Fund Research

Majedie Investments

Last update 12 August 2019

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Majedie Investments. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Summary

Investment objective

To maximise total shareholder return whilst increasing dividends by more than the rate of inflation over the long term.

As at:

09/08/2019

Group/Investment

Majedie Investments

Ticker

MAJE

Management Company

Majedie Asset Management Ltd

Manager Name

William Barlow

Association of Investment Companies (AIC) Sector

Global

12 Mo Yield

4.7%

Dividend Distribution Frequency

Semi-Annually

Latest Market Capitalisation

£128,045,870

Latest Net Gearing (Cum Fair)

11%

Latest Ongoing Charge Ex Perf Fee

1.3%

Turnover Ratio

6.0%

Shares Outstanding

53,350,946

(Discount)/ Premium (Cum Fair)

-18.8%

Daily Closing Price

241p

Source: Morningstar

Majedie Investments (MAM) aims to maximise total shareholder return while increasing dividends by more than the rate of inflation over the long term.

The portfolio is divided into six funds, all of which are managed by the well-respected boutique fund managers at Majedie Asset Management. MAM was launched in 2002 using finance provided by the investment trust and was led by a team that previously worked at Mercury Asset Management and Merrill Lynch. The strategy was to manage UK equities on behalf of institutional clients, but this has since been broadened to include global equities and an absolute return strategy, and clients now include wealth managers and endowments alongside institutions. The trust has a 17.1% stake in the privately-owned asset management company itself, which as of 31 March 2019 had £11.6bn of assets under management and makes up 27.5% of NAV (as at 30 June 2019).

The team at MAM uses a bottom up, fundamental research-based approach and a high emphasis is placed on risk aversion. When considering investments, the various investment teams look to extract the maximum return per unit of risk taken and try to understand how the holding will hold up in different market environments. As an illustration, over the past year the trust has the lowest down capture ratio, at 46.32, in the AIC Global sector, and a standard deviation of 10.86 relative to the sector average of 16.9, when excluding the effects of the holding in MAM.

Since the revamp of the trust in 2014, performance has been a tale of two halves. In the two years leading up to the 2016 European Union membership referendum, the trust delivered NAV returns of more than 50%, outperforming the MSCI World Index (49.9%), AIC Global peer group (41.7%) and the IA Global peer group (36.3%). However, the referendum result hit the trust hard, principally due to its large exposure to the UK and the cautiously positioned absolute return fund. Since then, the trust has struggled relative to global peers as investor sentiment towards Britain has soured. Over the past three years, the trust has delivered returns of 23.4% relative to 58.5% from the MSCI World, 69.4% from the AIC peer group and 52.3% from the IA peer group. With this said, the Global underlying funds have performed strongly relative to their respective benchmarks.

Alongside capital growth, dividend growth is an important part of the trust’s investment proposition. The board re-set the dividend in 2014 and, since then, shareholders have seen compound progression in excess of 10% p.a. Currently, the trust is yielding 4.7%, comfortably the highest yield in the Global sector, where the weighted average is 1.3%. In fact, it is the second-highest yield of any trust in the AIC Global Equity Income sector. As of the most recent annual report, the trust retains historic revenue reserves of close to £26m.

Currently the trust is trading at a discount a little over 18%, considerably wider than the sector weighted average of 0.2%.

Kepler View

Majedie has been self-managed since becoming an investment trust in 1988, initially employing fund managers before bringing management in-house in 2014. Currently trading on a discount of more than 18%, this moment in time presents investors an opportunity to enter a trust that is well positioned for an increase in global market volatility or even possibly a global downturn. In particular, we believe the Tortoise holding, which offers investors steady capital growth, will become an attraction for investors seeking a more defensive route to global equity exposure. The defensive positioning of the long-only funds should also provide downside protection.

Alongside a lower beta approach, the trust offers investors an attractive yield of 4.7%. On top of this, the company has revenue reserves to continue paying out an increasing dividend regardless of economic conditions.

