Aviva has been gradually selling stakes in various investment trusts it acquired when it bought Friends Life in 2015. Two went out last year, including Witan, a favourite of this column. Two more exits have just been announced. One is Scottish Investment Trust, in which Aviva has a near-12 per cent stake. The shares are being bought at a 10.75 per cent discount to net asset value and cancelled by the trust. This is a largely positive move for its shareholders, because the way the maths works out is to provide a 1.3 per cent uplift in that net asset value.
Scottish is a bit of an oddity. The trust dates back to 1887 but until a new manager, Alasdair McKinnon, took over a couple of years ago was not terribly well known or appreciated. Attempts have been made since to raise its profile. Assets are more than £900 million, while charges, at 0.49 per cent, are relatively low.
The number of investments is a bit over 60 and at first sight they do not make a lot of sense, spread across a number of different territories and sectors. This is because the managers divide investments into three categories: “ugly ducklings” that are unappreciated by the market and where the price has fallen too far; “changes afoot” where action has been taken but is again not appreciated yet; and “more to come”.
This form of contrarian investment can be very successful if you get your timing right, and for the past couple of years the trust’s net assets have been rising sharply. The biggest holding is in an Australian wine producer that owns the Penfolds and Wolf Blass brands. This had been performing poorly but is being turned around by new management.
Microsoft hardly seems to fit into any of those three categories, but the managers believe the market has yet to latch on to the shift from selling PCs to a subscription model for software that offers more reliable earnings and that the price earnings multiple fails to reflect this. Sands China is a Macau casinos operator also being turned around but offering an 8 per cent dividend yield.
Also there on income grounds are Severn Trent and Marks & Spencer. That spread of investments and shrewd stock picking are the main reasons for buying.
My advice Buy
WhyThe range of investments may at first sight look random but the team have a good record for contrarian stock picking
Fidessa
Fidessa makes software used by financial institutions in their trading in equities and derivatives. It therefore does well out of tighter regulation and can expect to benefit from Mifid II.
It also does well from deregulation, of the sort being suggested by President Trump and the repeal of the Dodd-Frank reforms, because this encourages its customers to trade. It further benefits from the low pound, because three quarters of its revenues are in other currencies, mainly dollars. Profits before tax in 2016 were up 25 per cent on a reported basis to £48.8 million but up only 1 per cent at constant currency rates.
The shares are tricky to value because of the annual “special” dividend, which has been coming for the past decade and is therefore anything but special, Fidessa getting a strong cashflow from its subscription model and having little else to do with the money in the absence of any acquisitions.
There are plans to move into fixed-income software but nothing firm yet — it took a while to develop the derivatives business but this is now 12 per cent of sales. The shares, off 50p at £23.50, sell on 27 times earnings, which looks fair value.
My advice Avoid
Why Dividend is attractive but multiple is high
Victoria
In 2012 Geoff Wilding, a New Zealand-born investment banker, led a boardroom coup at Victoria, the carpet maker, and embarked on a string of acquisitions that were aimed at making it the market leader in the UK and Australia. It has achieved the first and is in second place in Australia; now the company has taken its first step into Europe with the purchase of two makers of artificial grass in the Netherlands for €11.2 million down and another €5.1 million of deferred consideration.
Mr Wilding emerged from that coup with a half stake in the company, though a placing in 2015 to pay for a couple of those deals has whittled this back to about a third. Investors will not be complaining. The shares were below 30p in mid-2014. They added 3p to 467p yesterday. Victoria is paying a bit more than five times earnings for the two, which is about in line with earlier deals.
The aim is to make further purchases on the Continent. Mr Wilding has been acting as executive chairman, but a new chief executive with experience in the European carpet industry joins next month. The artificial grass market is growing fast and the aim is to import some of the product into the UK and expand Victoria’s range. Further deals will follow.
It is hard to quibble with either the strategy or its execution. More than half the flooring laid in the UK is imported, so any further deals make sense. The shares, though, are on 20 times this year’s earnings and 15.5 times next year’s, which suggests much of that growth is in the price.
My advice Avoid
Why Shares have come up a long way and are fully valued
And finally . . .
Nextenergy Solar Fund came to the market in April 2014 and, as the name suggests, invests in solar power plants, recycling the income from these in the form of dividends. The fund has raised £465 million since the float, most recently another £115 million in November. The long-term trend in energy prices, upwards, is in its favour. The fund pays a quarterly dividend and has just confirmed that the total for the year to March 31 will hit its target of 6.31p. On that basis the yield is an assured and attractive 5.8 per cent.
