News & Insight • Market Insights
03 January 2024 | William Buckhurst
2023 A Year in Review - Portfolio Funds
YFS VP Portfolio Funds
In October 2023, we launched the Vermeer Portfolio Funds – a “growth” fund and a “balanced” fund designed to mirror the two core strategies that we have been running for clients since 2019. The funds both finished the year with assets of just over £20m each and we are grateful to our clients and intermediaries who seeded the funds at launch. Both funds will serve as shopwindows for Vermeer Partners’ discretionary performance for clients going forward. Since October 16th 2023 to the end of the year, the Vermeer Partners Portfolio Fund returned 4.61% and the Growth Portfolio Fund (which has a higher equity content and, therefore, higher risk profile) also returned 4.72%.
Both funds are invested predominately in Vermeer’s global equity selections but will also have varying degrees of fixed interest and alternative investments (including but not limited to property funds, infrastructure funds and gold ETFs). Both funds distribute income to investors with the Portfolio Fund currently showing an income yield of around 3%.
In November we added a new holding in the UK-listed, equipment rental business, Ashtead Group. Ashtead has long been admired as one of Britain’s best run public companies and is one of the very few to trade at a premium to its US peers. Ashtead issued an unscheduled trading update, which took investors by surprise and sent the shares down 12% on the day. It noted a number of one-off issues such as the Hollywood film studios strike and less impact from hurricanes and wildfires. Despite this disappointment, we do see these items as largely one-off and therefore took the opportunity to start a new position. In the US, the secular growth drivers from infrastructure spending are only really now starting to kick in. Ashtead is in a great position to benefit from that and is a fantastically well-managed business.
Following the very strong bounce in markets through November and December, we took the decision towards the end of the year to reduce equity exposure somewhat. We sold the holding in US mega-bank JP Morgan Chase & Co., leaving the portfolios with no direct holdings in banks. JP Morgan is one of the best run banks in the world, at around 18% it has notably higher returns on equity than most other banks and has been a conspicuously better performer in terms of share price over recent years (certainly in comparison to UK banks). However, now trading on around 1.9x price to tangible book and with question marks about its credit quality should the global economy cool in 2024, we took advantage of the strong share price performance this year to sell our holding. Moreover, there are clear headwinds that all banks face as more stringent capital rules proposed by US regulators limit the potential for outsized returns going forward.
We also took the painful decision to sell our unsuccessful holding in Paypal. Optically, the business finally looks cheap trading on a price to forward earnings ratio of around 10x for 20% EPS growth and there is the potential for an operational turnaround if the new CEO proves his worth. The margin pressure is well advertised as lower margin, unbranded growth takes more share of the mix; but we worry that branded user growth slowing could present a sort of ‘double hit’ of slowing revenues and lower margins. It does appear that the basic PayPal proposition has lost some of its edge with digital wallets offering a convenient alternative and so we feel that the cash can be better used elsewhere.
It has been a not dissimilar story with ITM Power. Shares that were once flying high, as the mania for the “green hydrogen” story gripped markets, are now on their uppers. As the only UK electrolyser manufacturer in production today we expect ITM to continue to benefit from the ramp up in UK green hydrogen projects over the coming years; however, the company has a long way to go until it hits profitability (its cash burn – the annual rate at which an unprofitable company is forecast to spend cash to funds its growth – continues to be a concern) and so we prefer to watch from the sidelines for now.
One of the difficult areas for multi-asset portfolios has been so-called “alternative income” funds, funds that invest in real assets such as property and infrastructure and aim to provide inflation-linked returns. But the steady ascent (until recently) of two- and 10-year gilt yields has had a direct impact on the broad UK REIT and infrastructure sector – areas that traditionally acted as useful diversifiers. UK interest rates started their steep incline in the tail end of 2021 and ever since then listed funds investing in longer duration or real assets have fallen back steadily, with the overall sector still trading at a sharp discount to stated asset value. The listed alternative income sector has also not been helped by confusing and – at times – over-zealous regulatory requirements surrounding cost disclosures which have created forced and (in our view) unnecessary selling pressure. Although we have trimmed our exposure a bit, we do not believe holders should be selling at these discounted levels.
Case Studies
Schiehallion Fund
Schiehallion is a UK-listed private equity fund investing in unquoted (predominantly technology) growth companies. It is managed by Baillie Gifford who have built a stellar reputation for investing in pre-IPO technology companies, many of which have turned out to be long-term winners. The fund currently includes investment in around 45 companies including: SpaceX, the Elon Musk owned manufacturer of rockets and spacecraft, ByteDance, the Chinese owner of TikTok, and Wise, the UK-based financial technology company. Like many of its growth capital and private equity peers, Schiehallion has seen its previously highly rated shares suffer a drastic derating and currently sits on a 37% discount to its net asset value. Importantly, Baillie Gifford – unlike many other private equity managers – maintain a disciplined approach to ensuring that the unquoted element of the portfolios are frequently revalued and reflect as far as possible the level of an open market transaction. Given the potential for outsized growth in some of the underlying portfolio companies, we believe that Schiehallion – along with its larger sister fund Scottish Mortgage – offers an attractive and heavily discounted way of getting exposure to future disruptors and technological innovators.
Novo Nordisk
Novo Nordisk is the market leader in obesity and diabetes drugs that use the so-called GLP-1 mechanism, with over a 50% market share globally and a market that analysts predict could reach $140bn a year. Sales within the Danish pharmaceutical group’s Diabetes and Obesity care division soared 36% to almost $22bn in the first nine months of the year and the shares have received a further fillip from recent trial data suggesting that Novo’s blockbuster weight-loss drug Wegovy can also cut the risk of serious cardiac events by around 20%. The shares trade on an expensive 40x earnings and the challenge will be whether it can ensure widespread, affordable access to its drugs as well as manufacturing enough of its drugs to keep up with demand. We have trimmed some of our position to lock-in some of the outsized gains, but it remains a core holding going into 2024.
This publication has been produced by Vermeer Investment Management Limited (VIM) trading as Vermeer Partners. It is provided for information purposes only. VIM makes no express or implied warranties and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. VIM will not treat unauthorised recipients of this publication as its clients. Prices shown are indicative and VIM is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Without limiting any of the foregoing and to the extent permitted by law, in no event shall VIM, nor any of its officers, directors, partners, or employees, have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. Other than disclosures relating to VIM, the information contained in this publication has been obtained from sources that VIM believes to be reliable, but VIM does not represent or warrant that it is accurate or complete. VIM is not responsible for, and makes no warranties whatsoever as to, the content of any third-party website referred to herein or accessed via a hyperlink in this publication and such information is not incorporated by reference. The views in this publication are those of the author(s) and are subject to change. VIM has no obligation to update its opinions or the information in this publication. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the client who receives it. Any securities discussed herein may not be suitable for all investors. VIM recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. This material has been issued and approved for distribution in the UK by VIM. ©2024 Vermeer Investment Management Limited. All rights reserved. No part of this publication may be reproduced or redistributed in any manner without the prior written permission of VIM.