BMO Global Smaller Companies manager Peter Ewins has picked up cheap defensive stocks as he predicts a 'shocker' for corporate earnings this year.
BMO Global Small Companies (BGSC ) has hiked its dividend for the fiftieth consecutive year despite the outbreak of coronavirus shrinking the amount of income the trust received from its UK holdings.
Companies reacted to the economic coma caused by the Covid-19 pandemic by cutting and cancelling dividends, stymying income flows into the £697m investment trust, particularly from UK stocks.
However, BGSC managed to boost its dividend in the year to 30 April, increasing its payout by 3% to 1.7p per share, meaning it joins the select band of trusts that have increased their dividends every year for 50 years.
However, with a yield of just 1.5% the semi-annual dividend payer may not set alight the hearts of income seekers, although its distribution looks positively generous compared to zero-yielding rivals Edinburgh Worldwide (EWI ) and Smithson (SSON ).
Chairman Anthony Townsend said the ‘level of anticipated dividend income failed to materialise in the final quarter’ but revenue streams for the full year were down just 2.3%.
He said ongoing economic uncertainty means investors should ‘expect a significantly lower revenue return’ in the next financial year but assured them future dividends were still supported as it has held income in reserve for the last few years and built ‘substantial’ reserves of £17.9m, or more than 1.7 times the annual dividend payout.
The dividend cover will be of some comfort to shareholders who have suffered a declining net asset value (NAV) in the year to 30 April, although the fund beat its benchmark the portfolio lost 13.8%. The benchmark, a blend of 70% MSCI All Country World ex UK Small Cap and 30% Numis UK Smaller Companies index, fell 14.1% over the same 12 months.
Smaller companies typically suffer under the stress of turbulent markets and to try and counter some of the ill effects of coronavirus manager Peter Ewins increased exposure to healthcare and technology and reduced weightings to financials and energy stocks.
With markets nosediving, Ewins (pictured) also removed the gearing from the trust in early March to reflect the risk for corporate earnings and ‘the likelihood of a significant recession ahead’ but snapped up cheaper, more defensive stocks.
Ewins added MIPS (MIPS.STO), a Swedish cycling helmet producer, which has patented a system to reduce the risk of brain injury during crashes.
He expects the system to become more widely used and there are opportunities in new industries such as construction.
‘The aggressive market fall in March meant that the share price reached a more reasonable level and we built a position,’ said Ewins.
The trust has also built a stake in Remy Cointreau (RCO.PA), which owns a number of premium cognac brands, where the shares were performing poorly even before the coronavirus criss.
After the shares fell further in March, ‘we felt that the value of the business could be accounted for entirely by its stock inventories’, which actually increase in value over time, he said.
Ewins also picked up a stake in meal kit provider HelloFresh (HFG.DE) as he said the product was becoming ‘more established’ in family life and was an ‘environmentally superior’ proposition due to reduced waste.
‘The current restrictions have of course helped drive more in-home consumption and, while we would expect this to decline once the lockdown is over, this has been an incredible marketing opportunity for the company, accelerating their growth plans at an attractively low cost,’ he said.
While market success will depend how quickly economies can go back to normal and whether a vaccine is forthcoming, Ewins said he could confidently predict that ‘2020 is going to be a shocking year for corporate earnings, and sadly that many millions of people around the world will lose their jobs’.
Shares in the trust have risen about 50% since their lows in March but at 117.4p today are still 22% down from their 150p starting point in January. Although the shares have narrowed their discount to NAV from 17% to 12% they offer some value compared to the 12-month average of 7%.
However, the bigger question is the gap between its longer-term performance and its rivals which have more successfully accessed growth opportunities. Over five years to yesterday, BGSC delivered a total shareholder return of just 23%, way behind the 117% of Herald (HRI ) and 167% from Edinburgh Worldwide. It is more competitive over 10 years with a 202.4% return, though still some way behind the other two which have respectively generated 338% and 449%.