Perpetual Income & Growth reports underperforms its benchmark for a second year – The NAV total return of Perpetual Income & Growth (PLI) for the year ended 31 March 2018 was –5.6%.
Chairman of the company’s board, Richard Laing stated in his report that this was a disappointing result in a difficult year in which the company’s benchmark, the FTSE All-Share Index, posted a return of just +1.2%.
Performance
The company reported that this was the second year in a row that it had underperformed its benchmark and that has impacted longer term performance. The five year total return on net assets, which last year was well ahead of the benchmark, was 37.3%, relative to the benchmark return of 37.6%. The ten year return at 136.1% remains ahead of the benchmark return of 90.6%.
Underperformance came mainly from not holding any mining stocks, which performed well, holding tobacco stocks when there was a setback the sector’s performance and issues affecting certain individual holdings, particularly Provident Financial and Capita.
The board noted that the investment manager is long term conviction investor, and as a result the portfolio is not closely aligned to the benchmark. This can result in the performance of the portfolio being different from the benchmark. The chairman stated that the board remain supportive of the manager, whose style and process has delivered good performance for the company and its shareholders in the past.
Discount
The discount of the share price to the underlying net asset value narrowed marginally during the year, from 9.7% to 9.5%, and the share price total return at –4.9% was consequently slightly better than that on a NAV basis.
Dividend
The total dividend (excluding specials) for the year of 13.90p per share, representing an increase of 4.1% on the previous year.
Continuing the policy of recent years to pass on to shareholders special dividends received, the board has also declared a special dividend of 0.80p per share, also to be paid on 29 June 2018 to shareholders on the register on 8 June 2018.
Outlook
Mark Barnett, Portfolio Manager
“The performance of the UK stock market will remain heavily influenced in the near term by the combination of two key variables: the movements in sterling relative to the US dollar, being a reflection of the Brexit negotiations in Brussels; and the continued vacillations in sentiment to both the domestic economy and the fragile political scene.
The UK stock market is not expensively valued on an historical basis as demonstrated by a price earnings multiple of circa 14 times for the current year. This represents a discount to other major stock markets and is clearly indicative of the Brexit discount applied indiscriminately to UK quoted companies. The most significant area of opportunity is within the sectors that offer direct exposure to the UK economy, notably financials, consumer cyclicals and real estate.
The bias of the investment activity for the portfolio has remained focused on additional opportunities within these sectors. As a continuation of the trend in recent quarters, there has been plenty of negative commentary about the UK economy, in particular regarding the spike in headline inflation post the EU referendum and the impact on real wage growth. This trend has started to reverse and, given the tightness in the labour market, should result in an acceleration of real wages over the coming quarters. However, the market still expects to hear disappointing news about the domestic economy. This mood of pessimism has already had the effect of reducing domestic share prices. We expect that an acceleration in real wages will therefore come as a significant positive surprise to the market, and that domestic share prices will improve as a result.
It is noteworthy on that front that there has been a pick-up in corporate activity and take over proposals to UK companies. For example, the widening discounts of the real estate sector have prompted approaches, including a recently unsuccessful bid proposal to Hammerson by French competitor Klepierre. Activist investors have taken advantage of depressed share prices to take stakes in large cap companies to encourage changes in corporate strategy.
Recent market swings have favoured momentum style investing, with an ever-increasing disparity between valuation and fundamentals becoming clear. It is frustrating that in periods of extreme momentum – as we have experienced over the past year – portfolio performance will predictably struggle to keep pace. The current environment is supporting premium valuations for growth or disruptively innovative companies.
Within this context, attractive opportunities continue to appear in areas which would traditionally be seen as uncorrelated to the wider market and economy. When assessing these opportunities, it is important to understand the risk associated with the relative attractiveness of the returns. These opportunities encompass a wide range of sectors including Lloyd’s insurers and alternative lending businesses. Whilst these opportunities may lag the broader stock market when momentum seems to outweigh valuation, as the first quarter of 2018 has demonstrated, these investments can continue to deliver returns irrespective of the performance of the market.
The outlook and positioning has changed very little over the past few months. In a changing global environment the interests of investors are best served by employing a well-tested investment process, which is based on fundamental company analysis and a prudent approach to valuation. I continue to evaluate and re-evaluate the holdings in the portfolio and to seek the best opportunities to generate the real growth in dividend income required to achieve the Company’s investment objective. In times of extreme momentum and somewhat irrational market pricing it is vital to remain rooted in this fundamental investment thesis, which has served the Company well historically and should continue to do so.”
PLI : Perpetual Income & Growth reports underperforms its benchmark for a second year