Temple Bar Inv.Tst Half-year Report

 
TIDMTMPL 
 
HALF YEARLY REPORT 
 
Performance 
 
During the six month period to 30 June 2017 Temple Bar generated a total return 
on gross assets of 3.53%, underperforming the benchmark FTSE All-Share Index 
total return of 5.50%. 
 
The portfolio benefitted from its holdings in builder's merchant Grafton which 
performed well on the back of earnings upgrades driven by excellent operational 
performance in Ireland, and SIG which, following the appointment of new 
management, bounced back strongly. Notable holdings that detracted from 
performance were Signet Jewelers, hindered by weakness in malls across the US 
and concerns regarding its loan book, Barclays which announced results weaker 
than expected, and Tesco whose bid for food wholesaler Booker worried investors 
that a reasonably straightforward recovery story had been made unnecessarily 
complex. 
 
Market background 
 
In recent years, the success of different styles of equity investing has become 
a slave to bond yields with, in general, Value investors, including Temple Bar, 
finding progress hard when bond yields have been low and falling. We would 
therefore expect any significant increase in yields to reverse this trend 
swiftly; should it occur, many investors are poorly placed for such a reversal. 
 
The language of central bankers modified in late June with hints of a reversal 
of Quantitative Easing (QE - the printing of money to purchase bonds) and the 
requirement for higher interest rates as advanced economies return to more 
normal conditions. 
 
In briefings, the central bankers have raised a number of issues: 1] 
significant increases in asset values may have created false prices and driven 
mis-allocation of capital; 2] the effects such increases have had on wealth 
inequality; 3] the unknown long-term inflationary effects of loose monetary 
policy; 4] unemployment is falling, possibly to a level which would stimulate 
inflation; 5] interest rates need to be higher ahead of the next recession. 
 
Markets shrugged off this change in tone, believing either the central bankers 
were all talk or that any weakness in markets following implementation of this 
strategy would quickly force its cessation (or even reversal). 
 
While we would prefer to sideline banker/market noise, and focus on picking 
individual stocks from detailed bottom-up analysis, we cannot ignore the 
changing attitudes of central bankers.  Their previous decisions have driven 
bond and equity markets to very high valuation levels, and investors should be 
alert to the likely consequences of a change of tack.  We identify three 
scenarios. 
 
Scenario 1: interest rates rise across the yield curve and QE is reversed, with 
no significant effect on economic growth.  We believe this would depress asset 
markets.  After all, if interest rates return to historical levels, equity 
ratings should also revert to long-term norms.  However, it is unclear whether 
the monetary authorities have the nerve to watch bonds and equities fall 
without acting. 
 
Scenario 2: rising interest rates slow economic growth, dampening inflation 
expectations.  This would probably be good for government bonds and for asset 
classes with valuations most closely linked to bond yields.  Precious metals 
might also benefit if markets worry that central 
 
banks would find difficulty in unwinding QE. This scenario implies a 
continuation of low interest rates, low inflation, sub-par economic growth and 
no significant increase in government spending.  However, around the western 
world politicians have recently been left in no doubt of voters' resentment of 
the status quo. As this scenario appears to be unsustainable, we should prepare 
for scenario 3. 
 
Scenario 3: if central banks fail to increase rates and reverse QE while 
inflation falls and/or there is an equity market crisis, markets may price in 
the risks of further QE or, more likely, increased government spending.  Or 
governments may authorise the creation of helicopter money (ie money printed 
specifically to be used for increased government spending - a neat blend of 
monetary and fiscal policies). We assume this would be a very good outcome for 
precious metals, a bad outcome for bonds (as investors would suspect that 
governments are desperate to generate inflation) and a mixed outcome for 
equities.  We believe equities most closely correlated to bonds would struggle, 
relative to those less sensitive to interest rates. 
 
The portfolio, although not purposely constructed for this outcome, is best 
placed for scenario 3.  We believe, broadly, that markets are approaching the 
end of an era.  The long-term trend of globalisation has had very deflationary 
effects and, combined with extreme monetary policy, has driven bond yields down 
to very low levels. The current mood among electors and politicians suggests 
that the globalisation trend of the last few decades could give way to trade 
barriers, tariffs, protectionist policies and restricted movement of labour, 
plus greater use of fiscal policy. The consequence of scenario 3 is likely to 
be a more inflationary future and one, with government debt so high, which the 
authorities would welcome. 
 
Portfolio changes 
 
Our new era views are reflected across the portfolio and in the activity of the 
last six months. We sold out completely from our tobacco holdings BAT and 
Imperial Brands, the last of our 'bond proxies'. Both companies have a number 
of attractive operational and financial characteristics but, we believe, they 
were more than adequately reflected in the share prices. 
 
