Since they took over the management of the Temple Bar Investment Trust (LSE: TMPL) in October 2020, Ian Lance and Nick Purves have generated a total return of 100% compared with 55% for the FTSE All-Share index.
This is also well ahead of global indices. When the board moved the management contract, they chose to continue the previous manager’s value strategy rather than join the then-fashionable pursuit of growth.
This has proved shrewd, not just because the UK market, in which Temple Bar is focused, is short of growth stocks, but also because the trust’s contrarian reputation was worth preserving. “We are very much contrarians,” says Lance.
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Although the global pendulum has hardly swung back to value investing, the UK has proved a fertile hunting ground for recovery stocks.
In the face of indifference, if not animosity, towards quoted companies by government, regulators and the general public, corporate managements have been shaken out of their torpor and complacency into improving investors’ returns.
Think twice before investing in collapsed companies
Lance and Purves avoid “value traps” (companies that are cheap, but show no signs of improvement) and “mindless contrarianism” – buying into companies solely on the basis of a collapse in their share prices.
“Investors love to buy what everyone else hates, but having respect for what the market is saying is key. Don’t buy rubbish.” They emphasise the importance of discipline in value investing as it is “tricky – people are hardwired to conform”.
Also, “bargains are rare, so make the most of them” and “timing is never easy, so be patient, be long-term”. In 2023, they missed the FTSE 100’s top performer, Rolls-Royce, which tripled and has since risen by another 40%, but were invested in Marks & Spencer, which more than doubled.
It is in the top-ten holdings at just 4% of the portfolio as they have taken profits. This may prove premature; contrarian investors are prone to selling too early, at the stage when recovery is turning into growth.
On the other hand, Centrica, another top performer in 2023, has declined by 25% from its 2023 peak, but “it’s still very cheap on a multiple of four times earnings with half its market value in cash”, according to Lance.
The impressive performance of International Distributions Services, held since 2020, was the result of favourable year-end pricing rather than any sustained uptrend, so it looks as though even more patience will be needed.
“It has £10bn of loss-making revenue in Royal Mail, including 50% of the UK parcels market,” says Lance. The trust’s worst performer of 2023 was Anglo American.
Energy stocks strengthen
Three of the top four holdings (BP, Shell and Total), comprising 19% of the portfolio, are energy majors. They were held before the change of management, but added to in the pandemic “when the oil price briefly went negative”.
Their good performance since then will surely be enhanced by their “de-emphasising” of renewable energy in favour of their core oil and gas business. Total is part of the 30% of the portfolio listed outside the UK.
This also includes Dutch insurance group NN (“a decent well-run business that was very cheap”) and car company Stellantis (“bought on an earnings multiple of two and a dividend yield of 9%; 30% of its market value is in cash”).
UK banking stocks
Financials comprise 27% of the portfolio, more than half of which is accounted for by three FTSE-100 lame ducks: NatWest (formerly RBS), Aviva and Barclays.
Branch closures are eroding the competitive advantage that incumbent banks have over start-ups, while more stringent capital adequacy rules limit their return on capital.
Banks have retreated from corporate lending and now focus on mortgages, which the government’s Help to Buy programme has made highly competitive. In addition, every time the Financial Conduct Authority (the City regulator) needs to top up its bonus pool, it seems it looks for an excuse to raid the UK banks.
“Hundreds of companies have come together to make Aviva,” boasts its website, which just shows that Aviva’s history is one of merging and shrinking.
As a pension-fund manager it was at the forefront of the charge out of UK equities and into government bonds – which have made no real Temple Bar Investment Trust is a diversified bet on British equities and looks excellent value A top tip for a UK turnaround returns over the past 20 years.
Nevertheless, the share prices of all banks appear to have turned the corner. This often signals better times ahead for companies in the doghouse, and managements appear to have the bit between their teeth.
With price to book value ratios of 0.4 for Barclays and 0.6 for NatWest, investors are not expecting either to generate much in the way of return on capital. Lance points out that NatWest has returned 43% of its market value to shareholders in dividends and share buybacks in the last two years.
While Barclays has returned only 21%, it has generated 47% of its market value in earnings in the last two years, compared with 39% for NatWest.
Discounted shares
But if it was easy to see the optimistic case for these (and other) shares, they wouldn’t be this cheap. Temple Bar’s shares trade at a 10% discount to net asset value (NAV) and yield 4%, last year’s dividend having been increased by 2.7%.
The trust is as good a bet as you’ll get on a UK market turnaround, with the spread of investments taking away the risk of being left behind in one of those value traps. As Lance says, “if you are a good investor and pick the right stocks, you can still make money in the UK”.
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