Chairman of Aberdeen Standard Equity Income upbraids fund manager after ‘considerable disappointment’ of 11% drop in net asset value in the past year.
The chairman of Aberdeen Standard Equity Income (ASEI ) has scolded fund manager Thomas Moore for a ‘very poor result’ after the investment trust’s net asset value (NAV) dropped 10.8% in the year to 30 September.
Richard Burns said the fall – which translated into a shareholder loss of 15.1% as the shares trailed the underlying value of the £206 million portfolio – was ‘a considerable disappointment’ because it eradicated the trust’s previous long-term outperformance of the UK stock market.
Burns acknowledged that Moore’s ‘value’ investment style and preference of small and medium-sized domestic stocks were largely an unavoidable obstacle at a time when the stock market had rewarded large, high quality growth companies such as Diageo, Unilever and RELX, which he agreed looked too expensive.
However, he said the unrewarding positioning had not been countered by successful stock picking by Moore. ‘Indeed, the reverse is very much the case,’ he said, highlighting ‘several serious disasters, such as Kier Group and Staffline’ which had fallen around 90% after emergency rights issues to raise capital.
‘Sadly, these were not offset to any significant degree by big successes,’ Burns added, pointing to Moore’s failure to take decisive action and sell underperforming stocks.
Nevertheless, after careful consideration of Moore’s eight-year management of the trust, in particular its ‘excellent’ record of 6.5% average annual dividend growth, Burns said the board continued to back the manager.
‘We believe that Thomas Moore and his supporting team have learnt from this experience and will get back on track. We are encouraged by the fact that our net asset value has outperformed in both September and October,’ he said.
The 2018/19 slump contrasted with a ‘solid’ 5.5% NAV return in the previous year. It has damaged the trust’s long-term record with portfolio returns over three, five and 10 years to 30 September of 8.2%, 25.5% and 120.1% all trailing the FTSE All-Share which provided 21%, 38.9% and 121% respectively.
The latest data from the Association of Investment Companies, which includes the recent rally Burns referred to, places ASEI firmly in the bottom half of the UK Equity Income sector with a five-year total shareholder return of 16.5%, under half the peer group’s 38.7%.
The only mainstream trusts to have done worse than this are largely run by Invesco, with Mark Barnett’s Edinburgh (EDIN ) and Perpetual Income & Growth (PLI ) and Ciarran Mallon’s Invesco Income Growth (IVI ) offering 14.5%, -2.2% and 16.3% respectively.
Citywire manager ratings indicate the huge impact Brexit uncertainty has had on Moore's record. Before the June 2016 European referendum, Moore had held a monthly rating for superior performance on his open-ended UK Income Unconstrained Equity fund for over five years, with a top AAA rating for the last 19 months. From August 2016, however, he has been mostly unrated.
For his part, Moore admitted returns had been disappointing but said his conviction in his investment process was not shaken after notching up some limited successes with infrastructure group John Laing, emerging markets fund manager Ashmore and home furnishing retailer Dunelm.
With the stocks in the portfolio trading on an average of 11 times forecast earnings, a 20% discount to the rest of the market, and dividend yields of around 5%, Moore said the scope for a re-rating was strong.
‘While investor sentiment may remain choppy, the foundations of solid corporate fundamentals and low valuations are in place for a recovery in your company's performance,’ he said.
Numis Securities analyst Ewan Lovett-Turner said Moore was not alone as a UK equity income manager struggling with a value and domestic focused portfolio.
‘The coming weeks are likely to be key to sentiment towards these funds and whether there will be a reversal in these themes. Aberdeen Standard Equity Income is currently trading on a 8% discount and a prospective yield of 5.5%,’ he said.