Admittedly, performance in recent years has been muted relative to the trust’s AIC and IA peers; however, this is largely due to the trust’s overweight exposure to the UK given the macroeconomic and political uncertainties following the referendum. When comparing the underlying funds to their benchmarks over the past year, half have actually generated positive levels of alpha and, four out of the six funds have achieved this over five years. This clearly illustrates that, should we see some of the uncertainty subside, there is little reason to believe the trust should not see its discount narrow.

bull bear
Highly rated fund managers with excellent long-term track record Exposure to UK is high relative to Global peers, meaning trust is not necessarily truly "global"
Wide discount in absolute and relative terms Expensive charges figures, although mitigated by the dividend received by Majedie Investments Limited
Strong underlying alpha generation gives clear reason to believe there could be a re-rating when Brexit uncertainty subsides
Strong yield, far higher than peers in Global and Global Equity Income sector

Portfolio

Majedie Investments (MAJE) aims to maximise total shareholder return while increasing dividends by more than the rate of inflation over the long term. In 2014, the trust was restructured and the majority of the company’s assets came under the management of Majedie Asset Management. The trust retained a large holding of 17.1% in Majedie Asset Management Limited (MAM) – originally seeded by MAJE – which had £11.6bn of AUM as of 30 June 2019. This stake makes up 27.5% of NAV.

Alongside the MAM holding, the portfolio is split across six funds, all of which are managed by the various teams at MAM. The investment process is shared across desks and revolves around the concept of sustainable outperformance, achieved through entirely bottom-up, fundamental research. The team takes a “commonsensical” approach to risk, always aiming to extract the maximum return per unit of risk taken. This is illustrated by the five-year beta figures for the underlying funds. The five long-only equity funds boast a beta of less than 0.68 and the long/short Tortoise fund has a standard deviation over the past five years of 9.77%, compared to 15.06% for global equities, as represented by the MSCI World.

Looking at the portfolio as a whole, once we remove the possible effects of MAM and the cash holding, the portfolio had a beta of 0.69 relative to the MSCI All Country World Index over the past five years. Alongside this, the standard deviation of the trust, at 10.81%, was considerably lower than the MSCI ACWI’s 13.24% over the same time period. Both figures illustrate the trust’s low-risk approach, which could be attractive in more volatile markets. With this said, we have used the March 2019 portfolio weightings for the analysis, which would have a slight impact on the figures, although the allocations remain reasonably stable over time as the below table shows.

portfolio construction

Majedie Investments Asset Allocation
30.09.16 (%)
30.09.17 (%)
30.09.18 (%)
30.06.19 (%)
MAM UK Equity
30
29.7
29.3
8.9
MAM Tortoise Fund
15.9
16.4
13.3
13.2
MAM UK Income Fund
9.7
7.9
8
8
MAM US Equity Fund
3.6
3.8
4.4
5.1
MAM Global Equity Fund
9.1
10.1
11.3
12.6
MAM Global Focus Fund
3.2
3.5
4
4.4
MAM
28
28.4
29.5
27.5
Cash/ Other
0.5
0.2
0.2
0.20.3

Source: Majedie

The proportion of assets allocated to each of the underlying funds is managed by the board, which meets formally five times a year and more often on an ad-hoc basis if necessary. Within these parameters, the underlying fund managers are left to run their strategies according to their differing remits.

Majedie Asset Management

Majedie Asset Management (MAM) is an independent investment boutique, as we refer to above, that was first established in 2002 using finance and seed capital provided by the Majedie Investments trust. MAM currently has £11.6bn in AUM and Majedie Investments holds a 17.1% stake in the unlisted company. The managers at MAM invest in equities on behalf of institutional clients, wealth managers and endowments across a range of UK and global strategies, and all employees at Majedie own equity in the business, aligning the interests of everyone at the company with their clients.

The holding in MAM is held at fair value and is valued twice a year: once at the interim and once at the full-year stage. Currently, the holding represents some 27.5% of the portfolio, representing a stake worth approximately £50m. This valuation is formulaic, being based on earnings and surplus cash, and was discounted at 30 September 2018 and 31 March 2019. The discount applied by the board reflects valuations of market-listed fund management companies and more volatile stock markets.

