Compass - June 2020
This month we’re looking further afield for income and we find out how investment companies have been helping in the coronavirus fight.
By Annabel Brodie-Smith
I hope you are all well and have managed to enjoy some time outside during the sunniest May ever. My husband’s birthday barbecue has had plenty of use and we’ve been swimming in the river.
Baby steps towards a new normal are being tentatively taken, with more shops opening on June 15th and, the one I’m most excited about, July 4th mooted for the reopening of some pubs, cafes and restaurants. In the meantime, the kitchen office is in full swing and this week I have also been adjudicating my younger son’s school tests.
Stock markets are also grappling with the new normal and there’s some better news. The Global investment company sector is up 12% in the last three months to the end of May and up 16% over the last year. It’s still too early to be sure that the worst is behind us. The possibility of a second coronavirus spike remains very real and there’s concern that markets have got ahead of the forthcoming economic problems. However, long-term investors are all too familiar with these uncertainties and are investing for the long haul.
With dividends under pressure, exemplified by Shell making its first dividend cut since the Second World War, it may be time for income seekers to look further afield. So we asked the analysts to look beyond the UK and Global sectors and to consider where the other investment company income opportunities lay. They named companies in a range of sectors from Asia Pacific Income and Japan to Infrastructure, Debt - Structured Finance and Property - UK Residential.
The spotlight during the pandemic has been on the Biotechnology and Healthcare sector, which has continued to thrive, up 9% over the last three months and up 19% over the year. This month our investment guru, Ian Cowie reviews his successful investments, which include Worldwide Healthcare Trust. He also explains why the search for a coronavirus vaccine prompted him to invest in April in International Biotechnology Trust.
Vaccines, tests and treatments for coronavirus are dominating the daily news so we thought we’d update you on the investment companies investing in this sphere. It’s encouraging to see many investment companies outside the specialist sectors investing in the fight to combat coronavirus. For example, the Global investment company, Scottish Investment Trust invests in Gilead Sciences which make remdesivir, a drug developed in the fight against Ebola, which is being used against COVID-19. VCTs also feature prominently, with Foresight VCT and Foresight 4 VCT investing in Biofortuna which is acting as a contract manufacturer for two global customers to deliver laboratory-use tests for COVID-19.
Finally, it’s been inspiring to see how people in the UK have come together during the coronavirus pandemic, with Major Tom’s achievements quite rightly making him a household name. So, it’s heartening to see how the investment company sector and their portfolio companies have been helping during the crisis. Read how the industry has been helping by donating PPE, offering services for free and providing support and advice to small businesses.
And at the AIC, our communications team completed a 5K charity run, although I opted to row it instead. There are some rather sweaty pictures but we felt good afterwards!
Wishing you a healthy June.
Communications Director, AIC
Analysts explore income stars outside the UK and Global sectors
With HSBC, Shell and BT among the many income stalwarts cutting or suspending dividends and interest rates remaining near all-time lows, income investors face an arid environment.
The ability of investment companies to reserve up to 15% of their income each year has helped them to carry on raising dividends through such intense market downturns as the 1987 crash, the dot com bubble bursting and the financial crisis. Companies in the UK Equity Income, Global and Global Equity Income sectors are particularly well known for this, and dominate the AIC’s list of ‘dividend heroes’.
However, these are not the only sectors generating healthy yields and reliable income streams. The AIC has spoken to investment company analysts to find out which other investment company sectors they consider for income.
Looking east: Asian equity
Anthony Stern, Analyst at Stifel, said: “We think the Asia Pacific Income funds offer a different source of income. Asia was the region first into the COVID-19 crisis and the first out. The Asian funds offer dividend yields of 5% or more and these dividends are fully covered by revenue income, unlike some trusts in the investment company world. The funds have been recognised for increasing their dividends over the long term and are part of the AIC’s next generation of dividend heroes. All of the funds have substantial revenue reserves which should allow them to maintain their dividends through their lean times.
“Aberdeen Asian Income is clearly the value play in the sector at a 13% discount and offering a 5.5% dividend yield. Schroder Oriental Income has been managed since inception by the highly experienced Matthew Dobbs. It has one of the best track records of the Asia Pacific Income funds on a total return basis and offers a dividend yield of 5.3%.”
