In January, the Trust’s net asset value (NAV) grew 5.0% versus a 4.2% rise in the FTSE All-Share (both on a total return basis). In a reversal of the performance during December it was the industrials sector that was the biggest contributor to performance. The weakness in industrials in late 2018 was generally due to concerns regarding a slowdown in global economic growth rather than anything company specific. As companies have begun reporting full year results, trading has been shown to be more nuanced than share prices were suggesting, with pockets of both strength and weakness.
The best performer during the month was specialist engineer Senior, which supplies components primarily to the aerospace industry. This performed poorly during December, owing to short-term pressure on margins as a result of them winning new work in their aerospace division (which requires upfront investment). This new work will lead to higher sales and earnings growth in future years so we were surprised at the scale of the negative reaction, therefore January’s strong performance was partially a reversal following a weak end to 2018.
The largest detractor from performance was insurer Hiscox. This had performed well during 2018 and has been a strong performer for the portfolio over the long term, having been held since 1992. As a result, it was trading at a material premium to the insurance sector. While Hiscox is an excellent quality company capable of generating good returns over the underwriting cycle, the scale of the valuation premium has led us to reduce the size of the position.
We were quite active during the month, using share price weakness to add to a number of existing holdings including Severn Trent, TT Electronics, Babcock and Findel. A new position was added in XP Power, which makes power converters for a range of end markets such as healthcare, general industry and semi-conductors. Due to concerns regarding a slowdown in semi-conductor end demand the shares have de-rated materially and we used this weakness to establish a position. While there will be pockets of weakness in end markets they generate excellent operating margins with a strong balance sheet.
Three positions were exited during the month – satellite operator Inmarsat, convenience store operator McColl’s and kettle safety controls company Strix. In the case of Inmarsat and McColl’s while the companies operate in completely different end markets the reasons for the sale were similar – both had high levels of leverage and little visibility regarding operational performance. Strix was sold on valuation grounds having been a strong performer since IPO.
December and January have been very volatile months with little company-specific news driving share price moves. We are aiming to use this volatility in both directions, to reduce holdings where we think the valuation looks high versus history and add to holdings where we think the share price reaction seems overdone. We would expect that our turnover will be slightly higher than it is normally (the long term average is approximately 20% p.a.) during this period.