It has been a tumultuous year for Temple Bar with the Covid sell-off being followed by the appointment of a new manager and the long-awaited rotation into value.
The £775m Temple Bar Investment Trust (LON:TMPL) had struggled for years, and when manager Alastair Mundy retired for health reasons last April it forced the board to take action. After analysing the reasons for the underperformance, they decided to stick with their value-style approach, but to bring in RWC Asset Management to implement it.
RWC took over at the end of October and a couple of weeks later received a massive shot in the arm when the first coronavirus vaccine was approved. Pfizer Monday marked a real turnaround in the markets with cyclical value stocks surging back into fashion as investors rushed to take advantage of the re-opening of the global economy.
In its financial year to the end of December, the fund’s NAV was down 28% versus a 10% fall in the FTSE All Share, although most of the decline was during the Covid-19 sell-off. In the final few months of the year it rallied strongly and year-to-date is the top performing trust in the UK Equity Income sector with a NAV total return of 17.8%, well ahead of the 4.8% achieved by its peer group.
Changes to the portfolio
RWC have made considerable changes to the portfolio since they took over in October. These reflect their own unique value approach, which aims to exploit opportunities created by over-reactions by investors.
The fund now has a relatively concentrated portfolio of 33 holdings, each of which is considered to be a sustainable business with a sound balance sheet that is trading at an attractive valuation compared to its intrinsic value based on the long run (normalised) earnings. It largest holdings include Royal Mail, BP, Anglo American, Royal Dutch Shell, NatWest, Standard Chartered, ITV and Marks & Spencer.
Ian Lance and Nick Purves, the new managers, believe that the portfolio ‘offers the potential for significant gains over a very reasonable timeframe’, with the fund being well-placed to benefit from the likely recovery that will come as economies open up again. They think there are parallels with the dot-com bubble of 1999 and the global financial crisis of 2008, with some areas of the market looking overpriced, while others offer significant value.
Income and outlook
Up until 2020 Temple Bar had raised its dividend every year for 36 years, yet the pandemic created significant problems for its investee companies, with the underlying income falling from £39.7m to £12.7m. Despite drawing heavily on the revenue reserves, the fund had little option but to cut its annual pay-out by 25.1% to 38.50p per share.
Looking ahead, the board hopes to resume dividend growth from this lower level with the distributions paid four times a year. The shares are currently yielding 3.4%, so hopefully this will pick up as the various holdings recover.
RWC were fortunate with the timing of their appointment as the positive vaccine news and the resolution to Brexit led to a sharp rotation from growth to value. The shares now trade close to NAV, but if you believe that the shift in favour of value has only just started, there should be much more upside to come.