Anthony Leatham, Head of Investment Trust Research at Peel Hunt, said: “Outside of UK and Global Equity Income, there are a number of sectors and regions that offer attractive yields. We would highlight the differentiated equity income story in Japan. Richard Aston has been manager of CC Japan Income & Growth Trust (CCJI) since its launch in December 2015, boosted by the focus on shareholder return from Abenomics. CCJI currently offers a yield of 3.8% and an unconventional sector mix versus other developed market equity income strategies.
“Healthcare has historically been a valuable source of equity income for investors. However, this can be at the expense of capital growth. BB Healthcare pays its dividend out of capital and currently offers a yield of 3.0%. The benefit of this approach is that it allows the managers to adopt an unconstrained and high conviction approach, without being tied to the high-yielding, often ex-growth stocks in their universe.”
Firm foundations: infrastructure and social housing
Alan Brierley, Director of Investment Companies Research at Investec, said: “Sustainability of income is key and our preferred sector is Infrastructure. Our recommendations include HICL Infrastructure, The Renewables Infrastructure Group, Greencoat UK Wind and Sequoia Economic Infrastructure Income. These companies give a diversified exposure to social, economic and renewable infrastructure along with infrastructure debt. Within the debt sub-sector, many constituents had over-promised and under-delivered even in a benign credit environment before the onset of the pandemic. Here, stock selection is even more critical – our preferred investments are GCP Asset Backed Income, which invests in asset-backed loans, and BioPharma Credit which provides debt capital to the life science industry.”
Monica Tepes, Head of Investment Companies Research at finnCap, said: “If you are looking for as much certainty as possible that your dividends are not going to be cut, I think you need to look at sectors where either the local or state government is your counterparty, or your payments come from businesses which are unaffected or even benefit from the current environment. In the first category I can only put infrastructure equity (BBGI, International Public Partnerships, HICL Infrastructure), infrastructure debt (GCP Infrastructure Investments, Sequoia Economic Infrastructure Income) and supported living (Civitas Social Housing, Triple Point Social Housing REIT). In the second category I think there are no clear winning sectors – certain players in the logistics sectors seem to be in the right assets, but others aren’t. If the products transiting through your logistics centres are not selling, you will have trouble collecting rents.”
Conor Finn, Investment Fund Analyst at Liberum, said: “Aside from Infrastructure and Renewable Energy Infrastructure funds, we believe the social housing REITs offer the prospect of long-term, uninterrupted income. Following recent acquisitions, Civitas Social Housing has achieved full dividend cover on a forward-looking basis and we expect an increase to cover of 1.08 years by Q1 2022. The portfolio produces a long-term, inflation-linked income stream from specialist supported housing. Civitas is focused on accommodation for individuals with care needs that are moderate to high. Rental payments from housing associations are funded from housing benefit. Rent collection in the sector has been unaffected by the COVID-19 crisis, unlike other real estate.”
Ewan Lovett-Turner, Director of Investment Companies Research at Numis Securities, said: “The investment companies I have highlighted generate their income from a range of asset classes with different underlying return drivers. In addition, they have diversified portfolios with a large number of underlying investments. For example, International Public Partnerships has over 100 projects in the UK, Europe, North America and Australia, including public private partnership projects such as schools, courts and police stations as well as offshore transmission cables, transport assets and the Thames Tideway Tunnel project. TwentyFour Income offers exposure to both mortgage and corporate loans across Europe, backed by thousands of underlying loans.”
But what about the risks?
Simon Elliott, Head of Investment Research at Winterflood Securities, said: “With any investment trust investing in equities overseas for income, there is always the potential for adverse currency movements. These can be meaningful and counter any increase in the level of the underlying dividend, however, this obviously works both ways. Sterling has proven relatively weak in general so far this year, which provides a following wind for overseas equity income mandates.”
Conor Finn, Investment Fund Analyst at Liberum, said: “The regulator has been critical of the social housing sector and has highlighted issues at a number of housing associations. The counterparties to the leases are typically smaller housing associations. Civitas Social Housing has been working with the housing associations to address the issues raised. Civitas has led several initiatives to improve professionalism and the long-term sustainability of the sector. These include force majeure clauses in the leases, assisting housing associations with governance changes and board appointments and supporting the establishment of a not-for-profit, community interest company. On a portfolio level, Civitas has also been working on increasing the amount of the portfolio that is supported by 25-year, back-to-back care provider leases which represent 30% of the portfolio.”
