Speaker 0:
Welcome to the Premier Martin Diversified Fund Range. Latest update. Video. I'm Neil Birrell, the lead fund manager of the range of funds and also Premier Martin's chief investment officer. I'm here today with Thomas Globe, Kirsty Riddle and Robin Willis, who all managers of individual asset classes within the range of funds.

Speaker 0:
It's been quite a period for financial markets. It all. It all started with the advent of covid. Ever since then, markets have been dominated by inflation. News by macroeconomic data, interest rate moves up and down, which have all driven the share price of asset classes over and above the fundamentals of each of the investments within those asset classes.

Speaker 0:
What we want to do today is to talk about what we've been doing in the funds and probably more importantly, the outlook for those individual asset classes. One of them has done quite well through 2023 so far, and the other two have done slightly less well. However, we do think there are good prospects for those asset classes sort of go going forwards. So why don't we kick off? So, Tom, let's start with you Global equities, which is which is where your specialist area at UK.

Speaker 0:
Um, everything's been dominated by the big tech and coms name so far this year. We've seen these big moves. Do you think that's set to continue or have their evaluations got so high that, um, they're going to be falling back?

Speaker 0:
Yeah, there's certainly been some impressive moves in share prices here. And if I can answer this question with any degree of certainty, I think it would make my life an awful lot simpler but kind of going from there. I think if you look over the past few weeks, maybe as far as a couple of months, you're starting to see a degree of breadth returning to markets, Um, the share price performance of the the US Mega CAPPs has been tempered somewhat.

Speaker 0:
And as to whether this will continue like you said, we've had a period where you've had lots of talk about inflation, interest rate rises, impending recession, and you see this flight to safety into a relatively small number of stocks, and it it isn't the usual defensive names you'd expect. It's straight into these US mega CAPPs, and you look longer term. You've seen a an incredible R rating.

Speaker 0:
Um, it's getting to the point where it is relatively hard to see value in some of these names. That being said,

Speaker 0:
you have to think about the incredible earnings power that these companies have. If you go back to Q one, you had NVIDIA reporting earnings. You saw a 25% share price move on the day they reported, and the stock actually de rated due to the earnings upgrades, which is is incredible. Um, and from there you see pretty big intra day moves continuing on from that. So there are clearly still buyers out there.

Speaker 0:
So I mean, these are good companies. Let's face it. I mean, there's no getting away from that. It's all about the multiple that's standing on the valuation that they they're standing on looking away from sort of sectors at the moment and focusing on sort of the US. Are there any other geographical regions that you think are attractive at the moment,

Speaker 0:
aside from the US or yeah, aside from the US, aside from the US, um, yeah, I think it's I mean, firstly, we're very much bottom up stock selection. We we don't invest purely based on geography or sectors. Um, but they do form an important part of our decision making process. Um, outside of the US, we have been adding to Japan. It is a an area that seems to have been

Speaker 0:
endlessly discussed in terms of improving corporate governance, Japanese companies focusing more on shareholder returns and and just improving quality. And it's it's never really played out until recently, where we seem to be seeing positive moves there. So we've, um, yeah, definitely, definitely. Look, to add a little bit more there. And then

Speaker 0:
in terms of valuation, Europe has had such a a difficult time that we feel like there's probably opportunities there as well. And we have added a couple of European names recently, OK, I mean, I think it's fair to say that we see the UK as attractive in itself, but that's not your sort of remit. We we look at that. Look at that separately. Um, but maybe maybe Kirsty and let's turn to you for a minute. I mean, you're looking at property companies across the whole of Europe and the UK,

Speaker 0:
um so what? It is in a tough environment for for property companies and we've seen sort of share prices, sort of struggle and a V start to fall. Could you just give us a bit of background about why that's all happened? Sure Now so normally, inflation is quite positive for real assets such as real estate. But what we saw last year was inflation

Speaker 0:
quite economically damaging levels and central banks then moved to to rapidly hike interest rates from very low levels. And this is quite damaging for the real estate sector because property value property yields had to adjust to higher interest rates and this caused quite steep valuation declines.

