Kernow Asset Management's commentary for the month ended September 30, 2023.
Last month, the strategy declined 0.2% amidst a busy earning season with a wide range of company outcomes.
September seemed to stretch as though an entire year had passed in one month. Our portfolio companies released 25 announcements. The companies' share price moves were diverse, with the short positions doing particularly well and insulating the portfolio from Metro Bank’s share price decline.
Read more hedge fund letters here
As reported in the media, Metro Bank's Advanced Internal Ratings-Based application for government approval has been delayed. Although we wouldn’t usually comment on this month’s news in a backwards-looking factsheet, we would highlight the comprehensive refinancing deal announced today by the bank.
In other portfolio news, Mondi Plc (LON:MNDI), a paper and packaging company, has become one of our top five largest holdings. It had an unexpected boost from a €775 million sale of non-core Russian assets, for which we had prudently anticipated zero return in light of recent government asset seizures. This 10% company gain appears likely to be distributed to shareholders. This industry is also garnering increased attention, following Smurfit Kappa's announcement of a partnership with WestRock to establish the world's largest publicly traded paper and packaging company, valued at nearly £16 billion.
Two other holdings within our top five largest positions reported results last month. Saga PLC (LON:SAGA) raised its expectations for full-year profits and confirmed its ability to meet its 2024 bond obligations. Galliford Try Holdings PLC (LON:GFRD) increased its dividend by 30% and reported a 9% growth in its order book, boosting its confidence for FY 2024. Notably, Galliford Try's investor roadshow has evolved from a few days to a two-week schedule, and has received growing interest, including from US investors. We were pleased to see positive reactions in the share price during the roadshow.
Meanwhile, three of our short positions revised their profit guidance downward. The resulting share price declines significantly benefitted our portfolio. In addition, we covered our short positions in Trustpilot Group PLC (LON:TRST) and Videndum PLC (LON:VID), which successfully reached the end of its catalyst. We continue to hold our short position in the mining sector, a company which is likely to run out of money without any operating assets.
Elsewhere, our largest short position received a markedly unfavourable audit report. The company was forced by its auditor to make revisions of over £80 million to its accounts. The auditors published a "qualified opinion", which is in itself a red flag, stating that "significant errors were found" and "significant deficiency identified during the previous audit period". They also found significant issues with a subsidiary. It is striking that management did not adequately address the auditor's concerns, and did not provide the additional evidence requested. The auditor asked the Board to intervene, but it did not comply.
Since its inception in November 2019, the Kernow strategy is up 26%, compared with the prevailing UK equity market, which has increased 17% over the same period. The collective upside in the portfolio is worth more than 242%.
- Book (well a Substack) of the month: A Beginner's Guide to Accounting Fraud by Leo Perry
- Good month for: Renewi PLC, up 53% after a bid approach
- Bad month for: Videndum PLC, down 37% on continued impact from Hollywood worker strikes
Last month Kernow Asset Management turned four years old. Over the years, we have grown and thrived, navigating through challenges and achieving new milestones. We extend our heartfelt gratitude to our valued team for their commitment, and, most importantly, to our exceptional clients for their trust.
We look forward to many more years of growth and continued success together.
Best regards
Alyx Wood
Chief Investment Officer
Kernow Asset Management