Underlying funds

The largest fund allocation, and the second-biggest individual position, in the portfolio is the Majedie UK Equity Fund, making up close to 30% of the assets. This strategy aims to produce a total return in excess of the FTSE All-Share Index over the long term, mirroring the Majedie UK Equity Fund via a segregated account. The fund focuses primarily on FTSE 350 stocks, but also allows for 10% of assets to be invested in small-cap companies and up to 20% of NAV to be invested in overseas holdings. After a period of difficult performance over the past year, small cap specialist Richard Staveley left the team, leaving James de Uphaugh, Chris Field and Imran Sattar to continue managing the fund. As we mention in the performance section, it is the trust’s high allocation to UK equities that has held back its performance relative to less UK-centric peers in the global sector. The board views the UK as undervalued and under-owned, with much of the Brexit uncertainty in the valuation.

The third-largest portfolio position is the Majedie Tortoise Fund, at 13.2%. This long/short fund was launched in 2007 and currently has around £1bn of assets under management. The managers, Matthew Smith and Tom Morris, aim to achieve positive absolute returns in all market conditions by investing primarily in long and synthetic short positions in equities over rolling three-year periods. The managers also hope to achieve this with less volatility than a conventional long-only equity fund.

MAM Global Equity Fund is the final holding to make up more than 10% of the trust’s NAV. It is Majedie’s flagship global fund and is managed by Tom Record, Adrian Brass and Tom Morris. The objective of the fund is to produce returns in excess of the MSCI All Country World Index over the long term by investing in a diversified portfolio of global equity securities, including emerging markets.

Majedie Investment also has smaller holdings in MAM US Equity Fund (4.7%), MAM UK Income Fund (7.8%) and MAM Global Focus Fund (4.3%). Two of these funds also fall under the remit of Tom Record, Adrian Brass, Tom Morris and the rest of the global team; however, the UK Income fund is run by Mark Wharrier.

Gearing

The company uses gearing via a long-term debenture. As can be seen in the graph, gearing has been a regular feature of the trust and is currently 11%.

The structural gearing is in the form of a £20.5m debenture, paying interest at 7.25% and due for redemption in 2025. The trust paid off a second debenture in 2017 – as can be seen in the graph below – which paid interest at 9.5%. The repayment of this debt incurred 0.6% NAV dilution, but the objective was to reduce gearing while stock markets were at record levels and this has in turn helped improve cost ratios, with finance costs falling by £0.2m.

Returns

Due to the nature of the fund of funds approach, the trust has no single benchmark against which performance is measured. Instead, each underlying fund is measured against specific, more appropriate benchmarks. For the purpose of comparison, we use the MSCI World Index and the AIC and IA peer groups as benchmarks for MAJE as a whole. Since the revamp of the portfolio, performance can be described as a game of two halves, as illustrated in the graph below.

Performance

Source: Morningstar

As we mention in the portfolio section, MAJE was revamped in 2014 when the board adopted the current investment strategy. The trust got off to a good start, but Brexit has caused performance to falter somewhat. For example, since the start of 2014 to the end of 2016, the trust delivered NAV returns in excess of 50%, outperforming the MSCI World Index (49.9%), the AIC peer group (41.7%) and the IA peer group (36.3%). However, the referendum hit the trust hard, principally due to the trust’s large exposure to the UK, and since then has struggled relative to peers as investor sentiment toward Britain has soured.

The past three years have seen the trust deliver returns of 23.4%, relative to 58.5% from the MSCI World, 69.4% from the AIC peer group and 52.3% from the IA peer group. With this said, four of the six underlying funds have outperformed their respective benchmarks over the period, showing the underperformance is largely due to the trust’s asset allocation as opposed to poor stock selection from the managers. As the table below shows, the standout performer since the trust’s inception, on an relative basis, has been the Majedie UK Equity Fund, returning 182.7%. More recently, the strongest performing funds have been the Majedie Global Equity Fund, at 2.6%, and the Majedie Global Focus Fund, at 3.7%.

