During February, the Trust declined in absolute terms, although it outperformed its benchmark. Lowland’s net asset value declined 3.0% on a total return basis (using debt at fair value) versus the FTSE All-Share which declined 3.3%. Within this, a rise in bond yields means that Lowland’s private placement note was fair valued downwards. Keeping debt at par, Lowland’s net asset value declined 3.2%.
The best performer during the month was Royal Mail. The shares rose after the company announced an agreement with the union regarding pay and pensions. Analyst forecasts have been revised up in response to the news, as the deal provides improved visibility on future wage and pension costs. We continue to hold the shares given that we think the story is de-risked by this agreement and there remains a structural growth opportunity within the Packages segment.
The largest negative contributor during the month was early stage pharmaceutical company, 4D Pharma. The shares underperformed as investors became frustrated by the lack of news about a joint venture to co-fund future clinical trials. We continue to be patient with the stock because we believe the company has a good cash position and has reported positive indications from their bacteria treatments in early trials. Elsewhere, Standard Life Aberdeen (SLA) performed poorly after reports surfaced that Scottish Widows and Lloyd’s Banking Group Wealth are reviewing their long term asset management agreements, including the £109bn of assets currently managed by SLA. The shares took a further step down after the company announced the sale of its UK and European Life business to Phoenix at a perceived low valuation. We still see value in SLA despite the short term difficulties and have, therefore, maintained the position.
Gearing has increased slightly versus last month and currently stands at approximately 11.9% of net assets. On the whole we continue to find that companies that we think are well managed with good potential for earnings growth are trading at relatively high valuations versus history. In our opinion this does not, however, preclude there being opportunities to gradually purchase sound companies, which may be facing challenges, but that are trading at undemanding valuations. For example, during the month, we took advantage of weak trading days to initiate positions in Greene King, Hammerson and Severn Trent, where the valuations are low and the problems are well aired.
Net asset value – the total value of a fund’s assets less its liabilities.
Gearing – how much money the Trust borrows for investment purposes.