Fund Manager Commentary - Lowland Investment Company

14/06/2019

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​In May Lowland’s NAV fell 4.2% versus a 3.0% fall in the FTSE All-Share index. At the sector level industrials were the largest detractor as the imposition of US tariffs on both Chinese and Mexican imports led to concerns about lower global economic growth. This impacted some of Lowland’s broader industrial holdings including IMI (-13.8% during the month) and Morgan Advanced Materials (-9.3%), as well as XP Power (-13.4%) which produces roughly 40% of all products in China (about half of which are shipped directly to the US). A sharp downward movement in bond yields also meant the fair value of the debt was revalued upwards and this detracted 0.4% from NAV during the month.

At the stock level the largest contributor (that is actively held) was Castings. This reported good results from its foundry division (partly as a result of orders being pulled forward ahead of the original ‘Brexit’ date of the end of March). As a result earnings were ahead of expectations. We continue to hold the position as the UK lacks foundry capacity and Castings is among the market leaders, with a strong net cash balance sheet. 

The largest detractor was building materials company Low & Bonar, which reported a disappointing trading update. While we participated in the emergency rights issue earlier this calendar year as in our view there is a core building materials business that is capable of generating good (mid-teens) operating margins, the underlying trading conditions have worsened and the balance sheet even after the rights issue is difficult.

During the month the largest individual purchase was adding to the existing holding in GlaxoSmithKline. After many years of little earnings growth, the company can return to (modest) growth driven by strength in their vaccines and consumer health divisions. Within their pharmaceutical division one of their largest respiratory drugs has had generic competition enter the market, meaning that earnings can be re-set to a lower base from which to grow in future years.  The holding in Direct Line was also added to. While the motor insurance market is difficult currently (as claims inflation is outpacing price increases) Direct Line is managing to maintain margins and we therefore think the current 9% dividend yield is sustainable. 

It is a particularly difficult period to have conviction, with the dual uncertainty of tariffs (industrials are approximately 25% of the total portfolio) and domestic uncertainty (best illustrated by Sterling which has fallen from ~$1.30 to $1.26 during the month). Where we have been adding to holdings it has (broadly) detracted from performance as it is our inclination to add to ‘value’ within the portfolio and these companies have tended to continue to de-rate. The difference in valuation levels between defensive and cyclical companies has reached extreme levels. The value opportunity is clear in certain sections of the market but we will continue to add slowly, recognising that it is detracting from performance.

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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