Fund Manager commentary - Lowland Investment Company



​Lowland Commentary, December 2018

In December, Lowland’s net asset value declined 6.5% while the FTSE All-Share benchmark declined 3.8%. The weakness in equity markets was predominantly because of concerns regarding slowing global economic growth. For example, there has been weakening economic data from China, the US economy will begin annualising corporation tax cuts and Eurozone economic growth has slowed notably from 2017. This resulted in slowing, but still positive, global economic growth and meant that those sectors that are more cyclically exposed (such as financials and consumer discretionary) underperformed.

For the UK specifically, small and medium sized companies underperformed large companies. Smaller companies are on average more exposed to the domestic economy and the uncertainty surrounding Brexit has led to these companies performing poorly. As a result, they are currently trading at a material valuation discount to the broader market. 

The best (actively held) performer during December was Palace Capital, a property company that owns office and leisure assets predominantly outside of London. The shares had performed poorly in recent months and the move upwards is on little news. The shares still trade at a material discount to net asset value and management think there is good scope for rental growth.

The largest detractor from performance was aerospace components manufacturer Senior. The company reported what were perceived to be disappointing results as they are facing short term pressure on margins and cash generation as a result of winning new work on aerospace programmes (that require an upfront investment). This resulted in a relatively minor earnings downgrade and the shares performed poorly as a result. Despite the short term earnings pressure on a longer term basis, this new work should lead to better sales and earnings growth and therefore we remain comfortable with the holding.  

The largest trade during the month was reducing the position in Royal Dutch Shell. This had become a large holding (approximately 7% of the portfolio as at the end of November) as we had added to the shares following the previous oil price fall in 2014 and they have subsequently re-rated. When we were previously adding to the shares there were questions around dividend sustainability (at the trough the shares traded on an over 8% dividend yield). The question mark over the dividend has now been largely resolved due to cost-cutting and the shares have re-rated to a just over 6% dividend yield. Therefore, we have reduced the holding to free capacity in order to invest in better value opportunities elsewhere. We have, for example, taken a small initial position in one of the UK housebuilders (Taylor Wimpey) as the shares are approaching book value. 

December was a disappointing end to what was a difficult year for both the Trust and the UK equity market as a whole. This has left the portfolio valuation looking low relative to where it has been in recent years. The average price/earnings of the portfolio (on a 12-month forward basis) is now 10.5 versus 11.3 for the FTSE All-Share benchmark. Therefore while there is a considerable degree of uncertainty surrounding the domestic (and global) economy in 2019, valuations are already factoring in a high degree of caution.

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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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 investment products and services are provided by Janus Capital International Limited (reg no. 3594615), 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 registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). 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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