Though net asset value (NAV) came under pressure in the half year to 31 March, Keystone Investment Trust’s (KIT) manager James Goldstone (pictured below) insists his portfolio is ‘positioned for the anticipated recovery in value stocks, especially in UK domestic cyclicals'.
Furthermore, the fund is ‘well placed to navigate what lies ahead’, confident comments that help the shares 12.5p higher to £18 this morning.
Half year figures show the net asset value falling 4.2% (on a total return basis), underperforming the benchmark FTSE All-Share’s 2.3% reverse. Encouragingly, Keystone's share price discount to NAV narrowed in from 12.6% to 9.7% during the period and since 31 March, the NAV total return is up 8.3%, albeit lagging a 10.6% rise in the FTSE All Share.
Goldstone took over the management of Keystone from Invesco Perpetual’s star stock picker Mark Barnett in April 2017. He reminds investors that ‘the UK equity market delivered negative returns over the period as a whole, masking intervals of very positive returns, particularly entering the New Year. Market volatility occurred against a backdrop of continued geopolitical uncertainty and a sustained rally in sterling.'
Factors driving the negative market performance included fears of a potential trade war between the US and China, ‘fuelled by ongoing protectionist rhetoric from President Trump’ as well as the strengthening pound, which weighed on the outlook for earnings from internationally exposed FTSE All-Share stocks.
WHICH STOCKS HURT PERFORMANCE?
Since taking over the portfolio, Goldstone has tilted the portfolio towards UK domestic cyclicals and financial stocks, often trading on depressed valuations, where he believes there is considerable earnings upside.
Encouragingly, performance was supported by an overweight position in financials, including Barclays (BARC) and Sigma Capital (SGM:AIM), the manager of PRS REIT (PRSR), both new acquisitions since Goldstone took over managing the trust.
Barclays is now the largest holding at 5.3% of the portfolio. Goldstone believes the market is overly pessimistic about the earnings outlook and capital generation and notes the recent boost to the share price after the activist, Sherborne Investors (SIGC), announced a stake.
Goldstone says the ‘largest drag’ came from software and IT management services provider Micro Focus (MCRO), whose shares slumped during March ‘following difficulties in integrating recently acquired Hewlett Packard Enterprise software assets’.
A lack of exposure to miners proved a performance headwind, holdings in British American Tobacco (BATS) and Imperial Brands (IMB) weighed on returns, while Saga (SAGA) ‘detracted from performance as the share price fell sharply on the company’s warning that the collapse of Monarch Airlines and a challenging insurance market would negatively impact full year profits' and has since been sold.
TIDE ABOUT TO TURN?
The good news for shareholders is Goldstone believes his ‘diversified portfolio of well-positioned and attractively-valued businesses, with the protection afforded by an allocation to gold equities, is well placed to navigate what lies ahead.'
The current list of things to worry about includes ‘signs of cyclical weakness in global leading indicators, numerous geopolitical uncertainties, China credit, governments that remain horribly geared, challenges to the US dollar’s reserve status, threats to global trade, and the prospect of QE reversal and higher interest rates, which may have unpredictable consequences, especially for emerging markets.'
‘Whilst it is too early to call a definitive end to such a long-established low growth, low inflation and low interest rate regime and to the equity market phenomena that have followed in its wake, it doesn’t feel a stretch to say that this is the closest markets have been to a turning point since the financial crisis,’ says Goldstone.
He explains ‘the portfolio has been positioned for the anticipated recovery in value stocks, especially in UK domestic cyclicals, and has limited exposure to the parts of the market that have seen valuations expand the most in recent years. I am therefore cautiously optimistic in light of recent developments.'
RECENT BUYING & SELLING
Goldstone, whose top ten includes Next (NXT), used weakness as an opportunity to top up the holding in online clothing retailer N Brown (BWNG). New investments were made in CVS (CVSG:AIM), Endeavour Mining, MJ Gleeson (GLE) and Tesco (TSCO), while BAE Systems (BA.), Rentokil Initial (RTO) and Touchstone Innovations were sold.
Numis Securities regards Keystone ‘as a far more a more interesting vehicle now that it is differentiated from is sister funds, Edinburgh Investment Trust (EDIN) and Perpetual Income & Growth (PLI), by having a different lead manager.'
The broker says 'Goldstone has made significant changes to put his stamp on the portfolio. His approach has a lot of similarities with Mark Barnett, using a bottom-up approach with a focus on quality companies with visible cash flow growth. However, we believe that James places greater emphasis valuation, and less on the top-down macro framework.'
