Gervais Williams
Premier Miton UK Multi Cap Income Fund manager
For information purposes only. The views and opinions expressed here are those of the authors at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Performance in perspective
Over the first 6 months of 2023 the return of the FTSE All-Share Index was 2.61%, whilst the FTSE AIM All-Share Index fell -8.50%. This compares with a return of 0.15% from the IA UK Equity Income sector and a fall of -7.65% from the Premier Miton UK Multi Cap Income Fund (class B accumulation shares).
Calendar year performance (%) data as at 30.06.2023
Past performance is not a reliable indicator of future returns.
Performance source: FE Analytics. Based on UK sterling, class B accumulation shares on a total return basis. Performance is shown net of fees with income reinvested.
On 30 November 2020, this fund moved from a single pricing basis (mid) to a swing pricing basis.
Performance could be shown on a combination of bid, mid or offer prices, depending on the period of reporting.
iEnergizer delisting
During this period there was one exceptional development within the portfolio that detracted strongly from returns. iEnergizer has been a Fund holding for some years, and over that period it has grown, paid growing dividends to shareholders, and even paid a one-off special dividend in 2020 in a year when many other companies cut their dividends.
iEnergizer’s challenge is that they have been disappointed with their market valuation. They feel their cost of capital has been too high to be of real use, so in the end the CEO chose to terminate its stock market listing. Although this proposal requires a shareholder vote, the CEO holds such a significant percentage of the company shares that the delisting vote was a formality.
On announcement of the news, the iEnergizer share price quickly fell back to a level at which it was yielding over 40% despite its potential to continue to pay dividends as previously. (The CEO doesn’t draw a salary, so the dividend is his primary source of pay). As iEnergizer was one of the Fund’s largest holdings, unfortunately its share price setback detracted c1.9% from Fund returns over the half year.
We remain upbeat about its prospects for the business and so we have chosen to retain a holding. We are reassured that iEnergizer has arranged for the JP Jenkins Exchange to provide a third-party market price.
Part of a wider problem
In a way, the iEnergizer issue also illustrates a wider problem within the UK equity market currently. With the large redemptions of UK OEICs over the last two years, most AIM-listed share prices reflect the marginal sellers and have been very weak. Whilst there are also large local sellers of UK majors as well, as the UK market is undervalued, they are being offset by international buyers.
The net effect is that the FTSE 100 Index has outperformed some global stock markets over the last two years, whereas simultaneously many AIM-listed stocks have underperformed badly. There is now a differential in return between the FTSE 100 Index and the FTSE AIM All Share Index over the last two years.
A second feature that has detracted from investment returns over the last 6 months relates to the nature of the Fund’s portfolio. We take the view that active fund managers can deliver value to investors beyond just generating an investment return over time. Our ambition is to both minimise the risk of a permanent loss of capital and deliver fund returns that are less correlated with that of the mainstream stock markets.
To do this the portfolio invests across a long list of stocks including both large caps and AIM-listed stocks, local businesses and international businesses, mature and immature companies. The portfolio often includes a range of small cap energy, minerals and financial company shares. Other multicap strategies in the peer group may disregard small caps in these sectors, as they may not have conviction about the future price of various commodities and so largely avoid these sectors.
We take a different view
During periods when economies are unsettled, the returns on capital intensive businesses can improve, whilst those of most other industry sectors weaken. During the early part of 2021 for example, the return on the Premier Miton UK Multi Cap Income Fund was boosted by the holdings in some of these sectors,
The key for us is diversification. Including these kinds of holdings in a portfolio can enhance the prospect for sustained dividend growth and hence the longer-term returns of the strategy. This may help generate returns that are less correlated with that of the mainstream indices. During March 2020, and during the stock market recovery that followed, the Fund performed strongly in our view.
Over the half year to June 2023 however, particularly in the second quarter, the share prices of many small cap minerals, energy and financial services companies have been particularly weak. Even those that exceeded profit forecasts did not appreciate much in value.
Many of these were already standing on what we consider to be low valuations. These are companies typically with strong balance sheets and often with net cash balances in many cases. As energy prices have fallen over the half year the share prices of Shell and BP, for example, have held up well as international investors supported them given their low valuations compared to international comparatives.
Meanwhile the share prices of Jadestone, Kistos, I3 Energy have all fallen more than 40% over the first 6 months of 2023. Whilst the Fund had already reduced holdings in these after they had outperformed well in 2022, the remaining investments detracted from returns over this half year period.
Finally, over the last two years the Fund’s holding in a FTSE 100 Index Put option has detracted around 1% per year, including 0.5% during the first 6 months of 2023. This is as anticipated as the Put option adds considerable upside when there are wide falls in equity markets. Its role at these times is to soften any drawdowns in the Fund value. But it can also be sold to fund additional equity income holdings. Because of this we still see value in the Put option currently.
The final word
In summary, in our view the weak returns of the Fund over the last two years are principally related to the share prices of many small cap companies it invests in not appreciating in part due to major UK OEIC redemptions.
The share prices of some of the energy, minerals and financial small caps have been weak over the last six months. The position has been further worsened by the iEnergizer share price collapsing as it delisted, and the FTSE 100 Index Put option detracting because there has not been a substantial and wider reaching fall in equity markets.
The advantages of the Fund investment strategy may be more apparent during geopolitical uncertainty and during stock market setbacks. Given the risk of a global recession, we believe its advantages could be much more apparent in the coming quarters, as it was in the year from March 2020 onwards.
