Fund Manager Commentary - Lowland Investment Company

15/08/2019

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It was a difficult month for performance; the Trust’s net asset value fell 1% relative to a 2% rise in the FTSE All-Share. The decline in Sterling meant international earners performed well while domestic stocks (on the whole) underperformed. This can be seen at the index level where the FTSE 100 outperformed the FTSE 250, Small Cap and AIM. There was also some M&A activity within the FTSE 100 in which we did not participate (Just Eat being taken over by Takeaway.com, and LSE buying data analytics firm Refinitiv).

At the stock level the largest (active) detractor from performance was industrial chain company Renold. This discovered fraudulent accounting in its gears business where profit had been overstated for several years. We have spoken to the management team and have maintained the position. The gears division could be disposed, leaving an industrial chains business with good market share and scope to grow margins over time (at a very low valuation). Aerospace components supplier Senior also performed poorly as a result of ongoing disruption caused by the grounding of the 737 Max, to which it is a large supplier.
The best performer during the month was textile rental company Johnson Service Group. This reported a positive trading update for the first six months of the year. Organic growth has continued to be encouraging and they are adding significant new capacity for hotel linen at a new facility in Leeds, due to open in 2020.

The largest purchase during the month was adding to the existing position in GlaxoSmithKline following an encouraging meeting with the head of their Pharmaceuticals division. Their pharmaceuticals business has had a disappointing R&D track record in recent years but under a new management team there are positive changes being made that should over time result in improved output from their pipeline. In the interim they have a new vaccine for shingles which is growing well and their consumer healthcare division provides a steady earnings stream. The largest sale during the month was reducing the (long held) position in Relx. This has performed well in recent years due to consistent sales and margin growth. As a result it has been revalued upwards and now trades on over 20x current year earnings, therefore we felt it was prudent to reduce the position.

It has been a difficult period for performance. There have been multiple headwinds including heightened uncertainty around the UK economic outlook (to which the Fund is more exposed than the benchmark) and heightened uncertainty around the global economic growth outlook (to which the Fund has significant exposure due to its large position in industrials).  We think valuations are pricing in a significant degree of this uncertainty. The portfolio as a whole is trading on approximately 11.4x forward earnings with a 4.8% forward dividend yield. We think this valuation looks compelling, particularly the income opportunity relative to other asset classes.

Glossary

Forward Earnings: an estimate of a next period's earnings of a company

Dividend yield: the ratio of a company's annual dividend compared to its share price

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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Please read the following important information regarding funds related to this article.

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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