HALF YEARLY REPORT
Performance
During the six month period to 30 June
2017 Temple Bar generated a total return on gross assets of
3.53%, underperforming the benchmark FTSE All-Share Index total
return of 5.50%.
The portfolio benefitted from its holdings in builder’s merchant
Grafton which performed well on the back of earnings upgrades
driven by excellent operational performance in Ireland, and SIG which, following the
appointment of new management, bounced back strongly. Notable
holdings that detracted from performance were Signet Jewelers,
hindered by weakness in malls across the US and concerns regarding
its loan book, Barclays which announced results weaker than
expected, and Tesco whose bid for food wholesaler Booker worried
investors that a reasonably straightforward recovery story had been
made unnecessarily complex.
Market background
In recent years, the success of different styles of equity
investing has become a slave to bond yields with, in general, Value
investors, including Temple Bar, finding progress hard when bond
yields have been low and falling. We would therefore expect any
significant increase in yields to reverse this trend swiftly;
should it occur, many investors are poorly placed for such a
reversal.
The language of central bankers modified in late June with hints
of a reversal of Quantitative Easing (QE – the printing of money to
purchase bonds) and the requirement for higher interest rates as
advanced economies return to more normal conditions.
In briefings, the central bankers have raised a number of
issues: 1] significant increases in asset values may have created
false prices and driven mis-allocation of capital; 2] the effects
such increases have had on wealth inequality; 3] the unknown
long-term inflationary effects of loose monetary policy; 4]
unemployment is falling, possibly to a level which would stimulate
inflation; 5] interest rates need to be higher ahead of the next
recession.
Markets shrugged off this change in tone, believing either the
central bankers were all talk or that any weakness in markets
following implementation of this strategy would quickly force its
cessation (or even reversal).
While we would prefer to sideline banker/market noise, and focus
on picking individual stocks from detailed bottom-up analysis, we
cannot ignore the changing attitudes of central bankers.
Their previous decisions have driven bond and equity markets to
very high valuation levels, and investors should be alert to the
likely consequences of a change of tack. We identify three
scenarios.
Scenario 1: interest rates rise across the yield curve and QE is
reversed, with no significant effect on economic growth. We
believe this would depress asset markets. After all, if
interest rates return to historical levels, equity ratings should
also revert to long-term norms. However, it is unclear
whether the monetary authorities have the nerve to watch bonds and
equities fall without acting.
Scenario 2: rising interest rates slow economic growth,
dampening inflation expectations. This would probably be good
for government bonds and for asset classes with valuations most
closely linked to bond yields. Precious metals might also
benefit if markets worry that central
banks would find difficulty in unwinding QE. This scenario
implies a continuation of low interest rates, low inflation,
sub-par economic growth and no significant increase in government
spending. However, around the western world politicians have
recently been left in no doubt of voters' resentment of the status
quo. As this scenario appears to be unsustainable, we should
prepare for scenario 3.
Scenario 3: if central banks fail to increase rates and reverse
QE while inflation falls and/or there is an equity market crisis,
markets may price in the risks of further QE or, more likely,
increased government spending. Or governments may authorise
the creation of helicopter money (ie money printed
specifically to be used for increased government spending - a neat
blend of monetary and fiscal policies). We assume this would be a
very good outcome for precious metals, a bad outcome for bonds (as
investors would suspect that governments are desperate to generate
inflation) and a mixed outcome for equities. We believe
equities most closely correlated to bonds would struggle, relative
to those less sensitive to interest rates.
The portfolio, although not purposely constructed for this
outcome, is best placed for scenario 3. We believe, broadly,
that markets are approaching the end of an era. The long-term
trend of globalisation has had very deflationary effects and,
combined with extreme monetary policy, has driven bond yields down
to very low levels. The current mood among electors and politicians
suggests that the globalisation trend of the last few decades could
give way to trade barriers, tariffs, protectionist policies and
restricted movement of labour, plus greater use of fiscal policy.
