Keystone’s interim results for the six months ended 31 March 2015 show the fund’s net asset value delivering a total return of 7.8% – ahead of the 5.3% return generated by the FTSE All-Share Index. The return to shareholders was 7.2%. The dividend was maintained at 18p per share.
The report says holdings in Reynolds American, Imperial Tobacco, Provident Financial and BT Group were significant contributors to the portfolio’s performance.
Given two of the top performers were tobacco companies, the manager talks about the sector in the report. Reynolds American and Imperial Tobacco delivered total share price returns of 30% and 15% respectively over the period. Last summer Reynolds American announced the agreed acquisition of its North American competitor, Lorillard,
which, he believes, should further strengthen its position in the US market. Imperial Tobacco also stands to benefit from this deal, which is currently awaiting approval from the US Federal Trade Commission as it will make a strategic purchase of some of Lorillard’s North American brands. Both companies continue to offer above average dividend yields, in spite of the strong share price performance over the last six months.
The tobacco industry’s high barriers to entry for new competitors and the premium brands continue to demonstrate revenue growth despite an increasingly difficult operating environment. The advent of plain packaging in Australia has encouraged a greater focus on brand differentiation through quality of tobacco, innovation around packaging and filter technology. The prospect of plain packaging spreading across the globe is not considered a major threat given the significant existing restrictions on packaging in most jurisdictions.
The portfolio has significant exposure to the financials sector, with holdings in insurance companies, specialist lenders and property companies, and these all contributed positively to performance during the period. The portfolio has no exposure to banks.
Provident Financial, the largest UK non-standard lender, continued its positive run after an upbeat trading update in November 2014 followed, in February 2015, by solid final results which were accompanied by a 15% increase in its
dividend. The digital investment in its home credit business is nearing completion and its successful drive to improve credit quality and collections continues to have a positive impact on margins. He says last year’s acquisition of the Moneybarn car finance business is expected to open up opportunities for further synergies and for cross-selling the Vanquis credit card products, and vice versa. Also, an online instalment lending business, Satsuma, has been launched and demand has been encouraging.
There was positive news from BT Group regarding its agreed acquisition of mobile telephony company EE. The acquisition of EE for £12.5bn provides BT with access to 31 million UK mobile telephone customers and 834,000
broadband customers as well as the largest 4G customer base of any operator in Europe. The combined business is expected to achieve attractive cost and capital expenditure synergies as well as provide greater scope for future
product innovation. Furthermore, it will enable BT to offer a full range of communications services to the combined customer base including broadband, fixed line and pay-TV services. Significant cross-selling opportunities are
expected and the acquisition is seen as a major milestone for the company.
Among the detractors to portfolio performance were Drax Group, Centrica and Game Digital. Whilst the portfolio’s exposure to the oil and gas sector is relatively low, the impact of a falling oil price was felt through the holdings
in UK utilities, Drax and Centrica, as earnings forecasts were downgraded and sentiment turned negative. Additionally, Drax was also impacted by the UK government’s decision to change its method of subsidy for future biomass conversions and by the possibility of EU intervention. Centrica announced a reduced dividend in its final results and its recently appointed chief executive announced that he would conduct a strategic business review with a view to improving efficiencies and streamlining the business. The share price reacted negatively in the short term, but the manager remains positive on the longer term outlook for the company.
Game Digital, after a strong share price performance post flotation in June 2014, gave back some gains following a profit warning in January, when it reported that short-term profitability had been negatively impacted by Black
Friday trading, and after a more muted start to 2015 than management had expected. The portfolio manager viewed the fall in share price as an additional opportunity to buy, remaining optimistic about the long term potential of the
company and the attractive valuation point to which the shares had fallen.
KIT : Keystone outperforms, says little threat to tobacco holdings from plain packs