Our short term performance continues to be driven by ‘growth’ versus ‘value’ sentiment in the market and, as more companies appear to be trading better than the most bearish ‘guesstimates’, we are starting to see a bit more commentary on the valuation gap between the two. Uncertainty persists for a lot of companies however as to how much of the trading pick up in the last couple of months is ‘catch up’ and how much is sustainable. We believe that investors will stop paying higher and higher multiples for certainty of growth when there is increasing evidence of a more broadly based upturn. One particularly interesting aspect of recovery is the scope for productivity improvements as business levels ‘normalise’, which in some instances is considerable, and we are looking for companies that will emerge from the crisis in improved competitive positions. On the dividend front there were no real surprises in the last month, good or bad. One thing we have noted in a couple of instances is a slight shift in the boardroom dynamic towards the Finance Director with respect to dividend discussions, who necessarily tends to be more cautious. We expect this to unwind as trading gradually improves and Boards have a better feeling for ongoing levels of business activity.
There was no real discernible trend amongst our best and worst performers last month. Two of our contracting companies, Morgan Sindall and Keller, were strong but the former is essentially a UK focussed business and the latter is a global business. XP Power captured some of the ‘tech’ euphoria whilst Marstons and Restaurant Group, two domestic cyclicals, performed well. Wood Group benefitted as it beat “worst case” scenarios and Provident Financial found buyers as belief grew that the company would come out of the crisis as a stronger business as competitors withdraw from its marketplace. On the downside, STV performed poorly over fears about advertising revenues which now seem overdone and RM fell as uncertainties over school openings continued. One of our holdings, Saga, announced a fund raising at a premium to the market price, partly underwritten by a former owner of the business. Interestingly, the board also announced that they had turned down an indicative offer for the group from private equity. We have stated previously that we believe that the reintroduction of company guidance will help our underlying share prices, but it is currently a slow process. A couple more hostile takeover approaches would act as a catalyst to bring the whole process forward.