QD view – growth works, value works, cash not so good

At QuotedData, we don’t tend to make much of a fuss about interim reports from investment companies, but during the summer lull we looked closer than usual at some statements and interesting things emerged.

Good returns from growth-focused private equity

Last year, COVID put a dampener on private equity markets but things are looking up; in a recent news show we looked at Apax Global Alpha (APAX) ’s half-year numbers, which saw record distributions from the private equity funds that it invests in. A busy IPO market has helped with two recent issues within its portfolio – Paycor and Global-e – performing incredibly well. Now its largest underlying investment – Thoughtworks – is looking to list; potentially good news for APAX’s NAV. In the six months to 30 June 2021, the exits it achieved averaged more than 25% premium to NAV. We think APAX’s shares trade on about a 10% discount currently.

APAX is a growth-style investor, backing companies in growing sectors and helping them expand; however, since Nov 2020, value investing has had a better run which has been good news for Temple Bar.

Good returns from value stocks

In H1 2021, Temple Bar (TMPL) generated a total return on NAV of 19.3%, 8.2% more than the UK market as a whole and a significant change in the fortunes of this trust. New manager RWC’s Ian Lance and Nick Purves, assumed responsibility on 1 Nov 2020 and made wholesale changes.

At the end of June, half of Temple Bar’s portfolio was invested in its 10-largest positions; top of the list is Royal Mail Group whose share price rose by 70% in H1, having doubled in 2020. As we described in our note – Just getting started – the managers are excited about the prospects for Royal Mail’s European parcel business that trades on less than 10x earnings.

Whilst many investment managers have eliminated or much reduced holdings in a sector challenged by the need to tackle climate change, TMPL has significant exposure to oil and gas with BP, Shell and Total all in the top-10. It’s managers are not ignoring the threat – they voted against Shell’s Energy Transition Strategy, which they didn’t believe went far enough – but they are attracted by cash earnings yields in excess of 15% and feel  ‘engagement is better than divestment as it will more likely lead to better practices over time’.

EP Global considering its future

By contrast, interim numbers for EP Global Opportunities (EPG) were pretty dire – an NAV return of just 2.0%. EPG’s policy is to time markets – holding significant debt instruments, cash or cash equivalents when the manager thinks markets look expensive and gearing up to 25% of total assets when it considers them cheap.

Entering 2021, the manager felt markets were overvalued; however, the prospect of economic recovery and significant government stimulus drove shares higher and the £105m market cap trust now trades on a 9.6% discount. The new chairman is out telling shareholders ‘the newly constituted board now considers it has an excellent opportunity to consider the strategic direction of the company for the benefit of shareholders’. At 31 July 2021, EPG had 9.6% of its portfolio in fixed income and 26.7% in cash.

Many managers will tell you that attempting to time markets is a mug’s game. It may be that this particular fund is nearing the end of this chapter of its life.

James Carthew, head of investment companies, QuotedData