Ewan Lovett-Turner, Director of Investment Companies Research at Numis Securities, said: “The risks vary widely according to the nature of the underlying assets. International Public Partnerships has modest exposure to regulated assets, some of which are subject to periodic price controls where the regulator sets the allowed return. A small part of the portfolio has some demand risk, although there are various downside mitigations within certain contracts which provide some comfort. However, the majority of revenues have a high level of predictability under availability-based payment structures, or through senior debt investments. TwentyFour Income could be exposed if default levels in European loans or mortgages are significantly higher than expectations, although there is typically first-loss protection and current valuations are pricing in an increase in defaults.”
Anthony Leatham, Head of Investment Trust Research at Peel Hunt, said: “There has and will continue to be dividend disruption facing the market as a result of COVID-19 and its economic impact. Revenue reserves have helped investment companies to deliver income to shareholders through periods of stress and we expect to see this play out again. Volatility may also give certain investment companies more opportunity to use option strategies to enhance the income generated by their portfolios. In addition, investment companies can employ gearing to take advantage of market dislocations, boosting the yield. Finally, the closed-ended structure protects portfolio managers from becoming forced sellers. Open-ended fund managers have had to deal with redemption requests and this can have a detrimental impact on portfolio performance and income generation.”
Monica Tepes, Head of Investment Companies Research at finnCap, said: “The scarcity of income is nothing new and the economic backdrop of ultra-loose monetary policy is going to make income-producing alternative assets even more attractive. The investment company alternative income sector has grown tremendously over the last 15 years precisely because it can fill this gap, which open-ended funds, equities and bonds can’t. I think there will be more income solutions to come from this space.”
Coming down from the clouds
Ian Cowie highlights his COVID top performers
The coronavirus poses the biggest threat to global health and wealth in living memory but investment companies have helped savers and investors minimise its risks so far. On average, these closed-ended funds have avoided nearly two-thirds of the losses suffered by other shareholders this year.
While the FTSE All Share index, a broad measure of the London market, has lost 15% of its value since the start of 2020, the FTSE Equity Investment Instruments index, a benchmark of investment companies in the All Share, has fallen by only 5.1% at the time of writing. The explanation is largely based on the most fundamental way to diminish the danger inherent in investment; diversification.
Pooled funds can spread individual investors’ money over dozens of different underlying companies, countries and currencies to reduce our vulnerability to setbacks or failure at any one of them. In particular, many investment companies’ exposure to overseas stock markets has proved beneficial because some of these markets have recovered more rapidly from the coronavirus crisis than the London Stock Exchange.
For example, while the FTSE 100 index, a benchmark of Britain’s biggest companies, has fallen by 15% since the start of 2020, the Dow Jones index of American blue chip stocks is 8% down. Meanwhile, the Standard & Poor’s 500, a broader measure of the US market, has fallen by less than 2% over the same period.
One reason for the American market’s resilience in this crisis so far is that far more healthcare and technology businesses are listed there than in Britain. Healthcare companies have benefited from the search for a vaccine or cure, while many technology businesses’ revenues have boomed as more people work from home and shop online.
Coming down from the clouds, two of my most valuable shares have surfed both trends. Worldwide Healthcare, a self-descriptive investment trust in which I have been a shareholder for more than a decade, has delivered positive total returns of 14% over the last three months and 39% over the last year, according to independent statisticians Digital Look and Morningstar. Meanwhile, Polar Capital Technology, another investment trust in which I have been a shareholder for more than a decade, has soared by 22% in the last three months and 52% over the last year.
Neither pays much income; while Worldwide Healthcare yields 0.7%, Polar Capital Technology pays no dividend. Even so, such good total returns, especially in such bad times, mean I am very happy to pay ongoing charges of 0.9% for the former share and 1.33%, including a performance fee, for the latter stock. Both benefit from professional fund management, like all investment companies, which enables shareholders to gain access to opportunities in specialist sectors of which we know little or nothing.
Similarly, reading about the search for a vaccine prompted me to invest in International Biotechnology Trust in April, where hopes for some of its underlying holdings have helped deliver total returns of 29% in the last three months and 28% over the last year.