The consequence of scenario 3 is likely to be a more inflationary
future and one, with government debt so high, which the authorities
would welcome.
Portfolio changes
Our new era views are reflected across the portfolio and in the
activity of the last six months. We sold out completely from our
tobacco holdings BAT and Imperial Brands, the last of our ‘bond
proxies’. Both companies have a number of attractive operational
and financial characteristics but, we believe, they were more than
adequately reflected in the share prices.
The weighting in the bank sector remains the portfolio’s
largest. We believe the market underestimates the changes banks
have made to their operating models over the last decade. The high
growth and weak and aggressively financed balance sheet approach
has been replaced by one focused on low growth and a strong and
conservatively financed balance sheet. Although investors typically
regard regulatory interference with caution, we believe the
regulators’ actions since the Global Financial Crisis significantly
reduce the downside risks for equity holders in banks. This
downside resilience together with the low valuations of the banks
continue to provide us with confidence that they remain
undervalued.
We did, however, decide to sell our holding in Lloyds Banking
Group. We believe the business has a number of challenges. It has a
significant exposure to very profitable variable rate mortgages
(vulnerable to both competition and regulation) and has grown
quickly in personal and car loans at a time when the UK consumer is
under increasing financial pressure. Although we are fairly
sanguine about bank regulation overall, we believe Lloyds could be
affected by further changes as its mortgage book is currently
considered as very low risk. New regulation may demand more capital
is held against this book and consequently reduce dividend
expectations for the company.
The portfolio retains a significant weighting towards the UK
consumer, mostly through holdings in banks, retailers, travel and
leisure companies and builder’s merchants. Many UK consumer focused
companies are finding trading conditions tough and as Brexit is
negotiated there is a clear risk of further deterioration. However,
valuations and performance of these stocks reflect a lot of bad
news particularly when compared with other areas of the market. We
retain some dry powder as absolute valuations remain rather high
for our taste. Within the consumer sector
we increased our holding in US jewellery retailer Signet and
clothing retailer Next although we did sell our holdings in Best
Buy (it having recovered from some self-induced woes) and Sainsbury
(our hypothesis of weakness in the discounter market did not play
out as expected).
Dividend
A first quarterly dividend of 8.33p per share was paid on
30 June 2017 and the directors have
declared a second interim dividend, also of 8.33p per share, an
increase of 3%, to be paid on 29 September
2017 to those shareholders on the register of members as at
8 September 2017. The ex-dividend
date for this payment is 7 September
2017.
Outlook
The changes underway in central bank attitudes and actions,
after nearly a decade of ultra-accommodative policies, may well
unsettle markets, leading to a re-appraisal of valuation criteria
and enhanced volatility. In such an environment, where predictions
become unreliable, strict adherence to our value investing approach
becomes more important than ever. The general performance of the
value investing style, compared with alternatives, hinges
critically on an increase in interest rates towards more historical
levels of normalcy.
