|Cumulative returns for the periods ended 28 February 2019 %|
|1 year||3 years||5 years|
|TB Wise Multi-Asset Income – A Shares||-2.06||35.67||37.52|
|TB Wise Multi-Asset Income – B Shares||-1.42||38.32||41.84|
|TB Wise Multi-Asset Income – W Shares*||-1.17||N/A||N/A|
|IA Flexible Investment Sector||-1.15||27.28||32.05|
|UK Consumer Price Index (CPI)||1.33||6.51||6.83|
|Cboe UK All Companies Index||1.65||31.2||28.58|
Performance based on income shares. Source: Financial Express. Total return, Bid to Bid. Sterling terms.
Past performance is not a reliable indicator of future results. Investors are reminded that the price of shares and the income derived from them is not guaranteed and may go down as well as up.
* The W shares were launched on 9 December 2016.
Explanation of the TB in TB Wise Income
T Bailey, a Nottingham-based firm, has been our funds’ administrator and Authorised Corporate Director (ACD) since 2007. The ACD is a regulated function which primarily involves ensuring that the fund does not breach any of the FCA’s rules. An FCA rule states that where a company manages a fund with its own company name in the title, as in Wise Multi-Asset Income, if the fund uses an external firm as its ACD, then this fact must be designated by inserting the initials of the ACD in the title, as in TB Wise Multi-Asset Income. For brevity, the fund will be referred to as Wise MAI in the remainder of this report.
This report will discuss the fund’s performance during the year ended 28th February 2019 and give a brief summary of the outlook for the coming year.
Investment Objective & Policy
Wise MAI was launched in October 2005. Its three aims remain the same as they were on the day we launched the fund. The aims are to pay an attractive income yield to investors, and to increase the annual income payments, and the fund’s share value, at the rate of inflation or better over time. We will discuss our performance against these objectives further on in this report.
Our investment universe is deliberately as broad as possible. Wise MAI can invest in any or all of the following asset classes – cash, fixed interest including government stock and company stock (corporate bonds), shares – both listed equities and private equity, commercial property (via investment trusts) and infrastructure funds including renewable energy. We can invest in these assets anywhere in the world, and in whatever proportions we believe will best achieve our stated objectives.
Wise MAI is included in the IA Flexible Investment sector, which allows us the freedom to invest in the unconstrained fashion which we believe will produce the best overall returns for our investors.
Wise MAI has three share classes. The A shares are a legacy share class, with higher charges. At the year-end, only around 1.25% of the fund was in the A shares. The W share class is restricted to investments of over £100m. Figures quoted in this report will refer to the B shares, which the majority of investors hold.
2016 -7, a stellar year for performance, in which the fund made 33.2%, has been followed by two weaker years, with a total return of 5.33% in 2017-8, and minus 1.42% in the year just ended, 2018-9. Over the last year the fund marginally underperformed the average fund in the IA Flexible sector, which was down 1.15%, and more significantly underperformed its benchmark Cboe UK All-Companies index, a proxy for the UK stock market, which returned 1.65%.
2018-9 was the mirror-image of 2017-8. The earlier year began with three months of strong performance, followed by a steady decline. In 2018-9, the stronger performance came at the end, following very weak market conditions in the last few weeks of 2018. Overall, the fund has seen a prolonged period of consolidation, lasting from the end of May 2017 to the end of 2018. During this time, the assets in our investable universe became steadily cheaper, and their yields rose. Wise MAI’s dividend yield rose during this period from 4.8% to 5.6%.
Over longer periods the fund’s performance has remained well above that of its benchmark, inflation and cash. Over three years, Wise MAI made a total return of 38.26%, while the Cboe UK All-Companies index returned 30.89%, and the IA Flexible sector average, 27.81%. Over five years, the fund made a return of 41.85%, while the Cboe UK All-Companies index made 28.58%, and the IA Flexible sector average, 32.05%.
The above figures are based on the accumulation units, where dividends are reinvested, to reflect the total returns from a fund which produces high levels of income, and correspondingly lower levels of capital return.
Our management of the fund, which gives rise to the performance, is discussed in detail in the Review section.
High volatility occurs when asset prices move around violently.
The fund’s volatility has risen significantly over the past year, while remaining well below that of the stock market. As at February 28th, Wise MAI’s three-year annualised volatility was 8.56%, compared to 8.41% a year earlier. The corresponding figures for the Cboe index were 13.0% and 11.03%. The higher numbers reflect higher levels of volatility.
