It’s a challenging watch when you have conviction in your holdings but the market is moving away from you. And as many times as you might remind investors to keep faith and remember that investment is a medium to long-term commitment, it is tough when underperformance continues for an extended period. That’s a scenario familiar to investors in the CT UK High Income Trust. Thankfully, their patience is now paying off as the market moves towards recognising value in the companies we hold.
Niche products and simple business models
Performance has been helped further by some of the purchases we have made in the last six months, when many high-quality growth stocks fell to exceptional valuations during bouts of volatility. We used these opportunities to acquire businesses we like and wanted to buy but were waiting to hit reasonable valuations. Recent acquisitions, bought in some cases at exceptional valuations, include Hiscox, Rotork, Hargreaves Lansdown, Experian, ASML, Schneider and Delivery Hero amongst others.
The French multinational Schneider is a global leader in energy efficiency. With technology that addresses energy management in private homes, data centres, infrastructure and industry it stands well-placed to tap into the demand to meet 2030 targets for emissions.
Dutch multinational ASML specialises in the development and manufacture of photolithography machines which are used to produce computer chips. It is the sole supplier of extreme ultraviolet (EUV) photolithography machines used to manufacture the most advanced chips. Effectively, this is a monopoly position in a very valuable sector of industry. The company has an order book that is attractive stretching out for the next two years.
Bath headquartered Rotork is a market-leading manufacturer of industrial flow control equipment. Its products are used by industries including oil and gas, water and wastewater, and chemicals processing, to manage the flow of liquids, gases and powders. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.
As these examples show, we like simple/streamlined manufacturers that have a clear-cut vision and excellence in a niche product.
Broad-based financials preferred over banks
We are similarly certain about the sort of stocks we actively want to avoid. We have steered clear of the oil and gas sector on the basis that their businesses have delivered poor returns on capital for decades. We also see risks around renewables, where the return profiles are difficult to gauge, and because energy bills are becoming increasingly politicised.
High-street banking is another area that hasn’t met our quality or returns criteria. While the ability of banks to pass on rate increases to customers is boosting profits for many in the short term, peaking interest rates and an impending recession will keep a lid on any earnings growth. Besides, we believe there are superior and more consistent businesses within the diversified financial sector with better long-term prospects than banks.
In this space we have positions in private equity company Intermediate Capital, capital markets and wealth manager Close Brothers, financial services platform Hargreaves Lansdown and financial services and asset manager Legal and General. Whilst these companies are exposed to knock-on effects from banking, including the recent fallout from the collapse of Silicon Valley Bank, the broader base of their businesses gives comfort from worries about potentially overstretched loan books in a rising interest rates/recession pending environment. In the case of Intermediate Capital, the nature of the sector provides for permanent capital over the next decade, and with 80% of their current fundraising complete we are assured by high recurring revenue which fares attractively in our assessment of volatility and risk.
The financials listed above have been a good source of dividend yields also, which is an important consideration for a trust such as ours where income is a stated feature. UK housebuilders, tobacco and mining are the other areas where good dividend income tends to come from.
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