By order of the Board
Investec Fund Managers Limited
24 July 2017
TWENTY LARGEST HOLDINGS AS AT
30 JUNE 2017
Company |
Industry |
Place of Primary Listing |
Valuation
£’000 |
% of
Portfolio |
UK Treasury 1.00% 2017 |
Fixed Interest |
UK |
139,214 |
14.11% |
HSBC Holdings |
Financials |
UK |
81,451 |
8.25% |
GlaxoSmithKline |
Healthcare |
UK |
68,531 |
6.95% |
Grafton Group |
Industrials |
UK |
52,944 |
5.37% |
Royal Dutch Shell |
Oil & Gas |
UK |
51,884 |
5.26% |
Barclays |
Financials |
UK |
46,527 |
4.71% |
BP |
Oil & Gas |
UK |
44,560 |
4.52% |
SIG |
Industrials |
UK |
38,286 |
3.88% |
Royal Bank of Scotland |
Financials |
UK |
30,468 |
3.09% |
WM Morrison Supermarkets |
Consumer Services |
UK |
28,715 |
2.91% |
|
|
|
|
|
Top Ten
Investments |
|
|
582,580 |
59.05% |
|
|
|
|
|
CitiGroup |
Financials |
USA |
24,838 |
2.52% |
Marks & Spencer |
Consumer Services |
UK |
22,400 |
2.27% |
Tesco |
Consumer Services |
UK |
21,808 |
2.21% |
ETFS Physical Silver |
Physical Gold and Silver |
UK |
20,257 |
2.05% |
Travis Perkins |
Industrials |
UK |
19,692 |
2.00% |
Signet Jewelers |
Consumer Services |
USA |
18,705 |
1.90% |
Centrica |
Utilities |
UK |
17,769 |
1.80% |
CRH |
Industrials |
UK |
17,491 |
1.77% |
Global X Silver Miners ETF |
Basic Materials |
USA |
17,383 |
1.76% |
Direct Line Insurance |
Financials |
UK |
16,586 |
1.68% |
|
|
|
|
|
Top Twenty
Investments |
|
|
779,509 |
79.01% |
|
|
|
|
|
STATEMENT OF COMPREHENSIVE INCOME FOR
THE SIX MONTHS ENDED 30 JUNE 2017
(unaudited)
|
|
30 June 2017
(unaudited) |
30 June
2016
(unaudited) |
31 December
2016
(audited) |
|
|
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Investment income |
|
18,985 |
- |
18,985 |
18,969 |
- |
18,969 |
34,069 |
- |
34,069 |
Other operating income |
|
4 |
- |
4 |
4 |
- |
4 |
5 |
- |
5 |
Total Income |
|
18,989 |
- |
18,989 |
18,973 |
- |
18,973 |
34,074 |
- |
34,074 |
|
|
|
|
|
|
|
|
|
|
|
Gains on investments |
|
|
|
|
|
|
|
|
|
|
Gains on investments held at fair
value through profit or loss assets |
|
- |
17,767 |
17,767 |
- |
14,550 |
14,550 |
- |
128,792 |
128,792 |
|
|
18,989 |
17,767 |
36,756 |
18,973 |
14,550 |
33,523 |
34,074 |
128,792 |
162,866 |
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
Management fees |
|
(699) |
(1,048) |
(1,747) |
(596) |
(893) |
(1,489) |
(1,380) |
(1,990) |
(3,370) |
Other expenses including dealing
costs |
|
(353) |
(511) |
(864) |
(344) |
(609) |
(953) |
(633) |
(1,039) |
(1,672) |
|
|
|
|
|
|
|
|
|
|
|
Profit before finance costs and
tax |
|
17,937 |
16,208 |
34,145 |
18,033 |
13,048 |
31,081 |
32,061 |
125,763 |
157,824 |
Finance costs |
|
(1,308) |
(1,980) |
(3,288) |
(1,311) |
(1,992) |
(3,303) |
(2,645) |
(4,012) |
(6,657) |
Profit before tax |
|
16,629 |
14,228 |
30,857 |
16,722 |
11,056 |
27,778 |
29,416 |
121,751 |
151,167 |
Tax |
|
(108) |
- |
(108) |
- |
- |
- |
(163) |
- |
(163) |
Profit for the period |
|
16,521 |
14,228 |
30,749 |
16,722 |
11,056 |
27,778 |
29,253 |
121,751 |
151,004 |
Earnings per share (basic and diluted) |
|
24.71p |
21.28p |
45.99p |
25.01p |
16.53p |
41.54p |
43.74p |
182.06p |
225.80p |
A first interim dividend of 8.33
pence per share in respect of the quarter ended 31 March 2017 was paid on 30 June 2017.
A second interim dividend of 8.33
pence per share in respect of the quarter ended 30 June 2017 was declared on 24 July 2017 and is payable on 29 September
2017.
The total column of this statement represents the Statement of
Comprehensive Income, prepared in accordance with IFRS. The
supplementary revenue and capital columns are both prepared under
guidance published by the Association of Investment Companies.
All items in the above statement derive from continuing
operations.