Speaker 0:
The listed sector then moved, uh, to trade at quite deep discounts to NAV as investors tried to price an uncertainty around how high interest rates would have to go detain inflation and what what that would mean for the property sector and the wider macroeconomic environment as well. Meanwhile, what we've seen is very resilient operational performance. So we've seen rental growth across all of our sub sectors be that inflation linked to otherwise,

Speaker 0:
and what this does is it partly cushions the impact from rising property yields on valuations, and it also helps to absorb higher costs from things like higher interest rates on debt, which is unhedged or or needs refinancing.

Speaker 0:
So what we've started to see recently is, although inflation, uh, is still elevated, there's increasing evidence that it is coming down. Um, and we certainly seem to be closer to the end of the current hiking cycle than we are the beginning. And each incremental, uh, interest rate hike has a less meaningful impact on property values. So we are starting to see signs of of valuation stabilising. And in some instances, we're seeing valuation growth in industrials.

Speaker 0:
So despite this, we're seeing the listed, uh, sector still trade at record discounts to nav so around levels we've only seen three times in the last 40 years. Well, I hope you're right about being near the end of the cycle in hikes than we are at the beginning. That would be rather terrifying.

Speaker 0:
Rob Robin. A lot of it's been the same for you, um, looking at alternative sort of assets where we're looking for looking be lowly, correlated to to other sort of the main asset classes of of, of equities and bonds, and you're mainly sort of looking at investment trust. There's been a bit of a torrid time there as well. You want to talk us through that a little bit? Yeah,

Speaker 1:
there's been quite a dramatic de rating, um, of it investment companies that invest in alternatives. And I think there's a few reasons for that. I think you've touched on them. There's been that

Speaker 1:
that that spike in in interest rates in bond yields, which has maybe led to some kind of low risk investors selling their shares and alternatives and moving into back into the bond market where they haven't been for quite a long time. And when the risk free rate goes up, discount rates go up, go up the discount rate that's used to for the valuations of these companies. Um, so that's put a put a bit of, um, a bit of worry on on on on the valuations in that space. And also we've seen a bit of we've seen quite

Speaker 1:
discriminate selling of of kind of footie 2 50 baskets of stocks, of which I think both property and alternative investment companies are a large part. Uh, personally, I think it's been well, overdone. The share price falls, and I think there's a few reasons for that. I think it's not really taking into consideration the total return nature of of these companies. Um, there's a lot of inflation linkage. You know, if interest rates are going up because inflation is high,

Speaker 1:
then that that's offsetting the revenues that those companies revenues rises with with inflation. Um,

Speaker 1:
and I think, you know, I think we're starting to see, you know, it gives me a lot of comfort that in the private markets, we're seeing transactions. I think we see on the property as well. Transactions are justifying these levels of valuations. So we've got a stage now where you know these companies are trading on wide discounts. Dividends are very high, and I think there's a real opportunity for us going forward. And I think kind of historically when companies like this have been trading on the discounts they are now, it's been a really good buying opportunity.

Speaker 0:
Could you maybe give us a couple of examples? I mean, it's become an increasingly large asset class alternatives in, in in the alternative investment company space. What what's at the core of the portfolio? I think

Speaker 1:
one of the larger parts of the alternative portfolios in renewable energy generation. So that's wind. Solar hydro diversified across those technologies and and and geographies as well.

Speaker 1:
Yeah, we're looking at that part of the portfolio, and we're yielding 6 to 8% Well covered yields, a lot of inflation linkage. A lot of government backed revenues via subsidies. Um, and we think, you know, that's how it is looking really attractive. An example would be green coat UK wind. Uh, dividend cover is, uh, very high, uh, trading on a high yield and able to take advantage of, uh, the windy weather conditions we're having at the moment this summer. Unfortunately, um,

Speaker 1:
uh, another example would be, um, hypnosis songs. Uh, so it's a It's a company that's had its issues, but I think the share price more than reflects that. We think it's a kind of deep discount opportunity, really. The underlying as class is performing really well, and music streaming is growing very strongly. We're starting to see revenue come through from live performances that have been hit quite hard during covid. So that's coming through, I think, especially in the case of hypnosis, it's a case of

Speaker 1:
the potential for kind of corporate action and, um, shareholder protection built into the the prospect of these companies. It's got a continuation vote coming up in September, and between now and then, the the, uh, the board is going to have to convince shareholders that the company should continue. And if they can't do that, then you know, we expect,

