May was a good month for the Trust in absolute terms although it underperformed the broader market. The net asset value rose 2.7% on a total return basis (with debt at fair value) relative to the FTSE All-Share which rose 4.4%.
The primary reason for the underperformance was that more domestically exposed smaller and medium sized companies (which are a substantial part of Lowland’s portfolio) underperformed their more international counterparts in the FTSE 100. In our view there are a few reasons for this. Firstly the domestic economic environment has become more uncertain as a result of the upcoming general election (where polls are narrowing at the time of writing). Secondly the economy is slowing, with Q1 GDP growth coming in lower than expected, and inflation is rising.
Among the largest contributors to performance during the month was Stobart Group. Following the IPO of their Eddie Stobart Logistics business in April they reported encouraging results from the remaining portfolio of assets such that they increased the quarterly dividend by 50%. As a result we added a small amount to the holding. Insurer Hiscox also performed well as the growth in their retail business (in both the UK and internationally) is allowing them to better withstand a tough pricing environment in other areas of the insurance market.
The biggest active detractor from performance was industrial chain manufacturer Renold. The end markets to which it is exposed, such as mining, energy and agriculture have been tough and this has put pressure on sales. Management, however, have made good progress in reducing costs and we think this puts them in a good position when the end markets recover.
We were modest net sellers during the month and the gearing is now 12%, having been 13% at the end of April. The sales were all companies where, while we like the underlying business and the management team, valuations are reaching levels where we feel it is appropriate to take profits. This included Scapa, Hill & Smith, Conviviality Retail and Johnson Service Group. We are, however, still finding attractive value opportunities to invest in, for example we took a small position in an IPO called PRS REIT. This is a REIT of private residential housing that has the potential for a 6% and growing dividend yield.