Few investments have fallen from grace as quickly as Temple Bar (LSE: TMPL). Last year the £1bn flagship of the UK equity-income sector returned 29%, 10% ahead of the FTSE All-Share index, and its shares traded close to net asset value. However, the pandemic has been disastrous for the high-yielding recovery stocks backed by its manager, Alastair Mundy. This year, the net asset value has fallen 48% and the share price 56%. The 3.7% yield that it offered back in January has provided scant compensation, especially as the 70% fall in revenue per share in the first half showed it to be unsustainable.
Under new management
Mundy departed on grounds of ill health in April and last month Temple Bar’s board appointed Nick Purves and Ian Lance of RWC Asset Management, a firm set up in 2000 that now has £13bn under management. Arthur Copple, Temple Bar’s chairman, announced that the trust would be sticking to the “value” style of investment, given that “UK equities are trading at their greatest discount to world equities for 50 years and UK value stocks are trading at their greatest ever discount to growth”. RWC offered “by far the strongest investment proposition” and he pointed to the total return over 20 years generated by Purves and Lance of 234% against 122% for the All-Share index.
Sceptics have countered that the shorter-term record of Purves and Lance’s RWC Income Opportunities fund has been poor. Over five years, it is at the bottom of the 77-strong global equity-income sector, according to Morningstar, with a return of just 7.7%. Brokers are adopting a “wait and see” attitude until the new managers have established a record. “We view Temple Bar as a medium to longer-term turnaround story that may require its existing shareholders to be patient for a while yet,” says Winterflood.
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However, that may be too cautious. Although the dividend has been cut by 25% and is not expected to be covered by earnings (and so won’t be increased) until at least 2022, Temple Bar’s yield of 5.8% is attractive. So is the current 13% discount to net asset value, since the trust is likely to buy back shares if this widens.
Room for improvement
RWC’s illustrative top-ten holdings show the potential for better performance. These include both BP and Shell, already held by Temple Bar. Demand for oil may have peaked last year, but is likely to decline only slowly. Major investment projects, such as deep-water exploration, are out of the question so supply could fall faster than demand, to the benefit of prices. Though BP and Shell are both committed to renewable energy, they will surely invest cautiously.
Marks & Spencer’s high-street stores are struggling, but food stores are doing well and its joint venture with Ocado gets it into home delivery. Royal Mail is benefiting from the surge in online shopping. Pearson’s online education division has struggled for years, but now faces an opportunity to make it work. Kingfisher, a pan-European home-improvement firm that owns B&Q, is little affected by online retailing.
Anglo American is well on the road to recovery from its trauma of five years ago, helped by firm metal prices, while Centrica no longer faces the threat of a hard-left government in the UK seizing its domestic assets. As an Asian bank, Standard Chartered does not face the same challenges to margins and profits that UK and European banks do. That leaves Barclays, which probably needs higher interest rates.
This does not mean that all ten will prove to be good investments, but valuations are so low that very little improvement in these or other holdings is being discounted.
Existing holders of Temple Bar should consider topping up their holdings. Non-holders should put their toe in the water with a small initial holding.
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