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This week’s column amounts to a quick tour of UK equity income as several trusts in this popular sector feature in both our tables from Numis Securities.
Ever since the Brexit vote last summer we’ve become used to seeing equity income funds in Numis' ‘cheap’ list as the prospect of higher inflation and rising bond yields have undermined the appeal of the so-called ‘expensive defensive’ stocks in which many of the trusts invest.
So it’s striking to see Temple Bar (TMPL), one of the best known funds in the sector, enter the bottom of our second table as its shares start to look dear on Numis' data.
The shares closed yesterday on a 3% discount below net asset value, a big improvement on the 10% discount to which they fell last July after the Brexit vote. While any discount can be regarded as cheap, the trust’s ‘Z-score’ of 2.3 shows they are in fact relatively expensive given they have traded on an average of over 7% below their NAV in the past 12 months.
Just to recap, a Z-score is a measure used by analysts to tell if an investment trust share is trading beyond its normal one-year range. Broadly, a Z-score of -2 or below is considered cheap, while a score of 2 or more is viewed as getting expensive.
|'Cheap' trusts||Share price premium (-discount) to net asset value %||12-month average premium (- discount) %||Z-score|
|Vietnam Infrastructure (VNI)||-84.8||-18.4||-5.9|
|F&C Capital & Income (FCI)||-2.4||0.5||-2.3|
|Edinburgh IT (EDIN)||-6.2||-2.5||-2.1|
|Strategic Equity Capital (SEC)||-15.2||-7.5||-2.1|
|CATCo Reinsurance Opportunities C (CATC)||-5.7||-0.1||-2.0|
|Fundsmith Emerging Equities (FEET)||-0.9||1.9||-1.9|
|Perpetual Income & Growth (PLI)||-9.8||-6.3||-1.8|
|SME Loan Fund (SMEF)||-10.3||-7.1||-1.7|
|Schroder European Real Estate (SERE)||-7.3||3.8||-1.7|
|Terra Capital (TCA)||-18.2||-14.4||-1.6|
|Troy Income & Growth (TIGT)||-0.1||0.9||-1.6|
|NB Distressed Debt - Extended Life (NBDX)||-7.7||-5.7||-1.6|
|JPMorgan American (JAM)||-5.2||-3.5||-1.5|
|Qatar Investment Fund (QIF)||-18.2||-14.4||-1.4|
|Drum Income Plus REIT (DRIP)||7.0||11.0||-1.4|
Source: Numis Securities 23/2/17
Run by contrarian value investor Alastair Mundy, Temple Bar had a difficult 2014 and 2015 when it lost money and lagged the FTSE All Share index. The manager’s style of buying cheap, out of favour stocks was seriously out of step with the market and as a result its three- and five-year returns look mediocre, although over 10 years the trust still looks good, albeit a long way behind sector leader Finsbury Growth & Income (FGT) managed by Nick Train.
Last year, however, saw Mundy and Temple Bar bounce back with a total return of capital growth and income from the portfolio of 20.4%. As the latest issue of Investment Trust Insider highlights, Temple Bar has the deepest value-orientation of any investment trust on the London Stock Exchange according to investment analyst Morningstar.
While debate continues to rage about whether we will see a sustained recovery in value investing, as central banks like the US Federal Reserve pull back on the massive monetary stimulus they have provided since the financial crisis, there is no doubt that Temple Bar has been a big beneficiary of the rotation in markets so far. Over 12 months it has generated a 35% total return for shareholders, beating all its 19 rivals in the UK equity income sector.
In the £850 million trust’s final results this month chairman John Reeve expressed hope that after a protracted recession in value investing, the style would start to find favour. The dramatic narrowing in Temple’s discount suggests it has. The only question is whether investors should hold on and enjoy the trust’s attractive 4.4% yield or take profits on the rebound so far?
Incidentally, Numis, which serves as corporate broker to Temple, caught the rally well, with its analysts adding the trust to their list of ‘core buys’ last July.
|'Expensive' trusts||Share price premium (-discount) to net asset value %||12-month average premium (- discount) %||Z-score|
|Industrial Multi Property Trust (IMPT)||8.4||-31.0||3.6|
|Prospect Japan (PJF)||-2.4||-25.6||3.4|
|Honeycomb IT (HONY)||7.7||2.0||3.3|
|CVC Credit Partners Euro Opps - Euro (CCPE)||1.7||-2.3||2.9|
|Civitas Social Housing (CSH)||9.2||6.4||2.9|
|Better Capital 2012 (BC12)||-44.1||-64.2||2.7|
|NB Private Equity (NBPE)||-15.2||-23.9||2.7|
|HBM Healthcare Investments (HBMN)||-20.7||-28.4||2.6|
|Eurocastle Investment (ECT)||7.0||-12.5||2.5|
|UK Mortgages (UKML)||9.6||4.0||2.5|
|TR European Growth (TRG)||-10.2||-14.8||2.5|
|Raven Russia (RUS)||-1.1||-25.1||2.5|
|Globalworth Real Estate (GWI)||-23.4||-38.8||2.4|
|Temple Bar (TMPL)||-3.1||-7.2||2.3|
|Dunedin Smaller Companies (DNDL)||-13.1||-18.0||2.3|
Source: Numis Securities 23/2/17
Going back to the first table of ‘cheap’ looking trusts, there are clearly several opportunities in the UK equity income sector. Foremost among these are Mark Barnett’s Edinburgh (EDIN) and Perpetual Income & Growth (PLI) trusts, which continue to trade on attractive discounts of 6% and 10%.
Alternatively, if you don’t insist on buying trusts when their shares are below net asset value, you could consider Troy Income & Growth (TIGT), a more recent entrant into the top table. The £220 million trust has a good record and is conservatively managed by Francis Brooke and Hugu Ure, who, this week’s Skin In The Game report from Canaccord Genuity revealed, hold £2.66 million and £74,973 respectively in its shares.
The trust operates a ‘zero discount policy’ which means it buys back and issues shares with a view to ensuring the shares don’t stray too far from their underlying net asset value. In recent years the trust has tended to trade at a small premium, which is why even though the shares stand at ‘par’, or NAV, they earn a cheapish-looking Z-score of -1.6.
It’s a similar situation with F&C Capital & Income (FCI). A 2.4% discount is hardly earth-shattering but compared to the average 0.5% premium of the past year, it is cheap and merits a -2.3 Z-score.
Although nowhere near as value-oriented as Temple Bar, FCI has enjoyed a strong rally in the past year, although longer-term performance of the £280 million fund under fund manager Julian Clare does not really stand out in this competitive sector. However, it offers a slightly above average yield of 3.6% and has grown its dividend every year since 1992.