All information is at 29 February 2020 and unaudited.
Performance at month end is calculated on a cum income basis
|Net asset value||-10.0||-3.8||16.9||40.0||88.4|
Sources: BlackRock and Datastream
*With effect from 22 March 2018 the Numis Smaller Companies plus AIM (excluding Investment Companies) Index replaced the Numis Smaller Companies excluding AIM (excluding Investment Companies) Index as the Company’s benchmark. The performance of the indices have been blended to reflect this.
|At month end|
|Net asset value capital only:||599.13p|
|Net asset value incl. income:||603.24p|
|Discount to cum income NAV||2.2%|
|Total Gross assets2:||£483.0m|
|Net market exposure as a % of net asset value3:||110.4%|
|Ordinary shares in issue4:||80,074,312|
|2019 ongoing charges (excluding performance fees)5,6:||0.6%|
|2019 ongoing charges ratio (including performance|
1. Calculated using the 2019 interim dividend declared on 23 July 2019 and paid on 28 August 2019, together with the 2019 final dividend declared on 06 February 2020 and due to be paid on 02 April 2020.
2. Includes current year revenue and excludes gross exposure through contracts for difference.
3. Long exposure less short exposure as a percentage of net asset value.
4. Excluding 456,014 shares held in treasury.
5. Calculated as a percentage of average net assets and using expenses, excluding performance fees and interest costs for the year ended 30 November 2019.
6. With effect from 1 August 2017 the base management fee was reduced from 0.70% to 0.35% of gross assets per annum.
7. Effective 1st December 2017 the annual performance fee is calculated using performance data on an annualised rolling two year basis (previously, one year) and the maximum annual performance fee payable is effectively reduced to 0.90% of two year rolling average month end gross assets (from 1% of average annual gross assets over one year). Additionally, the Company now accrues this fee at a rate of 15% of outperformance (previously 10%). The maximum annual total management fees (comprising the base management fee of 0.35% and a potential performance fee of 0.90%) are therefore 1.25% of average month end gross assets on a two year rolling basis (from 1.70% of average annual gross assets). On the first day of the financial year outperformance from the previous financial year (if any) is carried forward and accrued in the daily NAV released to the London Stock Exchange.
|Sector Weightings||% of Total Assets|
|Oil & Gas||0.1|
|Net current assets||0.8|
|Market Exposure (Quarterly)|
|Ten Largest Investments|
|Company||% of Total Gross Assets|
|Watches of Switzerland||2.8|
Commenting on the markets, Dan Whitestone, representing the Investment Manager noted:
During a month where global stock markets fell significantly, the Company fell by 10.0% (net of fees), marginally underperforming our benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index, which fell by 9.6%.
Unsurprisingly the short book contributed positively during the month, while the long book detracted slightly. We would, however, attribute the small underperformance of the long book to broader market movements rather than major stock specific disappointments. In terms of positioning, our exposure away from resources was a major positive contributor, however, our exposure to the Travel & Leisure and the wider Consumer Services sectors were a drag to relative performance during the month.
The two largest detractors to performance during the month were Dart Group and WH Smith, which were both impacted by their exposure to airline travel disruption caused by COVID-19. Both these shares have subsequently updated the market with negative outlook statements reflecting the sheer speed and severity of the disruption caused by necessary route closures. The inability to predict the duration of route closures for Dart or concession/shop closures in transportation hubs for WH Smith has created enormous uncertainty over the profit outlook and cash drain on both businesses. Both business we believe are well operated companies with strong track records of value creation, that have proved themselves as good operators and market share winners. Importantly they also have stronger financial structures than their peers and have levers to pull to reduce costs and manage liquidity, but the situation remains fluid hence the huge uncertainty and precipitous falls both these shares have seen in February and March. We remain owners of both companies and believe their management teams will do what is necessary in the interests of their customers, staff and shareholders to ensure they get through this period and emerge as stronger competitors with stronger market positions, as capacity inevitably comes out of the market. We do not think the medium to long term opportunity is reflected in the valuation of either company today.
On the positive side, the largest contributor to performance was YouGov. The shares continued to perform well after issuing a trading update at the end of January, highlighting particularly strong performance in its data products business, in both the UK and US. Elsewhere Avon Rubber also added to performance, benefitting from its positive trading update at the end of January.
We are currently witnessing significant levels of volatility, reflecting the huge uncertainty over the economic and societal impact from COVID-19, as country by country tries to grapple with this global pandemic. Investors continue to trade ahead of any company information, and it is really only in the airline and cruise ship industries where company updates have been given, but in time more sectors will follow. Clearly, in those industries the updates are negative and the outlook highly uncertain. However, in broader industrial companies there are fewer updates and it is uncertainty about Western demand rather than Eastern production that is at issue, since most company management teams have updated us that their production facilities are improving capacity as Chinese facilities return to work. This gives us some confidence that the economic effect can be a passing issue, which is not to dismiss it, but simply to observe that the initially infected areas appear to now be improving, though we accept these countries were very quick to act.
We can’t predict the duration of demand weakness caused by COVID-19 or accurately quantify the economic impact on GDP or for corporate earnings, so rather than look at conventional metrics like “Price to Earnings”, we instead are focusing on balance sheet leverage and liquidity, determining whether companies have sufficient cashflows to see them through. Those that survive are likely to emerge as stronger operators and could go on to thrive over the medium term.
We acknowledge that some of you may rightfully question why we have maintained a high gross exposure (c.127%) and a net greater than 100%. We accept that this will have been a drag on performance in the latter half of February, early March, but the speed and severity of market falls has certainly exceeded our own expectations, moreover, because of this rapid re-pricing of equity values there has been limited liquidity. We are mindful not to reduce the gross and net exposure too far in light of the potential rebound given the size of falls already seen, and also because we have taken this opportunity to close or reduce some of our shorts to lock in the gains as well as add to some of our long positions that we think have been significantly oversold. We take our role as fiduciary manager very seriously and will always do our best to protect your capital, but we must also not be afraid to use times like these when fear abounds, to capitalise on the opportunities we are presented with and ensure the Company is well placed to prosper over the coming months and years. We thank all our shareholders for their continued support.
1Source: BlackRock as at 29 February 2020