December was a broadly flat month for the Trust in absolute terms, although it outperformed its benchmark. Lowland’s net asset value declined -0.3% on a total return basis (using debt at fair value) versus the FTSE All-Share which declined -2%. Keeping debt at par Lowland’s net asset value declined 0.6%.
The best performer during the month was aerospace and auto parts manufacturer, GKN. The shares rose sharply following a takeover bid by Melrose. The bid was rebuffed by the GKN board on the view that the offer undervalues the company’s potential. GKN’s management has subsequently released details of a new cost cutting, capital allocation and company separation plan that provides a roadmap to improving operating returns in the medium term. In our view, the new company strategy and takeover offer provide shareholders with two viable approaches to unlocking value after a period of underperformance. We have taken some profits in the position following the bid.
The largest detractor from performance during the month was Carclo, a technical plastic and specialist wire manufacturer. The group released a disappointing trading statement which missed expectations due to delays in several large contracts. Management are now reviewing potential operating efficiencies in order to improve margins in the plastics division. The company’s financing position remains healthy and the current valuation provides some downside protection as management works to improve business fundamentals; therefore we have not reduced the holding.
Gearing remains at a similar level to last month and currently stands at approximately 9.5% 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 opportunities to top up positions and during the month we increased our holding in Gordon Dadds after management announced the acquisition of legal firm, White & Black, which appears to be accretive to the business going forwards.
Net asset value - the total value of a fund's assets less its liabilities.
Total return - the financial benefit, including income and appreciation of capital, that somebody gets from an investment.
Fair value - a sale price agreed to by a willing buyer and seller, assuming both parties enter the transaction freely. Many investments have a fair value determined by a market where the security is traded.
Gearing - how much money the Trust borrows for investment purposes.