Numis Update: Temple Bar dropped for Fidelity Special Values & ADIG downgraded

'Brave' choice of RWC to run Temple Bar not enough to convince broker's analysts that UK equity income trust will turn a corner, preferring Alex Wright's Special Values approach instead.

Stockbroker Numis Securities has cut Temple Bar (TMPL ) from its list of recommended investment trusts, instead switching to Fidelity Special Values (FSV ) for exposure to struggling UK ‘value’ stocks.

Numis analysts dropped Temple as a ‘core buy’, a status it had held since July 2016, describing the decision of the £484m trust’s board to appoint RWC Asset Management in place of Ninety One last month as a ‘brave one’.

Like former fund manager Alastair Mundy, in RWC’s Nick Purves and Ian Lance, the board has again placed its faith in ‘value’ investors seeking to buy cheap, out-of-favour stocks rather than highly-rated growth companies.

‘Time will tell if this decision is vindicated by a reversal in fortunes for the value style, which is at close to historic levels of underperformance versus growth,’ said Numis.

The pair joined RWC together in 2010 from Schroders. 

Numis analysts, led by director of investment companies research Ewan Lovett-Turner, pointed out the team’s longest track record was on the SJP Equity Income fund. This has delivered 234%, gross of fees, versus 122% for the FTSE All-Share index from December 2000 to August 2020. However, the managers’ style has held back performance in recent years, with returns of 2.2% in the five years to August against 17.3% for the benchmark.

Moreover, the analysts saw few catalysts for a re-rating of the UK equity income trust’s shares in the near term and did not expect the manager change to have an ‘immediate impact’, despite Purves (pictured) and Lance’s strong profile with UK retail investors.

Shareholders have lost close to half their money this year, with a -48% total return, even with dividends reinvested, making Temple Bar one of the worst performers in the investment companies universe. The shares have also derated and are currently on a more than 10% discount, having traded close to net asset value (NAV) at the start of the year.

Numis expects that a significant narrowing of the discount will require a bout of strong returns for the value style, improving the trust’s recent performance record.

With the timing of that difficult to predict, the broker removed the buy recommendation, with analysts noting that ‘there was no mention from the board of any discount control measures or exit, which may have disappointed some investors’.

The Wright alternative?

As an alternative to Temple Bar, analysts recommended Fidelity Special Values managed by Alex Wright (pictured). They believe Wright’s ‘focus on change as a route to  value’ presents a better chance of success, even if conditions remain unfavourable to the value style also employed by the fund manager.

The £530m trust, which has been tipped as a ‘core buy’ since July 2015, has also struggled this year.

Shareholder total returns of -33.4% are well below the -20.1% performance of the All-Share. That has in part been the result of a widening discount, with the shares now trading 8% below NAV double the average discount of the last year.

Over five years, returns come in at just 2% versus the 12% for the index. That is generally viewed as a decent performance, given the consistent headwind of Wright’s investment style, with the manager gaining a reputation as a solid stock-picker even in unfavourable markets.

However, the Fidelity manager has acknowledged the ‘very disappointing’ losses sustained during the March crash, with many holdings he had previously considered defensive being undone by lockdown.

FSV was also tipped by broker Stifel recently  as a contrarian play on the beleaguered UK market.

Alternative trades

In other changes, Numis downgraded its rating for Aberdeen Diversified Income & Growth (ADIG ) from a ‘core buy’ to a ‘trading buy’, reflecting less conviction over its long-term prospects, although acknowledging its view was dependent on movements in the discount.

The latest evolution of the £291m former British Assets trust was unveiled last week, with a further push into private equity and unlisted debt instruments planned. Lead fund manager Mike Brooks is stepping back, with Nalaka De Silva, Aberdeen Standard Investments’ head of private market solutions, taking his place.  

Numis admitted performance of the global defensive portfolio, which is invested in areas which are hard for retail investors to access, had been ‘dull’.

NAV total returns have been 4% over the last three years, versus 24% for the MSCI AC World index. But shareholders have suffered a 17% loss as the shares have derated, hit by exposure to loss-making insurance investments, with the discount now standing close to 20%.

However, Numis analysts highlighted that the trust is buying back nearly three quarters of its long-term debt. That will give the board greater flexibility to manage the discount though share buybacks, a prospect the broker thought was encouraging.

‘Investors are likely to wait until this is delivered before there is a substantial rerating, but we can see the discount narrowing from current levels if there is a more active approach to discount management,’ said analysts.

A number of holdings are starting to mature and generate more income, which could help improve performance.

ADIG’s nearly 6% yield – which will be maintained – could also mean investors spy a bargain, as identified  in last week’s Trust Watch

JARA less expensive

The broker also removed the ‘trading sell’ rating on JPMorgan Global Core Real Assets (JARA ), given the share price has fallen about 7% since it noted the shares looked expensive in July.

Analysts still saw the 11% premium – down from 13% previously – as ‘relatively large’ and speculated ‘there may be more attractive entry points’, but noted the £213m investment company had also made more progress deploying the proceeds of last year’s flotation. 

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