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Temple Bar's steady income at a rare discount

Temple Bar Investment Trust is at its widest discount to NAV in years, so now could be a good time to buy in.
April 29, 2015

In this week's Big Theme we highlight recent shifts in investment trust discounts and premiums to net asset value (NAV) in the Association of Investment Companies (AIC) UK Equity Income sector. Many of the trusts in this sector were on premiums due to investors searching for income amid low interest rates and bond market concerns, however these have now swung out to discounts.

1188p
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points
  • Rare discount to NAV
  • Good long-term performance
  • Low charge
  • Possible downside mitigation
Bear points
  • Poor short-term performance
  • Yield not as high as some peers

One of the more notable movers has been Temple Bar Investment Trust (TMPL). This had consistently traded at a premium since 2011, but this year has moved to a discount of more than 5 per cent. There is a good reason for this, as well as the sector trend: the trust has struggled over the past 18 months, and so failed to beat its sector average and the FTSE All-Share over one year.

However, it beat the index over three and five years, and both the index and its peers over longer periods. Between 2002, when Alastair Mundy of Investec took over management of the portfolio, and March 2015, the NAV total return was 310 per cent, against 188 per cent for the FTSE All-Share. This is one reason why Alan Brierley, director of the investment companies team at Canaccord Genuity, considers the wide discount to NAV "an opportunity".

The trust's more recent numbers have been dented by a difficult 2014, due mainly to three investments: Tesco (TSCO), Avon Products (AVP:NYQ) and the pharmaceutical sector.

The trust suffers short-term underperformance from time to time due to its contrarian investment approach. This involves focusing on out-of-favour stocks, which often go even more out of favour after purchase, for good and bad reasons. However, when sentiment turns this approach can result in strong performance. The trust holds its positions on average for four to five years, which means you need to be a long-term investor to reap the benefits, but also cuts the costs of trading, eating less into returns.

Temple Bar's manager is highly downside aware and at the moment is cautious on the economic outlook, so has positioned the portfolio accordingly. This has been achieved via diversification, and also by exposure to some economically cyclical sectors such as banking and construction, as he believes companies in these sectors better reflect some of his concerns in their valuations. He also holds cash and short-dated bonds, and has exposure to gold and silver, which could mitigate some downside in the event of market turbulence.

The trust has raised its dividend for 31 consecutive years and in 2014 paid out 38.88p - a 3 per cent increase on the previous year. Its yield of 3.24 per cent is not as high as some UK Equity Income trusts, but Temple Bar has revenue reserves equivalent to 77 per cent of the last total dividend. Mr Brierley says this should enable it to smoothe dividend progression, particularly in the event of a more challenging environment. This year it has also moved to paying quarterly dividends.

The trust has an ongoing charge of just 0.48 per cent - one of the lowest in the AIC UK Equity Income sector.

Temple Bar has performed poorly for a while and there is no guarantee its performance will turn. And, even if it does turn, it could take a while due to its contrarian approach. However, it has done well over the long term, and with the discount at its current wide level any improvement is likely to narrow this, helped by the fact that the trust offers a reasonably attractive income.

So if you have a long-term investment horizon, and want to buy an income investment trust with the potential for downside protection at a rare discount that may tighten, then Temple Bar could be a good opportunity. Buy.

TEMPLE BAR INVESTMENT TRUST (TMPL)

PRICE1,188pGEARING0%
AIC SECTOR UK Equity IncomeNAV1,260.6p
FUND TYPEInvestment trustPRICE DISCOUNT TO NAV5.33%
MARKET CAP£802.5mYIELD3.24%
No OF HOLDINGS51*ONGOING CHARGE0.48%
SET UP DATE30-Dec-26MORE DETAILStemplebarinvestments.co.uk

Source: Morningstar & *Investec

 

Performance

 1-year share price return (%)3-year cumulative share price return (%)5-year cumulative share price return (%)10-year cumulative share price return (%)
Temple Bar ord1.442.381.7161.9
FTSE All Share TR GBP10.841.757.7126.5
AIC UK Equity Income sector average6.268.7103.8152.4

Source: Morningstar, as at 27 April 2015

 

TOP TEN HOLDINGS as at 28 February 2015 (%)

HSBC7.5
Royal Dutch Shell 'B' 6.9
GlaxoSmithKline6.7
BP6
Grafton 4.7
Lloyds Banking 3.5
British American Tobacco3.4
Direct Line Insurance2.6
BT2.5
Royal Bank of Scotland2.3

 

Sector breakdown (%)

Financials22.2
Cash & short-dated gilts14.9
Industrials14.5
Oil & Gas14.1
Consumer Services8.1
Consumer Goods6.9
Healthcare6.7
Utilities3.1
Telecommunications2.6
Physical Gold2.2
Basic Materials1.9
Technology1.5
Fixed Interest1.3