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Perpetual disappointment calls for new initiatives

Perpetual disappointment calls for new initiatives – The interim statement covering the six months ended 30 September 2019 for Perpetual Income & Growth marks another period of poor performance for the trust. Over the period, it returned -1.2% in NAV terms and -1.0% in share price terms, against +4.6% for the All-Share Index. One bit of good news is an increase in the dividends for the first half from 6.5p to 6.8p.

14.7m shares have been bought back in just six months in an attempt to stabilise the discount. this has shrunk the trust by about £45m. This pattern has been repeated with similar open-ended funds managed by Invesco.

The chairman says he is disappointed with the performance. He goes on to say: “The board is very sensitive to shareholder concerns about the continued weak results. We engage regularly with the portfolio manager, Mark Barnett, who continues to apply his consistent valuation based investment approach. We have also had a number of discussions with Invesco management about the continuing poor performance and about processes around individual portfolio managers. We note the recent appointment of a new chief investment officer, Stephanie Butcher, and have met with her to discuss new initiatives to be put in place with the aim to improve portfolio performance. We will be closely monitoring progress.

[It is hard to interpret today’s statement. The board seems to be saying that it is concerned about the investment process and has asked for ‘new initiatives’ but does not articulate what these might be. At the same time, the statement seems to emphasise the consistency of Mark Barnett’s approach. It doesn’t feel like the board is about to fire Invesco but we would expect other managers to be knocking on its door.]

Extracts from Mark’s report

The Company’s investments have continued to generate meaningful growth in income that has supported the growth in dividends. However, the capital returns have been disappointing as a consequence of the challenging backdrop facing UK domestically orientated companies, some particular stock specific challenges, and also the consequences of a large forced seller in the UK equity market.”

The portfolio’s core themes of UK domestic value, international growth opportunities, tobacco and non-correlated financials have remained consistent over the past six months. The tilt towards UK domestic companies has been maintained, as persistent negativity towards domestic sectors continues to present compelling opportunities. Exposure to selective global industries, namely oil and tobacco, remains prominent whilst a significant proportion of the portfolio is also invested in non-correlated financials.”

The portfolio’s UK domestic opportunities theme continued to provide some positive returns over the period. BCA Marketplace, KCOM and Next were the standout contributors within this theme. Both KCOM and BCA Marketplace received private equity bids during the period. KCOM’s Board of Directors recommended a bid in April, but later abandoned it in favour of an enhanced all cash offer from a European infrastructure fund. Meanwhile, BCA Marketplace confirmed in June that it was in advanced discussions with a private equity firm, following an all cash offer for the company. Elsewhere within the portfolio’s domestic theme, Next released a strong trading statement in July, which confirmed better-than-expected full price sales for the second quarter. Half-year results
released in September confirmed double-digit growth in online sales, whilst management reaffirmed its full year guidance.

The portfolio’s absolute performance was also supported by its exposure to international growth opportunities. Stock selection within this theme proved decisive, as holdings in BAE Systems and HomeServe were amongst the portfolio’s best performing stocks over the period. HomeServe released full year results in May, which were ahead of market expectations. The company delivered another year of strong organic revenue growth and confirmed a double digit increase in the annual dividend. Meanwhile, BAE Systems traded well over much of the period. The company released supportive half-year results in July that showed double digit profit growth, fuelled by an increase in US defence spending.

Relative performance also benefitted from the portfolio’s zero weighting in the metals & mining sector, which proved highly volatile amid geopolitical tensions. Conversely, the non-inclusion of several highly rated, internationally focussed  stocks proved to be a drag on relative performance.

Tobacco remains a prominent theme, with investments in Altria, British American Tobacco and Imperial Brands. These holdings have previously delivered exceptional returns for shareholders, however more recent performance has continued to prove challenging. Investor sentiment towards the tobacco sector was affected by revived fears around regulation, whilst the release of
underwhelming sales data for Imperial Brands’ next generation technology reignited concerns around the outlook for future revenues. The portfolio’s significant weighting in the sector adversely affected relative performance, with negative returns from non-UK index stock Altria being a significant detractor. Despite these persistent concerns, the outlook for the sector remains positive, particularly as the headwinds outlined are reflected in depressed valuations across the sector.

The portfolio’s final theme proved the most substantial driver of weakness during the period. Having been a strong contributor to fund performance over many years, Burford Capital provided the portfolio’s largest negative return over the period. In August 2019, the litigation financer was the subject of a highly critical report from a US firm that specialises in publishing research for short-sellers. This caused a very material fall in the company’s share price. Burford Capital robustly defended itself against the accusations and later announced a series of corporate governance enhancements. Whilst the share price recovered some losses during September, the value of this holding still remained significantly lower at period end.

Elsewhere within the non-correlated financials holdings, Amigo also provided a negative contribution to returns, as concerns grew around the regulatory focus for the guarantor backed loan sector. The share price fell sharply at the end of August on the release of results for the first quarter, when the company cut its full year guidance and announced a change in lending strategy, to prioritise new customer lending over repeat customer lending. Despite these specific challenges, there were a number of holdings in this area that performed well over the period. Most notable was AJ Bell, which has traded very well following the initial public offering (IPO) in December 2018. In April, the company released a strong trading update for the second quarter, which supported positive momentum in the shares. AJ Bell has been a very successful holding for the Company. Initially held as a private, unquoted company, we were extremely supportive of the IPO, which saw significant gains realised for the portfolio.

Other notable contributors within the wider portfolio included PureTech Health. The company’s share price performed very well over the period, supported by positive developments from a number of the firm’s underlying companies. News that PureTech Health is exploring a listing on the US Nasdaq exchange was also well received by the market.

A final comment on performance drivers is that a small number of portfolio holdings experienced notably weak price performance due to challenges facing other shareholders rather than issues with the businesses themselves. While this short-term share price disruption was not isolated to this portfolio, it has been a source of some frustration. We maintain the view that the long-term outlook and inherent value of those companies impacted are unchanged.

PLI : Perpetual disappointment calls for new initiatives

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