New Star has announced its interim results for the six months ended 31 December 2016. During the period, the Trust provided an NAV Total return of 10.35%, whilst its share price returned 24.3%, reflecting a narrowing of the discount from 39.5% to 31.7%. The Trust says that, in comparison, the Investment Association’s Mixed Investment 40-85% Shares Index rose 10.37%, the MSCI AC World Total Return Index gained 15.55% and the MSCI UK Total Return Index gained 11.52%.
The investment manager, Brompton Asset Management, (Brompton) says that the portfolio benefited from its relatively-high holdings in foreign-currency investments. In particular, the majority of the Trust’s significant cash allocation is held in dollars. Over the period, profits were taken from some investments in overseas equity funds and reinvested in US equities and one UK private company. However, Brompton also says that rising inflation and the accompanying change in equity market leadership in favour of more cyclical, “value” stocks proved to be a headwind for some of the portfolio’s actively-managed funds. The managers of Fundsmith Equity and Newton Global Income focus on companies with stable cash flows and strong barriers to entry. These funds returned 10.18% and 10.46% respectively over the period but fell short of the 15.55% sterling gain from global equities. The holdings in both funds were reduced through profit-taking. Artemis Global Income, however, outperformed, rising 19.81% because of its higher holdings in cyclical companies. Brompton says that the Trust’s largest investment, FP Crux European Special Situations, was also affected by the change in equity market leadership, rising 11.64% while equities in Europe excluding UK gained 14.60%. The holding was reduced through profit-taking.
From an economic perspective, the outlook for Europe ex-UK equities brightened over the period. Economic leading indicators and employment and inflation data all improved but Brompton highlights that the region is confronted in 2017 by a number of elections in which populist, anti-European Union candidates may gain support. The Trust’s exposure to Europe ex-UK equities was reduced further through the outright sale of Schroder European Alpha Income.
Following the US election, the Trust invested directly in US equities through purchases of the SPDR S&P 500 and iShares S&P 500 Financials Sector exchange-traded funds. Brompton says that Trump’s expansionary economic policies should benefit US equities. It comments that rising US bond yields and the new president’s commitment to reducing regulatory burdens favour financial companies. Brompton says that a high-water mark in financial regulation appeared to have been reached in February 2017 when Trump signed an executive order to review the Dodd-Frank Wall Street Reform and Consumer Protection Act. During a period in which US equities gained 16.65% in sterling terms, the Trust has benefited from its significant allocation to US equities through investments in global equity and multi-asset funds. Polar Capital Technology, which typically has a high allocation to US technology companies, gained 18.22%.
UK equities returned 11.52% as sterling’s fall increased the export competitiveness of UK companies. Brompton says that all of the Trust’s UK equity fund holdings outperformed because of their relatively high allocation to UK smaller companies, which outperformed their larger peers. It says that Aberforth Geared Income did the best, returning 16.41% as a result of the manager’s focus on smaller companies and value-investing.
Brompton says that, amongst the Trust’s emerging market investments, Neptune Russia & Greater Russia did the best. It returned 38.82%, buoyed by the rouble’s 13.21% rise against sterling and higher oil prices. The investment was reduced during the period through profit taking. Indian equities underperformed other emerging market equities, rising 5.44% in sterling terms, with their losses in local currency more than offset by the rupee’s 7.59% gain against the pound. The Stewart Investors India Subcontinent holding, which returned 7.98%, was reduced through profit-taking.
The rise in inflation and expectations of further monetary tightening in 2017 resulted in a 6.25% fall in the gold price in sterling as the opportunity cost of holding this nil-yielding asset increased. The gold price fall led to bigger falls for gold equities, with BlackRock Gold & General declining 12.18%. Brompton says that the Trust’s holding in this fund was reduced although the residual investment continues to provide an important source of diversification. In January 2017, the gold price recovered 3.09% in sterling terms.
Brompton says that all six FP Brompton Global funds outperformed their respective benchmarks during the period under review, with FP Brompton Global Equity the strongest performer, rising 18.34%. FP Brompton Global Conservative was the weakest in absolute terms, returning 6.91% as a result of its low-risk mandate.
In July, the Trust invested in the unquoted Embark Group, a leading personal pension and small self-administered pension scheme administrator through its Hornbuckle and Rowanmoor brands. Brompton says that the industry is undergoing significant regulatory and technological change and that these developments should provide an opportunity for larger players such as Embark to increase market share.
In terms of outlook, Brompton says that, over the coming months, fresh details about Donald Trump’s policies of fiscal stimulus and protectionism are likely to have a significant impact on financial markets. In Europe, meanwhile, the eurozone’s stability and integrity may be challenged by election results. Brompton also says that the recovery in inflation in developed economies is also likely to remain an important theme and that equities could prove vulnerable if inflation rises rapidly and precipitates a more hawkish stance on monetary policy from the Federal Reserve. However, Brompton comments that, in this event, the Trust’s investments in gold equities, cash and FP Brompton Global Conservative should provide some diversification and prove defensive. Equities tend to perform well, however, when inflation rises from subdued levels and conversely, longer-duration bonds could post losses. Brompton says that the Trust is positioned for this environment with a high allocation to global equities and no direct investments in bonds.
New Star benefits from overseas exposure but some funds lagged cyclical rally : NSI