Strong relative performance: Temple Bar

The managers’ value-focussed approach and strength of stock picking has led to strong relative performance…by Josef Licsauer

Overview

Ian Lance and Nick Purves formally took the helm of Temple Bar (TMPL) in November 2020 when the management contract was won by Redwheel, bringing extensive experience in UK investing and a strong track record in value-oriented strategies. Over their nearly four-year tenure managing TMPL, they’ve aimed to establish the trust as a go-to for value investing, centring their strategy on identifying companies they believe are undervalued by the market, trading significantly below their fair or intrinsic values. By investing in such companies for the long run, they argue it helps build in a margin of safety which can protect against unforeseen events and offer excess investment returns when the market eventually corrects these undervaluations (see Portfolio).

However, unlike traditional deep-value strategies, the managers will not entertain cheap businesses with little to no growth prospects and steer clear of those that are vulnerable to market disruptions or cyclical downturns. Their approach is selective, and whilst valuations are indeed fundamental to their stock selection process, they want companies with upside potential, demonstrating financial resilience, sustainable profitability, and the ability to consistently generate cash, which can be returned to shareholders through dividends or share buybacks. Following strong earnings growth in the first half of 2024, the board increased the second interim dividend by 20%. The shares now yield 3.6% on a historical basis.

This combination has proven a powerful source of return for investors, contributing, at the time of writing, to TMPL’s sector-leading Performance under the managers’ tenure, with particularly strong results over the past 12 months. Financials like NatWest, Barclays, and NN Group, despite being valued at depressed multiples, have remained operationally strong, consistently generated cash, and returned it generously to shareholders, ultimately boosting their share prices. TMPL’s strong relative performance has led to its Discount narrowing towards its five-year average, though it remains wider than the sector average.

Analyst’s View

 
One of the distinguishing features of TMPL is the managers’ commitment to a value-investing approach. We believe the current value dispersion in the UK market, coupled with the managers’ expertise, makes this attractive at the current juncture, and buying shares at a discount offers significant upside potential as the market corrects its mispricing over time. Moreover, combining valuation with an emphasis on quality, means the managers can identify operationally robust businesses that generate strong earnings and consistently return value to shareholders. We think this approach provides TMPL with considerable total return potential and, to date, has proven a powerful source of return, contributing to TMPL’s sector-leading Performance under the managers’ tenure.

However, some investors might be hesitant to embrace a value-oriented approach, especially given the previous dominance of growth strategies over value in the years leading up to the pandemic. Should growth strategies regain their dominance, it’s likely TMPL will fall behind, a risk to bear in mind. However, the managers acknowledge that their approach isn’t designed to outperform in every market environment but rather serve a specific role within a portfolio—providing long-term investors with access to a differentiated portfolio of predominately undervalued UK businesses which have significant upside potential. We also think this makes TMPL a potentially good counterbalance to growth-heavy portfolios.

For income investors, we think the improved revenue reserves and the exposure to businesses with strong earnings potential, means the trust is on a more sustainable path for dividend growth. Overall, the managers have leveraged their experience across multiple market cycles to build a diversified portfolio of attractively valued businesses seemingly well-positioned to benefit from the catalysts driving the realisation of value in the UK.

Bull

• Seasoned managers, experienced in value investing in the UK market
• Wide value dispersions in the UK market should give plenty of stock-specific value opportunities
• Relative performance has been strong under current managers’ tenure, supported by stock selection

Bear

• Value-oriented investment approach is likely to lag a growth-driven market
• No guarantee discount to NAV will narrow, and it could widen
• Concentrated, high-conviction portfolio can add risk

See the full research on Temple Bar here >

Disclosure – Independent Investment Research

This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.