February 2019

By | 13th March 2019

After the stunning rally in January during which the benchmark rose 7.2%, February saw a steady reversal of the start-of-year euphoria. The benchmark corrected by -3.0% and managed only seven positive trading days in the month. However, much of this downward movement evaporates when you look at stock performance in local-currency terms. When viewed in euros, the benchmark fell just -1.2%. Sterling strengthened +1.8% during the month, bringing the year-to-date figure for sterling/euro to +4.8%. Currency markets appear to be pricing in a reduced risk of a ‘no deal’ or hard Brexit. As a reminder, the Trust’s currency exposure is managed in line with that of the benchmark by using forward contracts. This means that the manager’s stock-selection process is not driven by expectations of currency movements. The process also ensures consistency in the currency exposure, regardless of the underlying stock positioning. The net asset value (NAV) fell -2.3% over the month, delivering +76bps of relative outperformance. The share-price correction was even more modest, at -1.6%.

Against this slightly weak backdrop, there was considerable positive activity among a number of our small-cap positions. The highlight was Terreis, the owner of a quality portfolio of central Paris office buildings. The company is 54% owned by the founder and Chairman, Jacky Lorenzetti, a serial property entrepreneur. He announced an agreement to sell 72% of its portfolio (€1.7bn) to Swiss Life and take the remainder private, thus buying out all minority shareholders. The price (€60 per share) was a 40% premium to the undisturbed share price and a 7% premium to the NAV in December 2018. Our holding equated to 2.3% of the fund’s assets. The initial investments in 2011 (€12–13 per share) were augmented over the intervening period, particularly when small caps were out of favour even though fundamentals were sound. This holding has been a poster child for our strategy of backing strong management focused on a particular submarket which is entirely aligned (through their co-ownership).

The UK was the top-performing country, as investors reacted to the perceived reduction in the likelihood of a hard Brexit. UK large caps performed well, with Landsec (+4%) and British Land (+5.3%) both gaining. Segro (+2.2%) took advantage of conditions to raise £450m (7% of equity) in an overnight placing at 635p (closing the month at 661p), with the proceeds to be spent on the development pipeline. There was also a strong response to companies reporting strong figures, for example Safestore (+6.1%). There was M&A activity, with the second largest healthcare REIT, Primary Health Properties, agreeing to take over its smaller competitor, Medicx. The combined group will have a market cap of £1.4bn – both share prices responded strongly to the expected cost synergies and improving debt profile. The enlarged group will continue to be externally managed by Nexus (the current fund manager of PHP), which is owned by the founder of PHP, Harry Hyman. The fund owns shares in PHP (+6.8%) but not Medicx (+6.2%). The latter was over-distributing its dividend and unable to grow. The deal includes a £10m payment to Octopus, the external managers, for the rest of their contract.

Continental Europe was weaker than the UK in virtually all markets, with the Netherlands particularly weak. However, this was very stock specific; that country’s exposure is dominated by Unibail-Rodamco-Westfield (previously Unibail Rodamco). It reported weak figures and (at best) a flat dividend as it battles hard to absorb the US malls acquired in the Westfield transaction. The other Dutch listed shopping centre companies, Eurocommercial (-9.2%) and Wereldhave (-8.3%), also performed poorly on equally unimpressive results. UK retail wasn’t immune, with both Hammerson and Intu highlighting asset liquidity issues. Both companies have bowed to pressure to reduce debt on their balance sheets. The former has agreed to an activist’s request for a Board-level sub-committee focused on disposals, and the latter has cancelled its dividend in order to preserve cashflow.

German residential companies were surprisingly weak. This was surprising because bund yields ended the month where they started, and wage inflation remained ahead of broad inflation, helping rent affordability. After the month-end, the European Central Bank announced further long-term bond purchases and an expectation that short rates won’t move for the remainder of the year. German residential companies therefore recovered this lost ground in early March.

Discrete rolling annual performance as at 28.02.2019 (%):

Share Price30.88-10.3613.08