Great results from BMO Managed Portfolio – over the year ended 31 May 2021, BMO Managed Portfolio’s growth and income pools both beat the UK market. The Income pool delivered an NAV return of 29.0%, beating the UK market by 5.9% and the Growth pool returned 32.5%, beating the UK market by 9.4%. The dividend on the income pool was increase by 1.6% to 6.2p per share.
The dividend has now been increased every year for ten consecutive years. Given last year’s difficulties, the chairman says that “the eventual outcome for revenue generated from both Portfolios was better than expected. Although there were some dividend cuts, the vast majority of investment company holdings maintained, or in some cases raised, their dividends, often by utilising revenue reserves built up over previous years. In addition, the income contribution from holdings in the “alternatives” sector proved very robust.” [We think this speaks volumes about the attractions of using investment companies within a portfolio designed to generate dividend income.]
Another name change likely
The manager’s business has been sold to AMERIPRISE and the new owners of BMO Managed Portfolio’s manager will be Columbia Threadneedle.
Extract from the manager’s report
Growth Portfolio – Leaders and Laggards
There are two common themes amongst most of the principal contributors to performance in the Growth Portfolio. First is that, with the exception of Chrysalis Investments which was only listed in late 2018, all the investment companies featured have been long term holdings, often for many years. Second is the prevalence of UK equity investment companies in the leaders list. Most of those mentioned got onto the list due to very strong performance in the second half of the financial year, as UK stocks with a domestic bias, typically medium-sized and smaller companies rallied strongly on prospects of the economy re-opening.
The single biggest share price gain was achieved by Henderson Opportunities Trust which rose 114% over the past twelve months. The trust, which invests in UK equities, is run by James Henderson and Laura Foll and has a market value of around £130m which means it falls under the radar of the large private wealth groups who would consider it too small to invest in. This resulted in a discount of nearly 20% a year ago; however, since then it has performed very strongly. The trust has an unconstrained mandate and has around 15% in FTSE 100 companies, 10% in FTSE 250 medium-sized companies with the rest in smaller companies with nearly 60% in FTSE AIM stocks. This area is invested in “next generation winners” with a clear focus on capital growth which has been the key driver to performance. The portfolio has significant exposure to the industrial, financial, technology and consumer discretionary sectors. The excellent asset performance has begun to be recognised as the discount has closed to around 5%.
Three other UK equity trusts featured strongly amongst the leaders. Artemis Alpha Trust, Fidelity Special Values and Henderson Smaller Companies Investment Trust with respective share price gains of 71%, 69% and 69%. The Artemis trust has an eclectic portfolio structured to benefit from a recovery in growth as the economy re-opens. It has sizeable positions in low cost airlines, housebuilders, retail and banking. The fund manager undertakes detailed due diligence and has developed a track record as a stock picker. Like Henderson Opportunities Trust, it is also unrecognised by larger wealth management groups with a market value of only £170m. However, due to strong asset performance it has experienced a similar tightening of the discount to around 4%. Fidelity Special Values employs a contrarian value-focused approach and has taken full advantage of a return to favour of “value” stocks since the vaccine announcements. The portfolio has a price earnings ratio of just 11x, a 20% discount to the already undervalued UK market. Once again, the focus is on more domestic companies in financial, consumer discretionary and industrial sectors. Henderson Smaller Companies Investment Trust, as the name suggests, is a UK small and mid-cap specialist, managed by Neil Hermon for nearly 20 years during which time it has built an outstanding performance record. Although employing more of a “growth” stock selection strategy, the trust has benefitted from its mid and small cap exposure with very strong asset performance.
Chrysalis Investments has been a remarkable success story in a very short time. The trust focuses on mainly UK high growth companies, perhaps two to three years from listing on the stock market. It has a concentrated list of ten to fifteen investments and is prepared to continue holding companies as they move from being private into the public arena, a recent example being The Hut Group. Chrysalis Investments is well placed to achieve strong growth in the coming years and its share price rose 82% over the last twelve months.
Of the laggards, none had significant price declines and the largest was BH Macro which fell 2%. Interestingly, the year before it was one of the top performers. This investment company invests in the Brevan Howard Master Fund which is a hedge fund which specialises in taking advantage of movements in interest rates, currencies and bond markets. It should be viewed as a defensive holding which does well when equity markets fall. European Opportunities Trust has been a long time holding in the portfolio; however, it had a sizeable holding in German digital payments company Wirecard that went bankrupt and is the centre of a fraud investigation. The fund manager is now very focused on recovering performance and there are early signs that is happening. The shares were flat over the year. Syncona invests in early stage, mainly British biotechnology companies with the backing of major shareholder, Wellcome Trust and has a highly capable and experienced management team. After some years of strong performance as portfolio companies have been sold realising strong returns, the past year has been quieter with three holdings that are listed in the US trading at lower levels due to adverse sentiment across the wider biotech sector. Longer term prospects for Syncona remain bright; it is extremely well funded with nearly half of net assets in cash. The shares rose 4% over the year. Also recording a 5% share price gain over the year was Worldwide Healthcare Trust. The trust has been held for many years in the Growth Portfolio and has a long-term record of outperformance. It is a specialist global healthcare portfolio investing across a series of different sub-sectors within healthcare. It is managed by Orbimed in New York who have deep resource with over 100 investment professionals focussed on the sector. The trust experienced a period of flat share price performance as the biotechnology and healthcare sectors in the US marked time during the US presidential election and this continued until Democrat plans for the sector became clear. The portfolio is modestly valued relative to the wider market and is well placed for the future.
