Keystone Investment Trust has published its accounts for the year ended 30 September 2015. On a total return basis (i.e. including income), the FTSE All-Share Index returned -2.3% over the year. Keystone however managed a return on net assets of 6.4% and a return to shareholders of 7.3%. The base dividend was increased slightly from 50.5p to 51p but there is also a special dividend of 12.3p per share (up from 8p in 2014).
The Board has made a small tweak to the company’s investment policy – it will allow investment in unquoted stocks up to 5% of assets. The statement also reveals that the Board has been keeping the fund’s gearing low all year – refusing to allow the manager to make any purchases that would push net equity exposure beyond 105% of net assets.
Mark Barnett’s manager’s report says the key contributors to performance over the period at the stock level, were tobacco companies, and in particular the holdings in Reynolds American and Imperial Tobacco. During the course of the Company’s financial year, Reynolds American saw a share price total return of over 60% as the company’s proposed acquisition of US tobacco company Lorillard met with final approval from the Federal Trade Commission. This saw Reynolds acquire the dominant menthol cigarette brand Newport, which strengthens its position in the US market. Meanwhile, Imperial Tobacco, as part of the deal, acquired some US brands from Reynolds (including Winston), as well as Lorillard’s US based salesforce. Dividend growth and profit margins remain healthy across the tobacco sector, in spite of a continuing decline in global cigarette sales by volume, as product innovation, tobacco quality improvements and cost rationalisation have helped
enhance pricing power in many territories.
The other key contributors to performance over the last year were in the ‘other financials’ sector. Provident Financial has been a long-term holding in the portfolio. It specialises in the non-standard lending market in the UK and has two main lending divisions – Vanquis, a non-standard credit card business and CCD, its consumer credit division – the latter has improved the profitability of its home collected credit business in recent years, by being more stringent on credit quality and through technology-derived efficiency gains. The company has expanded into complementary areas of credit, both organically through the creation of Satsuma Loans, its online short-term loan business and by acquisition, with the purchase of Moneybarn, a company specialising in car finance. The core of future profit growth is expected to come from Vanquis, Satsuma and Moneybarn as they build on existing synergies and exploit economies of scale. Provident Financial has been quick to adapt its business model to advances in technology and changes in customer borrowing habits. Profit margins are high and stable while default rates remain low and within the management team’s expected range. The company’s share price rose by over 50% in the year ending 30 September.
Having been a beneficiary of consolidation within the insurance sector earlier in the year with the acquisition of Friends Life by Aviva, the Company’s holding in Amlin, a Lloyds insurance market investment vehicle, received a takeover approach from Japanese company Mitsui towards the period end, resulting in a significant uplift to its share price. They were fully supportive of this acquisition proposal as the price paid reflected a full valuation for the business. The share prices of Beazley and Hiscox, also in the non-life insurance sector, both rose during the period on the back of positive half-year results, and amid growing takeover speculation.
Whilst a high weighting was maintained in the ‘other financials’ sector, the portfolio continues to have no exposure to banks, due mainly to uncertainty on the future direction of dividends as a result of regulatory restrictions. Equally the portfolio continues to have no investments in mining companies. Indeed it was in part having no exposure to these sectors that helped drive the Company’s outperformance of its benchmark during the year.
Among the detractors to performance over the period were BP, Drax and Rolls-Royce. A decline in global energy prices was in part responsible for falls in the share prices of BP and Drax. BP announced an increased dividend with its second quarter results and gave further details around the substantial restructuring agenda and opportunities within the business, with chief executive Bob Dudley also predicting that oil prices would stay ‘lower for longer’. The continued fall in wholesale electricity prices weighed on Drax and its share price declined further on news in the Chancellor’s summer budget statement, that the UK government would cut its renewable energy tax break by removing an exemption that hitherto had allowed companies like Drax to pay less tax. The fear is that providers of capital will be reluctant to finance future
renewable projects making government emissions targets harder to achieve.
Rolls-Royce continued to disappoint, in share price performance terms, during 2015. The appointment of Warren East as chief executive in July saw him make a further downward revision of the expected full-year pre-tax profits and cancel the share buyback in order to protect ‘dwindling cash reserves’. Headwinds for its marine business, a slowing production line for the Airbus A330, lower-than-expected demand for engines to power business jets, and a softening in the spares and replacement market for regional planes in 2016 and beyond, weighed on the company’s share price. However, Mr East was keen to emphasise his belief in the long term prospects for the business as a whole, citing
‘exceptional technology and outstanding long-term prospects’.
KIT : Keystone profits from tobacco exposure