STATEMENT OF CHANGES IN EQUITY FOR THE
SIX MONTHS ENDED 30 JUNE 2017
(unaudited)
|
Ordinary
share |
Share premium |
Capital |
Retained |
Total |
|
capital |
account |
reserves |
earnings |
equity |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
BALANCE AT 1 JANUARY 2017 |
16,719 |
96,040 |
735,178 |
32,003 |
879,940 |
|
|
|
|
|
|
Profit for the period |
- |
- |
14,228 |
16,521 |
30,749 |
Unclaimed dividends |
- |
- |
- |
11 |
11 |
Dividends paid to equity
shareholders |
- |
- |
- |
(16,390) |
(16,390) |
BALANCE AT 30 JUNE 2017 |
16,719 |
96,040 |
749,406 |
32,145 |
894,310 |
STATEMENT OF CHANGES IN EQUITY FOR THE
SIX MONTHS ENDED 30 JUNE 2016
(unaudited)
|
Ordinary
share |
Share premium |
Capital |
Retained |
Total |
|
capital |
account |
reserves |
earnings |
equity |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
BALANCE AT 1 JANUARY 2016 |
16,719 |
96,040 |
613,427 |
29,569 |
755,755 |
|
|
|
|
|
|
Profit for the period |
- |
- |
11,056 |
16,722 |
27,778 |
Unclaimed dividends |
- |
- |
- |
24 |
24 |
Dividends paid to equity
shareholders |
- |
- |
- |
(16,023) |
(16,023) |
BALANCE AT 30 JUNE 2016 |
16,719 |
96,040 |
624,483 |
30,292 |
767,534 |
STATEMENT OF FINANCIAL POSITION AS AT
30 JUNE 2017 (unaudited)
|
30 June
2017
(unaudited) £’000 |
30 June 2016
(unaudited)
£’000 |
31 December 2016
(audited)
£’000 |
NON-CURRENT ASSETS |
|
|
|
Investments held at fair value
through profit or loss* |
986,691 |
868,130 |
973,353 |
|
|
|
|
CURRENT ASSETS |
|
|
|
Receivables |
4,557 |
12,610 |
4,266 |
Cash and cash equivalents |
18,108 |
6,303 |
17,340 |
|
22,665 |
18,913 |
21,606 |
TOTAL ASSETS |
1,009,356 |
887,043 |
994,959 |
|
|
|
|
CURRENT LIABILITIES |
|
|
|
Interest bearing borrowings |
(25,000) |
- |
(25,000) |
Payables |
(1,200) |
(5,713) |
(1,169) |
TOTAL ASSETS LESS CURRENT
LIABILITIES |
983,156 |
881,330 |
968,790 |
|
|
|
|
NON-CURRENT LIABILITIES |
|
|
|
Interest bearing borrowings |
(88,846) |
(113,796) |
(88,850) |
NET ASSETS |
894,310 |
767,534 |
879,940 |
|
|
|
|
EQUITY ATTRIBUTABLE TO EQUITY
HOLDERS |
|
|
|
Ordinary share capital |
16,719 |
16,719 |
16,719 |
Share premium |
96,040 |
96,040 |
96,040 |
Capital reserves |
749,406 |
624,483 |
735,178 |
Retained earnings |
32,145 |
30,292 |
32,003 |
TOTAL EQUITY |
894,310 |
767,534 |
879,940 |
|
|
|
|
NET ASSET VALUE PER
SHARE |
1,337,33p |
1,147.75p |
1,315.84p |
*Includes £139.2 million UK Treasury holding considered by the
Board to be held in lieu of cash.
