As we move into the traditionally quieter summer months it’s a good time to reflect on recent portfolio activity.
Despite a great deal of market noise and a notable spike in volatility, the first half of 2018 has delivered negligible returns for most UK equity investors.
Even so, the average discount rating in the investment companies sector remains tight by historic standards and it is difficult to identify particularly compelling investment opportunities at present.
Meanwhile, in the value versus growth debate, the growth camp continues to deliver, as demonstrated by the stellar performance of Baillie Gifford’s Scottish Mortgage Investment Trust, which has increased its net asset value by circa 17 per cent year to date.
The Unicorn Mastertrust holds sister fund, Monks Investment Trust, which has also performed well and has recently published its annual results.
The managers noted the significant performance contribution from a relatively narrow range of technology and internet companies and they have started to harvest some of the gains among their technology and US cyclical holdings “where progress is well recognised by the market”.
While Monks will remain firmly in the growth camp, it was interesting to see that much of the focus in recent months has been on portfolio diversification.
My contrarian tendencies have, however, led me to tilt my portfolio towards more value oriented trusts, such as Aberforth Smaller Companies, which resolutely employs a value style.
Aberforth’s portfolio will never have the pizzazz of a growth fund and will, by its very nature, always look attractive relative to the wider market. But the current undervaluation is extreme by past comparisons.
The managers’ preferred metric, the ratio of enterprise value to earnings before interest, tax and amortisation (EV/Ebitda), places their portfolio on a multiple of nine times the 2019 forecasts compared to 11.3 times for their tracked universe of UK smaller companies and 16 times for UK smaller company growth stocks.
They contend that many growth businesses are being valued as if they were the next Amazon and note that few businesses succeed in retaining high stockmarket valuations for extended periods.
Brexit uncertainty and the poor perception of the UK market on the part of global investors are contributory factors to the lowly rating of Aberforth’s portfolio, but with cash rich private equity investors looking to deploy capital at higher multiples I can’t help thinking that further merger and acquisition activity will occur in the fullness of time.
In the meantime the underlying companies on average offer reasonable yields of around 3 per cent, with high dividend cover and robust balance sheets.
Other value names within Mastertrust’s portfolio include Fidelity Special Values, which has produced excellent performance under the guidance of Alex Wright, who started managing the trust in 2012 having built a strong record managing the Fidelity UK Smaller Companies fund since 2008.