Witan Investment Trust | Interim Results

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  • 13 mins 26 secs
Andrew Bell, Chief Executive, Witan Investment Trust plc, discusses what has been driving performance and what effect the political landscape has had.

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PRESENTER: I’m now joined by Andrew Bell, the Chief Executive of the Witan Investment Trust, to get an update on the company’s interim results for June 20th 2017. Well, Andrew, good to have you with us today. Now, Witan delivered a net asset value return of 10.8% in the first half of 2017, outperforming the benchmark return of 7.4% for the same period, what enabled Witan’s outperformance this interim?

ANDREW BELL: There were two principal drivers. The first was a return to form for active managers, generally, and our managers in particular. That last year they’d struggled with performance, this year they as a group outperformed the benchmark. And we augmented their outperformance by the use of gearing during the half.

PRESENTER: The share price total return over the period was 12.2%, as the discount narrowed by 4% at the end of 2016 to 2.7% at the end of June, do you envisage the discount narrowing further, and what are the implications for shareholders?

ANDREW BELL: The short answer is we hope so. We recognise that the market sets prices for assets, but we were quite concerned last year at the widening of our discount after a couple of years when it had been fairly narrow, and we responded by buying back a lot of shares during the year. We’ve carried on buying back shares this year, and the reason is that it’s in shareholders’ interests that their shares should trade in the market at the highest sustainable rating. However, we recognise that the discount is important for shareholders, but the main objective we have is to deliver investment performance, and if we do that consistently and well over time, then the rating will sort itself out. So performance is what we’re primarily focused on.

PRESENTER: The first half of 2017 presented some political surprises, included an unexpected general election result in the UK, how do you expect the political climate of the UK and the United States to affect Witan’s portfolio during the remaining part of the year and into next?

ANDREW BELL: I think the last year or so has underscored the fact that markets are usually more responsive to economic numbers than they are to political events. We had the Brexit vote, the Trump election, the election surprise with the hung parliament in the UK, all of which you would probably in advance have thought would have made markets more nervous. And obviously there are some cases like Russian Revolution in 1917 or thermonuclear war which would have an impact on markets, but I think the reason that markets have been able to shrug off those effects over the last year is there’s been a generalised improvement in economic growth. And it’s broadened from the US where it was quite well established before to the emerging market areas and to particularly Continental Europe where there were a lot of political concerns at the beginning of the year, so better growth worldwide and an improvement in corporate profits has scored more highly than a hung parliament in the UK.

PRESENTER: Now, you made some changes to Witan’s allocations to third party managers in the first half of 2017. Can you describe the changes and what prompted them?

ANDREW BELL: There were two changes really. We appointed an emerging market manager called GQG Partners in February. That was actually the result of a search that we completed during the latter part of last year, but it then takes a while to implement. And so that increased our allocation to emerging markets. And in May we consolidated our five global managers into three. We analysed the combined portfolio and felt that with the three managers we’ve retained we kept a good degree of portfolio diversification, but we eliminated areas of overlap, and we think that that’s going to give us a more concentrated portfolio with more scope to outperform.

PRESENTER: You oversee in-house investment portfolio, which is separate from the portfolio managers externally, and constitutes up to 10% of total assets at the time of investment. This portfolio outperformed by 9.6% over the period. So what were the key drivers of this performance, and would the company ever consider increasing the propositions of assets managed in-house?

ANDREW BELL: The key drivers were the strong performance from several of the larger holdings in that portfolio. It is a very concentrated portfolio. Because it invests in principally closed end funds but basically funds, it can take quite concentrated bets on individual holdings in a way that you might not do with an individual stock portfolio. The three that did particularly well were the listed private equity holdings and a company called Syncona that we made a new investment into at the end of last year, which was moving away from a fund of funds investment approach towards backing early biotechnology companies, and the market became to recognise some of the good news coming from them.

Could we increase the amount in the longer term? Well at the moment we have a limit of 10% at the point of investment. And we think that that’s a proper balance between taking advantage of opportunities which are different from those our managers will look at; on the other hand, paying proper attention to the 90% of the assets managed by the other managers. I think there’s a danger if you have too much in the in-house portfolio that that would attract an undue amount of our attention. It could change over time - never say never - but at the moment we’re very happy with the 10%. Just as a caveat we would say the performance relative to the benchmark is going to be quite lumpy both positive and negative, because it’s very different in constitution from the benchmark, but at least it’s good that this year so far it’s been rewarding for shareholders.

PRESENTER: Witan maintained gearing at between 10 to 12% during the first half of 2017. How does gearing serve the portfolio and did this allow for any specific opportunities?