Speaker 1:
uh, there'd be some kind of liquidation events. Uh, and and in the meantime again, we're seeing those private transactions going through. There is demand for these type of assets. You know, there's there's a lot of talk about the the the Queen catalogue being worth $1 billion. So there are these

Speaker 1:
actions going through to justify the valuations. So I think we're going again. We're seeing more of that kind of corporate action in the background. More consolidation, more M and a more liquidity events, more recycling of assets into the better opportunities, or repaying capital back to shareholders. It's

Speaker 0:
quite a complex asset class, isn't it? Sort of, um, Kirsty, we come back to to to you a sec. I mean, clearly, you know, everywhere we go, we see sort of buildings. We we see, we see property. Um, and again, it's sort of a very complex area. What are you looking for in the individual companies in in which you're investing?

Speaker 0:
So we target those areas that, uh, are seeing favourable supply and demand dynamics.

Speaker 0:
So what that means is you get tend to get low vacancy and that that puts upward pressure on rents resulting in rental growth and assuming, uh, prudent cost and debt control earnings growth. And we really think that rental growth will be key in the sort of new environment that we're moving into.

Speaker 0:
Indeed, the majority of the property portfolios within diversified are exposed to sub sectors which are subject to structural demand drivers rather than economic demand drivers and therefore they should be resilient even in a tougher macro environment. Uh, meanwhile, supply has been fairly constrained.

Speaker 0:
That's partly as a result of tighter regulation following the global financial crisis and more prudent approach to leverage, but also more recently as a result of higher construction costs and higher finance costs. And we think that what that will do will exacerbate the sort of supply and demand of balance. We're likely to see uh, going forward. So we also, uh, focus on those really high quality management teams, which have a good track record of actively managing their portfolios to drive value creation.

Speaker 0:
And we particularly like those teams that are well aligned with shareholders through their own shareholding. Um, also, we target those companies with, uh, appropriate leverage and and debt management. And we also see a sustainability strategies as being really quite crucial in order to create quite future proof portfolios and drive returns going forward as well.

Speaker 0:
Well, a bit like Robin, it's quite a complex area. Could you maybe just give a couple of examples of the the companies we hold? Yeah, absolutely. So, uh, if we take the office space, the sentiment is really quite negative around the office space. But we're seeing companies such as London and and they're benefiting from the ification we're seeing with, uh, with Corporates increasingly targeting these sort of really high quality, highly sustainable, um, buildings. And that's they can meet their own sort of carbon carbon reduction targets.

Speaker 0:
And actually, these sorts of assets make up a very small proportion of the market. So if you look in the west end of London, sort of new grade a prime space, um accounts vacancy is just 0.6% of the market, and then the equivalent in Paris CBD is just 0.4%. So what we're seeing is really quite strong rental growth coming through for that sort of space. And we're seeing tenants pre Lett space years in advance. Um, in some instances, and and often these companies are letting space ahead of ER VS or estimated rental values.

Speaker 0:
If we look at the industrial space, you've got, uh, owners and developers such as Monte and CTP. And they're creating space, uh, for tenants with the need for really robust supply chains. Given the challenges we've seen in recent years and the sort of de globalisation trends, um, and they're also benefiting from trends towards near shoring and on shoring and even friend sharing. Meanwhile, these these companies are also, um, able to benefit

Speaker 0:
from providing energy, um, as as a separate income stream, because these assets have flat roofs suitable for solar panels, and they can actually generate quite good income from that as well.

Speaker 0:
And then finally, in the alternative space, we have, uh, companies such as Unite Group or Z or and their student housing, um, providers or we have, uh, stocks such as the and primary health properties, which are healthcare stocks. And these these all of these sorts of stocks are benefiting from supportive demographics or supplies is low or insufficient or just fit, not fit for purpose.

Speaker 0:
It's interesting. I mean, both of you are talking about fundamentals there and and what's been driving the the asset prices in your your area? There has been this sort of macro data, and yet the fundamental story you're telling is sort of really quite compelling. What we need is that to sort of come through and this change change in attitude of of investors more broadly, I think which may be will come when we see the peak in rates and inflation sort of certainly falling.