A multi-asset fund such as Wise MAI can invest in such disparate asset classes as shares, fixed interest, infrastructure, property and cash. The prices of these assets move in different ways, and sometimes in opposite directions, so by its nature a multi-asset fund should be less volatile than a stock market index. However, the policy of Quantitative Easing (QE) has made the fixed interest markets so expensive as to be uninvestable over the past decade. Infrastructure, which is seen by many investors as a higher-yielding proxy for fixed interest, is also fully valued now, so the fund as currently configured is concentrated in property, listed shares and private equity, which are the three most volatile asset classes in our universe.
We see a deep value opportunity in UK shares. The Brexit process has dominated the political and economic landscape for three years, and still, at the time of writing, the crisis is ongoing, and we continue to await clarification of the long-term arrangements. UK investors prefer to invest in exporting companies, which serve the world’s markets rather than the domestic one, while international investors prefer to shun the UK altogether, leaving swathes of the UK market at their cheapest levels of valuation since the Global Financial Crisis (GFC) of 2007-9. While scenes of political chaos appear nightly on our television screens, the stock market has gyrated wildly, attempting to price in each new development. This elevated level of volatility is uncomfortable, but it is a price we are prepared to pay in the short term. With UK shares at their current levels, we have access to attractively high dividend yields, and, we believe, the prospect of an eventual re-rating in the shares of UK companies that serve the domestic economy.
Wise MAI’s dividend yield was around 5.6% as at February 28th. This means that an investor who invested £100 on that day could expect to receive £5.60 in dividends over the next twelve months. This would happen if the underlying holdings in the fund were to remain unchanged during the year, and if all of them were to pay the same dividend as they had the previous year. In practice, there are always portfolio changes, and there are always dividend increases, and sometimes cuts, so the quoted yield can be no more than a guide.
A year earlier, on February 28th, 2018 the fund’s dividend yield was 5.2%, and a year before that, 4.8%. The rising dividend yield is a reflection of the generally lower prices of the assets in our universe. It also reflects our rotational policy of selling holdings when their prices have risen substantially, and their yields have dropped, adding the proceeds to assets when their prices have fallen, and dividend yields have risen.
Investors are prepared to pay more for a secure income than an unreliable one, so a ‘safe’ income tends to be a lower one. We assess each asset on its own merits and come to our own conclusion on risk. We believe that the market gets it right a lot of the time, but not always. In an over-valued market, it gets harder and harder to find high income streams that aren’t also offputtingly risky, and in such times, we prefer to accept a lower-yielding asset, rather than one that continues to pay a higher income, but with a high risk of dividend cuts and capital losses. On a scale of 1-10, where 1 is cheap, with high, safe dividend streams widely available in all asset classes, and 10 is the opposite, we would judge today’s market to be around a 6.
Ongoing Charges Figure
Wise MAI’s OCF was 0.87% as at February 28th. It is pleasing to report another fall in a figure which has been reducing steadily over the years, and is now, at well below 1.0%, attractively priced relative to the fund’s peers. The fund’s OCF today is more than 40% lower than it was seven years ago.
The OCF reflects two variables – changes in the size of the fund, and the proportion of the fund held direct, rather than through other funds. The OCF will fall if the fund grows, or if we hold a higher proportion of it directly. Over the course of the year, the fund size remained roughly the same, but the proportion held direct increased to 71%, from 59% a year earlier, and 56% two years ago.
The proportion of direct holdings is unlikely to grow above its current level.
‘B’ shares % p.a.
The fund size as at February 28th was £ 111.5m, up 3% on the year.Fund Size
Where Wise MAI Invests
The table below shows how Wise MAI was invested at the year-end. We have included the comparable figures for the previous year-end, which shows that there have been only minor changes in overall asset allocation over the year.
|28th February 2019||28th February 2018|
|UK Commercial Property||14||14.3|
The full list of holdings at the balance sheet date is shown in the Portfolio Statement on pages 43 to 46.
The price of Wise MAI fluctuates from one year to the next, but the process, and the principles which inform the management of the fund, do not change, and it may be useful to reiterate them here.
Whether investing in companies or in funds, we invest primarily in people. We don’t know what the future has in store, but we believe that we are best equipped to cope with it, if we place our shareholders’ money in the hands of experienced people with energy and sound judgement, who we believe care deeply about the institutions they manage, and who are able to explain their plans to us in a clear and credible way.
We aim to invest in these companies and funds at times when their share prices are significantly below our estimate of their fair values, and even though our respect for them doesn’t change, we will sell once the valuations rise to levels we aren’t comfortable with.
We believe we can serve our shareholders best by adopting the widest possible investment remit, so that when certain asset classes become dangerously expensive, we have the best chance of finding value in others.
