CT Global Managed Portfolio reflects on difficult year of performance

CT Global Managed Portfolio (income shares: CMPI; growth shares: CMPG) has published its annual results for the year ended 31 May 2024. The income share provided an NAV total return of 7.0% (2023: -7.4%), underperforming its All-Share benchmark, which the trust says returned +15.4% (2023: +0.4%). The income shares paid an annual dividend of 7.40p per share (equivalent to a yield of 6.2% at the trust’s year end), an increase of 2.8% over the prior year’s 7.2p per income share. Share price total return for the income shares was 5.2% for the financial year (2023: -2.1%), also underperforming its benchmark. The growth shares provided an NAV total return of 12.7% (2023: -5.8%) and a share price total return of 12.9% (2023: -7.8%), both underperforming the benchmark.

A key factor behind the underperformance of the income portfolio was the performance of certain alternative investment companies. Discounts remained wide and interest rates stayed ‘higher for longer’, which led to reduced NAVs and share prices. In particular, this affected investment companies in the infrastructure, renewable energy infrastructure, property and debt sub-sectors where the income portfolio has a much higher exposure than the growth portfolio.

For income shareholders, dividends have now been increased in each of the last 13 years. For growth shareholders, their net asset value compound annual growth rates to 31 May 2024 have been 6.6% over 10 years and 9.1% over 15 years, which the trust says compares to compound annual growth rates of 5.9% and 8.6% respectively for its All-Share benchmark for the same periods.

Dividend target for 2025 year

The trust’s board says that, in the absence of unforeseen circumstances, it intends to pay four quarterly interim dividends and each of at least 1.85p per income share so that the aggregate dividends for the financial year ended 31 May 2025 will be at least 7.40p per income share.

After allowing for the payment of the fourth interim dividend for the year ended 31 May 2024, CT Global Managed Portfolio Trust has a revenue reserve of £2.87m, equivalent to approximately 75% of the current annual dividend cost (at 7.40p per Income share). In addition, the trust has a £29.6m distributable reserve (the 2022 special reserve was created following the cancellation of the share premium account) which is attributable to the income portfolio. This reserve can be drawn on to support the payment of dividends to income shareholders if and when considered appropriate by the board.

Gearing

The trust has a £5m unsecured term loan at a fixed interest rate of 2.78% (which is fully drawn down in the income portfolio) and a £5m million unsecured revolving credit facility (RCF), both with The Royal Bank of Scotland International Limited, which are available until 10 February 2025. At the year end £2m (2023: £2m) of the RCF had also been drawn down in the income portfolio, resulting in total borrowings of £7m (2023: £7m) in the income portfolio (10.4% of its gross assets (2023: 10.4%)) and zero in the growth portfolio.

Management of premiums and discounts to NAV

In normal circumstances, the trust’s board aims for the discount to NAV at which the two share classes trade to be no more than 5% and, during the financial year ended 31 May 2024, the income shares and growth shares traded at average discounts of -0.2% and -2.5% respectively. The board says that it is active in issuing shares to meet demand and buying back shares when this is appropriate. During the financial year 1,225,000 new income shares were issued from the trust’s block listing facilities at an average premium to NAV of 1.6%. In addition, 2,440,000 growth shares were bought back into treasury at an average price of 231.76p per growth share and at an average discount to NAV of -3.3%. No income shares were bought back or growth shares issued.

The board is seeking shareholders’ approval to renew the powers to allot shares, buy back shares and sell shares from treasury at the forthcoming Annual General Meeting (AGM). Specifically, the board is seeking approval to allow the trust to issue (or sell from treasury) up to 20% of its income shares and up to 20% of its growth shares without rights of pre-emption and, in this respect, there are two resolutions proposed.

Each resolution is for up to 10% and, therefore, for an aggregate of up to 20% of each of the income shares and growth shares. This approach allows any shareholder who may not wish to give approval to an aggregate limit higher than that recommended by corporate governance guidelines the ability to approve the first resolution for up to 10% and to also consider the second resolution separately for a further 10%.

Share Conversion Facility

Shareholders have the opportunity to convert their income shares into growth shares or their growth shares into income shares annually subject to minimum and maximum conversion thresholds which may be reduced or increased at the discretion of the board. The next conversion date (subject to minimum and maximum thresholds) will be on 24 October 2024.

Investment manager’s comment on the performance of the income portfolio

“A common theme amongst the underperformers in the Income Portfolio was widening share price discounts, much of which was the result of rising interest rates and importantly higher discount rates which are used to value future cash flows and assets for many alternative investment companies. The renewable energy infrastructure sector has been particularly affected as illustrated by The Renewables Infrastructure Group whose share price total return was -11%. The company’s net asset value was impacted modestly by lower power prices and was broadly flat over the year; however, the share price discount widened sharply to over 20% which reflected investors’ fears over the impact of higher interest rates. Where possible, companies have sought to prove valuations by selling certain assets and by increasing dividends. The Renewables Infrastructure Group increased its dividends by 4% to yield in excess of 7%. However, despite this, the shares lagged over the past year. Something similar occurred to Impact Healthcare REIT (‘Impact’) which has been held since its IPO in 2017. Impact operates as a real estate investment trust (‘REIT’) and acquires and develops real estate assets principally for care homes in the healthcare sector, but it does not manage the operations. The company has a conservative balance sheet and has steadily grown rental income and net asset value; however, the shares have de-rated to a discount of around 28% and are thoroughly out of favour. Encouragingly, the dividend has continued to move ahead such that the shares yield over 8%. Rather surprisingly, global equity income trust The Scottish American Investment Company (‘Scottish American’) delivered a marginally negative share price total return of -0.3% for the past year. The net asset performance of Scottish American has been good over the long term. However, the entire gain in net asset value over the past year was offset by the share price moving from trading around par a year ago to a discount of 9% by the end of May 2024. Scottish American was one of the Income Portfolio’s best performers the previous year.

