London, UK, 12 April 2024

Edison issues review on Lowland Investment Company (LWI): Is the tide turning?

Lowland Investment Company’s (LWI’s) unconstrained, multi-cap investment policy differentiates it from most peers in the AIC UK Equity Income sector. It offers investors broad market exposure, outside of the large, traditional ‘income stocks’ at a 13% discount to NAV. The underperformance of small- and mid-cap companies versus larger peers has slowed and a turnaround would be very positive for LWI. Portfolio returns are already benefiting from acquisition activity, spurred by low valuations, and LWI has been outperforming its benchmark for the past 18 months. Meanwhile, quarterly DPS is running at 4.9% above the previous year, an annualised rate of 6.4p, reflecting a prospective yield of 5.3%.

LWI has a strong record of outperforming its broad market benchmark and sector peers over the long term. However, the marked underperformance of domestically focused businesses, of which there is a strong small- and mid-cap (SME) company representation, since Brexit, has negatively affected nearer-term performance. With typically no more than 50% invested in the largest stocks versus a benchmark weight of more than 80%, the underperformance is now apparent in the 10-year data. There are indications that the tide may be turning. The margin by which overseas-oriented, often defensive larger stocks have outperformed SME stocks has narrowed over the past year and in its fiscal year to September 2023 LWI outperformed the benchmark by 3.4pp, ahead of the market in every market cap segment. Since September, sensing a turn in the interest rate cycle, mid-cap stocks have outperformed the market and LWI too, albeit slightly. While the valuation opportunity in SME companies has yet been widely recognised in the market, low valuations are being increasingly underpinned by takeover activity, including several LWI holdings The investment managers note that history suggests that buying good stocks when they are on low valuations enhances long-term returns. Moreover, they believe that a tough economic outlook is more than priced into share prices and note that a recovery towards historical norms of profits and valuations would be a potent cocktail for returns. Meanwhile, the shares provide a dividend yield and are trading at a 13% discount to NAV.  

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