We prefer not to invest in the tobacco and gambling industries, or the arms trade, and have avoided these areas for many years. We strongly believe in renewable energy, though even in this area we will not invest when the assets do not meet our valuation criteria.
We prefer to invest in entities which serve people’s needs rather than their whims.
Though the fund’s remit is global, we will not invest in areas where we can’t be sure that property rights or the rule of law will be upheld – Russia, for example, though we may not be able entirely to avoid minor holdings in generalist global or emerging markets funds.
As this is an income fund, we do not invest in any asset which doesn’t pay an income, with an unofficial minimum of 2.5 – 3.0%.
This review will briefly cover the political and economic backdrop, discuss the performance of the different elements of the fund, and end with a more in-depth review of the UK construction and retail sectors, the ones which have had the biggest negative impact on the fund’s performance during the year.
Rising interest rates
Investment markets thrive at times of steady but unremarkable economic growth, low interest rates, peace and political stability. In 2018-9, there was plenty in the background to unsettle the financial markets
Following the GFC, central banks attempted to kick-start recovery by reducing interest rates almost to zero (the Zero Interest-Rate policy, or ZIRP) and by buying vast quantities of government bonds (known as Quantitative Easing, or QE). Ten years later, interest rates are still at rock-bottom levels, and central banks continue holding the bonds that they have bought. In due course these policies will need to be reversed. The most progress has been made in the US, where interest rates have been raised to the range 2.25-2.50%, and the Federal Reserve has begun to sell its bonds back into the market. ZIRP and QE were intended as stimulants, so reversing them will have a correspondingly restraining effect on economic growth and investment markets. Central bankers believed last year that conditions were robust enough to withstand the effects of policy reversal, but investors weren’t so sure. As interest rates in the US rose, the two-year government bond yield threatened to rise above the 10-year rate, an event which is closely watched by commentators as in the past it has had a high degree of accuracy in predicting recessions. In late autumn, Fed. Chairman Jay Powell stated that the US was far from policy normalisation, meaning that interest rates would need to rise a lot further before reaching an appropriate level for the economy. Investors, already nervous about the possibility of ‘policy error’, the over-tightening of interest rates, panicked, and a headlong flight from ‘risk assets’ ensued.
More recently, the Fed. has performed a U-turn, and is now saying that rates will definitely not be raised in 2019 and may even be cut. Financial markets have rebounded in response to this more ‘dovish’ outlook.
Low global growth
China’s economy, now the world’s second largest, is the main engine of global economic growth. There have been signs of slowing in the last few months, and the level of debt in the Chinese economy is concerning. Accurate data is in short supply. Some commentators believe that the Chinese economy is robust, but the authorities there are taking no chances, are leaning on the banks to increase their lending and have proposed major tax cuts. Meanwhile, there are signs that the US economy could be slowing down, and Eurozone economies, including the largest, Germany, have been struggling too.
The worrying aspect of interest rates not going up may be that it’s because they don’t have to. Interest rates are raised to curb excessive economic growth, in the absence of which, there is no need to raise interest rates.
Mr Trump’s crusade against (mainly) the Chinese contains a kernel of reality among all the bluster. The world would be a better place if Chinese companies didn’t steal intellectual property from their overseas competitors. The threat and then imposition of tariffs have acted as a brake on trading activity, as well as affecting sentiment during the year. The Americans have been saying for the last few weeks that a deal is imminent, and we can only hope that they are right.
Writing the day before March 29th, our due date for leaving the UK, it is possible to say nothing except that the outcome is as unclear as it was at the time of the referendum, and that the current situation doesn’t appear to please anyone.
The UK economy is in remarkably good shape in the circumstances. Employment, at 32.7m, is at an all-time high, while the unemployment rate of 3.9% (EU average 6.5%), is at its lowest for over four decades. The government’s finances are at their strongest since before the GFC. Inflation, at 1.8%, is running slightly below the Bank of England’s target rate.
On the other hand, alongside the distressing headlines about businesses relocating overseas (Honda, Nissan, Dyson) there is a sense of decisions large and small being deferred until the outcome is known. The period of ‘negative real wage growth’ (wages rising more slowly than the rate of inflation, leaving people with less spending power) ended around a year ago, but the increasingly fractious Brexit process has discouraged activity. The UK’s car fleet, for example, grows steadily older, and at more than 8.5 years, the average cars on the road is older than it was 20 years ago. It will be interesting to see whether some kind of policy clarity, following the end of the Brexit process, when it happens, will trigger a release in pent-up demand, from both individuals and companies. Our guess is that it will.
