Artemis Alpha investment trust manager John Dodd is backing Brewin Dolphin and Charles Stanley, believing that on the basis of the price Bestinvest paid for Towry, both wealth managers look ‘significantly undervalued’.
Dodd (pictured) holds the two stocks in his £131 million trust, saying that he used the proceeds from his holding in Ashcourt Rowan, which was acquired by Towry, to buy back into Brewin, which he had previously taken profits on.
Tilney Bestinvest acquired Towry for £600 million back in February in a deal that equated to a 6.7% multiple of Towry’s assets under management (AUM). Towry itself bought Ashcourt Rowan in March 2015 for £120 million, around 2.4% of AUM.
Dodd expects M&A activity in the sector to continue and says the Tilney Bestinvest/Towry deal suggests significant upside potential in both Brewin and Charles Stanley. Although their prices have pared back some of their 2016 losses in the post-Brexit rally, Brewin is still down 22.9% and Charles Stanley 15.2% year to date.
‘Consolidation in the wealth management space continues. Here, we used the proceeds from the takeover of Ashcourt Rowan to buy back into Brewin Dolphin, having previously sold at higher levels,’ wrote Dodd in the trust’s annual report.
‘At the end of the financial year, Towry was bought by [Tilney] Bestinvest. This deal makes the company's investments in Brewin Dolphin and Charles Stanley look significantly undervalued.’
‘Other financials’ is Dodd’s largest sector weighting, comprising 35.5% of the portfolio, although it was an overall detractor from performance to the trust to the tune of 1.5%. Much of this was due to a holding in Polar Capital, which is down 34.3% over the last 12 months on the back of larger than expected redemptions.
‘Outflows from Polar Capital's large Japanese fund continued and the performance of its other products was mixed, so we reduced our longstanding holding,’ Dodd said. ‘We reinvested some of the proceeds into another fund manager, Liontrust. In contrast to Polar Capital, it is benefiting from strong performance and good flows into its product range.’
Although Artemis Alpha is widely thought of as a small cap-focused trust, it does sit in the AIC’s UK All Companies sector and in a slight departure from the norm, Dodd has been using this multi-cap flexibility to buy into what he deemed bargain blue chips.
Addressing persistent underperformance
Dodd retains a loyal following, but even his most ardent fans must be concerned about the trust’s persistent underperformance. Much of this has been attributed to its weighting to unquoted stocks, which cost the trust a further 5.5% of its net asset value (NAV) over the 12 months to the end of April.
It has suffered another disappointing year in which the trust’s share price fell by 22.8%, taking its five-year return to -33.7%, while its discount to NAV has widened to 28.2% versus a 9.8% sector average.
This has now prompted the board to act as it is concerned that the trust’s diminishing size means further share buybacks may not be in shareholders’ best interests. In its last accounting year, the trust bought back 676,000 shares, representing 1.6% of shares in issue, at a cost of £1.6 million.
Instead, the board has said that the trust will reduce its exposure to unquoted investments over time, describing these holdings as ‘the principal contributor to the company’s weaker share price rating’. The board is targeting the reduction of the unquoted portfolio from 27.3% of assets currently to under 10% within the next two years.
‘Whilst the objective is to reduce the exposure to unquoted companies, this will not be done at any price, and the exact timing cannot be predicted,’ chairman Duncan Budge said.
‘Investments in new unquoted companies will only be made on an exceptional basis and then only once the investment has been formally considered and approved by the board. Follow-on investments that will improve the prospects of the investee company - or preserve the company's economic interest in it - will be permitted and remain at the discretion of the fund managers.
‘When unquoted investments are realised, it is expected that the proceeds will be invested in quoted companies.’
The trust’s AGM is to be held on 5 October in Artemis’s London offices.