Herald Investment Trust has announced its interim results for the six-months ended 30 June 2016. During the period the Trust’s net asset value per share increased by 0.9% to 889.6p in the first half of 2016. The chairman, Julian Cazalet (pictured) says that this small disguises what has been a very volatile period for the Trust’s manager to navigate.
In the first part of the year, the company says that its UK portfolio was a haven of stability while the North American portfolio fell nearly 20% but that China’s decision to stimulate credit allowed markets to regain their collective nerve. They say that there was a rapid recovery after February, followed in the UK by a long hiatus ahead of the vote on continued EU membership but that the vote to leave, unexpected as it was by most pundits, caused momentary market panic and a sharp depreciation in sterling. The UK portfolio fell by 3.5% between the referendum result and the period end but the company says that this reflected defensive mark-downs by market makers rather than real selling pressure. They say that the more immediate impact of the vote to leave was the precipitous decline of sterling. The Trust’s assets benefited from foreign currency gains of £22.5m on overseas holdings and on cash held in overseas currencies, offsetting modest falls in the UK equity portfolio and interest rate swap losses. The company says that, whilst this is a one-off gain, the depreciation of sterling also has a longer-term impact on the portfolio. Herald owns many UK companies that export products and services and the managers believe that these companies increased competitiveness ought to lead to useful upgrades to profit forecasts.
The company says that, over the first half of 2016, the UK portfolio returned -4.95% versus a setback of 5.2% (total return) in the Numis Small Companies Index (including AIM and excluding investment trusts). Within this portfolio performance was mixed. On the negative side, the company says that Alternative Networks issued a profits warning reflecting the decline in mobile roaming charges but continued to increase its dividend. Another detractors was Bango. The company says that, in spite of 78% growth in end user spend, Bango disappointed the market with continued margin pressure. The managers say hat SQS, an AIM-listed company with a German headquarters, downgraded earnings and expectations because it lost a software testing contract with Morrisons the food retailer. However, they say that profits continue to grow. The managers say that none of these disappointments can be attributed to Brexit or to the macroeconomic environment and that they are all very stock specific. However, in contrast, they say that Imagination Technologies bounced usefully (+£6m) and IDOX performed well. KBC Advanced Technology was the only material takeover in the period. Its share price was 124p before the first bid at 185p from a NASDAQ listed company, and then a Japanese company counterbid 210p, valuing the Trust’s holding at £8.3million. The managers say that the scale of the takeover premium provides an interesting counterbalance to the market illiquidity.
The North American portfolio rose by 13.6% in sterling terms versus the Russell 2000 Technology Index which appreciated 11.5% (total return). However, he managers say that, in US dollar terms the index was only just in positive territory. OF HRI’s US holdings the managers say that Silicon Motion has been the outstanding performer, adding £8m to the Trust’s NAV. Alliance Fibre Optic was acquired and delivered a 13.5x return since acquisition in 2008.
The managers say that the European portfolio has been the star performer in the period, rising 23.3% and that this reflects a strong performance from BE Semiconductor, based in the Netherlands, and the takeovers of two smaller holdings (Opera Software in Norway and Cegid in France). The managers say that these bids signal the spread of acquisition activity from the UK to the Continent.
The trust’s Asian holdings also delivered a positive return of 7.4%. The managers say that Foreign exchange gains more than offset a slight reduction in the local currency return.
In terms of portfolio activity, the proportion of gross assets invested in the UK has fallen from 60.6% at the end of December 2015 to 55.6% at the end of June 2016. The managers report that this reflects market movements and a purposeful endeavour to be positioned defensively ahead of the referendum vote. They say that, although there remain investment opportunities at very attractive valuations, it remains their policy to limit the size of holdings while liquidity remains so uncertain.
The Trust’s chairman says that he suspects that the market has been cautious on Herald both ahead of and after the EU referendum because the majority of assets are UK-based. However, he says that, in his view, this ignores the fact that sales of the portfolio’s companies are widely diversified internationally through exports and overseas subsidiaries and overall the Trust benefits enormously from sterling weakness. He comments that margin expansion from UK exports can be much more significant than straight currency translation of overseas investments. Julain says that participants in the equity markets have reacted calmly to the referendum outcome and that they continue to see attractive valuations and growing companies in a low-growth world. He says that they now view the outlook with more optimism, and hope and expect that professional investors will return to the asset class in due course.
Herald navigates volatile period with modest uplift in NAV : HRI