Acorn Income suffers post referendum

Over the course of 2016, the Numis Smaller Companies (ex investment companies) Total Return Index lagged the broader market with an increase of 11.08%. Acorn Income Fund suffered from the relative weakness of the small company sector, some underperformance of the Numis Index and a widening of the discount to NAV at which its Ordinary Shares traded. The total return on Acorn’s gross assets over the year was 6.73% and on net assets 6.91%.  With a widening of the discount the total return to Acorn Ordinary shareholders was -6.32% (share price plus dividends).

There were two principal factors responsible for this outcome for Acorn. First was the poor sentiment towards smaller companies that persisted for most of the year. At the start of the year smaller companies were tending to lag the broader market and then, following the unexpected EU Referendum result, sentiment towards smaller companies moved sharply negative. The small company indices fell further than the FTSE 100 and FTSE All-Share indices and recovered more slowly. Larger companies recovered quickly from the initial shock as investors focused on the increased value of overseas earnings which would result from weak sterling. Smaller companies were perceived to have more of a domestic focus and hence to be more exposed to the slowing of the UK economy that many economists and commentators expected to arise as a consequence of leaving the EU.  The last two months of the year saw improvement in the sentiment towards smaller companies as the downbeat forecasts for the UK economy retreated and, as investors differentiated between those small company stocks that would benefit from weaker sterling and those that might be under pressure from a slowing domestic economy, the small company indices and Acorn’s net asset value began to move ahead to levels that exceeded the pre-Referendum level.

The second factor giving rise to the disappointing return for shareholders was the fact that the rating of the Ordinary Shares deteriorated significantly over the year. Indeed at the start of the year the Ordinary Shares had been trading at a premium to NAV of 1.02% and by the year-end were trading at an 11.84% discount. The discount arose when sentiment towards smaller companies deteriorated following the Referendum.

The Zero Dividend Preference Shares appreciated in value by 5.79% over the year. The ZDP Shares closed the year at a price of 139.38 pence, trading at a premium to their net asset value.

The quarterly dividend was increased by 14.3% from 3.5 pence to 4.0 pence per Ordinary Share in the second quarter. Over the year the total dividend distribution was 15.5 pence per Ordinary Share. Following the year-end the Company has brought forward the June 2017 dividend increase and announced a 12.5% uplift to the first interim for 2017 from 4.0 pence to 4.5 pence per Ordinary Share.

The strongest contribution to performance came from Somero, the manufacturer of laser guided concrete spreading and levelling equipment, which added 170 bps to performance.  The Company continued to enjoy strong demand for its products around the world and also benefited from the strength of the US dollar.

In addition to the bid approach for British Polythene Industries further approaches were made for UK Mail and Lavendon during the period, as overseas buyers looked to take advantage of the weakness in sterling. In August Deutsche Post announced a cash offer for UK Mail, moving the shares sharply higher and generating a contribution to performance of 117 bps. UK Mail endured a tough year in 2015 however they remained convinced in the underlying value of the business and say it was pleasing to see their patience pay off following the bid approach.  An approach for the equipment rental business Lavendon in November by Belgian firm TVH Group sparked further interest from French rival Loxam SAS – with both companies bidding for the firm during the period.  By the end of the year Lavendon had generated a contribution to performance of 148 bps – marking a significant return on the investment they made at the end of 2015.

The Company’s largest holding, Clipper Logistics, also enjoyed another strong period of operational and share price performance, generating a return of 112 bps during the year.  Further strong returns were also provided by BBA Aviation (88 bps), Amino Technologies (78 bps) and Hill & Smith Holdings (73 bps).

The largest detractor from performance was Secure Trust Bank, which cost the portfolio 107 bps of performance.  The shares were sold off sharply in line with all the challenger banks following the EU referendum, and only partially recovered this lost ground by the end of the year. Secure Trust remains a core long term holding within the portfolio and the position was increased by over 20% during the period as they looked to take advantage of the short term share price weakness.

Sprue Aegis, the manufacturer of smoke and carbon monoxide alarms also struggled during the year as a non-safety critical technical issue with one of their products resulted in an expensive increase in the warranty provision. Their position was increased by 25% during the period on share price weakness however it did have a negative impact of 99 bps on performance.

AIF : Acorn Income suffers post referendum


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