Behind all these ephemera, most of which are unlikely to be remembered in ten years’ time, the accelerating technology revolution continues, leaving very little untouched. The death of cash, electric and autonomous vehicles, artificial intelligence and robotics, are changing the way we live in front of our eyes. The vision which fuelled the investment bubble in technology two decades ago is becoming a reality. More than ever, companies are either forces for change, able to adapt, or threatened with extinction. As the pace of change quickens, the future becomes ever less predictable.
TB Wise Multi-Asset Income
The fund invests in assets which the managers believe can deliver a robust and growing income stream a long way into the future. We need to bear macro-economic factors in mind when choosing these assets. An example would be a ‘legacy’ retailer, who is in the process of being disintermediated by online competition. A retailer with high fixed costs and no competitive advantage would quickly go out of business, and in the last year, many have. The trend towards going out more to drink and less to eat has affected pubs (positively) and restaurants (negatively). The recent pause in the longer-term growth in life expectancy has created a windfall for life insurers.
Things that went well
We began the year with a roughly 11% position in the utilities sector (water and electricity) with holdings in National Grid, Pennon and the Ecofin Global Utilities and Infrastructure investment trust. Utilities have traditionally been seen as a safe source of ‘defensive’ income because of the perennial need for their products, and their status as monopolies. However, they are threatened by regulators who pressure them to invest as much as possible in infrastructure, while keeping customers’ bills as low as possible, to the detriment of shareholder returns. The UK water companies are currently negotiating with their regulator OFWAT for the new five-year pricing regime for the period 2021-5, and it is already clear that permitted returns will be lower. The other threat for UK companies is of re-nationalisation. However, we felt that all of these considerations were reflected in the low share prices, and we had international exposure through the Ecofin fund to assets unaffected by the UK-specific renationalisation threat. All three of our holdings in this sector were among the fund’s top ten contributors for the year.
We did well to invest in infrastructure, mainly through the HICL investment trust, when it was cheap early in the year, exiting the positions after a few months following a sharp re-rating in the sector.
Other top-ten contributors were Legal & General, Polar Capital Holdings, Morses Club, Rio Tinto, Shoe Zone and Sainsburys. Sainsbury’s share price traded for several years in a range between £2.20 and £2.80 until the announcement of the merger with Asda last April, whereupon it jumped to £3.20. It was clear that the deal would be subject to forensic scrutiny by the Capital Markets Authority (the CMA), would face opposition, and would take well over a year to be cleared, so we sold the holding, thinking it would be possible to re-buy it in due course. The CMA’s response to the proposed merger has been so frosty as to make it unlikely that the deal will go ahead at all, and the shares have fallen by a third from where we sold them. Meanwhile, a technology update at Sainsbury’s Bank has had a major cost over-run, and price competition in food retail remains intense. We remain on the side-lines for now.
Things that didn’t go well
Of the ten biggest detractors to performance, there was one fund, Princess Private Equity, and nine shares. Four of the shares were in the retail sector – Halfords, Moss Bros, Photo-me and McColls, two were financials – Numis and Aviva, two were in the construction sector – Kier and Telford Homes, and the other was Vodafone.
The UK is the world’s most advanced retail market in terms of the penetration of online sales, with around 20% of all goods purchased online. The trend towards online shopping is accelerating, making physical retailers vulnerable in even the best locations. Their challenges include cost pressures – the National Living Wage, high business rates and higher cost prices for imported goods, as a result of the weaker pound. There have already been many casualties. The survivors will be strongly managed, with strong finances and excellent cost control, and with a factor which enables them to withstand online competition. The whole sector is cheap. Investors are well aware of the adverse environment in which retailers operate, and many expect physical retailing to disappear altogether.
We identified Shoe Zone as a potential survivor three years ago. Shoe Zone has evolved as a family company and retains many of the characteristics of a family business – a large family shareholding, rational, long-term planning, managers with long tenure, and intense attention to detail. Shoe Zone’s principal business is sourcing shoes from China and retailing them at extremely competitive prices. Their shops tend to be in secondary locations, where rents are lower at each review. Growth comes from newer ‘big box’ stores and increasingly from the online channel. Shoe Zone has been a rewarding investment for Wise MAI, and at the end of the period paid a dividend which, including a special dividend, came to 8% of the company’s value. Shoe Zone has substantial cash and no debt.