Personal Assets Trust is another long-term holding in the Growth Portfolio and is part of a sub-group of positions that could be viewed as “portfolio protectors”. The others are BH Macro, Ruffer Investment Company, Capital Gearing Trust and RIT Capital Partners. They are defensive in nature and hold their value in market downturns which can affect the rest of the Portfolio adversely. Personal Assets Trust is about 40% invested in equities with the rest in defensive positions such as US TIPS (inflation linked bonds in the US). It would be surprising if the portfolio kept pace with the FTSE All-Share Index when it has a strong up year. In this context and given how its portfolio is structured a 8% share price rise is in line with expectations.
Income Portfolio – Leaders and Laggards
Two themes were evident amongst the winners in the Income Portfolio. First was private equity where the Portfolio has significant holdings in Princess Private Equity Holding and NB Private Equity Partners which respectively achieved share price gains of 58% and 60%. As with many investment companies in the sector, they sell at double digit discounts to net asset value despite strong asset performance and have recovered strongly from the worst effects of the pandemic. Geographically NB Private Equity Partners is mainly exposed to the US whilst Princess Private Equity Holding is more global. Both however, tend to focus on medium-sized and smaller companies in sectors like technology, healthcare, education and consumer which have strong long-term growth prospects. Underlying companies which are holdings for these investment companies often are focussed on capital growth and do not pay dividends to shareholders, however the ability of investment companies to pay a dividend from capital reserves allows them to offer an attractive dividend yield to shareholders. From an investment management standpoint, this allows assets (in this case private companies with high growth characteristics) to be included in an income portfolio.
The second theme was exposure to the UK with reference to companies and assets which will benefit from the eventual re-opening of the UK economy. Law Debenture Corporation and Lowland Investment Company are both in the UK equity income sector and had share price rises of 61% and 58% over the past twelve months. The investment portfolios of both investment companies are managed by James Henderson and Laura Foll of Janus Henderson and they employ a similar valuation driven process that aims to identify high quality companies that are undervalued at the time of purchase. Law Debenture Corporation is one of the largest holdings in the Income Portfolio and is a unique investment company. Within it is an independent professional services business which provides a series of niche services to corporate clients that generates steadily growing revenue (last year the division accounted for 68% of revenues but in a normal year it is around 40%). This means the fund managers have significant additional flexibility in terms of the investment portfolio to invest in lower yielding companies. Last year Law Debenture Corporation increased its dividend by 6% to yield 3.6% as at 31 May 2021. Lowland Investment Company managed to maintain its dividend by dipping into reserves, however a similar investment approach saw it achieve a significant recovery in both asset value and share price.
Secure Income REIT is a specialist real estate investment trust which seeks to own a portfolio of assets with very long leases often with an indexed-linked element to the rental charge. It had a share price gain of 58% over the past year. The core of the portfolio is a chain of private hospitals which have done well in the pandemic, however a portfolio of hotels operated by Travelodge was badly affected and stopped paying rent due to lockdown. Prospects have improved going forward and full rents are set to be restored by the end of this calendar year as the economy re-opens. Management maintained a well-financed balance sheet through the past year which puts the company in a strong position going forward with the result it has moved from being a laggard last year to a leader this year.
The theme amongst the laggards is that they all come into the all-embracing category that is called “alternatives”. There is no clear definition of what an “alternative” investment company is. However, a common thread amongst the very wide variety of mandates in this category is the lack of exposure to equity markets. In a year when the FTSE All-Share Index appreciated by over 23% (total return), the lack of equity sensitivity is the overriding reason why the investment companies below are in the laggards list.
Assura experienced a 2% fall in share price over the past twelve months after appearing in the top performers for each of the last two financial years. The company is a specialist healthcare REIT (real estate investment trust). It is the owner of primary care properties leased mainly to General Practitioner Partnerships across the UK for typically in excess of 20 years. With the NHS as the ultimate guarantor of the lease payments, of which many are index-linked, a secure and rising stream of income has many attractions; however, the share price lagged simply due to not having any exposure to a rising equity market.
Tetragon Financial Group’s share price was flat despite a decent 9% rise in asset value for 2020. The company sells at a 60% discount to asset value mainly as a result of its share structure which gives effective control to the managers. They do, however, have a very significant shareholding of over 25% so it can be argued there is some alignment of interests. The company is a financial conglomerate with divisions in asset management and infrastructure which are performing well and property and CLOs which did less well. A cut dividend did not help.
Biopharma Credit is a specialist credit company which lends against the royalty stream of income from approved drugs and life science products. Target borrowers are small to medium-sized pharmaceutical companies who typically need finance to fund research and development. Pharmakon Advisors manage the trust and have built significant resource, which enables detailed due diligence to be undertaken on the underlying products. Returns from this trust are mainly income-related and the dividend yield is 7%. The shares are priced in US$ and achieved a positive return but when translated to sterling fell 7% over the period.
The last company to feature in the laggards list is The Renewables Infrastructure Group which is one of the largest renewables funds in the UK with a market value of £2.7bn. It is 55% onshore wind, 35% offshore wind with the rest solar. About 40% of its assets are in Europe with the rest in the UK. As with others in the list of relative underperformers in the Income Portfolio, a lack of exposure to equity markets was the main reason it lagged during the past year. The shares still managed a rise of 11% and the dividend yield remains highly attractive.”
BMPI / BMPG : Great results from BMO Managed Portfolio