ANDREW BELL: Gearing has the effect of amplifying your returns good or bad. Because if you can borrow at a rate which is less than the rewards you can get from investing the money, obviously in rising markets that’s a benefit: you get extra returns. In falling markets, it effectively means that you’re getting a negative return on money that you’re having to pay interest to borrow. So you do have to try and be a bit judicious and selective in when you use borrowing, particularly at times like the moment when markets are not generally viewed as cheap, they don’t offer any great windfalls, so you do have to be attentive to the risks as well as the opportunities. And we have varied the gearing a little bit, not as much as we did last year, but we’ve basically maintained a relatively high level of gearing of between 10 and 12%. We’re quite watchful, because if the markets start offering a less attractive opportunity we will cut that gearing back, with the intention that if you have a setback in markets then we can put it to work again.

PRESENTER: What other mechanisms do you have at your disposal to drive performance, and how did they impact the portfolio for the period?

ANDREW BELL: Well, apart from share buybacks, which sometimes do have a significant effect, for example last year, which are beneficial for both the rating at which the shares trade and also for NAV, the other area that we sometimes use, but it’s very much by exception, is the use of equity indexed futures to increase or decrease our exposure to particular assets. And one example this year was we’ve been relatively lowly weighted in Europe for quite a number of years, because we thought there were better opportunities elsewhere, political overhang in Europe and so forth. The political clouds in Europe began to clear a little bit, and so just ahead of the French election which finally appears to have cleared those clouds, we added to our European exposure using index futures. And the timing of that was fortuitous, it did work well for us, but it enabled us to deal on the day we wanted to increase our exposure, rather than having to go through the slightly more cumbersome process of allocating money to a manager to invest. But we’re quite selective when we use that. But it’s a bit like if you need to change your car tyre, it’s then useful if you’ve got a jack in the boot.

PRESENTER: The company bought back over two million shares in the six months to the end of June. These were bought back at a discount range of between 4% and 2.1%. Has Witan’s buyback policy changed in recent years, and what impact does this have for shareholders?

ANDREW BELL: Our long-term objective, since we became a multimanager about 12 years ago, has been to hope that our shares would be able to give liquidity for shareholders around NAV. If you like the NAV is the magnetic north for value in the shares, and if they’re trading at a big discount to that that would argue that there’s an opportunity and they’re too cheap. At a premium, we would probably issue shares, because we’ve got no interest in selling overvalued assets to people. Over the years how we’ve acted in the market has changed. Because we are responsive to market conditions, the market determines prices. And once our discount broke through what used to be seen as a ceiling of 10%, we carried on buying shares. And in the first half of this year, as you mentioned, we bought back shares at between discounts of just over 4% and just under 2%, and the intention of that, apart from the fact that it adds to NAV, it’s intended to demonstrate that we think that our shares are good value at that sort of level, and to give encouragement to people, if they want to buy in the market, which is obviously their decision, we don’t want people think oh I can’t buy because it’s only on a 2% discount. We think what people should be buying into is Witan as an investment story, and we will do what we need to do in shareholders’ interests to moderate swings in the discount, as far as we’re able to.

PRESENTER: Witan will pay an interim quarterly dividend of 4.75p in September, is this income fully covered by revenue from the underlying portfolio, and do you see the company being able to comfortably maintain its long history of dividend growth?

ANDREW BELL: The dividends that we’ve paid have been covered by revenue. We don’t know the revenue picture for the whole of 2017 but last year we made about 22p a share and paid out 19p, so we had put four into the lock as it were. I would expect that we will make the same or a slightly higher level of earnings this year so that should allow us room to increase our dividend which would be for the 43rd consecutive year. That’s not something that we can formally promise, but one of our objectives is to increase the dividend ahead of the rate of inflation. The progress of our revenue earnings this year has so far been quite encouraging.

PRESENTER: Lastly, where do you see the greatest opportunities for investors during the remainder of the year, and what would you advise investors to be cautious of?

ANDREW BELL: I think you’re right to mention caution, because although we’re quite positive on the outlook for economic growth, we’re not expecting great guns from economies, but we’re expecting a continuation of the relatively persistent slightly grudging recovery that we’ve had since 2009. But equity markets have rerated to take account of that, and I think that conveys the message that you do need to be selective. There are some stocks which are not good value in the market. There are others where they might appear good value but where their business model is being undermined by technological change. But there are also stocks available in the market at any time, which offer undervalued assets or undervalued or underestimated growth, and that’s what our managers are out there trying to look for.

Two areas which we think are just looking a little bit interesting more generally are emerging markets and Europe. We’ve increased our exposure to both during the first half of the year. And the reasoning is that market returns are usually good where people underestimate something. And in the case of emerging economies, some of the worries people had just after the Trump election and in the wake of the commodity crash, a couple of years ago, have begun to reduce. And the political headwinds in Europe have also reduced. It’s not to say that they’re going to perform in the next year or so, but we think that the risks in emerging markets and Europe have abated, and we’ve adapted accordingly. But we do think selectivity and a weather eye out for the risks as well as the opportunities is something that people should bear in mind if they’re investing for themselves, and it’s something that we bear in mind when we’re investing for other people.

PRESENTER: Andrew, thank you.

ANDREW BELL: Thank you.