Lowland investors make 26% in a year – can UK stock market recovery boost this further?
Shareholders in investment trust Lowland have seen the value of their investments rise sharply over the past year thanks to a more vibrant UK stock market.
However, the managers believe more can be expected if the recovery in stock prices extends to the domestically focused companies that play a key role in the portfolio.
Laura Foll, who co-manages the £350m fund with James Henderson, says the fund’s recent performance – a return of 26 per cent over the past year – has been driven largely by a number of holdings it has in FTSE 100 companies.
For example, Aviva (up 31 percent) and Barclays (up 58 percent). Shares that are part of the FTSE100 Index account for more than 40 percent of the fund’s portfolio.
However, the smaller companies owned by the fund still need to be revalued.
“The foundation for such a revaluation has been laid,” says Foll.
‘From a valuation perspective, the UK stock market is at a 20 percent discount to other overseas markets.
‘That suggests that UK stocks are still cheap, especially smaller and mid-sized companies. We are also seeing signs that the UK economy is performing better than the market thought. OK, it’s not great growth and GDP (Gross Domestic Product) is unlikely to grow by more than 1% this year.
‘But this is good news for the small and medium-sized businesses we own, which generate the majority of their income here in the UK. A stronger economy means improved business income.’
The trust is diversified, with holdings in 118 companies. The number of positions has increased this year, mainly as a result of the trust acquiring companies it owned and the managers using the proceeds to build small stakes in a number of new companies.
“We don’t just take a two percent stake in a company,” Foll says.
‘We are taking our time to build a position. We are cautious.’ Recent additions to the portfolio include engineering company Dowlais – which was spun off from FTSE 100 company Melrose Industries – and packaging company Macfarlane.
“It’s not a glamorous business,” Foll adds.
‘But Macfarlane is well run, focused on the UK market and the shares need to be revalued. They look cheap.’
A major recent change to the portfolio was the sale of Rolls-Royce Holdings following a strong share price rally that began early last year.
“It was a relative value call,” Henderson said.
‘There are many good comparable companies in the smaller and mid-market whose shares have not yet participated in the market rally. They are potentially exciting.’ These include TT Electronics and Senior plc.
Lowland has an attractive dividend in reserve. This dividend has increased in absolute terms for 14 years in a row and has never been reduced since the trust was founded in 1963.
“It is a focal point for us and the foundation’s board,” said Foll.
The payments, which are paid quarterly, correspond to an annual income of 4.8 percent.
In the financial year to date, two dividends of 1.6p per share have been paid, compared with similar payments of 1.525p in the previous year.
The managers work for the international investment house Janus Henderson and jointly manage the Law Debenture investment fund.
The trust’s annual fees are competitive at 0.6 percent. Its stock exchange identification code is BNXGHS2 and its market ticker is LWI.
Other trusts focusing on UK equity income include Edinburgh, Merchants and Temple Bar.
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