The Independent Investment Trust (IIT) has announced its annual results for the year ended 30 November 2020, during which it recovered in the second half, despite reducing equities in March. Over the year, IIT produced a net asset value (NAV) total return of -2.2%. Its chairman, Douglas McDougall, says that, over the same period, theoretical investments in the FTSE All-Share Index and the FTSE World Index would have produced total returns of -10.3% and +11.3% respectively.
Douglas says that the best that can be said of this outcome is that it is considerably better than seemed likely at the half-way stage. Over the second half of IIT’s financial year, its net asset value staged a good recovery, outperforming both the FTSE World Index and, by a comfortable margin, the FTSE All-Share Index. Douglas says that this was despite the heavy burden of high cash balances that resulted from their flawed decision to reduce equity exposure in the second half of March.
Comments from Max Ward, the managing director
“After a resilient first half performance, our technology holdings really came into their own during the second half of our year, converting a loss of £2.6m at 31 May into a profit of £14.2m at 30 November. The key contributors were Herald, Seeing Machines and Gamma Communications. At long last, Herald started to receive recognition for its outstanding record over the life of the Independent; new management at Seeing Machines has instilled the commercial disciplines that should finally allow the company to exploit its fine technology for the benefit of shareholders; and Gamma Communications has continued to bolster its position in cloud based telecommunications both here and in continental Europe. Both Blue Prism and FDM saw their operations hampered by Covid-19, but fared better than many had expected. Alfa Financial experienced the first signs of a long awaited upturn in its markets, but Zoo Digital, the only holding not to appreciate over the year, has still to make the breakthrough in its market place that we had hoped for. Overall, a position worth £64.9m at 30 November 2019 had grown in value to £69.8m by 30 November 2020 after net sales of £9.3m.
Our holdings in the travel and leisure sector had a value of £60.6m at 30 November 2019; by 30 November 2020, this had fallen to £47.6m after net sales of £29m. This strong performance split into an outstanding showing from our three computer games companies (the third, Codemasters, was sold after it was bid for) and a dismal showing from our (now much depleted) traditional holdings. The computer games companies were big beneficiaries of the restrictions on movement imposed round the world in response to Covid-19, just as the traditional leisure companies were severely hit by the same restrictions. In the latter part of our year, On the Beach and Loungers staged strong recoveries as hopes rose for a return to some form of normality following the announcement of successful vaccine trials. In the case of Loungers, trading in the summer and early autumn was also well ahead of general expectations.
Our dealings in housebuilders in the year under review were badly wrong-footed by the appearance of Covid-19. Early purchases in anticipation of a prolonged period of favourable trading conditions were looking good up until late February. The sector then suffered a sudden and dramatic change in investor sentiment as the prospect of lockdown threatened both the supply of housing and the demand for it. We were slow to recognize this, but felt that the scale of our position posed an unacceptable risk in the face of a possibly prolonged period of extremely difficult operating conditions. We therefore made substantial sales at what turned out to be distressed prices. This reflects one of the problems of investing with conviction: when the basis of one’s conviction is seriously undermined in short order one is left with little choice but to prioritize risk over value. The net result was that we ended up buying high and selling low – a textbook example of how not to ply our trade, about which we feel suitably sheepish. On a happier note, the industry adapted quickly to the constraints imposed by the virus and enjoyed unexpectedly buoyant demand over the summer and early autumn. The most recent government restrictions have been unhelpful (but much less damaging than the initial lockdown), but our confidence in the long term outlook for the industry has been strengthened by the experiences of the last twelve months. After net sales of £3.8m, our housing stake fell in value from £53.6m at 30 November 2019 to £28.6m at 30 November 2020.
A wish to reduce the sensitivity of our portfolio to fluctuating economic conditions, together with considerations of value, led to tobacco reappearing in the portfolio after an absence of some years and to Direct Line Group joining our longstanding holding in the Polar Capital Insurance Fund. Our tobacco companies have performed well so far, but Direct Line was held back by regulatory issues. During the course of the year we eliminated our exposure to the oil and gas sector, which also had the effect of reducing the portfolio’s economic sensitivity.
Our two healthcare holdings saw divergent share price performances. Medica suffered from a big drop in routine scans following the outbreak of Covid-19, while Oxford Biomedica benefited both from a greater range of collaborations with other biotechnology companies and from its involvement in the manufacture of the Astra Zeneca covid vaccine, although the latter will contribute more in terms of prestige than of profit.
New holdings were taken in Telecom Plus, a company which should benefit from more rational pricing in the household energy market, and Derwent London, a high quality West End property company whose shares looked cheap following concerns about the impact of working from home on office property prices.
Elsewhere in the portfolio, we were hurt by poorly timed sales of Ashtead and Fever-Tree, although we retained a holding in the latter. We sold out of the retailers Joules and The Works, fortunately before covid struck but at prices that were disappointing in relation to our book cost. Small holdings in NAHL and Eddie Stobart were also sold, realizing big losses. Finally, our old favourite, Midwich, had a difficult year owing to covid disruptions to its business but we remain hopeful that it can achieve a full recovery on a return to normal trading conditions.”