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Independent publishes results for phenomenal year

Independent publishes results for phenomenal year – Over the year to 30 November 2017, Independent Investment Trust produced a net asset value (NAV) total return of 54.8%.  However one measures performance this was, by some margin, the best annual result in the history of the Independent: theoretical investments in the All-Share Index and the World Index would have produced total returns of 13.4% and 15.4% respectively.  The results rekindled enthusiasm for its shares, which moved from a discount of 11.2% at 30 November 2016 to a premium of 7.2% at 30 November 2017, producing a share price total return of 87.0%.

Max Ward’s manager’s statement gives you an idea of the drivers of returns: “It has been a remarkable year for our large technology and telecommunications stake: worth GBP44.6m at 30 November 2016, it had risen in value to GBP87.4m by 30 November 2017 after net sales of GBP1.1m.  Strong share price performances led us to make reductions in our holdings of FDM, Gamma Communications and Kainos.  In each case this was a mistake as all three companies produced strong results.  We also made a reduction in our holding in Herald Investment Trust to address the issue of overlap between our two portfolios.  This, too, was a mistake as the Herald discount fell after we sold in recognition of strong investment results.  Fortunately, we were less trigger happy in the case of our Blue Prism holding, which went from strength to strength throughout the year as demand for its software robots grew at quite extraordinary rates.  We do not pretend to know what the “right” valuation for the company is, but we continue to believe that it could grow to many times its current size in a relatively short space of time if it maintains its position of leadership in the embryonic market for robotic process automation.  Our two new technology holdings, Alfa Financial Software and Frontier Developments, both made encouraging debuts.  Alfa, one of the leading providers of software to the asset finance industry, is renowned for the quality of its products and for its ability to deliver complex implementations on time and on budget.  Frontier is a long established designer of computer games which is benefiting from the transformational effect of the cloud on the design and marketing of computer games.  It is also notable for having attracted the attention of the giant Chinese internet company, Tencent, which has taken a 9% stake in it. 

It has been a much better year for our large position in the housebuilding industry.  Conditions in the housing market have been about as favourable as they could be for builders. A plentiful supply of land at very attractive prices combined with robust demand, albeit helped at the lower end of the market by the government’s Help to Buy scheme, to provide strong sales at good margins.  The one exception to this happy picture is the retirement homes builder, McCarthy and Stone, which has again been held back by a sluggish market for second hand houses.  There are now, however, clear signs of improvement even in its business.  Strong profits and dividends have been rewarded with good share price performances, but in the case of most of our holdings we think the market continues to undervalue their long-term prospects.  Berkeley Group, which we held until October, is the one exception to this: its dependence on the London market and its policy of selling well ahead have left it with very high profits in the current year, but a more subdued outlook thereafter.  Despite the undoubted quality of the business, we decided to sell our holding at a very good profit.  Overall, despite sales of GBP7.7m, the value of our housebuilding stake rose from GBP51.0m at 30 November 2016 to GBP59.4m at 30 November 2017.

It has been another good year for our travel and leisure holdings: their value grew from GBP24.7m at 30 November 2016 to GBP34.8m at 30 November 2017 despite net sales of GBP1.8m.  The main contributor to this performance, as was the case in 2016, was the online package holiday company, On the Beach, which has once again delivered strong earnings growth against a difficult market background.  The strength of its customer proposition – low prices and flexible booking arrangements – is becoming increasingly apparent.  Gym Group delivered another year of good growth and was rewarded with a strong recovery in its share price.  The performance of the Hollywood Bowl share price was more subdued, but there was nothing wrong with its operating results. 

Given our disappointing record as investors in the retail sector, it may seem perverse that we have significantly increased our exposure to it at a time when there are widespread concerns about the outlook for consumer spending.  It is our hope that our new purchases, Footasylum and Quiz, will turn out to be resilient in a tough consumer environment and we believe that our addition to our old favourite, Dunelm, was made at an attractive valuation even given the uncertainties surrounding its immediate outlook.  Both Footasylum and Quiz are clothing retailers.  They serve totally different markets, but share the common characteristic (also shared with Joules, which we bought in 2016) of having developed a successful multichannel approach, in which the website and the physical estate feed off each other’s strengths.  The net result is rapid growth in internet sales combined with very fast paybacks on new store openings.  All three are highly cash generative businesses. Motorpoint, our other retail holding, has seen a strong rebound in its share price as results have recovered from the disappointing spell of trading in the wake of the referendum.  Overall, the value of our retail holdings rose from GBP15.2m at 30 November 2016 to GBP31.7m at 30 November 2017 after net purchases of GBP11.0m. 

Once again we consider it appropriate to devote an entire paragraph to the soft drinks company, Fever-Tree. Fever-Tree’s international business (probably 40% of total sales) is growing at over 40% per annum and in each of its geographical areas it dominates the premium segment of the mixer market.  We think premium mixers will continue to gain market share for years to come because they are starting from a low base and we expect Fever-Tree to be at the forefront of this trend.  Rather reluctantly, we took some profits towards the end of the year on grounds of valuation, but despite this it retained its position as our largest holding. 

It has been a year of considerable change for our holdings in the business services sector: we sold out of SThree and Gama Aviation, added to Midwich and bought a new holding in Eddie Stobart Logistics.  SThree has struggled in recent years to reprise the growth rates it achieved when we originally bought it, while Gama was sold largely on grounds of illiquidity.  Our addition to Midwich was well timed and it is pleasing to see the attributes that attracted us to this exceptionally well-run business are now beginning to achieve wider recognition.  Eddie Stobart, however, has failed to attract a following in the wake of its initial public offering despite reporting good results.  Overall, our business services stake grew in value from GBP11.4m to GBP25.9m after net purchases of GBP3.8m. 

Elsewhere in the portfolio, good results were reflected in the share prices of Ashtead and Luceco (although the latter issued a profits warning after our year end).  Our new holding in RPC, the oil service company, enjoyed a good share price performance. The same was true of teleradiology company, Medica, but in its case much of the share price strength has reversed since our year end in the wake of a disappointing trading statement. The Polar Capital Global Insurance Fund had a quiet year, while NAHL, to which we started to add towards the end of our year, saw its share price affected by uncertainty (which we consider largely resolved now) about the future of personal injury litigation.  We sold Telecom Plus and Bluefield Solar on grounds of valuation, and disposed of The AA and UP Global in the wake of disappointing trading news.”

IIT  : Independent publishes results for phenomenal year

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