During a disappointing year to 30 April 2019, Artemis Alpha Trust’s (ATS) net asset value (NAV) and share price plummeted by 8.6% and 8.9% respectively on a total return basis, underperforming a 2.6% increase for the benchmark FTSE All-Share.

Chairman Duncan Budge blamed the mellow performance on poor showings from some unquoted investments and declines for quoted companies with sensitivity to the UK economy, with Brexit-related uncertainties suppressing valuations.

REASONS TO BE CHEERFUL

The good news is fund managers John Dodd and Kartik Kumar are confident a portfolio repositioning ‘will be reflected in time with improved returns for shareholders’, who’ll be hoping this might help narrow in an 18.9% share price discount to NAV.

Dodd and Kumar have dramatically reduced the fund’s exposure to unquoted investments whilst putting money to work with more liquid mid and large cap stocks. In fact, unquoted investments have been reduced to 8.7%, down from 21.6% at the previous year end, while the portfolio has been rationalised from 91 to 49 holdings with exposure to mid and large caps rising from 35.1% to 60.3%.

CONTRARIAN CALLS

Seasoned investor Dodd and rising star stockpicker Kumar seek out companies with ‘observable competitive advantages and attractive industry characteristics’ that trade on ‘compelling valuations’ and are steered by ‘outstanding management’.

Larger holdings include groceries goliath Tesco (TSCO), internet business conglomerate Rocket Internet and also, Mike Ashley’s unloved Sports Direct (SPD), a position boldly increased last year.

The pair believes that on an underlying basis, Sports Direct is ‘performing well - for example, cash flow in the first half of 2019 increased by 15% as the UK sports franchise remains resilient and profitability was improved in the international businesses.’

Dodd and Kumar add: ‘In the past year the company acquired House of Fraser, Evans Cycles and Sofa.com at heavily distressed prices. Sports Direct has a low cost distribution platform and so in our view, such acquisitions are a good use of capital. House of Fraser’s footprint also represents a substantial opportunity to expand the group’s growing luxury retail presence. Sports Direct is a good example in our view of a share price falling when we estimate business value to be improving.’

They also added to another embattled retailer, Dixons Carphone (DC.), in the belief ‘investors are failing to distinguish between a traditional capital cycle and industries in structural decline, resulting in depressed valuations for market leaders. Arguably this is similar to what took place in the grocery industry in 2015/2016, allowing us to invest in Tesco at attractive prices.’

NEW ADDITIONS

New investments in the year included Facebook, Just Eat (JE.) and Domino’s Pizza (DOM), ‘companies with world-class intangible assets and with resilient and growing end-demand’, not to mention Barclays (BARC), EasyJet (EZJ) and Ryanair (RYA).

‘We have invested in European budget carriers as the airline industry has been pressured by high oil prices and weak consumer confidence,’ said the fund managers. ‘In EasyJet and Ryanair we have two industry leaders with market values that are underpinned by their asset bases. Ryanair has leading scale and low-cost operations, and EasyJet has a strong brand and capacity constrained network positions.’

OPPORTUNITY KNOCKS

In terms of the UK market outlook, Dodd and Kumar state that ‘the recent period has continued to be characterised by uncertainty because of Brexit, which has resulted in elevated volatility and certain sectors underperforming materially.’

The managers believe that premiums slapped on predictable UK businesses seemingly immune to the current political minefield are ‘sky high.’

‘By contrast, the aversion to uncertainty means that businesses which are economically sensitive or perceived to be challenged are very lowly valued. In this environment we are aiming to adopt an approach that is both patient and rational. We are using the opportunity to invest as bargains are unlikely to remain once obscurities clear.’


Issue Date: 19 Jul 2019