Mid Wynd International (MYI) is standing by its Lazards fund managers after the £205m global growth investment trust was hammered in the sell-off of “AI losers” and underperformed its stock market benchmark by nearly 26% in the year to 30 June.
Annual results showed the company made a total investment return of just 2% compared to 27.7% from the MSCI All Country World index. This was largely the result of 10 software, data and financial stocks, including management consultant Accenture, analytics group RELX and Intercontinental Exchange, which slumped 23-61% on fears their businesses could be made obsolete by artificial intelligence.
These knocked 15.5 percentage points off performance, while other “idiosyncratic” issues at animal healthcare company Zoetis, medical equipment maker Boston Scientific, Indian bank HDFC and South African pharmacy operator Clicks lopped off a further 5.8% of returns compared to the benchmark. The managers said they still owned and had conviction in their long-term outlooks despite their upsets.
Including MWY’s semi-annual dividends, this means the trust’s net asset value (NAV) has grown just 10.2% since Lazards’ Louis Florentin-Lee and Barnaby Wilson were appointed by the board to replace Artemis in October 2023. Over the same period up to 30 June the MSCI benchmark delivered a total 63.3% return.
Chair David Kidd said the board “deeply regrets this very disappointing investment performance” but said it presented “an unusual opportunity to invest in high-quality businesses at current valuations”.
Market conditions had been challenging for the managers’ quality growth strategy since they succeeded Artemis’ Simon Edelsten, Alex Illingworth and Rosanna Burcheri, Kidd said. The managers’ stock picks had derated significantly despite producing better operating performance than the index over the last three years.
“This cannot continue indefinitely and, given time, the strength of their earnings will be reflected in share prices. Our portfolio is trading on a rating relative to the MSCI All Country World Index seen in only two to three years in the last 20 years,” Kidd said.
Referring to the 10 AI casualties, the managers said: “In each of these cases, we believe the market is significantly overestimating the disruption risk presented by AI, while simultaneously underestimating the barriers to competition of these high-quality businesses and significantly discounting their ability to adapt and integrate AI into their own workflows.”
Warming to their theme, Florentin-Lee and Robinson expected all the portfolio compamnies to grow earnings faster than the market. “Given the attractive historical and expected growth profile of Mid Wynd, we believe this is a very favourable time to invest in our portfolio. 61% of our holdings are now trading in the bottom half of their price-to-earnings ratio range over the past decade, and 35% are at their lowest price-to-earnings ratio in the last ten years. Additionally, the portfolio’s relative valuation is at its lowest level in twenty years (excluding the financial crisis, when lower quality cyclicals saw their earnings fall and valuations rise),” they said.
Subject to shareholder approval of the final dividend of 4.75p, the total pay-out for the year rose 3% from 8.35p to 8.6p per share. Although revenue per share grew 9% from 5.54p to 6.05p, this was not enough to cover the dividends meaning that money will have to be drawn from revenue reserves which fell to just over £4m from £4.8m a year ago.
That still leaves a big buffer to support the 1%-yielder’s dividends given the cost of paying them also declined to £2.7m from £3.7m.
This may seem surprising given the increase in dividends per share but reflects the fact that the company spent £99m buying back nearly a third of its shares to defend a 2% discount. This huge level of buybacks shrank the company but did boost NAV by £2.1m, a gain that exceeded the company’s operating expenses.
As a result of the contraction, Lazards’ annual management fee fell to £1m from £1.5m although ongoing charges rose to 0.62% from 0.54%. To address this Lazards agreed to cut its annual management fee by 20% for two years from May. Under a tiered charging system, it now earns 0.32% a year up to £250m of market capitalisation down from 0.4%.
Our view
James Carthew, head of investment company research at QuotedData, said: “Mid Wynd’s pretty awful results demonstrate the struggle that quality-style managers have had over recent years. As with many peers, MWY’s managers had decided that a number of software and data businesses met their quality criteria and were prepared to hold these on high valuation multiples, but when agentic AI threatened these business models, their share prices collapsed. The managers are sticking by their portfolio but, as in HgCapital Trust’s case, even if it turns out that these stocks are AI winners not losers, I think it will take a long time for investors to regain confidence.”
