March Commentary - Lowland Investment Company

12/04/2018

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​During March, the Trust declined in absolute terms and underperformed 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 1.8%. Within this, a decline in bond yields meant that Lowland’s private placement note was fair valued upwards. Keeping debt at par, Lowland’s net asset value declined 2.7%.


The best performer during the month was K3 Capital, a financial services provider. The company issued a very strong trading update, showing good performance across all divisions. We see further upside in the story given the strength of the deal pipeline and ongoing revenue growth opportunities.


The worst performer during the month was drinks wholesaler, Conviviality. The company was partially hit by a difficult trading environment. However, the key issue was a series of internal control breakdowns that led to an initial profit warning over the current year’s guidance level and, subsequently, to an unexpected tax bill which had not been accounted for in the company’s cash flow forecasts. These two events resulted in a cash flow shortfall. Management approached investors and suppliers with the aim of raising £125m in order to provide adequate financial flexibility to trade out of their financial difficulties. They were unable to raise the necessary funds and management has since announced that they will likely file for administration. There are several parts of the business that could be sold off to create value, but the ability of the company to do this fast enough to plug the cash shortfall seems limited in our view. It is clear now that there was a lack of controls and oversight in the business. In fact, board members and management were purchasing shares shortly before the initial profit warning, and again following the first profit warning. We have written the value of the company down to zero and await further developments regarding potential asset sales.


Gearing has increased versus last month and currently stands at approximately 14% of net assets. We are marginal net buyers on weak days. We are gradually purchasing sound companies, which may be facing challenges, but that are trading on undemanding valuations. For example, during the month, we added to positions in Greene King, Pennon and National Grid, where valuations are low and the problems are well aired.

 

 

Glossary:

Gearing -

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Please read the following important information regarding funds related to this article.

Lowland Investment Company plc

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Specific risks

  • Active management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • This trust is suitable to be used as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this trust.
  • The trust could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the trust.
  • If a trust's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio diversified across more countries.
  • The return on your investment is directly related to the prevailing market price of the trust’s shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the trust. As a result losses (or gains) may be higher or lower than those of the trust’s assets.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The trust may use gearing as part of its investment strategy. If the trust utilises its ability to gear, the profits and losses incured by the trust can be greater than those of a trust that does not use gearing.
  • Some of the investments in this portfolio are in smaller companies shares. They may be more difficult to buy and sell and their share price may fluctuate more than that of larger companies.

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