In a market where just about all companies are removing guidance and analysts are literally down to guessing, there is no market leadership and we appear to have resorted to following Wall Street up or down on a daily basis. Our fund has been hit particularly hard in the sell off as we are a small and mid-cap fund and equity risk premiums have risen dramatically. More specifically we have suffered through our exposure to UK centric stocks where the effects of the ‘lockdown’ on company trading are most obvious. Housebuilders are now trading below asset value and stocks close to the consumer have fallen heavily. In addition, investors have sold off stocks with debt, even though we believe that banks and fund providers will accept temporary covenant breaches. In fact, the main positive of the current crisis compared to the financial crisis is the apparent determination of the government and lending institutions to keep companies, and thereby the economy, afloat. The timing of a return to ‘normality’ is obviously the big unknown, suffice to say it will happen. Until the outlook is clearer, we are analysing our companies on a three-month view (i.e. the current length of the furlough arrangements) to ensure they will survive, and then three months beyond that. At the same time, we have a picture of how quickly companies can get up and running again when things improve.
The wide-ranging cancellation of dividends is unprecedented in our thirty odd years of experience as fund managers. Even companies that appear to have the capacity to pay and where we know the Directors believe dividends are extremely important to shareholders, i.e. the ones we term ‘serial dividend payers’, are cancelling. On the face of it, financial prudence is the reason. We would also note, however, that a lot of our companies are using the Government’s furlough arrangements and the Treasury would probably not be very happy to be providing financial assistance with one hand only to see cash paid out as dividends on the other. For this reason, we expect dividend payments to start to resume after stocks are free of government aid, which should also be when the wheels of recovery have been set in motion. At this point, we will engage with Directors with respect to dividends. For information, we have reverted this quarter to only paying out to our shareholders dividend income that we have physically received, which stops us from paying out dividends that are then retrospectively cancelled. Whilst we can add little to the timing debate, ultimately, we have a portfolio of good companies run by high quality management teams that we believe will recover strongly.