The weighting in the bank sector remains the portfolio's largest. We believe 
the market underestimates the changes banks have made to their operating models 
over the last decade. The high growth and weak and aggressively financed 
balance sheet approach has been replaced by one focused on low growth and a 
strong and conservatively financed balance sheet. Although investors typically 
regard regulatory interference with caution, we believe the regulators' actions 
since the Global Financial Crisis significantly reduce the downside risks for 
equity holders in banks. This downside resilience together with the low 
valuations of the banks continue to provide us with confidence that they remain 
undervalued. 
 
We did, however, decide to sell our holding in Lloyds Banking Group. We believe 
the business has a number of challenges. It has a significant exposure to very 
profitable variable rate mortgages (vulnerable to both competition and 
regulation) and has grown quickly in personal and car loans at a time when the 
UK consumer is under increasing financial pressure. Although we are fairly 
sanguine about bank regulation overall, we believe Lloyds could be affected by 
further changes as its mortgage book is currently considered as very low risk. 
New regulation may demand more capital is held against this book and 
consequently reduce dividend expectations for the company. 
 
The portfolio retains a significant weighting towards the UK consumer, mostly 
through holdings in banks, retailers, travel and leisure companies and 
builder's merchants. Many UK consumer focused companies are finding trading 
conditions tough and as Brexit is negotiated there is a clear risk of further 
deterioration. However, valuations and performance of these stocks reflect a 
lot of bad news particularly when compared with other areas of the market. We 
retain some dry powder as absolute valuations remain rather high for our taste. 
Within the consumer sector 
 
we increased our holding in US jewellery retailer Signet and clothing retailer 
Next although we did sell our holdings in Best Buy (it having recovered from 
some self-induced woes) and Sainsbury (our hypothesis of weakness in the 
discounter market did not play out as expected). 
 
Dividend 
 
A first quarterly dividend of 8.33p per share was paid on 30 June 2017 and the 
directors have declared a second interim dividend, also of 8.33p per share, an 
increase of 3%, to be paid on 29 September 2017 to those shareholders on the 
register of members as at 8 September 2017. The ex-dividend date for this 
payment is 7 September 2017. 
 
Outlook 
 
The changes underway in central bank attitudes and actions, after nearly a 
decade of ultra-accommodative policies, may well unsettle markets, leading to a 
re-appraisal of valuation criteria and enhanced volatility. In such an 
environment, where predictions become unreliable, strict adherence to our value 
investing approach becomes more important than ever. The general performance of 
the value investing style, compared with alternatives, hinges critically on an 
increase in interest rates towards more historical levels of normalcy. 
 
By order of the Board 
 
Investec Fund Managers Limited 
 
24 July 2017 
 
TWENTY LARGEST HOLDINGS AS AT 30 JUNE 2017 
 
Company                 Industry         Place of       Valuation     % of 
                                         Primary            GBP'000 Portfolio 
                                         Listing 
 
UK Treasury 1.00% 2017  Fixed Interest   UK               139,214    14.11% 
 
HSBC Holdings           Financials       UK                81,451     8.25% 
 
GlaxoSmithKline         Healthcare       UK                68,531     6.95% 
 
Grafton Group           Industrials      UK                52,944     5.37% 
 
Royal Dutch Shell       Oil & Gas        UK                51,884     5.26% 
 
Barclays                Financials       UK                46,527     4.71% 
 
BP                      Oil & Gas        UK                44,560     4.52% 
 
SIG                     Industrials      UK                38,286     3.88% 
 
Royal Bank of Scotland  Financials       UK                30,468     3.09% 
 
WM Morrison             Consumer         UK                28,715     2.91% 
Supermarkets            Services 
 
Top Ten Investments                                       582,580    59.05% 
 
CitiGroup               Financials       USA               24,838     2.52% 
 
Marks & Spencer         Consumer         UK                22,400     2.27% 

                        Services 
 
Tesco                   Consumer         UK                21,808     2.21% 
                        Services 
 
ETFS Physical Silver    Physical Gold    UK                20,257     2.05% 
                        and Silver 
 
Travis Perkins          Industrials      UK                19,692     2.00% 
 
Signet Jewelers         Consumer         USA               18,705     1.90% 
                        Services 
 
Centrica                Utilities        UK                17,769     1.80% 
 
CRH                     Industrials      UK                17,491     1.77% 
 
Global X Silver Miners  Basic Materials  USA               17,383     1.76% 
ETF 
 
Direct Line Insurance   Financials       UK                16,586     1.68% 
 
Top Twenty Investments                                    779,509    79.01% 
 
 
STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHSED 30 JUNE 2017 
(unaudited) 
 
                                     30 June 2017                 30 June 2016                  31 December 2016 
                                     (unaudited)                   (unaudited)                   (audited) 
 
