Interactive Investor

Ian Cowie: life after death for UK trusts five years after Brexit?

24th June 2021 09:07

Ian Cowie from interactive investor

The sun is coming out to shine on the stock market, let’s hope it lasts longer than the British summer.

Is there life after death? Investors in the UK All Companies sector have reason to think so - and shareholders in Britain’s biggest undertaker must hope so.

Five years after the Brexit referendum on 23 June 2016, the Association of Investment Companies (AIC) sector that flies the Union flag is returning to favour after being shunned by many international investors. The £5.5 billion takeover bid for Wm Morrison (LSE:MRW) by the American private equity giant Clayton Dubilier & Rice shows how shoppers of all sizes are seeking bargains among British businesses.

Far away from the shelves of our fourth-biggest supermarket, prices are being pushed up across the formerly depressed UK All Companies sector but often remain below net asset values (NAVs). Henderson Opportunities (LSE:HOT) leads the pack over the last year with a total return of 86%, according to Morningstar via the AIC, but the shares still trade at a 7.6% discount to NAV. Top 10 holdings include the big banks Barclays (LSE:BARC) and NatWest (LSE:NWG) plus the electronic payments tiddler Boku (LSE:BOKU).

JPMorgan Mid Cap (LSE:JMF) stands second in this sector with a 63% total return over the last year. That includes a 23% gain on the £11.63 I paid in March, as reported here at that time.

Back then, pessimism had pushed its discount out to 12% and pumped its dividend yield up to 2.6%. Since then, the shares surged to trade just 0.8% below NAV, trimming the yield to 2.1%. Top 10 holdings include the cult toy-maker Games Workshop (LSE:GAW); the specialist magazine publisher Future (LSE:FUTR); the self-descriptive Pets at Home (LSE:PETS) and the homeware retailer Dunelm (LSE:DNLM).

Schroder UK Mid Cap (LSE:SCP) ranks third in the sector with a 62% total return over the last year but this £291 million trust remains priced at a 6% discount to its NAV.

Artemis Alpha Trust (LSE:ATS) is not far behind with at total return of 53% over the last year and still trades at a 6.8% discount to NAV. Back when Brexit was just a twinkle in Nigel Farage’s eye, ATS had headwinds of its own with severe and sustained underperformance, which can still be seen in disappointing total returns of just 60% over the last decade.

But the appointment of co-manager Kartik Kumar three years ago has reinvigorated performance, alongside old-timer John Dodd, who has been at the helm since 2003. Most topically, the £173 million trust’s top holding is in Dignity (LSE:DTY).

Britain’s biggest undertaker held its annual meeting this week after recent controversy saw the chairman unseated and three non-executive directors follow him out of the door. Interestingly, ATS is not the only UK All Companies trust with a major interest in Dignity.

Aurora (LSE:ARR), the £174 million investment trust managed by Gary Channon, also ranks DTY in its top 10 holdings. He played a prominent role in the campaign to overhaul the undertaker, in which I also happen to be a shareholder.

Channon is impressive in person and that is reflected by ARR trading at a 0.9% premium to its NAV despite mixed returns over the last one year, five years and 10 years of 37%, 59% and 30% respectively. But occasional wide variations from benchmark - the UK All Companies’ sector averages over the same periods are 45%, 79% and 214% respectively - are inevitable when active fund managers seek out-of-favour stocks at bargain prices.

Similarly, Kumar told me: “I focus on companies my research suggests are mispriced, and invest with conviction. That means needing to be prepared to look wrong at times and Dignity has had a volatile year.”

At one point in 2020, its share price fell 64% during an inconclusive Competition and Markets Authority investigation into allegations of overcharging by undertakers. Kumar tells me he used the drop to increase his position by 40% at an average price of 278p per share. Its annual meeting yesterday saw the share price rose 13% to close at 725p.

Kumar said: “It felt pretty stupid to weather a 60% loss in a funeral operator during a global pandemic. But if you know what you own, volatility brings opportunity. I like to think about buying stocks like buying a house – do rigorous work on the fundamentals and be there for a long time.”

That chimes with this long-term investor’s buy-and-hold approach. It may also touch a chord with other shareholders who hung on when British shares were under a cloud.

Now the sun is coming out to shine on the stock market, let’s hope it lasts longer than the British summer. Often the best time to buy shares is when you least feel like doing so, because that’s when confidence and prices will both be depressed.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor. 

Ian Cowie is a shareholder in JPMorgan Mid Cap (JMF) and Dignity (DTY) as part of a globally diversified portfolio of investment trusts and other shares.

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