The managers of Lowland Investment Company (LWI ) have said the de-equitisation of the UK, or the falling number of listed companies, is a ‘concerning trend’, despite benefiting from six takeovers over the financial year. 

Writing in the annual report, Janus Henderson managers Laura Foll and James Henderson said UK companies remain cheaply valued relative to global peers. 

While the raft of acquisitions of UK companies at cheap valuations delivered an immediate boost to the portfolio, the managers are concerned that when combined with falling company flotations, it meant the UK market is gradually eroding.

‘To counteract this trend, smaller company boards (often feeling vulnerable to acquisition) are announcing increasing share buyback activity,’ wrote Foll (pictured below) and Henderson. ‘While this is boosting valuation levels across certain companies, and is arguably attractive from a capital allocation perspective given where UK valuation levels are, it further contributes to the de-equitisation of the market.’

They pointed to the fact that 2.5% of the FTSE 350 market capitalisation disappeared in buybacks in 2022 alone, a trend which has accelerated in 2023.

The pair were bullish about the sustainability of company profits, noting the challenging backdrop of recent years had forced companies to cut costs and run leanly, with any pickup in sales likely to boost earnings.

The £393m UK equity income portfolio saw six holdings receive takeover bids from private equity and peers, including Deutsche Bank, which acquired broker Numis (NUM), driving underlying returns of 17.2%, including the full-year 6.25p dividend, while the FTSE All-Share returned 13.8%.

Other key drivers included shareholder returns via special dividends and buybacks, earnings recovery from a low starting valuation, coming from companies such as Marks & Spencer (MKS), and structurally growing markets, including Hill & Smith (HILS) which benefited from growing infrastructure spend, where it earns most of its profits.

These factors made up for the fact that the 5.3%-yielding trust only has a 47% weighting to the FTSE 100, whereas it constitutes 84% of the FTSE All-Share. Stock selection and the trust’s 12.3% gearing levels were chief contributors. 

Not holding blue-chip consumer discretionary names Diageo (DGE) and British American Tobacco (BATS), which both saw double-digit falls, were the two largest contributors, followed by M&S, which soared 140%.

Underperformance was similarly weighted, with Serica Energy (SQZ) seeing falling fossil fuel prices and a North Sea windfall tax, while Vanquis Banking (VANQ), a new holding, disappointed on cost overruns, which precipitated the departure of the chief executive.

The portfolio saw a boost in earnings to 6.7p, covering the dividend, with further recovery from holdings such as Shell (SHEL) and BP (BP) which cut their payouts during the pandemic. The pair remain the largest positions with respective weightings of 3.9% and 3.3%.

Financials make up the bulk at 33% of assets, followed by industrials and energy names, which make up 28% and 10% apiece.

Over the 12-month period shareholder returns totalled 13.9% as the discount widened from 11.5% to 14.2%. Chair Robert Robertson has previously said that a discount control mechanism is not in the best interests of shareholders. The UK Equity Income sector average discount sits at 4.2%, according to AIC data.

The pair admitted that longer-term performance remained ‘disappointing’, reflecting poor performance in the years following the Brexit referendum. Shareholder returns are down 3% over five years versus the FTSE All-Share’s 19.7% gain.

Five-year returns

Source: Morningstar