QD view – Time to back unloved Britain?

Time to back unloved Britain?

One bit of disappointing news this week was that the UK’s economic growth in August was 2.1%, below expectations and leaving economic activity still well-below pre-pandemic levels. The apparent second wave is triggering renewed restrictions and seems set to act as a brake on growth over the winter. On top of that, we face the increasingly probability of a no deal Brexit, which appears likely to cause further disruption.

The pound has held up remarkably well so far, but our stock market has been one of the worst-performing of all developed markets and is back to levels seen in 2007.

Given the backdrop, it might seem surprising that a number of asset managers are trying to launch new UK-focused investment trusts at the moment.

Tellworth fails to launch

The first of these to brave the IPO market has fallen at the first hurdle. Tellworth British Recovery & Growth Trust (BRIT), which we wrote about a few weeks ago, said “while the investment proposition and investment team have been very well received by discretionary wealth managers and intermediary retail platforms the overall level of demand was insufficient to meet the minimum fund size”.

Poor relative performance by the UK stock market was part of the argument for launching BRIT. The managers also drew attention to the considerable undervaluation of ‘value’ stocks relative to ‘growth’ stocks, and set out a case for backing young British businesses.

There are 12 companies in the AIC’s UK all companies sector. One of these, Jupiter UK Growth, announced that it was throwing in the towel mid-way through BRIT’s launch. Each of the 12 trades on a discount to asset value – ranging from 18.2% for Henderson Opportunities to 3.6% for Baillie Gifford UK Growth. Some commentators believe that this was a factor in the failure of BRIT’s IPO – why buy a new trust if you can buy an existing one at a discount?

BRIT sought to counter that by committing to use buybacks to keep the discount tighter than 5% in normal market conditions.

In total, the sector has net assets of £3.9bn and the largest of these trusts – Mercantile – accounts for 43% of that. It and Schroder UK Mid Cap both have a bias to medium-sized companies, which makes them fairly representative of ‘UK Plc’.

Diversity of approach

We have thought for some time that there is scope for consolidation within the sector. However, there is quite a bit of diversity within the investment approaches and that means that there’s a fair bit of dispersion of returns.

Just three of the 12 have made money for shareholders over the past 12 months. One of those is Henderson Opportunities, which begs the question: how does it deserve to be trading on the widest discount?

Bottom of the pack, in share price terms is Fidelity Special Values. Its manager, Alex Wright, has some interesting insights into the current situation… “uncertainty has translated into a very one-sided consensus. Investors’ focus has been very narrow and primarily on companies with superior long-term growth potential, seemingly irrespective of near-term uncertainty and unquestionably irrespective of valuations” … “ a vast number of less fashionable parts of the market [are] incredibly unloved and therefore very cheap, while conversely some areas are priced for perfection with little room for disappointment.”

Alex has been increasing the gearing on the trust to take advantage of a “number of value opportunities”. If his conviction is misplaced, shareholders in that trust could be in for further pain.

But what if Wright is right?

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