 
                                     Revenue  Capital   Total       Revenue   Capital     Total   Revenue   Capital     Total 
                                     GBP'000    GBP'000     GBP'000         GBP'000     GBP'000     GBP'000     GBP'000     GBP'000     GBP'000 
 
Investment income                      18,985         -    18,985    18,969         -    18,969    34,069         -    34,069 
 
Other operating income                      4         -         4         4         -         4         5         -         5 
 
                                       18,989         -    18,989    18,973         -    18,973    34,074         -    34,074 
Total Income 
 
Gains on investments 
 
Gains on investments held at                -    17,767    17,767         -    14,550    14,550         -   128,792   128,792 
fair value through profit or 
loss assets 
 
                                       18,989    17,767    36,756    18,973    14,550    33,523    34,074   128,792   162,866 
 
Expenses 
 
Management fees                         (699)   (1,048)   (1,747)     (596)     (893)   (1,489)   (1,380)   (1,990)   (3,370) 
 
Other expenses including                (353)     (511)     (864)     (344)     (609)     (953)     (633)   (1,039)   (1,672) 
dealing costs 
 
Profit before finance costs                                                                        32,061   125,763   157,824 
and tax                                17,937    16,208    34,145    18,033    13,048    31,081 
 
Finance costs                         (1,308)   (1,980)   (3,288)   (1,311)   (1,992)   (3,303)   (2,645)   (4,012)   (6,657) 
 
Profit before tax                      16,629    14,228    30,857    16,722    11,056    27,778    29,416   121,751   151,167 
 
Tax                                     (108)         -     (108)         -         -         -     (163)         -     (163) 
 
Profit for the period                  16,521    14,228    30,749    16,722    11,056    27,778    29,253   121,751   151,004 
 
 
Earnings per share (basic and          24.71p    21.28p    45.99p    25.01p    16.53p    41.54p    43.74p   182.06p   225.80p 
diluted) 
 
A first interim dividend of 8.33 pence per share in respect of the quarter 
ended 31 March 2017 was paid on 30 June 2017. 
 
A second interim dividend of 8.33 pence per share in respect of the quarter 
ended 30 June 2017 was declared on 24 July 2017 and is payable on 29 September 
2017. 
 
The total column of this statement represents the Statement of Comprehensive 
Income, prepared in accordance with IFRS. The supplementary revenue and capital 
columns are both prepared under guidance published by the Association of 
Investment Companies. 
 
All items in the above statement derive from continuing operations. 
 
STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHSED 30 JUNE 2017 
(unaudited) 
 
                         Ordinary    Share 
                            share  premium  Capital Retained    Total 
 
                          capital  account reserves earnings   equity 
 
                            GBP'000    GBP'000    GBP'000    GBP'000    GBP'000 
 
 
BALANCE AT 1 JANUARY       16,719   96,040  735,178   32,003  879,940 
2017 
 
Profit for the period           -        -   14,228   16,521   30,749 
 
Unclaimed dividends             -        -        -       11       11 
 
Dividends paid to equity                 -          (16,390) (16,390) 
shareholders                    -                 - 
 
BALANCE AT 30 JUNE 2017    16,719   96,040  749,406   32,145  894,310 
 
STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHSED 30 JUNE 2016 
(unaudited) 
 
                         Ordinary    Share 
                            share  premium  Capital Retained    Total 
 
                          capital  account reserves earnings   equity 
 
                            GBP'000    GBP'000    GBP'000    GBP'000    GBP'000 
 
 
BALANCE AT 1 JANUARY       16,719   96,040  613,427   29,569  755,755 
2016 
 
Profit for the period           -        -   11,056   16,722   27,778 
 
Unclaimed dividends             -        -        -       24       24 
 
Dividends paid to equity                 -          (16,023) (16,023) 
shareholders                    -                 - 
 
BALANCE AT 30 JUNE 2016    16,719   96,040  624,483   30,292  767,534 
 
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2017 (unaudited) 
 
                            30 June 2017   30 June 2016     31 December 
                             (unaudited)    (unaudited)            2016 
                                   GBP'000          GBP'000       (audited) 
                                                                  GBP'000 
 
NON-CURRENT ASSETS 
 
Investments held at fair         986,691                        973,353 
value through profit or                         868,130 
loss* 
 
CURRENT ASSETS 
 
Receivables                        4,557         12,610           4,266 
 
Cash and cash equivalents         18,108          6,303          17,340 
 
                                  22,665         18,913          21,606 
 
TOTAL ASSETS                   1,009,356        887,043         994,959 
 
CURRENT LIABILITIES 
 
Interest bearing borrowings     (25,000)              -        (25,000) 
 
Payables                         (1,200)        (5,713)         (1,169) 
 
TOTAL ASSETS LESS CURRENT        983,156        881,330         968,790 
LIABILITIES 
 
NON-CURRENT LIABILITIES 
 
Interest bearing borrowings     (88,846)      (113,796)        (88,850) 
 
NET ASSETS                       894,310        767,534         879,940 
 
EQUITY ATTRIBUTABLE TO 
EQUITY HOLDERS 
 
Ordinary share capital            16,719         16,719          16,719 
 
Share premium                     96,040         96,040          96,040 
 
Capital reserves                 749,406        624,483         735,178 
 
Retained earnings                 32,145         30,292          32,003 
 
TOTAL EQUITY                     894,310        767,534         879,940 
 
NET ASSET VALUE PER SHARE      1,337,33p      1,147.75p       1,315.84p 
 
*Includes GBP139.2 million UK Treasury holding considered by the Board to be held 
in lieu of cash. 
 
