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Bankers bets private equity bids will prolong bull market

17 January 2020

Bankers lead fund manager Alex Crooke is cautiously deploying a £35m cash pile into global equities believing a ‘wall of money’ from private equity investors will propel markets.

Bankers (BNKR) lead fund manager Alex Crooke is cautiously deploying a £35m cash pile into global equities in the belief that a ‘wall of money’ from private equity investors will continue to propel markets.

Although stretched share price valuations are a concern with global economic growth slowing, Crooke believes corporate earnings will rise if the US-China trade pact holds and the UK’s status outside the European Union becomes clearer.

With central banks keeping monetary policy lax to support the economy, Crooke predicts it will encourage companies to buy more of their own shares. This practice is particularly common in the US where bosses are incentivised to boost earnings per share, which are flattered by buying in stock.

‘With little prospect of interest rates rising and further support from central banks, it seems likely that corporates will continue using cheap borrowings to buy ever more of their stock for cancellation,’ he said.

Added to the mix, said Crooke, were private equity funds itching to buy companies with the billions of ‘dry powder’ they have raised.

‘The supply of new equity remains low by historical standards and the wall of money that is committed by private equity investors must surely start to be deployed taking listed companies private. It is therefore not difficult to paint a positive story of increasing demand over supply,’ he stated.

Crooke commented as the £1.3bn global investment trust reported  12.1% growth in net asset value (NAV), including dividends, for the year to 31 October. With the discount – or gap between the share price and underlying NAV – narrowing to 2.2%, shareholders received a total return of 13.6%.

Both beat the FTSE World index, which rose 11.7%, and extends five-year total returns to 85.7%, ahead of the benchmark’s 53.3%.

Cash pile

Crooke is responsible for Bankers’ overall asset allocation and monitoring the trust’s regional portfolios managed by colleagues at Janus Henderson.

Last year he announced plans to sell Bankers’ emerging market investments. The disposal of £32.8m in Latin America and Africa and taking profits on big holdings such as Microsoft and Estee Lauder lifted cash to nearly £35m by the financial year end, equivalent to 3% of net assets.

Crooke said all regions had outperformed their benchmarks with the US and China doing the best, which was ironic given the tensions between the two superpowers.

Returns for the year would have been better but for a fall in September and October when there was a brief shift in investor sentiment from ‘growth’ to ‘value’.

‘Our view is that this was not a shift to value but an indication that investors were questioning the growth at any price strategy, typified by the office space letting company WeWork. Although we experienced some relative underperformance in our US investments, we have limited exposure to such companies in the portfolio and prefer companies with a solid path to profitability,’ he explained.

Dividend growth has slowed from the companies in which Bankers and Crooke cautioned that if the pound rose back to its pre-EU referendum levels it would reduce the value of the overseas income it has received.

Nevertheless, Bankers remains a strong dividend payer, declaring its 53rd consecutive rise in annual payouts with a 5.35p final dividend taking the total for the year to 20.9p. This is 6% more than last year and outpaces inflation of 2.1%. In addition, £700,000 of investment income has been transferred to revenue reserves which now cover the dividend bill by 1.2 times.

The shares yield 2% and have advanced a further 10% in the past three months to stand on a small 1% premium over NAV at last night's close of £10.22.

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