STATEMENT OF CASH FLOWS FOR THE SIX
MONTHS ENDED 30 JUNE 2017
(unaudited)
|
|
|
30
June 2017 |
|
30
June 2016 |
|
31
December 2016 |
|
|
|
(unaudited) |
|
(unaudited) |
|
(audited) |
|
|
|
£000 |
|
£000 |
|
£000 |
Cash flows
from operating activities |
|
|
|
|
|
|
|
Profit before
tax |
|
|
30,857 |
|
27,778 |
|
151,167 |
|
|
|
|
|
|
|
|
Adjustments
for: |
|
|
|
|
|
|
|
Gains on
investments |
|
(17,767) |
|
(14,550) |
|
(128,792) |
|
Finance
costs |
|
3,288 |
|
3,303 |
|
6,657 |
|
Purchases of
investments 1 |
|
(180,266) |
|
(168,101) |
|
(335,164) |
|
Sales of
investments 1 |
|
184,694 |
|
170,145 |
|
346,228 |
|
Dividend
income |
|
(18,306) |
|
(18,373) |
|
(32,841) |
|
Interest
income |
|
(683) |
|
(600) |
|
(1,233) |
|
Dividends
received |
|
16,525 |
|
16,452 |
|
32,078 |
|
Interest
received |
|
701 |
|
917 |
|
1,683 |
|
Decrease/(increase) in receivables |
|
1,470 |
|
(8,284) |
|
(1,231) |
|
Increase in
payables |
|
30 |
|
4,639 |
|
95 |
|
Overseas
withholding tax suffered |
|
(108) |
|
- |
|
(163) |
|
|
|
|
(10,422) |
|
(14,452) |
|
(112,683) |
Net cash flows from operating activities |
|
20,435 |
|
13,326 |
|
38,484 |
|
|
|
|
|
|
|
|
Cash flows
from financing activities |
|
|
|
|
|
|
|
Unclaimed
dividends |
|
|
11 |
|
25 |
|
24 |
Interest paid on
borrowings |
|
|
(3,288) |
|
(3,287) |
|
(6,587) |
Equity dividends
paid |
|
|
(16,390) |
|
(16,023) |
|
(26,843) |
Net cash used
in financing activities |
|
|
(19,667) |
|
(19,285) |
|
(33,406) |
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash and cash
equivalents |
|
768 |
|
(5,959) |
|
5,078 |
Cash and cash
equivalents at the start of the period |
|
|
17,340 |
|
12,262 |
|
12,262 |
Cash and cash
equivalents at the end of the period |
|
|
18,108 |
|
6,303 |
|
17,340 |
1. Purchases and sales of investments are considered to be
operating activities of the Company, given its purpose, rather than
investing activities.
RESPONSIBILITY STATEMENT
The Directors confirm to the best of their knowledge that:
-
the condensed set of financial statements contained within the
half-year report has been prepared in accordance with the
Accounting Standards Board’s Statement ‘Half-Yearly Financial
Reports’;
-
the half yearly financial report includes a fair review of the
information required by Disclosure and Transparency Rule 4.2.7R of
important events that have occurred during the first six months of
the financial year and their impact on the condensed set of
financial statements and a description of the principal risks and
uncertainties for the remaining six months of the financial year;
and
- in accordance with Disclosure and Transparency Rule 4.2.8R
there have been no related parties transactions during the six
months to 30 June 2017 and therefore
nothing to report on any material effect by such a transaction on
the financial position or performance of the Company during that
period.
The half-yearly financial report was approved by the Board on
24 July 2017 and the above
responsibility statement was signed on its behalf by:
John Reeve
Chairman
Notes
1. Comparative
figures
The financial information contained in this half-year report
does not constitute statutory accounts as defined in section
434-436 of the Companies Act 2006. The financial information
for the six months ended 30 June 2017
and 30 June 2016 has not been
audited.
The information for the year ended 31
December 2016 does not constitute statutory accounts, but
has been extracted from the latest published audited accounts,
which have been filed with the Registrar of Companies. The
report of the auditors on those accounts contained no qualification
or statement under section 498(2) or (3) of the Companies Act
2006.
2. Publication
This half-year report is being sent to shareholders and copies will
be made available to the public at the Company’s registered office
and on its website.
For further information please contact:
Alastair Mundy
Investec Fund Managers
Limited
020 7597 2000