International Biotechnology Trust has ongoing charges of 1.68%, including a performance fee, and - unusually for its sector - yields 3.3%. This trust’s stated policy is to deliver a dividend equal to 4% of its net asset value (NAV) at the end of the preceding financial year.
Unlike other forms of pooled fund, investment companies can enhance dividends with capital gains and sustain income payments to shareholders by retaining up to 15% of income they receive in good years to top up distributions in bad years. Investment companies’ closed-ended structure also means their managers are never forced to sell assets to meet redemptions when confidence and prices fall, as often happens in a crisis.
Many of these characteristics of investment companies may have seemed like tedious technicalities in less challenging markets. Sometimes it takes a new threat to make us appreciate old safeguards or tried-and-tested ways to cope with the uncertainties of investment.
Commitment to the cure
The investment company holdings developing vaccines, tests and treatments
Despite the gradual lifting of lockdown, effective testing and treatment remains a crucial part of managing the long-term impact of coronavirus. The AIC has spoken to investment company managers to find out which holdings are developing vaccines, tests and treatments.
Annabel Brodie-Smith, Communications Director of the AIC, said: “Whilst the extra freedom of the past few weeks has been a welcome respite as lockdown has begun to be lifted, there’s still a long way to go. Many people are still receiving treatment for COVID-19 and testing is a key part of the government’s plan to combat the next stage of the crisis. It’s encouraging to see how investment companies’ portfolio companies are helping, whether that’s searching for a vaccine, developing treatments or producing antibody tests which can be used at home.”
Dr Trevor Polischuk, Co-Manager of Worldwide Healthcare Trust, said: “In the vaccine space, CanSino Biologics is leading the China-based efforts to create a vaccine, with the recent promise to share any breakthroughs universally if successful. In the US, Pfizer, among others, will likely have data near term on their vaccine initiatives as well. We expect the news flow related to COVID-19 therapies, diagnostics, and vaccines to be copious throughout 2020 and this should significantly impact lives, markets, and stocks alike.”
Alexandra Lindsay, Investment Director responsible for Mologic* at Calculus VCT, said: “Calculus VCT portfolio company Mologic, a leading developer of diagnostic technologies, has joined forces with self-testing experts BioSure to produce a COVID-19 antibody self-test. The innovative design has been proven to be extremely easy to use, requires only a fraction of a drop of blood and gives the user their own result in just ten minutes. The antibody self-test will be ready for mass production at the beginning of June. It will be available to the UK and global markets and will also be available to be directly purchased by end consumers. The team has worked tirelessly to develop a quality rapid diagnostic test in a short space of time. It is impressive that this test is now extremely close to being on the market following the partnership with BioSure.”
Joe Bauernfreund, Portfolio Manager of AVI Global Trust, said: “Kinnevik is one of our top ten holdings. Kinnevik's purpose is to invest in the power of technology to make life better. They have a strong focus on the healthcare sector and own a 16% stake in Babylon, a digital healthcare service company combining mobile technology and artificial intelligence with medical expertise. Babylon has recently launched a finger prick blood test that identifies people previously infected with COVID-19. It is exciting and rewarding to see our portfolio companies helping to find solutions for COVID-19.”
Jamie Ross, Fund Manager of Henderson EuroTrust, said: “We see limited disruption to Roche’s business from COVID-19 and, in fact, see a few ways in which the company could benefit. First, diagnostic testing is likely to become increasingly prevalent as a result of COVID-19. Roche has a very large diagnostics business and is well placed to benefit. In a specific response to COVID-19, Roche launched its SARS-CoV-2 IgG antibody test at the start of May and they are already selling this to customers. They expect to produce high double-digit millions of tests in May and this production capacity will grow as the year goes on. Roche are also looking into the development of other COVID-19 diagnostics tests using different technologies.”
David Turner, Senior Investment Manager at Foresight Group, advisor to Foresight VCT and Foresight 4 VCT, said: “Biofortuna, a portfolio company of Foresight VCT and Foresight 4 VCT, is acting as a contract manufacturer for two global customers to deliver laboratory-use tests for COVID-19 and is also assembling testing kits that are distributed to service laboratories. Biofortuna has scaled up its laboratory infrastructure significantly over recent weeks to meet demand and throughput is now in excess of four million tests per week. The company has also doubled its workforce, with 15 new members of staff joining in the last three weeks.”
