objective and Policy
It is now over five years since the Company significantly changed its Investment Objective and Policy, in January 2012, and SIGT says that, over that period its NAV total return has been +76.1%, significantly outperforming its benchmark return of +20.7%. At the forthcoming Annual General Meeting, SIGT’s Board is proposing certain changes to the Investment Objective and Policy. A Circular detailing these proposals accompanies the Annual Report.
The Board say that, having reviewed SIGT’s historic and prospective investment performance, it has concluded the current Investment Objective (and therefore Benchmark) materially understates what the Company seeks to achieve. The proposed Investment Objective is therefore “Over a typical investment cycle, the Company will seek to achieve a total return of at least CPI plus 6 per cent. per annum after costs with low volatility, and with the aim of growing aggregate annual dividends at least in line with inflation, through the application of a Multi-Asset Investment Policy”.
In essence, this means moving from a Benchmark of 3-month LIBOR plus 3% to one of CPI plus 6%. The Board says that the change recognises the importance of achieving real returns at a level that is more appropriate to the Investment Policy.
Dividends
Dividends for the year increased by 3.5% to 6.14 pence and, barring unforeseen circumstances, the board has said that it intends to at least maintain the quarterly dividend amount of 1.58 pence per share for the year to 30 April 2018 (aggregate dividends of 6.32 pence per share).SIGT says that, on this assumption, the shares will provide a yield of 3.7% on the share price of 171.5 pence that prevailed at the year end.
SIGT says that its aggregate annual dividends are well covered by earnings which in turn, it says, are generated naturally from a well spread and diverse range of sources. The board says that, because the fourth interim dividend for each financial year is declared in May and paid in June, shareholders do not get the opportunity to vote on this at the AGM (held in July). The board wish to address this and so, rather than deferring the dividend to allow this, the Board has decided to invite shareholders henceforth to vote annually on the Company’s dividend policy as detailed in the Directors’ Report and the Circular.
Discount Control Mechanism introduced
The period has been a busy one for SIGT, which saw its new DCM introduced in August 2016. In its key highlights for the year, SIGT says that its shares have traded in a very narrow range around NAV and that shares have been both issued and bought-in, raising over £1.1m net to date for the trust.
Performance
SIGT generated a net asset value (‘NAV’) total return for the year of +19.6% which it describes as being materially better than the benchmark return of +3.5%, being 3-month LIBOR plus 3%. According to the trust, its performance over the year compared reasonably well with most of the comparator indices, whose returns were: All-Share Index +20.1%, All-World ex-UK Index +32.0%, UK Private Investor Balanced Index +18.7%, and Gilts All-Stocks Index +8.2%.
The investment manager says that, whilst SIGT performed well, both in absolute terms and in relation to the average return of its peers, it should be noted that its mid cap holdings in the UK and lack of safe haven bonds did not serve it particularly well in the days following the Brexit referendum.
However, the manager highlights that equity markets soon bounced back, as it was quickly realised that the world had not fallen apart, and that weak sterling would in fact be positive for the UK economy and its companies, particularly those with overseas earnings. Furthermore, confidence and sentiment that had fallen in the months leading up to the vote, also bounced back, with pent up demand also providing an economic boost. SIGT was overweight equities relative to its strategic asset allocation throughout this entire period and so was well positioned to benefit.
SIGT’s managers say that All asset classes made a contribution to the overall return achieved, with overseas equities being the largest contributor, producing a return of +24.9%, as portfolio holdings benefitted from both strong underlying markets, but also the weaker pound.
UK equities also made a major contribution to the overall return, although the memphasis on mid-sized companies proved challenging in the immediate aftermath of the Brexit referendum, but by the end of the period the UK equity portfolio had returned +18.4%.
Specialist asset holdings, which consist of infrastructure, private equity, property and specialist financials, also made a positive contribution. The manager says that the high levels of income generated had a major positive impact on the returns achieved in this area. The outturn for specialist assets was +15.1% over the year.
All fixed income holdings gave positive returns over the period. The managers say that emphasis throughout the year has been concentrated on investment in high yield corporate bonds and emerging market sovereign debt, with both being areas where they find value. They continue to believe that developed market ‘safe haven’ bonds, such as gilts, offer very unattractive yields and returns are likely to be challenged going forward by rising inflation and higher interest rates. Fixed income holdings produced a return of +13.5%.
Moved to Flexible Investment sector
During the year, SIGT moved from the AIC’s Global Equity Income sector to the AIC’s Flexible Investment sector. SIGT says that the sector as a whole represents a better peer group with which to compare SIGT notwithstanding the diverse range of investment objectives and approaches among its constituents. The sector’s unweighted average NAV total return was +18.6% for the year.
Alan Borrows to retire at the end of 2017
SIGT announced in March 2017 that Alan Borrows intends to retire at the end of this calendar year. The Board says that it is very comfortable with the Manager’s succession planning and confident that its team structure, under Peter Elston’s leadership, bodes well for the Company’s future.
Asset Allocation
The manager says that the most significant change in asset allocation over the period was a decrease in the equities overweight from 5%pts to 1%pt. This reduction was made in four steps of 1%pt each in the latter part of the review period, and came mostly in overseas equities.The manager says that, as equity markets rose, valuations became less compelling, and thus the case for being quite so overweight was reduced. It also says that, given that sterling looked significantly undervalued, and that the case for maintaining the positions in SIGT’s UK mid-caps was still strong, it reduced overseas equities rather than domestic ones. Specifically, most of the reduction was made in Europe, where SIGT had been most overweight.
Elsewhere, the increase to fixed income was represented both by a new allocation to emerging market local currency debt, as well as to increases in existing high yield bond funds.
Outlook
The manager says that the global economy has been strengthening in recent months, which, in its view, means that we are now further into the current business cycle that begun in 2009. The manager says that the current cycle has already been longer than average, though to a great extent this is a function of the severity of the contraction that preceded it – the worse the ‘accident’, the longer the recovery. The manager thus feels that it is now time to start thinking about the next global economic contraction, which it anticipates will occur in or around 2020. It says that this prediction is based on an extrapolation of current employment and inflation trends, as well as taking account of other factors such as structural slack in labour markets. The manager says that, if its timing is correct, the chances of which it says are slim, the current cycle will have lasted 11 years, much longer than a typical cycle.
Reflecting this, the manager says that we are at the point in the cycle when equity returns should start to fall, albeit remain positive, and so it anticipates that the reductions in equity weights that it has implemented in recent months to continue for the next two years. This would mean that by the time economic growth is showing signs of more persistent decline, SIGT should be materially underweight.
The manager says that it is hard to say how severe the next downturn will be. There are some who argue that it will be mild, because this time monetary authorities have the tools to prevent economic weakness causing stress in financial markets. Others argue that it will be more severe, because debt levels are now higher and central banks will have less scope to lower interest rates or expand already bloated balance sheets. The manager says that it does not know which is more likely, but is fairly confident that the next economic downturn, however severe, will see declines in equity markets. It says it will strive to protect investors from such through what it believes is a sensible asset allocation framework that enables SIGT to reduce market risk, perhaps significantly, when deemed appropriate.
SIGT : Seneca Global Income & Growth outperforms strongly and proposes new benchmark