“Turning to the leaders and the best performer in the Income Portfolio with a share price total return of 29% was UK equity income trust Temple Bar Investment Trust (‘Temple Bar). Since Redwheel Partners took over management of the portfolio towards the end of 2020, Temple Bar has handsomely outperformed the FTSE All-Share Index. They employ a deep value style and work out an intrinsic value for each of its 25 holdings determined by free cash flow generation. Temple Bar has also benefitted from value stocks significantly outperforming growth stocks over the last three years after a long period in the doldrums. A number of holdings have been subject to bids which is not surprising given the cheapness of the underlying portfolio which is valued at a price earnings ratio of only 8.5x. Prospects for Temple Bar continue to be promising. Next best performer was The Mercantile Investment Trust (‘Mercantile’) with a share price total return of 27%. Mercantile, a strong performer over the long term, has a market value of £1.8bn and specialises in investments in the FTSE 250 Index. This is home to many of the UK’s best growth companies. However, when inflation started to rise and interest rates were increased to combat inflation from the start of 2022 onwards, medium and smaller companies in the UK underperformed the FTSE 100 Index of the largest companies by a substantial margin. Valuations in the medium and smaller companies segment of the equity market have become very attractive and Mercantile has taken advantage of this. It has a good record of dividend growth with a 3.4% yield. Despite last year’s share price performance, the discount remains wide at around 12%. The third best performer was another trust from the JPMorgan stable, that of JPMorgan Global Growth & Income which had a share price total return of 23%. The trust was also one of the best performers in the Income Portfolio last year and pays 4% of its year-end net asset value as a dividend. Around half of the dividend is generated from the underlying portfolio, with the balance coming from capital. This has allowed the trust to have large holdings in Nvidia, Microsoft, Amazon and Mastercard which typically either do not pay a dividend or only a small dividend. It has meant the trust is able to gain exposure to a series of strong performing technology companies which has been key to good performance. As a result, the trust has traded consistently at a small premium and has been able to issue shares. It has a dividend yield of 3.3% and a market value of £2.7bn.”

Investment manager’s comment on the performance of the growth portfolio

“Starting with the underperformers in terms of magnitude, the largest was the 27% fall in the Syncona share price total return, which was a major disappointment. Syncona aims to create and build life science and biotechnology companies from UK science focussing on unmet medical needs for patients. It aims to have around 20-25 companies (mainly private) where it takes significant shareholdings. The net asset value has gone sideways over the last three years. However, over the next twelve months there are a series of key trial data announcements from portfolio companies which could boost the net asset value if results are positive. Syncona is well-financed and expects to be able to fund the next three years of development for underlying holdings at approximately £200m p.a. It has net cash of over £450m and a market value of around £700m. The shares have moved to a discount of over 40%, which highlights how unloved private biotechnology companies have been and accords very little value to the underlying holdings. Shares in BH Macro declined 11% over the past year and, similar to Syncona, the net asset value has been flat over the period and the share price has been a victim of discount widening moving from a small premium to a discount of 10%. BH Macro is a macro hedge fund which exploits opportunities in interest rates, bonds and foreign exchange. A key reason it is held is due to the nature of the returns it has generated which tend to be inversely correlated with the direction of equity markets which helps to cushion overall performance in bear markets. BH Macro has begun to repurchase shares. Finsbury Growth & Income Trust is a UK equity trust managed by well-known investor Nick Train. It has had a difficult past year after being one of the Growth Portfolio’s better performers the previous year. The trust invests in large UK companies with consistent earnings growth. There is a focus on global consumer brands, digital transformation and data analytics. Certain of the consumer names, such as Diageo and Burberry, have had a challenging last year. However, more than half of the portfolio now comprises companies which benefit from data analytics, such as The London Stock Exchange, RELX and Experian, where prospects for growth are excellent. The shares fell 3% last year as the discount widened to 8%.

“Just as widening discounts were a common theme amongst the laggards, exposure to companies with secular growth characteristics was a common theme amongst the leaders. Allianz Technology Trust and Polar Capital Technology Trust both saw share price gains of 35% whilst Scottish Mortgage Investment Trust was not far behind with a gain of 33% over the fiscal year. The rapid development of Artificial Intelligence was a key factor behind the share price performance of all three trusts. All three have built large holdings in Nvidia and ASML, which make semiconductors needed in AI, as well as Microsoft and Meta, which are also perceived beneficiaries. Although some believe AI is no more than a fad and a bubble, experienced investors and commentators on the technology sector liken the advent of AI and its development as akin to where the internet was in 1995. All of these have been long-term holdings for the Growth Portfolio. While all were reduced in January 2022, all were increased during the year under review.”