Tim Creed, Fund Manager of Schroder UK Public Private Trust, said: “Benevolent AI and Oxford Nanopore are two British companies using the latest cutting-edge technology to research and understand COVID-19. Benevolent AI creates and applies artificial intelligence and machine learning to accelerate the drug discovery process and the technology has been providing important insights in the global effort to combat the COVID-19 outbreak. Oxford Nanopore has developed a new generation of DNA sequencers. The firm is providing support on the frontline of the coronavirus outbreak through their MinION sequencers, which allow rapid and decentralized genome sequencing, enabling better understanding of the disease and its development, including potential mutations.”
Alasdair McKinnon, Manager of The Scottish Investment Trust, said: “Some businesses are better placed than others to defeat the virus. Take Gilead Sciences, one of The Scottish’s pharmaceutical investments, as an example. As the pandemic unfolded, it became clear that no proven treatments for the disease existed; addressing the symptoms was the best that could be expected. However, Gilead realised that remdesivir, a drug developed in the fight against Ebola, might also be effective against COVID-19. Development and approval of new drugs generally take years, but the pharmaceutical industry and government agencies have massively accelerated the process such that promising drugs can be approved in weeks, including Gilead’s remdesivir. It doesn’t claim to be, and no one expects, a miracle cure, but it might provide respite for some patients who are battling for their lives.”
Dr Trevor Polischuk, Co-Manager of Worldwide Healthcare Trust, said: “Whilst the investment objective of the company is not solely to pursue the next cure or vaccine, we have many portfolio companies that have joined the battle against COVID-19. Novartis has led the philanthropic pathway with the commitment to donate up to 130 million doses of hydroxychloroquine to treat symptoms of COVID-19. Gilead Sciences has led the news cycle with the first Emergency Use Authorization by the FDA for remdesivir to treat hospitalized COVID-19 patients. Takeda is leading a global alliance of blood plasma companies to develop a plasma-derived therapy from recovered COVID-19 patients not only to treat infected patients but also for prophylactic use.
“Chugai is conducting global phase three trials of their already approved rheumatoid arthritis drug, Actemra, to determine if reducing the ‘cytokine storm’ helps to prevent patients from succumbing to the most severe lung complications of COVID-19. Similarly, Alexion has recently announced plans to initiate a global phase three study to investigate their own already marketed drug, Ultomoris, in COVID-19 patients who are hospitalized with severe pneumonia or acute respiratory distress syndrome.”
Jamie Ross, Fund Manager of Henderson EuroTrust, said: “Roche has a product called Actemra which is already approved to treat arthritis amongst other conditions. This product is currently being tested for its use in severe COVID-19 cases and the early indications are encouraging; there is more data to follow in June. Given that this product is already approved for use, it could theoretically be quickly rolled out if the data is positive.”
Mobile x-rays for the NHS
James Livingston, Partner at Foresight Group, advisor to Foresight VCT and Foresight 4 VCT, said: “Across our VCT portfolio, we have many examples of companies going out of their way to support the NHS through the present crisis. For example, Belfast, Dublin and Nottingham-based Hospital Services Group Limited (HSL), which Foresight VCT and Foresight 4 VCT invested into in 2015, has been providing mobile x-ray equipment and also home reporting equipment. This allows scans to be read at remote workstations as they would in a hospital environment. HSL has also been delivering consignments of face shields to give healthcare workers added protection when dealing with COVID-19 patients.”
On the front line
How investment companies and their holdings are supporting the nation's key workers
For the past few months at 8pm every Thursday the UK has stepped out on to front doorsteps and balconies to clap for our carers. This simple act of appreciation and support is being matched around the world by people and companies doing what they can in the fight against COVID-19.
Many companies are working to develop tests and treatments for coronavirus but there are lots of other ways businesses have been showing their solidarity and support. The AIC has spoken to its membership to see what investment companies and their portfolio holdings have been doing aside from testing and treatments to support the global initiative. Responses range from providing free data for health workers in Turkey to donating face masks to the NHS.
