Performance, Commentary & Portfolio

Fund Manager’s Review

Investors had to play a guessing game in March. Guessing what President Trump might say regarding geopolitical events, economic policy tariffs and guessing what this means for economic activity and financial markets. Investors were particularly concerned about “Liberation Day” 2 April where President Trump had warned of imposing 25% tariffs on the whole automotive industry. Uncertainty over policy is likely to put many investment decisions on hold, impacting economic growth expectations.

The German parliament voted to exempt a huge increase in defence spending from strict debt ceiling rules and to set up a €500bn defence and infrastructure fund. In the UK, Chancellor Rachel Reeves announced politically sensitive benefits cuts in her Spring statement, along with a diversion of part of the foreign aid budget to defence spending. Along with other tax tweaks, this was just enough to keep the UK within her fiscal rules.

Investors were nervous about the implications of tariffs and policy uncertainty. Equity indices generally fell back, led by the US and in particular, the technology heavy Nasdaq Composite Index. The UK stock market was down by around 2%, with continued high dispersion between individual share price movements. There was a slightly defensive feel to the market, with sectors like telecommunications, oil & gas, tobacco, and utilities outperforming, as well as life insurance. Many cyclical sectors underperformed, with notable weakness in travel & leisure and several of the industrial sectors.

Portfolio performance was in line with the benchmark. The Net Asset Value (NAV) total return was -2.85% compared to -2.25 % from the benchmark, FTSE All-Share index. For the second month in a row, the real estate company Assura supported performance, as the board announced they would be minded to recommend a potential takeover from a private equity buyer. British American Tobacco was also strong, and the portfolio benefitted from not owning AstraZeneca and Glencore, which underperformed. On the negative side, Burberry underperformed, on general concerns about US consumer spending. Entain and Energean were weak, whilst an underweight position in Shell also held back relative returns.

Volatility in stock markets can create investment opportunities. We try to look through short-term noise, to seek out companies where we see significant upside on a medium term view. We introduced two new holdings in March and sold two others.

We bought Sirius Real Estate, a property company, specialising in large multi-let sites with a mixture of light industrial, office, workspace, and storage tenants, in Germany and the UK. Sirius has an excellent record of buying properties with substantial vacancies, repurposing the space and filling voids to drive rental growth and also a higher valuation of the sites. Merchants Trust has invested in this company before, selling out five years ago, at a slightly higher share price than the recent reinvestment price. In the intervening years, the company has made excellent progress, acquiring and growing a UK division, building the book value per share by over 50% from 2020 to 2024, consistently growing the rental income and raising the dividend by nearly 70%. We bought the shares at an unusual discount to asset value, with a 6% dividend yield due to depressed sentiment and specific concerns about the outlook for German manufacturing activity. The German government’s announcement of increased defence spending, provided some reassurance on the outlook for industrial activity.

The second new investment was Michelin. This French-listed company is a leading global manufacturer of tyres. The tyre industry is predominantly a replacement market, thus less cyclical than the general automotive sector, and Michelin has a strong record of revenue growth at attractive profit margins. The company benefits from important structural trends. Higher performance cars and heavier electric vehicles are increasing the demand for higher specification, premium tyres. The company is also growing into speciality tyres, such as those on off-road vehicles in aerospace, mining, and construction. The valuation of the shares was low and it offered a 5% dividend yield.

The two companies sold were both holdings that had performed well. Whilst they are different situations, they approached our assessment of fair value, so were a useful source of cash to fund higher conviction investments.

Haleon is the world consumer health leader, with brands like Sensodyne and Panadol. When it demerged from GSK in 2022, we decided to increase the portfolio exposure, as we saw significant potential value. We added to the position when they fell heavily on concerns about potential litigation regarding the stomach acid drug Zantac, which seemed overblown. Since then, the Zantac litigation risk has dissipated and the company has delivered solid revenue and profits. This led to a strong appreciation of the shares, to a well-deserved premium rating, vindicating GSK’s decision to demerge the company.

Keller was the second complete sale. Keller is a specialist geotechnical engineering firm. Although Keller has a long record of revenue growth, its profitability has been very volatile, with a mixed record of contract delivery. Michael Speakman, CEO and his team, have done a good job of improving commercial practices and operational performance. This led to a sharp improvement in profits, supported by a strong US construction market. The share price more than doubled from mid-2023 until this year. Whilst Keller’s headline multiple remains very low, this is now based on high expectations.

Simon Gergel
11 April 2025

This is no recommendation or solicitation to buy or sell any particular security. Any security mentioned above will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date.

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