Performance to 31 March 2019

6 months (%)

1 year (%)

since inception (%)

Global Equity Fund
0.6
13.1
74.9
Relative to benchmark
+2.6
+2.6
+4.5
Global Focus Fund
1.1
14.2
71.1
Relative to benchmark
+3.1
+3.7
+0.6
US Equity Fund
0.5
15.9
90.8
Relative to benchmark
+2.5
-1.3
-11.6
UK Equity Fund
-4.4
3.2
472.4
Relative to benchmark
-2.6
-3.1
+182.7
Tortoise Fund
-0.4
-1.5
104.7

Source: Morningstar

Looking forward, the high UK exposure relative to peers could prove beneficial once the future direction of the UK’s relationship with Europe is made clearer, with many UK companies currently labouring on depressed valuations thanks to the uncertainty surrounding the negotiations. This, along with the trust’s high level of gearing, could mean we see a swift uptick in relative performance should markets respond positively to any Brexit developments.

Dividend

Offering increasing dividends at a rate greater than inflation over the long term is a key part of the trust’s investment objective. Currently the trust is yielding 4.7%, comfortably the highest level of the Global sector where the weighted average is 1.3%. In fact, the trust offers the second-highest yield of any trust in the AIC Global and AIC Global Equity Income sectors.

Last year saw the trust deliver a dividend of 11p per share, covered by 12.5p of earnings. The dividend pay-out was up by almost 15% from the year before. Since the trust was overhauled and the dividend re-based in 2014, shareholders have seen compound dividend progression of more than 10% p.a.

The trust also boasts impressive revenue reserves of close to £26m. This represents cover of more than four times the current annual dividend distribution, a key differentiating factor for the trust relative to peers in this current uncertain environment. Dividends are paid twice a year in January and June.

annual dividends

Source: Majedie

Management

The trust is managed at the top level by the four-strong board, which meets formally five times a year and more often on an ad-hoc basis. The chairman is David Henderson and the non-executive directors are Paul Gadd, Jane Lewis and Mark Little, as well as Majedie Asset Management’s chief executive, William Barlow.

The portfolio’s various sub funds are managed by a team of 16 investment professionals at Majedie Asset Management (MAM). MAM is an independent investment boutique that was established in 2002 using finance and seed capital provided by the Majedie Investments trust. MAM currently has around £12bn in AUM and Majedie Investments holds a 17.1% stake in the unlisted equity of the company. The managers at MAM invest in equities on behalf of institutional clients, wealth managers and endowments across a range of UK and global strategies and every employee at Majedie owns equity in the business, aligning the interests of everyone at the company with their clients.

Discount

Demand for the trust has previously been supported by its investment in MAM, combined with the trust’s ability to provide access to limited-capacity funds with strong track records. This can be seen below, where the trust has traded periodically at a premium to NAV since the portfolio was overhauled in 2014.

Discounts across the investment companies sector widened in 2016 in the face of increased risk-aversion and Brexit. Additionally, MAJE – along with a number of other trusts – was thought to be potentially under additional selling pressure as a result of a large stake held by Aviva Investors.

We understand that Aviva confirmed last year that it is a comfortable holder in the medium term given the reputation of the managers. With that pressure gone, we think the current discount of around 18.8% is extremely interesting. The trust's cautious positioning in the face of the recent market rally may be the reason for it.

Discount

Source: Morningstar

Charges

Fees are charged at 0.75% on all the underlying funds, with the exception of the Tortoise Fund where there is a 1.5% charge and a performance fee of 20% of the outperformance above 5% annual absolute hurdle, subject to a high-water mark.

Overall, the trust has an ongoing charge of 1.3%. Although still higher than the weighted average of 0.59% for the sector, this is 0.2% cheaper than when we covered the trust last year. The OCF includes fund management fees paid to MAM, which in turn pays dividends back to the trust. Last year this was £4.6m or 3% of the current NAV.

The trust has a KID RIY of 2.56 where the sector-weighted average is 1.0, although this is largely due to the coupon of 7.25% on the debentures. It is also worth noting that calculation methodologies can vary among companies.

ESG

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This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

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Fund History: Majedie Investments

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