Annabel Brodie-Smith, Communications Director of the AIC, said: “It’s heartening to see how investment companies and their portfolio holdings have been helping during the COVID-19 emergency. The help has included donating PPE, offering services for free and providing support and advice to small businesses. Investment companies have over 150 years of heritage so they are no strangers to extraordinary times. It’s good to see investment companies and their holdings helping today.”
Face masks for the NHS
James Armstrong, Managing Partner of Bluefield Partners, the investment adviser of Bluefield Solar Income Fund, said: “We were pleased to partner with our Chinese friends, LONGi Solar, on a local PPE initiative. In April, we were contacted by LONGi, the Shanghai based solar manufacturer, asking whether Bluefield needed any PPE for our teams operating in the field. We said yes and 2,000 face masks arrived. Our teams only needed a few hundred so we were delighted to donate 1,600 masks to the Royal United Hospital (RUH) Bath who are on the front line fighting COVID-19. My twin sons were born in the RUH almost exactly 12 years ago. It’s nice to be able to give something back to the wonderful staff at the hospital. Bluefield would like to thank them for the amazing work they are doing.”
Volunteering to help entrepreneurs
Tim Levene, CEO of Augmentum Fintech, said: “Augmentum is perhaps unusual amongst most investment companies as our entire portfolio is focused on fintech. As such our portfolio companies have been at the centre of much of the COVID-19 response, and given they are all technology companies, the response has been rapid. Habito’s online mortgage and re-mortgage services were able to ensure customers could make progress whilst in lockdown, iwoca are offering CBILS [Coronavirus Business Interruption Loan Scheme] loans, Tide are offering Bounce Back Loans, as well as having launched a coronavirus assistance hub to support small businesses during the pandemic and Farewill are supporting key workers with free wills for NHS staff.
“As a fund we have been working closely with our portfolio companies and inputting on government initiatives such as the Future Fund. Our partners have been hosting 1:1 Office Hours sessions with early stage fintech founders to support the wider industry and to ensure innovation continues and start-ups can continue to scale when they are ready. We also launched TeenVC, a free digital education platform where teenagers can learn about venture capital and entrepreneurship, at a time when teenagers are at home and parents and schools are looking for online educational activities.”
Free data for health workers in Turkey
Matthias Siller, Co-Manager of Baring Emerging Europe, said: “A company we invest a meaningful amount in, which provided an exemplary response to the COVID-19 related humanitarian challenges, is Turkcell, the leading mobile network operator in Turkey. Whilst not directly involved in the production or distribution of PPE or other healthcare equipment or services, we believe that the swift and non-bureaucratic actions taken by management to support businesses, individuals and households in dealing with the pandemic set a standard for other companies to aim for. Some of the key initiatives worth mentioning include hygiene equipment for field employees as well as free data allowances for university students, subscribers in the health sector and subscribers aged over 65 to facilitate remote working, online education and connectivity.”
The £50,000 “Wage War on Covid Fund”
Robin West, Co-Manager of Invesco Perpetual UK Smaller Companies Investment Trust, said: “We always seek to invest in well-managed, quality companies. One characteristic of a strong management team is an understanding and awareness of how the business interacts with and affects all its stakeholders: staff, customers and the wider community as well as shareholders. We are pleased to see how some portfolio companies are responding to the COVID-19 pandemic, which has increased awareness of the social ‘S’ component of ESG. Consultant engineers Ricardo have engineered and assembled face shields which were donated to workers in care homes and NHS facilities local to four of the company’s UK sites; Inspecs Group is an eyewear manufacturer which has diverted its production to supply safety eyewear to frontline medical professionals; and investment platform AJ Bell has launched a ‘Wage War on Covid Fund’ under the umbrella of the AJ Bell Trust, a registered charity, which has allocated £50,000 to the fund. In addition, directors and senior management have donated their April, May and June salaries, alongside other members of staff making similar pledges.”
Supporting cancer care
Ben Wicks, Fund Manager of Schroder UK Public Private Trust, said: “Rutherford Health is the very best of British. It is the first national provider of proton beam therapy, giving patients access to the most advanced form of cancer care within the UK. This is especially beneficial for children, the elderly and patients with a weak immune system. The firm has partnered with the NHS to provide care to patients at a time when many NHS healthcare facilities are dealing with a high number of COVID-19 patients.”