The Lowland investment trust has announced its annual results for the year to 30 September 2023, surprising to the upside despite headwinds to its small and mid-cap bias.
It achieved a net asset value (NAV) total return of 17.2%, 3.4 percentage points higher than its benchmark, the FTSE All Share, which stalled at 13.8%. The share price total return stood at 13.9%, as the discount widened from 11.5% to 14.2%.
The outperformance was attributed to stock drivers, particularly around takeovers in the small-cap side of the market, co-manager Laura Foll explained.
“Despite small and medium-sized companies underperforming, the key driver of outperformance for Lowland was the sheer number of takeovers that we had during the year,” she said.
“Because UK valuations are often at a discount to overseas peers, those peers are coming in and buying UK companies. This year, the key examples for us were the likes of Numis, which got bought by Deutsche Bank, and a company called Devro, which does sausage casings and got bought by a European peer.”
On the large-cap spectrum, which at 47% (as of 30 September) is an underweight for the trust when compared to its benchmark’s 84% allocation to the FTSE 100, the best performers were Diageo (not held), returning 1.3%, British American Tobacco (not held), which added 0.9%, and Marks & Spencer, which at 0.8% was among the best-performing positions, as noted by Winterflood analysts.
K3 capital and International Personal Finance followed, with the main drivers here also being takeovers, but shareholder returns via special dividends and buybacks, earnings recovery and structurally growing markets also added.
Detractors included Vanquis Banking (-0.9%), HSBC (-0.8%) and Serica Energy (-0.7%).
FE fundinfo Alpha Manager James Henderson disagrees with market valuations and the “deep scepticism” about the sustainability of UK earnings.
“When we look ahead to 2024 we continue to see pessimism reflected in both company valuations and economic growth forecasts. The best remedy is to meet company management teams, who serve as a reminder of the dynamism and innovation that exist in the UK,” he said.
“The challenging backdrop of recent years (Covid, the Ukraine war) has forced companies to look hard at their cost base and run leanly. On any pickup in sales, it is therefore our expectation that the boost to earnings will be meaningful.”
Other announcements included an earnings per share growth at 10%, alongside positive dividend growth of 2.5%, with the dividend for the year standing at 6.25%.
Also of note, chairman Robert Robertson announced his intention to step down at the 2025 annual general meeting.