November was a weak month for the Trust. The net asset value fell almost 2.0% on a total return basis (with debt at fair value) relative to the FTSE All-Share which fell 1.7%. The reasons for the underperformance were largely one-off stock specifics.
The largest detractor from performance was aerospace components supplier Senior. Senior shares have performed well year to date on the expectation that margins have troughed in both their aerospace and industrial divisions. The reason for the share price fall in November is that one of its peers, GKN, has come under margin pressure and this is casting some doubt as to whether Senior can increase its margins to the degree that some are expecting. Another of the detractors at the stock level was Daily Mail & General Trust, which has downgraded earnings expectations for next year as a result of a business disposal and some weakness within their consumer division (where print newspaper circulation and advertising revenues continue to decline).
The best performer during the month was Avon Rubber, which produces protective gas masks used by the US Department of Defence as well as equipment for the dairy industry. There had been concerns that as Avon Rubber was coming to the end of a long standing contract with the US DoD, they would struggle to replace the lost earnings. The management team, however, have done an excellent job of diversifying revenue such that work on new defence programmes will be sufficient to offset the legacy contract and the company can continue to grow earnings.
During the month we were a net investor and gearing rose to 11% net assets. Within this we have continued to gently rotate the portfolio away from higher valued, often small and medium sized companies, towards out of favour large-cap companies. This month the largest purchases included Vodafone, following encouraging results in which revenue growth seems to be inflecting upwards, and Babcock following a material de-rating which we felt was overdone. The largest sales included convenience store McColl’s Retail, building materials company Marshalls and brick manufacturer Ibstock. All were reduced on valuation grounds.