Witan - Jump to "its"

04/11/1999

Rating Remains Buy

Price: 4O4.½p

Witan is the third largest international generalist investment trust in the sector. It has a solid long-term track record. Over the ten years to 30 September 1999, NAV rose 143.0% which compares favourably with the rise of 126.3% in its composite benchmark index. Witan's managing director, Christopher Clarke, is supported by an extremely solid and highly respected team of Henderson fund managers, including David Thornton, Richard Smith and Stephen Peake. Witan is one of the very few investment trusts to have its own marketing manager, James Budden, and he has developed a wrapper savings product specifically for Witan. "Jump" is aimed at encouraging parents and grandparents to save for their children and grandchildren. Clarke is an enthusiastic supporter of using buy-backs to enhance NAV, although by the end of September only 2.8 million shares had been repurchased. The trust still has authority to buy back a further 56.3 million shares, equivalent to 14.2% of the issued share capital.

· The company's investment portfolio has a core 60% UK weighting; the current weighting is 57%, which is higher than the peer group average. It is made up of a combination of mainstream blue chip equities and a 'Richard Smith' portfolio of mid and smallcap stocks. As a result, the portfolio tends to be underweight in the large FTSE 100 stocks. UK stock selection continues to be good, in our view.

· The European portfolio (11%) is similarly split between two portfolio managers: John Botham, who runs the largecap, mainstream portfolio and Stephen Peak, who runs the smaller companies and special situations portfolio. European stock selection has been very strong this year, in particular in the smaller and special situation portfolios. Many of these stocks have performed well after disappointing last year.

· Asset allocation over the course of the last year has been a negative for performance, in particular the underweight US exposure. In line with most other international trusts, the trust had adopted what we regard as too defensive a US strategy and more importantly was underweight the technology sector. The asset allocation at the end of September was UK 57%, North America 17%, Europe 10%, Japan 7%, Far East 3% and Cash and Bonds 5%.

The trust continues to underweight both the Far East and Japan. Funds have recently been added to the Japanese portfolio where stock selection has been positive. Clarke regards 17,000 as being the lower end of the Japanese trading range.

Witan is unusual in that it pays a fixed management fee that is reviewed on an annual basis rather than being charged a percentage of funds under management. For the year to 1 January 2000, the fee was set at £3.5 million. In addition, Henderson Investors is paid a performance fee at the rate of £100,000 for every 0.1% outperformance of the composite benchmark index subject to a maximum payment of £0.5 million. What this means is that, unlike all other investment companies, the management group is not disadvantaged by actively repurchasing shares and therefore reducing the size of funds under management.

The AITC's generic campaign is geared towards the international generalist sector and, as the third largest generalist trust, Witan should benefit more than most from the campaign. Witan is one of the few investment trusts to have a marketing manager to work solely on developing the 'Witan' brand name and product. This includes raising the profile of the fund, increasing the retail demand and developing the Witan website (www.witan.co.uk). James Budden has therefore developed a wrapper product specifically for Witan.

"Jump" is aimed at encouraging both parents and grandparents to save for their children and grandchildren. It is effectively a flexible monthly or lump sum savings scheme where the underlying investment vehicle is Witan. "Jump has been developed specifically with saving for children in mind. The period of childhood lends itself perfectly to the benefits provided by long-term investment. Jump's investment objective of long-term capital growth combined with minimal risk means it is an ideal vehicle for those who want to secure their children's financial future." Including the AITC contribution, the board has committed itself to doubling the amount of money spent on advertising over the course of the next year. In our opinion, this can only be positive for the discount.

Witan should also benefit from the Henderson Investors' advertising campaign. As discussed in both City of London and Henderson Technology reviews, the Henderson "its" campaign coincides with the re-launch of the Henderson Investors' brand name.

Christopher Clarke is enthusiastic about repurchasing shares to enhance the NAV. He argues that if it is asset enhancing, then it is right for shareholders. By the end of September however, the company had only repurchased 2.8 million shares, equivalent to 0.75% of the initial issued share capital, generating an uplift of £1.9 million. The company has authority to repurchase 53.5 million shares, which at current prices would cost £210 million and would generate an NAV uplift of £33.8 million, equivalent to 0.9p per share.

Source: Deutsche Bank

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