Speaker 0:
Anyway, I Degra Tom back to you. I spoke to you for a little while, um, sort of the same questions to you. What are What are the sort of like the fundamentals that you look for in a company? Maybe give us a couple of examples of of names you hold? Yes. So, uh, the attributes you look for are pretty consistent. I mean, to be honest, they they never really change, Um, and the most at the at the most basic level, we want high quality companies that have really good long term growth potential.

Speaker 0:
Um, so we look for things like strong balance sheets, uh, really low levels of debt, good margins, decent and consistent returns and strong positions in in growing markets. Um, so it's all pretty basic stuff. Really. Um, in terms of examples, we recently added, No, no. So the Danish health care company, it is a, um, one of the two leaders in the diabetes and obesity space.

Speaker 0:
And unfortunately, in terms of demographic support globally, we are getting fatter and older.

Speaker 0:
So the addressable market here is is absolutely massive, and it's still in its relatively early stages as well. Um, on top of that, it has a strong balance sheet. It's net cash. The margins are incredibly impressive. So it's a really good example of the kind of thing we we look for,

Speaker 0:
um, as well as that, uh, we hold Broadcom. Broadcom has been a a very long standing holding for the fund, and it is a US semi conduct company with one of the most diversified end markets of the sector. Um, it's got a really broad spread across pretty much anything that a semiconductor goes into.

Speaker 0:
Um, And again, it's a It's got a strong balance sheet. It has minimal debt, has some debt, but very, very minimal. Um, it generates vast amounts of cash, and it's an A I beneficiary as well. Um, and we can get through the whole thing without mentioning it. So I think these are both both very good examples of the the kind of companies we look for, where we think they're high quality and you can just see a a really long runway of long term growth. OK, thank you.

Speaker 0:
Uh, no. We couldn't get through without mentioning a I could we? It wouldn't be possible. Um, OK, look, thanks all, Jim. And just just to round up, you're all advocates. You're an asset class, as you should be. That's what you're doing day in, day out. And that's sort of what what you're looking for. You know, in a few words, could you just sort of summarise the opportunity set that we're seeing from here? Sort of forward looking rather than backward looking? Kirsty, let's start. Start with you. So I see excellent medium term opportunities. So historically, once investors have confidence in property values, we see a re rating of of share prices back towards net asset value.

Speaker 0:
And just to put that in context, if we were to see that, um, there's some shares trading at a 50% discount if they were to to rerate back to Nav all else being equal on a on a mathematical basis, that would be 100% return. The average discount across the portfolio is is in excess of 30% which would quite to a mid 40% return.

Speaker 0:
So if we do see inflation coming back down to more management levels, um, and we see more clarity around where interest rates are going to peak and we see more transactional evidence coming through, which gives investors that confidence and I see good potential for shares to re rate.

Speaker 0:
And if they don't and and investors continue to miss Price um, companies in the listed space, it wouldn't be surprising if we had to see more M and a activity as we did earlier this year. Um, when Blackstone bought industrials rate at a 42% premium to the prevailing share price. OK, that's quite an opportunity, sir. Robin, what about you? I think

Speaker 1:
simply I. I think it's a really attractive opportunity to to gain exposure to

Speaker 1:
resilient alternative revenue streams with some really attractive growth dynamics at significant discounts to valuation. Um,

Speaker 0:
thank you.

Speaker 0:
And then, Tom, are you going to mention A I or something? Try and avoid it in this one. So I think that I always like to point out that out of the whole team, I probably have the broadest remit. And I've really got no excuse for not being able to find opportunity at least somewhere in the world.

Speaker 0:
Um, so at the moment, I think going back to what we talked about the start, you look at breadth returning to markets, and people have been talking about markets getting more expensive, valuations going up. But that's really been so concentrated in quite a small number of stocks. Um, so I think as breadth returns, there's gonna be some real good opportunities in stocks that just haven't been R rated and haven't participated in a what has been a strong start to the year.

Speaker 0:
Tom Kirsty. Robin, thank you very much. and thank you for watching this this update video on the premier diversified fund range. And we look forward to bring you more, uh, updates on the funds in the future.