STATEMENT OF CASH FLOWS FOR THE SIX MONTHSED 30 JUNE 2017 (unaudited) 
 
                                             30 June                     30 June                  31 
                                                2017                        2016            December 
                                                                                                2016 
 
                                         (unaudited)                 (unaudited)           (audited) 
 
                                                GBP000                        GBP000                GBP000 
 
 Cash flows from 
operating activities 
 
 Profit before tax                            30,857                      27,778             151,167 
 
 Adjustments for: 
 
 Gains on investments           (17,767)                    (14,550)             (128,792) 
 
 Finance costs                     3,288                       3,303                 6,657 
 
 Purchases of                  (180,266)                   (168,101)             (335,164) 
investments 1 
 
 Sales of investments 1          184,694                     170,145               346,228 
 
 Dividend income                (18,306)                    (18,373)              (32,841) 
 
 Interest income                   (683)                       (600)               (1,233) 
 
 Dividends received               16,525                      16,452                32,078 
 
 Interest received                   701                         917                 1,683 
 
 Decrease/(increase) in            1,470                     (8,284)               (1,231) 
receivables 
 
 Increase in payables                 30                       4,639                    95 
 
 Overseas withholding              (108)                                             (163) 
tax suffered                                                     - 
 
                                            (10,422)                    (14,452)           (112,683) 
 
 Net cash flows from operating                20,435                      13,326              38,484 
activities 
 
 Cash flows from 
financing activities 
 
 Unclaimed dividends                              11                          25                  24 
 
 Interest paid on                            (3,288)                     (3,287)             (6,587) 
borrowings 
 
 Equity dividends paid                      (16,390)                    (16,023)            (26,843) 
 
 Net cash used in                           (19,667)                    (19,285)            (33,406) 
financing activities 
 
 Net increase/(decrease) in                      768                     (5,959)               5,078 
cash and cash equivalents 
 

 Cash and cash                                17,340                      12,262              12,262 
equivalents at the 
start of the period 
 
 Cash and cash                                18,108                       6,303              17,340 
equivalents at the end 
of the period 
 
1. Purchases and sales of investments are considered to be operating activities 
of the Company, given its purpose, rather than investing activities. 
 
RESPONSIBILITY STATEMENT 
 
The Directors confirm to the best of their knowledge that: 
 
  * the condensed set of financial statements contained within the half-year 
    report has been prepared in accordance with the Accounting Standards 
    Board's Statement 'Half-Yearly Financial Reports'; 
 
  * the half yearly financial report includes a fair review of the information 
    required by Disclosure and Transparency Rule 4.2.7R of important events 
    that have occurred during the first six months of the financial year and 
    their impact on the condensed set of financial statements and a description 
    of the principal risks and uncertainties for the remaining six months of 
    the financial year; and 
 
  * in accordance with Disclosure and Transparency Rule 4.2.8R there have been 
    no related parties transactions during the six months to 30 June 2017 and 
    therefore nothing to report on any material effect by such a transaction on 
    the financial position or performance of the Company during that period. 
 
The half-yearly financial report was approved by the Board on 24 July 2017 and 
the above responsibility statement was signed on its behalf by: 
 
John Reeve 
Chairman 
 
 
Notes 
 
1.         Comparative figures 
 
            The financial information contained in this half-year report does 
not constitute statutory accounts as defined in section 434-436 of the 
Companies Act 2006.  The financial information for the six months ended 30 June 
2017 and 30 June 2016 has not been audited. 
 
            The information for the year ended 31 December 2016 does not 
constitute statutory accounts, but has been extracted from the latest published 
audited accounts, which have been filed with the Registrar of Companies.  The 
report of the auditors on those accounts contained no qualification or 
statement under section 498(2) or (3) of the Companies Act 2006. 
 
2.         Publication 
 
            This half-year report is being sent to shareholders and copies will 
be made available to the public at the Company's registered office and on its 
website. 
 
For further information please contact: 
 
 
Alastair Mundy 
Investec Fund Managers Limited             020 7597 2000 
 
 
 
END 
 

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July 24, 2017 12:22 ET (16:22 GMT)