Moss Bros appeared to be similarly well-positioned. The company has a very experienced Chief Executive and a healthy balance sheet with plenty of cash and no debt. They had spent a lot on refurbishing stores, with little lumpy capital spending ahead. The main competitor, Austin Reed, had gone out of business. Moss Bros dominates the wedding hire market. The online offering is growing fast, but is still small. We incorrectly assumed that people would buy suits in store rather than online, because of the need to try them on. Moss Bros’ problems are partly structural and partly self-inflicted. The wedding hire market has deteriorated rapidly from a supplier’s point of view. Men tend to wear suits at weddings (cheap) rather than morning suits (expensive), and often don’t need to hire. Moss Bros decided to reduce their suppliers from three to two, but one of the remaining two failed to deliver for several months, losing business which hasn’t returned. All the above undermines the long-term business case, and the position is being exited.
McColls had an annus horribilis in 2018. Two of its three suppliers went into administration at almost the same time. There was a Health and Safety issue when a customer was injured falling over scaffolding outside one of their shops. They lost business to the Beast from the East, as customers couldn’t get to the shops. The supply issues forced them into bringing the new supply agreement with Morrisons forward. This agreement, using the Safeway brand, should in due course upgrade the offer of higher-margin fresh and chilled convenience foods. Meanwhile supply issues with Morrisons remain unresolved. While this holding has been our biggest detractor in the year, we are continuing to hold it. The management team have long experience and know their market inside out. There is almost no online competition because of the local nature of the stores. The supply issues with Morrisons are being resolved, and the company has scope to cut costs. One should never hold shares in a company on the basis that it might be taken over, but there is a clear synergy with Morrisons, and some stores have begun using the Morrisons fascia on a trial basis.
Many people consider the construction sector to be of such poor quality as to be uninvestable. The business is inherently cyclical, with work drying up during recessions. Contracts are awarded on wafer-thin profit margins which disappear as soon as anything goes wrong. The sector has experienced skill shortages in the last few years, which will be exacerbated as the ageing workforce retires, and with a reduced supply of workers from eastern Europe, pushing costs up.
The last few years have been challenging for the sector, so much so that two of the largest operators, Carillion and Interserve, have gone into administration in the last year. We believe that the sector’s prospects may be about to improve. The public sector has been outsourcing risk to the private sector for years, via long-term fixed price contracts which have not compensated the companies adequately, as well as being an appallingly poor payer. This practice has become a national scandal, and the companies we talk to have all said that they are no longer accepting work on these terms. Increasingly work is offered through frameworks, where contracts are smaller, shorter-term, and more profitable. The government needs to spend more on infrastructure, and at last has the resources to do so. The demise of two large competitors should reduce pressure on the survivors.
Henry Boot takes land through the planning process and sells it to house builders, as well as having a development arm, a small house builder and a tool hire business. Henry Boot is still very much a family business, with prudent finances (debt is currently 6% of the asset value), excellent execution, and careful, long-term planning. 2018’s results were slightly below 2017’s, which were boosted by the early completion of a couple of large construction projects but were still the second highest in the company’s 133-year history. The dividend was increased by 13%, but at the higher level is still covered over three times by profits. The share price has languished during the year on concerns about Brexit, the UK, house building etc but has scope to re-rate. The company has seen no slackening in activity but is suitably cautious on 2019.
Kier has been a frustrating investment again this year. Skeletons have dropped out of their cupboard with alarming regularity, confirming that our judgement of the company’s management has been generous to a fault. Kier’s new strategy, following on from Vision 2020, was called Future-Proofing Kier (FPK), which mainly involved reducing debt. It’s generally believed that construction companies should run with no debt but Kier are indebted following several major acquisitions, May Gurney (services) Mouchel (motorway maintenance) and McNicholas (construction and services). The new strategy turned out to be too little, too late. Banks have become less willing to lend to the sector, while Kier’s debt remained inappropriately high. The company rushed into a rights issue (an offer of new shares to existing holders) at a deeply discounted price, but shareholders had become disillusioned, and even at the low level, declined to purchase more shares. Much of the new stock was left with the underwriters. Perhaps Kier expected Interserve to launch a rescue rights issue, and wanted to get theirs in first, but whether this was true or not, the result was an embarrassing disaster which cost the Chief Executive, Haydn Mursell, his job. Kier then announced that its debt, much reduced by the rights issue proceeds, was actually £50m higher than it had realised owing to the timing of certain sales. It then took a £25m charge on the Broadmoor Hospital refurbishment, which it may or may not be able to reclaim from the client. Finally, it turned out that one of the waste disposal contracts, taken on with May Gurney in order to diversify the company out of construction, has become structurally loss-making, and the company has taken a further £26m charge in order to exit the contract early.
We continue to hold Kier, mainly because the new Chief Executive, Alan Davies, who starts on April 15th, is highly regarded with good relevant experience. We look forward to meeting him at an early stage. Kier should