Manchester and London (MNL) has announced its annual results for the year ended 31 July 2022, during which an NAV total return of -23.0%* (2021: 8.7%*), which represents a 30.3% underperformance against its benchmark (the MSCI UK Investable Market Index). Software, which represents a large percentage of MNL’s portfolio, had a tough year with the North American software sector down 16% in sterling terms (S&P North American Expanded Technology Software Index). MNL’s manager says that this negative performance was predominantly driven by rising yields which led to declines in the valuation of high duration equities.
MNL began the period with 22.7% of the portfolio directly exposed to China. The Chinese Technology sector declined significantly during the first three quarters of MNL’s financial year due to a broad regulatory clampdown from the Chinese Communist Party which was compounded by concerns over China’s alignment with Russia regarding the war in Ukraine. Reflecting this, the portfolio’s Chinese exposure accounted for over half of the portfolio’s GBP negative return for the financial year.
Up to 15 March 2022, the date at which the Company sold its remaining Chinese exposure, the Hang Seng Tech Index had a total return of -45.8% in sterling and, reflecting this, the contribution from Chinese Technology positions was -12.3% in sterling terms (including costs). The contribution in sterling over the financial year from non-Chinese Technology positions was -10.7% in sterling terms (including costs).
MNL says that its benchmark had a positive total return of 7.3% over the period, meaning that it has now underperformed the benchmark for the three years to 31 July 2022 on a total return basis by 14.5% (2021: 32.2% outperformance). However, it should be noted that in accordance with the variable management fee arrangements, the manager has received a lower management fee percentage of 0.25% since the beginning of April due to this underperformance.
The 12.5% decrease in the value of Sterling against the US Dollar over the year was a tailwind for performance due to the significant level of US Dollar exposure in the portfolio. Overall, the manager estimates that the gain in portfolio performance from foreign exchange movements was roughly 10.3%.
Over the course of the year, MNL’s discount widened from 13.78% to 21.1%, although a number of the larger technology focused investment trusts, listed in the UK, also experienced widening discounts over this period.
Dividend – 50th anniversary paid
MNL is proposing a final ordinary dividend of 7.0p per share for the financial year 2022 (31 July 2021: 7.0p per share). Earlier in the year, MNL paid a special dividend of 7.0p per share in celebration of the 50th anniversary of its listing on the London Stock Exchange which was in addition to an ordinary interim dividend of 7.0p paid in May 2022 (31 January 2021: 7.0p per share). Accordingly, on a per share basis, the dividends proposed or paid out in respect of the 2022 financial year total 21.0p (financial year 2021: 14.0p). Excluding the special dividend, these dividends represent a yield of 3.6% on the share price as at the year-end (2021: 2.4%).
Portfolio activity – switching horses
The manager says that, while it believes that the long-term secular growth drivers in Technology are still intact, further rate rises from the Federal Reserve, as it combats persistently high inflation, are likely to remain a headwind to valuations whilst both the broader macro environment and the geopolitical tensions between the US and China could also cause further volatility. Representatives from the manager attended the Morgan Stanley Technology Conference in the USA in March and say that it was apparent that the US digital transformation story still had a long way to run. The manager concluded that an opportunity was being presented to “switch horses” from a regulation beaten and slowing economy driven Chinese Technology sector to a more upbeat US Technology sector which had also seen material devaluations.
Reflecting this, all remaining direct Chinese exposure holdings were sold in March as, regardless of the potential returns that might be derived from China in the future, the manager believed that the risk of these positions had crossed a point that put these holdings outside its preferred risk management boundaries. The manager says that it is pertinent to note that it held Tencent Holdings Ltd and Alibaba Group Holding Ltd because it believed that the growth of Cloud Computing in China would be dramatic and these stocks were the largest private providers of Cloud Technologies. Since the sale of these holdings, it has been reported in the financial press that further government regulation has seen a shift in the market share from these private operators in favour of state controlled operators hence the manager’s investment thesis for these two stocks has materially deteriorated.
During the final quarter of the financial year, MNL’s manager incrementally shifted the portfolio’s exposure from “Soft Technology” stocks to “Hard Technology”, as evidenced by the smaller sector weightings to Communication Services and Consumer Discretionary from the prior year. It says that this shift has generally been vindicated in recent earnings where “Hard Technology” positions have broadly shown greater resilience to a deteriorating macro-economic outlook compared to consumer exposed Technology stocks.
Chairman’s outlook
Daniel Wright, MNL’s chairman, says that the key variables for MNL’s next financial year’s performance are likely to be movements in the US sovereign yield curve and inflation & economic expectations, the movements in energy prices, the functioning of supply chains, how the Federal Reserve and other Central Banks respond to the aforementioned, whether there is any further material events in the break down of relations between the Chinese and US governments, and the regulation of Technology companies globally.