Keystone Positive Change 29 May 2019
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Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Keystone Positive Change. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Keystone (KIT) is managed by James Goldstone, who aims to generate long-term total returns with a valuation-based approach to buying UK equities. James aims to identify companies which are undervalued due to investor sentiment or past troubles and hold them while their valuations revert to fairer levels.
The attention he pays to the dividends on his portfolio companies, due to the implications they have for cash generation, management discipline and concerns for shareholders, means the yield tends to be higher than the typical growth fund. It is currently yielding 3.6%, which compares to the 4% average for the AIC UK Equity Income sector, despite the trust not specifically aiming for income. The trust has moved to a quarterly dividend, starting from the second half of the 2019 financial year, making it potentially more attractive to income investors.
James, who took over the portfolio in April 2017, believes the major area of undervaluation in the market since he took over has been and continues to be in companies with UK domestic earnings. In his view, the valuations on companies dependent on the UK economy have become irrational due to ongoing uncertainty around the terms of our exit from the EU and the economic consequences.
He has balanced this exposure to UK earnings with positions in international earners which are undervalued for different reasons, for example oil and gas companies. Just under 7% of the trust is also invested in gold mining companies, predominantly listed in North America, which should offer downside protection. He also holds a weighting in mid and small-cap growth companies, which he believes more than justify their current multiples.
The weighting to UK earnings has meant the trust has underperformed in recent years, as any resolution to the Brexit negotiations has been postponed and the uncertainty prolonged. The trust now languishes on one of the widest discounts in the sector at 13%. James believes that when investors’ attention returns to fundamentals, there is significant outperformance potential in the portfolio.
This has been a rough period to be a value investor, but we agree with James that valuations on quality domestic earners are an opportunity – the question is when this value will be recognised. It likely requires a resolution to the Brexit process, even if that is a “hard Brexit”, which would relieve the uncertainty and allow investors to focus on the fundamentals of individual businesses in the new environment. Sadly, this could take some time to arrive, with the decision currently postponed until October. The discount of 13% is intriguing, in our view, although it may take some time for the reversion of valuations to come through and the gap to close. In the meantime, James has positions in energy and miners as well as some mid-cap growth stories which could come good regardless.
|
BULL |
BEAR |
| A wide discount on a portfolio of out of favour stocks is an interesting value opportunity |
The Brexit negotiations will likely weigh on the share price in the short term |
| The yield of 3.5% on the current discount is an attractive one to lock in |
There is some legacy expensive debt which will weigh on the trust in weak markets |
| The trust pays a quarterly dividend |
Value as a style is out of favour |
Fund History
