December was a good month for the Trust in absolute terms, although it underperformed its benchmark. Lowland’s net asset value rose 3.4% on a total return basis (using debt at fair value) versus the FTSE All-Share which rose 4.8%.
Among the best performers was bowling alley operator Ten Entertainment. Its main peer, Hollywood Bowl, reported good results in December which showed that despite the difficult retail environment in the UK, sales growth in bowling as a subcategory remains encouraging. Also among the largest contributors was insurer Hiscox, as there are expectations that January insurance renewals will show positive pricing trends following a number of catastrophes (such as US hurricanes) in 2017. We have gently reduced the holding as while it remains an excellent quality business (capable of generating high returns over the underwriting cycle) it is trading on a high price to book versus history.
The largest (actively held) detractor from performance was specialist materials designer and manufacturer Low & Bonar. This reported poor results from its coated textiles division, which makes materials such as truck tarpaulins. This was particularly disappointing as it reported weak results from a different division in October, so earnings forecasts have quickly deteriorated. Where the shares are currently trading they are, in our view, not factoring in a recovery in margins from here and there are good parts of the business that remain (so far) unaffected; therefore we have not reduced the holding.
Gearing remains at a similar level to last month and currently stands at approximately 10% net assets. On the whole we continue to find that well managed companies with good potential for earnings growth are trading at relatively high valuations versus history. This does not, however, preclude there being interesting opportunities and during the month we added a new position in Sabre Insurance, a motor insurance IPO. This provides insurance for people that are difficult to insure (such as students, professional sports people or people with expensive cars). Sabre have a strong underwriting track record in their niche portion of the market and came to the market with an attractive dividend yield.
Absolute terms – refers to the actual, not relative investment returns achieved.
Net asset value – The total value of a fund's assets less its liabilities.
Total return basis – includes interest, capital gains, dividends and distributions realised over a given period of time.
Debt at fair value – the price that would be received should the debt be sold in the current market.
High price to book – a ratio used to compare a company’s current value to its book value. (Book value being the total value of the company's assets that shareholders would theoretically receive if a company were liquidated).
Gearing – A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes.
IPO – short for initial public offering, this is the first time that the stock of a private company is offered to the public.