Similarly, the outcome of the Greece discussions is no cause for celebration. Syriza was elected with a mandate to end austerity and renegotiate Greece’s credit commitments to Europe. Instead, it appears to have meekly succumbed to Europe’s demands in order to permit a four-month extension of its existing loan arrangements. This is a short-term agreement – nudging the battered proverbial can a little further down the road – not a sustainable long-term solution. The equity market’s reaction to these recent developments therefore, as has so often been the case recently, looks complacently optimistic.
Relative performance during the month was somewhat more challenging, as a stabilisation of commodity prices during the month triggered a short-term rotation back into the oil & gas and mining sectors. Nevertheless, the portfolio delivered a robust performance, assisted by some positive stock specific movements.
The largest contribution to the portfolio’s performance came from Allied Minds, which continued its strong run since its IPO in June 2014. The company, which specialises in the commercialisation of intellectual property, made no new announcements during the month, but speculation that it is close to agreeing the sale of its broadband subsidiary, Federated Wireless, drove the shares higher late in the month. Technical reasons were also cited, with tracker funds needing to buy more shares to reflect its increased MSCI Global Small Cap index weighting.
Elsewhere, BT continued to perform well on news it had successfully bid for the rights to continue to broadcast English Premier League football matches. Capita also performed well, with its financial results towards the end of the month looking typically strong, with further double-digit growth expected this year. Our tobacco and aerospace & defence holdings also contributed positively.
By contrast, Centrica was the largest detractor after the company cut its dividend with its full year results. We did not believe that a dividend cut was necessary but it appears that the new Chief Executive, Ian Conn, has taken the opportunity to get any bad news out of the way early in his tenure and mitigate the risk of a credit downgrade. Although this is disappointing, a dividend cut was already largely reflected in the share price. Centrica has been hit by a combination of factors recently (US and UK weather conditions, the oil price collapse, political and regulatory pressure) but as these abate, its long-term valuation attractions will become much more apparent. We added to the holding at the lower share price levels and also bought more SSE which was weak in sympathy.
We participated in the initial public offering (IPO) of Non-Standard Finance during the month. As the name suggests, Non-Standard Finance is a consumer finance business, which aims to offer financial services to the significant part of the UK population that is unable to access mainstream products. It raised £100m in its IPO in order to acquire businesses in this fast-growing industry. It aims to make its first acquisition within the next 6 months, specifically targeting the guaranteed loan, consumer loan, rent-to-own and home collected credit markets.
We continued to add to the holding in Babcock International, which was weak after it failed to secure the Ministry of Defence’s Logistics Commodities and Services Transformation contract. We believe it is wrong to place too much emphasis on this particular contract disappointment. Outsourcing businesses typically win fewer than half the bids they participate in (Babcock’s win rate is c. 40%). Indeed, losing contracts in this industry can be indicative of pricing discipline, which we welcome.
Elsewhere, we continued to add to a host of existing positions at attractive valuation levels including Cranswick, Game Digital, Next, Northwest Biotherapeutics, Utilitywise and Vernalis.
There were no disposals from the portfolio. The only other change of note was to introduce a hedge against the portfolio’s euro exposure. Until recently, all currency exposures had been unhedged as we believed that sterling would weaken against the US dollar, Swiss franc and euro and we wanted the portfolio to benefit from that weakness. This remains the case against the first two currencies but the introduction of Quantitative Easing in Europe has changed our view on the euro to the extent that it felt appropriate to hedge against the risk that the euro becomes structurally an even weaker currency than sterling.
In conclusion, it’s been a long time coming but the FTSE 100 has finally exceeded the peak it reached shortly before the new millennium, at the height of the TMT bubble. The market’s valuation is nowhere near as stretched now as it was then but, in our view, it is elevated enough to warrant caution about the near-term outlook. That said, it is worth remembering that even in an overvalued market, there are undervalued stocks. By building a portfolio around the most attractively valued stocks, and avoiding those that look most vulnerable, we remain very confident in our ability to deliver high single-digit returns to investors in the long run.