The Independent Investment Trust, managed by Max Ward (pictured), has announced its annual results for the year ended 30 November 2015. During the period, the trust produced an NAV total return of 28.1%, outperforming both the FTSE All-Share Index and The FTSE World Index, which produced total returns of 0.6% and 2.6% respectively. In terms of performance relative to the FTSE All-Share Index, it was the trust’s best year since 2002. The board say that they are pleased with this result and that it not only marks a return to form but also completes, for the moment at least, the process of recovery from the disasters that befell the trust in 2007 and 2008. Despite this, there was a small widening of the discount, from 6.5% to 6.9%, which led to a share price total return of 27.8%. Earnings per share for the year were 8.3p (7.35p in 2014) and the board have decided to dispense with the final dividend for 2015 and to pay a second interim dividend of 3p instead, to give a regular dividend of 5p (5p in 2014). They say that, in addition to this, they have declared a special dividend of 3p for 2015 (2p in 2014) in order to maintain the flexibility to vary the yield on the portfolio without threatening the regular dividend.
The board say that they anticipate that some shareholders, particularly those who bought early in the trust’s life, may wish to use the recent revival to reduce their holdings. As such, they say that, subject to market conditions, they’re hoping to be able to operate a rather more aggressive policy of buying back shares than is our wont for a period of about a month, starting from around the time of our AGM. This will be at some modest discount to net asset value would to protect the position of continuing shareholders. The board say that the trust’s managing director, Max Ward, has indicated that he may wish to realize part of his holding during this period, or earlier if there is natural demand at an acceptable price. However, they say that no other director intends to sell shares during this period or earlier.
In terms of performance, the trust says that there have been three important contributors. The first was the early reduction in its energy stake and the resulting low exposure to energy companies, together with our lack of exposure to mining companies. The second was its big housing stake and the additions made to it during the year. The third was the performance of many of the initial public offerings (IPOs) in which the company has participated since February 2014. Chief amongst these were Fever-Tree, Gamma Communications and FDM.
In terms of portfolio activity, the company says that the main changes were substantial purchases of consumer services companies, a big increase in the value of the trust’s housing stake (driven more by price performance than by new investment they say), a sharp reduction in our non-life insurance stake as bids were announced for three of the four companies the trust owned and the near elimination of the trust’s energy stake.
In terms of individual holdings, the performance of Baidu (the trust’s largest holding) was disappointing and the trust reduced its position. The manager says that the company has accelerated its investment in new business areas where its competitive position is not as obviously strong as it is in its traditional search activities. Alibaba and the trust’s other Chinese internet business, also had a disappointing year in share price terms, but the managers say that this was as much to do with its valuation at the start of our year as it was to do with fundamental issues. Last year’s IPOs, FDM and Gamma Communications, both had strong share price performances as their businesses outperformed expectations. FDM was the trust’s biggest holding at 30 November 2015. Kainos, a software consultancy the trust bought at IPO in July, also delivered good business results and a strong share price performance. The managers say that the trust’s longstanding holding in Herald recorded a less eye-catching share price performance, but nevertheless outperformed the wider market by a comfortable margin. The big exposure to the housing industry, the trust built up last year, has performed well and the managers added further to the stake during the year.
The trust’s consumer services companies have produced mixed results. The manager’s say that the AA gave back much of the strong performance it enjoyed in the previous year as investors began to appreciate the amount of investment required to realize the potential of the business. However, the also say that the new holding in BCA Marketplace saw its shares respond well to favourable trading news. The new holding in Gama Aviation fell in value despite satisfactory trading news and the other new holding, NAHL, saw its share price hit by fears that its business would suffer under the new regime proposed by the government for personal injury claims.
The industrials holdings also saw mixed results. The trust benefitted from a well timed sale of Aggreko and a profitable addition to its Ashtead holding but these were largely offset by a brief period of ownership of HSS. The large exposure to the non-life insurance industry with which the company started the year was severely, but profitably, depleted by a rash of takeover bids. The manager’s say that Beazley, the only one not bid for, was sold on grounds of valuation and the Polar Capital Insurance Fund once again performed well.
In retailing, the trust had a good year in the UK with Dunelm and SCS making a positive contributions. However, the managers say that this was offset by two disastrous investments in overseas retailers, Zulilly and Mysale. Both these were sold at big discounts to their book cost.
In terms of outlook, they say that the state of the world economy still provides plenty of cause for concern. China, so long a source of demand for other countries, is wrestling with slowing growth and an urgent need to re-orientate its economy; economic recoveries in Europe and Japan are fragile and dependent on unconventional monetary policies; tightening monetary policy in the USA may well have an adverse impact on the economies of many emerging markets; and there are signs that the momentum in corporate profits may be slowing or reversing. Any one of these issues has the scope to provide an unpleasant reaction in equity markets, but they say they are struck by the number of interesting new opportunities they are seeing in the UK market. They say that there are Many strongly cash generative businesses with apparently good growth prospects which are not especially dependent on the health of either the world or the UK economies for their prosperity. As such, whilst these can be purchased at sensible prices, they’re inclined to ignore the more general worries.
The best year for The Independent Investment Trust since 2002 : IIT