Value investors are an odd, difficult bunch. It’s in their nature to be a bit cussed and contrarian. They’re also usually very individualistic and secretive, which I suppose goes with the profession. If you find a true gem of a stock, trading at below its “intrinsic value”, your first instinct is to keep mum and not tell the world. Hence tracking down reputable value managers is a bit like hunting down gems in the investment rough. You’ve got to ask around among other value nerds for clues, while also digging into boring reports and accounts.
Simon Knott is one example of an elusive value manager. Search for his most established fund, the Rights & Issues Investment Trust (LSE: RIII), and you’ll encounter… well, very little. The truly diligent could comb through the trust’s regulatory news service releases to understand more about it – but you can save yourself a lot of bother by making use of the excellent fund summary available via Kepler Partners’ investment trust intelligence service.
The Kepler report on RII is a very good summary and rings true with the accounts I’ve heard from other value fund managers. Their message is simple. If you want to invest in small UK stocks, it’s worth having a look at this trust.
RII focuses on small caps and is very concentrated in a small number of key holdings (the top-ten holdings account for 83% of the portfolio’s total net asset value (NAV)). Portfolio turnover is low (2% on one measure), which indicates a high degree of long-term conviction in the portfolio. The trust has a market cap of around £188m and a current dividend yield of around 1.5%. It is the cheapest member of the AIC UK Smaller Companies sector, with an ongoing charge of 0.59% and no performance fees.
Knott has run the RII since 1984, and owns 5.13% of the voting shares, while his family owns 15% in total. As with so many of his value-investing peers, Knott’s forte is picking ignored stocks where he can visit the management and get up close and personal. Top holdings in the fund include bonding and adhesive manufacturer Scapa Group, and chemicals company Treatt, which specialises in fragrances and essential oils. Over the past 20 years the trust has delivered a NAV return of 2,053%, compared with returns of 577.5% and 485.9% from the Numis Smaller Companies ex-Investment Companies index and the AIC UK Smaller Companies sector respectively.
Given these numbers, you’d have thought the board would have done some marketing. They haven’t. This reluctance to shout about the fund has meant that the discount has gyrated around violently and is currently at around 12%, after some fairly heavy share buybacks and the Brexit-induced small-cap sell-off. To make matters even more complicated, the fund used to boast a two-tier structure with capital and income shares, but that’s been quietly phased out now.
This trust will be a volatile ride, its shares aren’t heavily traded (in fact, it’s the second least-traded small-cap trust) and it’s run by a board and a manager with a vampire-like aversion to marketing. But if you can get past this, you’ll get an experienced stockpicker with real expertise, skin in the game, a great track record, and low charges.
Activist watch
Daniel Loeb’s activist fund Third Point is pressuring Honeywell International to spin off its aerospace division, aiming to break off the conglomerate’s biggest business just weeks after the company changed leaders, say David Benoit and Thomas Gryta in The Wall Street Journal. Honeywell’s aerospace business accounts for almost 40% of its $39.3bn annual sales, though revenue from this department dropped 3% during 2016, and 4.3% in the last quarter alone. Third Point called the aerospace unit “a drag on the company’s performance” and argued that separating it “would result in a sustained increase in shareholder value in excess of $20bn”. Shares in the company went up 3.5% when Loeb announced his proposal.
In the news this week…
• European fund managers have seen their best quarterly inflows in five years, says Attracta Mooney in the Financial Times. Investors put a net €210bn into Europe’s mutual funds in the first three months of the year, the highest quarterly amount since 2012. This was more than double the €82bn put into the sector in the previous three months. “While the region remains mired in political uncertainty, investors have become less wary of geopolitical risks,” says Massimo Greco, head of European funds at JP Morgan Asset Management. “Growth is picking up in Europe, purchasing managers’ indices [indicators of the economic health of sectors] are moving in the right direction and [corporate] earnings are coming out strong.”
• The pace of outflows from Aberdeen Asset Management’s emerging-markets-focused equity funds has “slowed considerably”, as it reported a jump in first-half revenue due to market gains and cost cuts, says Simon Jessop on Reuters. Meanwhile, the firm’s revenue over the six months to the end of March was £534.9m, up from £483.6m over the same period in 2016, with underlying pre-tax profit rising by almost 20% to £195.2m. Aberdeen’s merger with Edinburgh-based insurer Standard Life is due to complete in the third quarter of 2017. A combined fund of £35m is reportedly being set aside to ensure top fund managers stay with the merged business.