Lowland Investment Company says that its net asset total return for the year ended 30 September 2016 was 12.2% which compares to a 16.8% return for the UK market and an 8.6% return on the Numis Smaller Companies Index. The total dividend for the year will be 45p, which is an increase of 9.8% over last year’s 41p.
James Henderson has been the manager since 1990. He has for the last three years been working with Laura Foll on the portfolio. The Board is delighted that with effect from 1 November 2016 Laura has been formally appointed as Joint Fund Manager.
The largest positive contributor to performance this year was Hill & Smith, a galvaniser and manufacturer of crash barriers. It has been a long-held position for the Company, initially purchased for GBP1.01 per share in 2004. In recent years it has been an excellent performer, benefitting from a good management team. They have successfully expanded their presence in the US and maintained a strong balance sheet. In particular they have been a beneficiary of the ‘Road Investment Strategy’ in the UK which spans to the early 2020s, increasing demand for their crash barriers and road signs. For the overall balance of the portfolio they have sold part of the holding with the intention of reinvesting in good value growing smaller companies.
At the sector level the Company benefited during the year from its relatively low weighting in the banking sector. They continue to be sceptical of the ability of domestic retail banks such as Lloyds to grow earnings. Due to their high cost base and desire to protect margins they are steadily losing market share to challenger banks in key areas such as mortgages. Over time this downward pressure on earnings will constrain their ability to pay high dividends and therefore we currently hold no position. Within financials their preference continues to be for insurers (such as Hiscox) which generate strong returns across the underwriting cycle and provide diversification for the fund’s high weight in the industrials sector.
The largest individual detractor from performance was industrial chain manufacturer Renold, which has seen earnings come under pressure as a result of difficult end markets in agriculture and energy. What they find encouraging (and why they have added to the shares on weakness) is that management have made real progress in taking costs out of the business. This meant that despite the tough environment margins grew year on year. They remain confident that in a more buoyant sales environment they can achieve their target of mid-teens margins which would leave the shares looking attractive at this level. They say they sold British American Tobacco too early. They were concerned by the high valuation.
LWI : New co-manager on Lowland