In March Lowland’s net asset value fell 1.1% while the FTSE All-Share benchmark rose 2.7%. The predominant reason for the underperformance was falling bond yields which came about due to ‘lower for longer’ interest rate guidance from central banks such as the Federal Reserve. This had two effects on the portfolio – the first was that in a reversal of trends year to date defensive sectors (such as consumer staples) performed strongly while cyclical sectors (such as industrials) underperformed. The second effect was that the fair value of the private placement moved quite sharply upwards and this is now taking 9p off the fair value NAV (detracting 0.3% from performance during the month).
At the stock level, the best performer was Churchill China, which makes ceramics primarily for the hospitality industry. It reported excellent full year numbers in which the hospitality part of the business grew strongly and it continues to build on its existing net cash balance sheet. Some of the industrial holdings (such as Somero Enterprises, TT Electronics and XP Power) also performed well following encouraging results.
The largest (actively held) detractor during the month was K3 Capital, a UK corporate broker. There was no company specific news but the business is entirely domestic and the shares have performed poorly in anticipation of the fact that there may be fewer willing buyers and sellers of UK businesses in the current climate. On weakness we added (in small size) to the holding as over the long term K3 Capital are well placed to take market share and in the interim have a strong net cash balance sheet.
The largest purchase during the month was Royal Bank of Scotland. Earlier this year RBS announced an encouraging special dividend and in our view has the potential to return materially more cash to shareholders (via dividends and share buybacks) in the future. We also took a small new position in UK housebuilder Bellway, which trades at a discount to the wider UK housebuilding sector despite similar returns and better potential for volume growth.
The FTSE All-Share is currently paying a 4.5% dividend yield with scope to modestly grow while the 10 year UK gilt is now yielding less than 1%. Therefore while there is considerable economic uncertainty (both in the UK and globally) what gives us confidence to be net investors is the available cash returns to shareholders.