J.P. Morgan Cazenove (JPMC) analysts have downgraded Alastair Mundy's Temple Bar investment trust to 'neutral', after finding it was the most at risk UK equity income offering to dividend cuts despite trading on one of the highest ratings in the sector.
Investment company analysts at JPMC dug into the portfolios of constituents of the Association of Investment Companies' (AIC) UK Equity Income sector to find the most and least affected by dividend cuts that have already and may in future be announced.
The study found almost half (47%) of Temple Bar's investee companies are currently not paying dividends to shareholders, with the next worst affected, Lowland, at 40%.
A further stress test of portfolios and revenue reserves allowing for existing dividend cuts showed Temple Bar would also burn through almost half (46%) of its reserves, compared to a sector average 19%.
Despite that, and while admitting it is difficult to know what the net asset value is today given market volatility, analyst JPMC Christopher Brown estimated the trust currently trades on a premium of around 5%.
That, he concluded, "looks expensive relative to peers, in our view", leading Brown to downgrade its rating from 'overweight' to 'neutral'.
A few weeks ago, the board of Temple Bar said it had agreed with Mundy to significantly increase the portfolio's liquidity by eliminating its gearing level, which had started 2020 at 8%, by exiting positions in some of its most cyclically exposed stocks.
The decision was brought about by the coronavirus outbreak, the board explained, "and the [subsequent] extreme market volatility [which] has proved an exceptionally difficult backdrop for the portfolio with many of the trust's holdings falling significantly".
The offloading of the more cyclical holdings, the board added, maintains "much of the sensitivity to a market, and in particular to a value, recovery" that Mundy had previously positioned the trust for.
As at 7 April, Temple Bar had lost 46.2% year-to-date in share price terms, compared to losses from its FTSE All-Share index benchmark and AIC Equity Income sector peers of 24.5% and 26.7% respectively, according to data from FE fundinfo.