During April, the Trust rose in absolute terms and slightly underperformed its benchmark. Lowland’s net asset value rose 6.3% on a total return basis (using debt at fair value) versus the FTSE All-Share which increased 6.4%. Within this, a rise in bond yields meant that Lowland’s private placement note was fair valued downwards. Keeping debt at par, Lowland’s net asset value increased 6.2%.
The best performer during the month was Airea, a floor cover manufacturer. The shares rose sharply after James Halstead PLC announced it was evaluating a takeover bid for the company. No formal bid has been made but the shares remained at an elevated level throughout the month. UK takeover rules require James Halstead to make a formal offer on or before May 2nd, so we should have more information on this in due course. In the meantime, the business continues to grow strongly, margins are expanding and the cash generation is strong.
The worst performer during the month was shipbroker, Clarkson. The company issued a profit warning due to a challenging global shipping market and a foreign exchange drag from a stronger sterling. We continue to believe the shipping market will recover over the medium term and are prepared to look through short term weakness given the company’s market leading position.
Elsewhere, the Trust’s underweight position in oil & gas was detrimental to relative returns. Company share price performance had lagged the increase in the oil price in recent months, but the market reacted favourably during April to improved capital discipline and dividends being covered by free cash flow in the last set of results.
The increase in gearing recently is driven by the view that there are opportunities in the market to purchase sound companies at reasonable valuations with good long term growth prospects. We are therefore marginal net buyers on weak days of companies where we believe the challenges are well aired and discounted in the share prices. During the month, we added to HICL Infrastructure and reopened a position in Hammerson. HCIL Infrastructure has been impacted by fears that infrastructure assets will be nationalised under a Corbyn government, despite the contracts held by infrastructure owners being long term in nature. At purchase, Hammerson is trading around a 40% discount to its net asset value. Management is under pressure from investors to prove its asset valuations after a bid from Klepierre was rebuffed, so we could see asset sales and increased shareholder returns in time.
Absolute terms – An amount that is expressed in absolute terms is expressed as a fixed amount rather than referring to variable factors such as what you earn or the effects of inflation.
Benchmark – A standard against which a portfolio's performance can be measured. For example, the performance of a UK equity fund may be benchmarked against a market index such as the FTSE 100, which represents the 100 largest companies listed on the London Stock Exchange. A benchmark is often called an index.
Underweight – To hold a lower weighting of an individual security, asset class, sector, or geographical region than a portfolio’s benchmark.
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.