Alex Crooke, Fund Manager for The Bankers Investment Trust, delivers an update to investors on how the Trust has fared in the first quarter of the year and his thoughts on wider economic and political developments. Alex also discusses the latest portfolio activity and where he and his team are finding value and quality.

Transcript

Hello and welcome to The Bankers Investment Trust update; let’s start with a very quick recap. We’ve seen some incredibly volatile and very difficult conditions for investing in the first quarter [of this year]. We saw a huge supply shock obviously as economies were forced into lockdown, something we’d never seen before; governments literally shutting economies and borders. Then leading to a huge demand shock as people stay at home and don’t spend money. And we’ve seen governments having to step in and furlough and pay salaries almost for a quarter – 30% of the whole population. Now we will see a recession on the back of this; we’ve seen already negative numbers, quite modest for Q1 for many countries but we’re going to see sharp declines in Q2 because we’re not going to see these lockdown conditions ease until June/July into Q3.

We’ve seen an obvious sharp fall in stock markets and a big recovery in April as central banks and governments supported the economy. But we have seen a big dispersion of returns, so some stocks have rallied very well; technology names, a few delivery companies and pharmaceutical companies. But then really sharp falls in both consumer related stocks like travel some of the financials.

On top of this we saw a huge oil shock as supply increased, ironically, while demand just collapsed. So very difficult conditions, it feels a little bit like the sea has receded from the beach and we’re sort of waiting now to see what sort of wave comes at us whether it’s going to be a tidal wave or a more modest easing of conditions. For the future really, we’ve got to establish what the new normal is. I see a very slow recovery, I think governments will be slow to open economies and consumers are going to be slow to get economically active again. How quickly will international travel resume, I think very slowly. Businesses also are going to find it very tough to increase working capital as they begin to build stock again to supply people and industries. And I also see companies re-equitising; converting debt into equity, raising new equity. And that government support comes at a cost; maybe the new loans they’re lending to a lot of companies will need to be turned into equity and dilute investors. So, a very careful difficult environment. I see Asia are recovering quickest, maybe Europe more slowly and the US very difficult to judge, as they’re still opening the economy up when actually live cases are increasing. Let’s just remember we also have Brexit on the horizon for the UK with a critical summit in June.

So, what has The Bankers Investment Trust been doing? Well if you have listened to me for most of last year, I was telling you we were raising cash and we had reduced gearing and ended up as a net cash of 3% by the end of our financial year at the end of October. We were struggling to find good investments at the right price. Obviously, with the market falling very sharply in February/March we did finally see value and we’ve been investing some of that cash back into the market. Not all of it, we’re down to about a 0% geared position by the end of April and we’re buying quality names so we’re not buying recovery stocks; I think it’s too early for that. We’re sticking to quality that fell too far and we’ve seen it rally quite sharply. [We were] initially buying some stocks in Europe and the UK where the share prices fell very sharply. But we’ll be looking to Asia I think for our next move to see some value and some better growth opportunities; I think that region will recover more sharply. As I said I’m still a little unsure of the recovery rate in the US and whether further lockdown conditions may be required to get control of the virus in that market. We’re also very underweight in areas which have really struggled: oils and banks. We’ve got a fair amount of financials mainly in credit card companies and we’re only 2% of the total portfolio in each of banks and oils, so again very low exposure to those areas which have been very difficult.

Let’s turn to dividends. We’re not going to be immune to some of the dividend cuts. We’ve seen cuts from our holdings in the UK in particular. Some companies passing dividends, so they are intending to pay them in the second half or beginning of 2021. Other companies have cut them and frankly I don’t think we’ll see them return to the same scale. Europe less so and actually US and Japan for us has been very good and partly through our mix of stocks that we own and also in Japan has a lot of companies with net cash. Some positives on the income side, we are global so in time we can move some of those companies that are not paying dividends into companies that will pay dividends and we can move assets into regions like Japan, Asia where we should see better dividend growth. Our sector mix is quite favourable as well. We’ve got decent holdings in technology names who are paying good dividends. We’re very underweight in oils and banks where we’ve seen most of the dividend cuts.

And finally, we’re investing the cash that we’ve been building up over the past year and that should earn some a decent return. And finally, we’ve got revenue reserves of about 1.6x the annual dividend. I’ve built these reserves over 15 years just for occasions like this, therefore we should be using those to keep the dividend progression.

We need to watch really have a dip and the recovery goes and then we can establish how quickly some of our investments will return to the dividend paying register. The Bankers Investment Trust declared its first quarterly dividend of the end of February of 5.35p; which is a 4.9% increase over the dividend last year. The Trust is very proud of its 54 years of dividend growth, consecutively and annually growing that dividend and over its life of 132 years The Bankers Investment Trust has seen lots of difficult times, but I’m really reassured in the quality of the team picking stocks for the Trust and the nature of the companies we own. They are quality names, they do have good quality balance sheets and they will be the quickest to recover as economic growth returns in the second half of the year. Thank you.