Temple Bar investment trust has been one of the most consistent UK equity income trusts for decades and managers Nick Purves and Ian Lance have continued that trend since taking charge toward the end of 2020.
The Covid period was a difficult one for the investment company, with 2020 a particular struggle. The trust was the worst performer in the IT UK Equity Income peer group, down 31.5%, with manager Alastair Mundy stepping down to pursue a career in teaching. This prompted change, with management moving from Ninety One to RedWheel.
Lance and Purves brought with them their value approach, which they said is “probably the thing that Temple Bar is best known for”. Since then, returns have been stellar.
It is the top-performing trust over five years and has beaten the average peer and FTSE All Share index in every calendar year since, including a 45.3% return last year.
Below, Lance tells Trustnet how investors suffer from human behavioural biases, why he is selling down banks after a phenomenal run and why he remains confident in advertising agency WPP despite its poor performance.
What is your investment philosophy?
Our philosophy is that we are value investors. Temple Bar is probably the purest value investment trust, certainly in the UK market.
We think that most investors suffer from human behavioural biases, which means they tend to overreact to short‑term news flow. This actually has relatively little impact on the underlying value of a business but means share prices tend to be more volatile than they probably should be.
Typically, people succumb to things like euphoria, fear and greed and overreaction, and share prices get driven down below the underlying intrinsic value of a business. What we're trying to do as investors is exploit the overreaction in other people.
How do you pick stocks?
We look out over about five years and ask ourselves: where do we think the earnings in this business get back to on a five‑year basis? You will sometimes hear me refer to that as ‘normalised earnings’.
Then we use that to calculate the value of the business – called intrinsic value. If we can see something where we think there’s at least 50% upside to our estimate of the intrinsic value, then that’s normally a good candidate.
What has been your best holding in recent times?
The thing we've really nailed in the past few years has been financials and banks in particular. The trust owns NatWest, Barclays and Standard Chartered, and all of them are up 100% or more over the past few years.
We basically invested in those at the right time. We bought during the pandemic, when share prices got absolutely crushed. And we held them throughout the entire period.
We've taken quite a bit of money out as share prices have continued going up but they’re still a meaningful part of the trust.
What went right with the banks?
Number one is starting valuation, which was ridiculous. During the pandemic, NatWest shares reached the same level as they were in 2008 when the government had to step in and nationalise it.
When you think about it, it is just utterly crazy. You're 12 years later, the company’s completely different, it has a much better balance sheet, is run by different people and has much better lending standards.
And yet, people were so fearful in 2020 that they drove the share price down to a level that effectively implied it was going bust. It wasn’t going bust.
The second part was fundamentals for the next few years were very good. Interest rates went up coming out of the pandemic – so net interest margins expanded. At the same time, they were using things like AI [artificial intelligence] and technology to drive costs down, while loan losses had almost evaporated, with basically no meaningful losses during that period.
And then the final thing was that the companies themselves took advantage of their low valuations to buy back their own stock. NatWest, for instance, has bought back about a third of its own shares in the past five years or so.
Even if profits didn’t grow, earnings and dividends per share would go up mathematically as a result.
Profits were growing, so earnings per share and dividends per share have gone up dramatically. Then you add in the fact that people have gone from hating these things to now quite liking them – so they have re‑rated as well.
Why have you trimmed them? Is the upside over?
Most things I talked about have played out now, so net interest margins aren’t going to carry on going up. You were buying them a few years ago at half book. Now they’re trading at 1x book.
They're not expensive and fundamentals are still relatively good, but having done so well out of them, it just makes sense to trim. We used to hold 20 million Barclays shares in Temple Bar. We now hold about 8 [million]. And yet it's still 3.5% of the trust. That gives you a clue to how much we sold and yet the share price has gone up, and therefore it’s still a relatively large holding.
What has been the worst holding?
The worst in the last year has been WPP, the advertising agency. We are still very positive on it despite the share price action.
There are structural issues going on in that industry. The advertising agencies face competition from Facebook, Google, et cetera and people’s advertising budgets have come under pressure. But actually, if you look at its peers, they have continued to grow. Publicis, the French company, probably its number one peer, continues to grow. And that sort of tells you that probably it's a WPP issue and not an industry issue.
[Shares are down 56.7% over the past three year].
Is there a catalyst for change?
There has been a change of management in the last year. A new CEO was appointed – a lady called Sydney Rose, who is ex‑Microsoft – and we believe that she has been setting out a strategy to effectively turn the business around and begin to improve its profitability.
A big part of that was the simplification of the business. Previously, new accounts would come up and there would be different bits of WPP pitching against each other. The company was built through a series of acquisitions. The challenge for Rose is unifying and simplifying the whole business.
But the valuation is very low. The share price is about £3. I think it’s forecast to do about 50p in earnings this year, so it's trading on about 6x earnings.
What do you do outside of fund management?
I've got a house down in St Davids, which is on the very tip of West Wales. So I spend time down there. It's very remote and it's basically farmland and has a beautiful coast.