Annual Report Strategic Report 17
Strategic Report
Investment
Management
Review and
Outlook
Steve Tatters
Director
Phoenix Asset Management
Partners
April 2022
During the year to 31 December 2021, the NAV per share increased by 19.1%
1
and
the share price by 13.5%. The FTSE All-Share Index (total return) rose by 18.3% over
the same period. Net assets at year-end were £194m (2020 £163m). This compares
well with the Company’s prior year performance, when the NAV per share declined by
5.3%, the share price declined by 10.0% and the FTSE All-Share Index (total return)
declined by 9.8%. Since Phoenix began managing the Company on 28 January 2016
to 31 December 2021, the NAV has risen 75.9% versus 59.2% for the FTSE All-Share
Index (total return).
The outperformance in 2021 has again resulted in a performance fee being earned,
80% of which was paid to us by way of shares in the Company in February 2022, the
remaining 20% will become due once the audit has been finalised. In accordance with
the Investment Management Agreement we are required to hold those shares for
3years. If the outperformance versus the index disappears on the third-year
anniversary, these shares will be cancelled, and we will receive nothing. This, we
believe, is one of the most aligned fee structures in the industry.
2022 started positively as the impact of COVID restrictions related to the Omicron
variant were reversed. The inflation hedge also continued to perform strongly, however
as we write in April, the portfolio and market have been impacted by the war in
Ukraine. Since year end up to 28 February 2022, the NAV has fallen slightly, with the
FTSE All-Share Index (total return) falling 0.5% for the same period.
Performance Review
From a performance perspective, 2021 continued to be dominated by COVID but was
also impacted by noise around Brexit. Additionally, some of the portfolio’s holdings
flagged during the year, the risk that persistent inflation would manifest itself became
more pertinent. Inflationary pressures were seen in the second half of the year and
Central Banks began to react by signalling the likelihood of interest rate rises.
The first half of the year saw a broad market rally which the portfolio participated
in. On 30 June 2021, the NAV was up 8.5% versus 11.1% for the Index.
In Q3 the portfolio fell slightly with the market up over 2%. During this period,
performance was impacted by, what we considered was an unnecessarily large and
deeply discounted rights issue from easyJet on which we comment more fully later.
In the fourth quarter the Company posted a good performance. The NAV rose 10%
versus 1.8% for the Index, as fears over the impact of rising interest rates resulted in
the inflation hedge performing strongly.
From a share price perspective, holdings with the highest price rises were the
inflation hedge and Frasers Group. The inflation hedge was implemented to protect
the portfolio against the impact of inflation, through the purchase of September 2022
put options on the short sterling future contract, the security identifier is LU2P99. The
options were purchased at £0.03 and were priced at £0.33 on 31 December 2021.
They subsequently rallied to over £1 and were sold in stages during the first two
months of 2022. The Frasers Group share price increased by 71% during the year, as
the company demonstrated a strong recovery from the pandemic and highlighted the
potential of its elevation strategy in its Flannels luxury retail business.
Other share price risers of note were Lloyds, which rose 35% during the year, and
the housebuilders, Bellway and Barratt Development, which rose 17% and 16%
respectively.
Fallers of note included our low-cost airlines due to the continued impact of the
pandemic. easyJet fell by 20% with Ryanair falling 12%. Prior to the emergence of
the Omicron variant both holdings had benefited from travel restrictions being lifted
but this was reversed when the scale of disruption around Omicron became clear.
1
This is an Alternative Performance Measure (‘APM’) the calculation of which can be found on page 99.