Commenting on the markets, Mike Prentis and Dan Whitestone, representing the Investment Manager noted:
During March the Company’s NAV per share rose by 3.9% on a cum income basis whilst our benchmark index rose by 4.8%; the FTSE 100 Index rose by 1.8%. Relative underperformance was mainly derived from the long only portfolio, which increased in value by 3.9%, the CFD portfolio fell by 0.1% of NAV. These individual portfolio returns are before costs.
Stock selection and sector allocation both detracted from relative performance in the long only portfolio. Underweight sector positions in food producers and mining companies, and our overweight position in household goods companies and housebuilders, all negatively impacted relative performance.
Within the long only portfolio the largest positive contributors to stock selection were our holdings in Fevertree Drinks and Marshalls. Fevertree Drinks’ shares saw profit taking in February but the shares rebounded in March. The company’s full year results showed revenues up by 71% and EBITDA (earnings before interest, taxes, depreciation and amortization) up by 82%. Management commented that they are increasingly well positioned to take advantage of growth in all geographies with the brand’s growing international reputation. Marshalls released full year results for the year ended 31 December 2015 which showed revenues up by 8% and operating margins much improved to 9.7% driving earnings growth of 41% and return on capital employed to 19.0%. Management confirmed that 2016 had started well. Marshalls increased the final dividend by 19% and was one of a number of holdings that reported during the month which also declared a special dividend.
Other companies delivering strong full year results included Hill and Smith, Savills and 4imprint Group. Each of these companies is very international in its operations. For instance, 4imprint Group, which announced revenues and earnings both up by 20%, derives all of its revenues from the US. We held many encouraging meetings with the management teams of our holdings during the month.
The largest detractors from relative performance from a stock selection point of view were three benchmark stocks, none of which we owned in the portfolio, Allied Minds, Evraz and Premier Foods, which saw share price increases of 56%, 31% and 88% respectively. Premier Foods was subject to a bid from the US.
Activity within the portfolio was fairly limited, although we took part in the IPO of Watkin Jones, a developer of student accommodation in the UK.
The CFD portfolio got off to a difficult start in March, as the reversal in market leadership witnessed in February continued into the first week or so of March. However, performance in March improved steadily from the second week onwards and we recovered most of the month’s losses, culminating in a negative 9 basis points (bps) of overall performance, with the long CFDs contributing 43bps, and the short CFDs detracting by 52bps.
We consider the long CFD portfolio is in good shape, having navigated the reporting season strongly, generally either meeting or exceeding expectations. The short book proved more mixed. We suffered from our short exposure to industrial and commodity related shares, but generated some strong stock specific success in the short book, with the biggest contributor to overall performance coming from the largest CFD short position (in the leisure sector) that profit warned for the second time this month.
Overall, the top ten contributors to performance were comprised of eight long positions and two short positions, and ranged from 2bps to 8bps of positive performance. Aside from the leisure short that was the biggest contributor, long standing long positions in Novae, Fevertree Drinks and 4imprint Group also performed well. The top ten detractors comprised of one long position and nine short positions. The biggest detractor was in Paddy Power Betfair which experienced some profit taking this month. We have now exited the position as Paddy Power Betfair joined the FTSE 100, the company has been a significant contributor to performance over the last few years. The other top detractors were all in short positions, generally related, but not exclusively, to commodities and industrials.
In terms of portfolio positioning little change has been made. Ultimately, we believe the key shares and sectors where we see good long investment opportunities are the same, and the short book still targets those areas that we see as overearning or under structural or cyclical pressure. Whilst this stance has been a modest drag on performance this year, we remain positive and still believe the CFD portfolio is positioned correctly, seeing the small giveback over the first quarter in 2016 in the context of the strong returns achieved last year.
18 April 2016
ENDS
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