Sticking to our guns on value

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Laura Foll, Co-Fund Manager of Lowland Investment Company, highlights activity on the Trust’s portfolio over the last quarter and what investors can reasonably expect over the coming months. Laura also explains how the team’s investment style has led to the Trust underperforming the index in the year to date.

Transcript

Q: Hello and welcome to this latest video update for The Lowland Investment Company. I’m delighted to be joined by the Co-Fund Manager Laura Foll. Laura, thank you very much for joining me today.

So we’re just past the halfway point of 2019, so perhaps it’s fitting if you could give us a quick snapshot for the year to date for U.K. equities?

A: U.K. equities have done well year to date; what’s quite an interesting dynamic beneath that though is that smaller companies have underperformed. So if you looked at, for example, the AIM (Alternative Investment Market) market or FTSE Small Cap that would have underperformed the FTSE 100 quite materially.

I think if I was trying to give a reason for that, and it’s always hard to pinpoint the exact reason, but smaller companies do tend to be more domestic. And there are still obvious question marks about the U.K. economy; questions like is there going to be a general election? And there’s still uncertainty over Brexit. So there is still that overhang on UK domestic companies. So if I were to say a reason why I think small cap has underperformed I think it’s probably that.

Q: If you were to compare the Trust’s net asset value (NAV) performance with that of the index, which is the FTSE All-Share, you would actually see a decoupling since the end of February with the Trust underperforming the benchmark. So perhaps you can give us your thoughts on why that’s happened?

A: You’re right the Trust would have underperformed year to date so it would be up on an NAV basis but it would be up less than the FTSE All Share, which is our benchmark. The overwhelming reason for that is that our investment style is value and what I mean by that is that we pay attention to the valuation of companies. So even if we think a company is excellent and has really good growth prospects, if we think the valuation is too high we’ll tend not to go there as we tend to stick to companies that we think are fundamentally undervalued.

That over the last five years has detracted from performance; what has done really well in the market is growth companies and that trend has continued and gone even more extreme year to date. So if you looked at the top performers in the FTSE 100 they would all be growth companies, whereas the bottom performers would all be value companies. So there’s been a real headwind in the way we run the portfolio and if I were to give just one reason why we’ve underperformed it would be that.

There are also of course other elements to it; we haven’t had a great deal on things like consumer staples. So this would be names like Diageo, Unilever, Reckitt; Lowland would have none of those in the portfolio, all would have been good performers. So there are definitely one-off sector elements as well. But the overwhelming reason would be our investment style.

Q: And finally perhaps you can share with us your activity on the portfolio in the past three months? And what can we reasonably expect over the next three months?

A: So what we’ve been doing in the last few months is we’ve been very slowly adding value in the portfolio. So this would be names like GlaxoSmithKline, which is a big pharmaceutical company, that’s gone up to about 3% of the portfolio. I think that looks quite attractively valued versus the rest of the global pharmaceutical sector. And you’re also getting a nice dividend yield from Glaxo. We have also been adding to names like Royal Mail and Hammerson, which is a retail property company, and things like Severn Trent which is a water utility. I think all of these companies are fundamentally undervalued and all would be paying you a nice dividend yield as well.

And what we’ve been doing to offset that is we’ve actually had a few takeovers in the portfolio year to date. So a company called Manx Telecom got taken over by private equity and then more recently we had a property company called A&J Mucklow, which was taken over by another property company. So that’s freed up some cash for us to invest in these more value opportunities, but we are going slowly because we’re recognising that the way the market is acting at the moment is not in our favour.

These value companies are tending to just get lower and lower rated, while the growth companies continue to perform well. So, while we think that eventually value will out, we’re just going very slowly with what we’re doing. That’s always the case for Lowland really; if you went back and looked at turnover over the long term, the average holding period would be about five years. So we do tend to go slowly.

Glossary

Dividend yield: the ratio of a company’s annual dividend compared to its share price. The dividend yield is represented as a percentage.

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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