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Aces High

Created:
6 May 2008
Written by:
Simon Thompson

Nineteenth century writer and critic John Ruskin once said: "Quality is never an accident; it is always the result of intelligent effort." He had a point and belatedly I have to take my hat off to the board of small-cap investment trust Manchester & London (TIDM: MNL) who have yet again delivered the goods.

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In fact, when the company reported interim results for the six months to end-January 2008, the trust's net asset value (NAV) had risen by a very respectable 1.6 per cent to 383p a share. By comparison, in the same period the FTSE All-Share index had fallen by 8.8 per cent and the FTSE 250 index had plunged by 12.8 per cent. Moreover, this was not a one-off performance as, over the five years to end-January 2008, both the trust's net asset value and share price have more than doubled in value, the latter outperforming the FTSE All-Share index by 21.2 per cent. And it was this stellar record, alongside an unusual shareholder perk, that caught my attention two years ago when I recommended buying shares in Manchester & London at 347p (Anyone For Tennis?, 26 June 2006).

To recap, at the time, the trust's founder and majority shareholder, Brian Sheppard, controlled 62.1 per cent of the company. But, as the outstanding issue of preference shares were due to be converted into ordinaries in September 2007, this would have lifted the Sheppard family holding to 73.1 per cent of the diluted share capital.

So, to avoid this happening and to widen the shareholder base, the trust raised £15m through the issue of 4.8m new shares at 321p - a 10 per cent discount to the company's net asset value of 356p - to private and institutional investors. Seeing an opportunity here I advised buying Manchester & London's shares, prior to the EGM to approve the share issue, so that we would be entitled to subscribe for the new shares at the discounted price. This reduced our average buy in price to 334p compared with the current share price of 358p, valuing the trust at £50m, or a 6.5 per cent discount to the last reported net asset value of 383p.

Part of the reason for the trust's decent investment record is the management team's decision to increase holdings in cash and gilts to around a third of the trust's NAV as the equity market started to decline last year. Also, the asset allocation has favoured companies that are likely to be bid targets. As a result, almost three-quarters of the trust is invested in the FTSE 100, mid caps and large international companies and up to 50 per cent of the portfolio can be invested in 'global-play' assets.

It has had a fair degree of success, too, with bids in the past year for beverage giant Scottish & Newcastle, chemical group ICI and waste group Biffa boosting the trust's returns. Currently, Manchester & London has 4.1 per cent of its funds invested in internet giant Yahoo!, which had until recently been in bid talks with Microsoft; 5.4 per cent in Xstrata, the mining giant that had until recently been courted by Brazilian rival Vale; and almost 10 per cent in Asian banking group and perennial bid target Standard Chartered. A further £9.7m (18.4 per cent of the fund) is now in cash or stocks subject to a bid.

Other investment strategies adopted include a focus on under-researched special situations and more highly rated growth stocks that have clear visibility of earnings growth. Holdings in business process outsourcing group Xchanging (4.3 per cent of fund), support services firm Mouchel (10.1 per cent) and consumer goods group PZ Cussons (16.6 per cent) all fit this bill. Interestingly, when an investment is showing decent gains the fund managers are more inclined to add to these winning trades rather than top-slice them. And it is not in for the short term either as the aim of the trust is to perform over three-year cycles with the average holding period for a stock in its portfolio approximately 27 months.

It's difficult to argue that the performance of Manchester & London has been anything other than impressive and, backed by a 10p a share dividend - equating to a decent yield of 2.9 per cent - the shares continue to have their long-term attractions. What's more, as I alluded to above, there is another reason to hold the shares. The trust happens to own debentures on seats on the Centre Court and No. 1 Court at The All England Club. And, unlike other companies, where these perks usually end up in the hands of the chosen few, Manchester & London has a draw each year to serve up 23 pairs of free tickets to Wimbledon to shareholders who own at least 2,500 shares.

So with the board serving aces on the stock market, and playing the money markets well - the cash pile was invested in euros and Swiss francs, currencies that have risen steeply against sterling - the trust continues to merit consideration for the long term.

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