During July, Lowland’s net asset value increased 0.8% on a total return basis (using debt at fair value), underperforming its benchmark which rose 1.3%. Within this, an increase in bond yields meant that Lowland’s private placement note was fair valued downwards. Keeping debt at par, Lowland’s net asset value increased 0.7%. The increase in the Trust’s exposure to larger companies over the year has marginally increased the overseas earnings of the portfolio. However, we remain heavily exposed to UK domestic earnings, which have been subject to a derating by investors.
The best performer during the month was technical plastics company, Carclo. Consort Medical made an indicative offer to acquire Carclo at a 44% premium to the pre bid share price. The board rejected the approach, viewing it as undervaluing the company’s long term value. The shares reacted positively to the news. We continue to hold the shares because we see real opportunity for value creation once management have addressed the current issues within the company, focusing the business on technical plastics and LED technologies. In addition, the management team has recently been strengthened with hires for the positions of Chairman, Finance Director and a new Non-Executive Director. Takeover activity is marginally helping value oriented investors at a time growth is substantially outperforming.
The worst performer during the month was pharmaceutical company, 4D Pharma. The shares had performed strongly during the month of June after a clinical collaboration with Merck was announced. In the absence of negative news flow, the decline in share price during July appeared to be profit taking by some investors. Babcock, a support services contractor, also underperformed during the period after the company released a disappointing set of results. Going forwards, the bid pipeline appears to be stronger and revenue visibility has improved. We see this as supportive for future growth in the company and continue to hold our position.
We are 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 participated in capital raises for Phoenix Group, DS Smith and Ilika, believing the funds will be used to create long term shareholder value. DS Smith, a paper company, is acquiring Europac in a deal that will increase DS Smith’s European footprint and provide cost efficiencies. Phoenix Group, an insurer, is acquiring the Standard Life Aberdeen’s UK and European Life assets at a low valuation. Ilika, a solid state battery company, raised funds to invest into large capacity batteries which have wide applications, including usage in electric vehicles. We sold our holding in Pearson, a publishing company. After a share price move upwards, the current valuation appears to be pricing in a turnaround ahead of any real progress.