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Housebuilding drags down Independent after a good six months

The six month period ending 31 May 2016 Independent Investment Trust produced a net asset value total return of 5.7%.  The total returns notionally attributable to the FTSE All Share Index and the FTSE World Index were 0.1% and 3.9% respectively. The net asset value per share rose from 390.1p to 400.3p over the period, and the share price from 363p to 387.25p, causing the discount to net asset value to fall from 6.9% to 3.3%.  The chairman says that, on the face of it, this was a respectable outcome, but it has been overshadowed by the impact on the portfolio of the result of the referendum on membership of the EU. By 11 July 2016, the net asset value had fallen to 338.1p and the share price to 329.25p.

Earnings for the half year amounted to 4.28p (4.79p) and they have already paid an interim dividend of 5p (2p). He says, as always, the outcome for the year will be influenced by activity in the second half, but it is likely that any further payment will be weighted in favour of a special dividend rather than a regular one.

Housebuilding resumed its place as the fund’s largest sectoral exposure.  The news from their housebuilding holdings during the period was all good with earnings and dividends either in line with their expectations or, in most cases, significantly ahead of them.  The housebuilding story developed very much as they had hoped: house prices (outside central London) and volumes were growing at rates that appeared sustainable for some years to come, and land was available in abundance at prices that looked very attractive in relation to predicted selling prices.  Sentiment towards the sector fluctuated during the period, but they made no transactions . As a result, a stake worth GBP56.5m at 30 November 2015 had grown through market movements alone to one worth GBP58.3m at 31 May 2016.

The housebuilding industry has been singled out by investors as one of the most vulnerable to consequences of the UK’s forthcoming withdrawal from the EU.  It is too early to assess the immediate impact, which may be negative, but they retain their longer term optimism about the industry’s prospects: wthey believe that there is a chronic shortage of housing, that the beneficial impact of any short term weakness in land prices could ultimately be considerable and that, in contrast to the situation in 2008/9, the companies’ balance sheets are strong enough to ride out a prolonged period of difficult trading conditions without the need for additional capital.  That said, they recognize that the damage done to stockmarket sentiment may take time to repair.

Within the rest of the portfolio, despite a strong showing from FDM (their biggest holding), a large position in technology and telecommunications suffered a small decline in underlying terms over the period: worth GBP62.3m at 30 November 2015, it had fallen in value to GBP47.9m by 31 May 20116 with net sales having accounted for GBP14.1m of the decrease.  Baidu, a large holding at 30 November, ran into difficulties with the Chinese authorities over its relationship with a number of dubious websites, as a result of which they decided to sell out.  Herald, Kainos and Gamma Communications, all of which have been successful investments for the fund, experienced some weakness in their share prices, but a new holding in the software robot company Blue Prism made an impressive start.  Profit taking in FDM and Gamma reflected the success of these holdings since their purchase in 2014.  Both companies continue to trade strongly.

Two new IPOs, Motorpoint and Joules, account for the big increase in their retail stake.  Motorpoint is a retailer of nearly new cars which is notable for both its profitability and the high regard in which its customers hold it.  Joules is a clothing retailer with a strong brand and scope for several years of physical expansion.  They took some more profits on the holding in, longstanding favourite, Dunelm and sold out of SCS.  Overall, retail holdings rose in value from GBP11.1m at 30 November 2015 to GBP23.0m at 31 May 2016 with net purchases having accounted for GBP10.3m of the increase.  Retailing is another industry that has suffered from adverse stockmarket sentiment since the referendum and they recognize the uncertainties surrounding the outlook for many retailers.  They believe their holdings are well managed, soundly financed and strong competitors within their market segments.   They see no immediate reason to be reject them.

A strong recovery in the share price of On The Beach was the main reason behind an excellent performance from travel and leisure holdings, which increased in value from GBP15.3m at 30 November 2015 to GBP19.0m at 31 May 2016, despite sales of GBP1.7m.  On The Beach is providing a clear demonstration of the strength of its customer proposition, but is inevitably vulnerable to the influence of terrorist incidents on the willingness of its customers to book holidays.  It is also affected by exchange rate movements: sterling weakness makes overseas holidays more expensive.  Gym Group, their other holding in the travel and leisure sector, appears to be making good fundamental progress, but its share price suffered latterly from speculation that a major competitor may be planning an IPO.

Elsewhere in the portfolio, Fever-Tree provided another sparkling performance as its growth continued to outpace lofty expectations, while Midwich, a distributor of audio visual products, made a strong start following its IPO.  Holdings in The AA, Polar Capital Global Insurance, Bluefield Solar and SThree were little changed in value, but those in Ashtead, Gama Aviation, Telecom Plus and NAHL all suffered material falls.  The weakness in the Ashtead share price was attributable to speculation that its earnings may be approaching a cyclical peak; Gama Aviation is being affected by weakness in its European operations; Telecom Plus has seen its competitive position undermined by weak wholesale energy prices; and NAHL’s business is reflecting uncertainty about the future of small claims litigation.  They sold the holding in BCA Marketplace at a satisfactory price to help fund a purchase of Motorpoint and sold a small holding in Bankers Petroleum – their last energy holding – on the announcement of a cash bid from a Chinese buyer.

IIT : Housebuilding drags down Independent after a good six months

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