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Keystone tackles Invesco’s gloomy Goldstone as long-term returns dwindle

29 November 2019

Pressure on Invesco’s UK equity team increases as board of Keystone expresses concern over fourth year of underperformance by £220 million investment trust.

The pressure on Invesco’s UK equity team increased today as the board of Keystone (KIT ) expressed concern over a fourth year of underperformance by the investment trust and revealed it had repeatedly challenged fund manager James Goldstone over his running of the £262 million portfolio.

Keystone, which Goldstone took over two-and-a-half years ago from Mark Barnett, Invesco’s head of UK equities and manager of its flagship equity income funds, now sits third from bottom in the AIC UK All Companies sector with a five-year total shareholder return of 5.5% as of 28 November.

This compares to the 71.4% average return of the 13 trusts in the sector and a FTSE All-Share growth of 38.3%, according to Morningstar data gathered by Numis Securities.

Keystone’s low ranking reflects that underlying growth in the net asset value (NAV) of its investments edged up just 1.1% in the year to 30 September, below the 2.7% total return from the All-Share. It has lagged the benchmark index in each year since 2016.

It also reflects evaporating demand for the shares, which now trade 16% below NAV, although the board has so far not resorted to buying back stock to narrow the discount.

There was also some disappointment with dividends, which 3.6% yielding Keystone will pay quarterly instead of semi-annually next year. Pay-outs were held at last year’s level of 56p per share after a slight dip in investment income although it yields more than sector rivals whose average yield is 2.6%.

Keystone’s poor performance puts it only just ahead of rival Jupiter UK Growth (JUKG ) whose board last month threatened to sack its fund manager, Jupiter Asset Management, if its returns did not improve.

‘Unsatisfactory’ returns

Writing in its latest annual report, Keystone chair Karen Brade acknowledged that the contrarian, value stock-picking style of Goldstone (pictured), who buys deeply out-of-favour companies, required patience at a time when Brexit sentiment punished the domestic equities the manager liked.

However, she indicated Goldstone was under pressure: ‘The performance of the company is unsatisfactory and the board is acutely aware of shareholders’ concerns. The board has supported James Goldstone and the team at Invesco since he took over the management of the portfolio in April 2017. This period has coincided with market sentiment aligning against UK domestic stocks.

‘During the year, the board spent a significant amount of time challenging the investment process and portfolio positioning. James’s contrarian approach to seeking truly undervalued companies in the UK requires patience,’ she added. 

That patience may have been bolstered in the short-term by the recent bounce Keystone and other UK trusts have enjoyed as hopes rise of an end to Brexit uncertainty after the general election on 12 December.

Brade concluded the board remained confident that Goldstone had positioned the portfolio to generate ‘worthwhile returns over time’.

Barnett blues

Keystone’s statement follows a similarly toughening in stance from Perpetual Income & Growth (PLI ) whose board this month said it was talking to Invesco about its poor five-year performance under Barnett (pictured).

That followed downgrades by funds analyst Morningstar which cut its ratings of Edinburgh (EDIN ), Barnett’s other investment trust, and his open-ended Invesco Income and Invesco High Income funds on grounds of poor performance and concerns over the lack of liquidity in the portfolios.

This prompted an apology from Barnett who reassured investors that his funds had reduced their holdings in unquoted and hard-to-trade smaller stocks. He said this made them entirely different to Woodford Equity Income , a fund run by his former boss Neil Woodford that is being shut after being overwhelmed by withdrawals from worried investors in the summer.

Invesco and Barnett, who took over the Income and High Income funds after Woodford set up on his own five years ago, hoped the intervention would reduce the flow of money from the funds, which have shrunk by £3 billion in the past 12 months, £2.2 billion caused by investors redeeming their stakes.

Dollar bear

For his part, Goldstone insisted he was sticking to his guns after scoring successes with broker AJ Bell, JD Sports Fashion, Next and publisher Future and enjoying premium takeover bids for Dairy Crest and BCA Marketplace.

These gains were undermined by profit warnings from household goods provider McBride and floorings manufacturer Victoria – both of which were retained – and antibiotic developer Motif Bio and financial trading platform Plus500 which were sold after their prospects soured.

Goldstone is bearish on the global economy, due to imbalances in both China and US and because he does not think the trade talks between the superpowers will resolve their fundamental strategic differences.

The manager is also negative on prospects for the US currency and has increased the trust’s holdings in gold miners to 9%, from just over 5% a year ago. He argues the precious metal will do well as the US dollar’s status as the world’s reserve currency comes under threat after the Federal Reserve effectively resumed quantitative easing, or money printing, with its recent intervention in the bond ‘repo’ market.

‘Ostensibly to deal with a severe liquidity issue that arose in mid-September in the critically important repo market, the Fed have so far provided circa $250 billion and promised to provide an additional $60 billion per month. Markets have not yet made a connection between the fiscal deficit and this recent change to monetary policy but I believe this is the next step.

‘The simple fact is that the US continues to live beyond its means. Overseas holders of treasuries [US government bonds] have stopped expanding their holdings and domestic buyers now appear to be saturated too, so the government has run out of buyers of treasuries to fund this overspend.

‘That leaves the Federal Reserve as buyer of last resort and threatens to take US monetary policy into a new realm with direct monetisation of government spending. This threatens the US dollar, both its value and also its status as the world’s reserve currency.’

With those grave macro-economic concerns looming, the fate of Keystone looks a minor issue. Nevertheless, the trust plans a five-for-one share split which will replace the existing shares which have a nominal value of 50p with new shares of 10p. This is designed to improve the liquidity of the stock and make them easier for investors to buy and sell.

Without a sustained Brexit bounce, however, it looks like there will continue to be far more sellers than buyers of this trust. If one occurs, the deeply discounted trust will look a bargain and Goldstone will be off the hook.

 

 

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