Discounts across the investment trust sector have widened –- dramatically at first – but in most cases have now narrowed back in somewhat. At first glance, the listed private equity (LPE) sector has widened most of all, and remains on a significantly bigger discount than other sectors. Does this present an opportunity?
Companies: OCI HGT ICGT NBPU AGT
AVI Global Trust (AGT – previously British Empire Trust) seeks to generate capital growth for investors through investment in a reasonably concentrated portfolio of listed companies whose shares trade at a discount to the managers’ estimate of fair value. Under current manager Joe Bauernfreund, who took over in 2015, AGT has evolved its investment strategy, looking to increase portfolio concentration, utilise attractive borrowing rates on long-term debt, and place a greater emphasis on identifying a catalyst for value realisation (amongst other factors). Holdings can be categorised as either: 1) closed-ended funds, 2) familybacked holding companies, or 3) asset-backed special situations, which currently consists primarily of Japanese cash-rich operating companies. The exposure to Japan has been gradually increasing in recent years, as AVI believes there is a substantial investment opportunity in their investment strategy in this area, so much so that they launched a separate investment vehicle focussing solely on this opportunity. Whilst focussed on accessing high-quality assets, the managers of AGT are cognisant of the price they pay for these holdings and look to acquire them at substantial discounts to their assessment of fair value. Presently, the look-through double discount to ‘fair value’ stands at c. 50% (as at 30/04/2020); as discussed in the Portfolio and Performance sections, this is anomalously wide relative to AGT’s history. Although past patterns do not always repeat, previous instances where the double discount reached this level tended to lead to periods of outperformance. Gearing has been tactically utilised in recent months, and the team tell us the recent market sell-off has created new buying opportunities in high-quality assets.
Companies: Avi Global Trust
The advent of social media has led to an increase in activism of all types, the like of which has not been seen since the penny press changed the course of American history in the 1800s. From #MAGA to the Arab Spring, platforms such as Facebook have had a profound effect on politics and society. Everywhere, we are invited to support campaigns on social media. Where once it would have taken a petition (which requires a pen, frayed paper, and someone to hand it around at the very least), it is now as easy as “liking” at the touch of a button any cause on Facebook to lend your support. As a result, individuals in society are ever more expected to engage on topics and issues that affect them (and even those that do not). In a further extension of democracy, rather than have our elected representatives debate and decide issues on our behalf, technology enables us to engage ourselves in the argument and help contribute to the decision-making process. And having tasted the forbidden fruit, it seems unlikely that things will ever be the same again. We are all becoming activists in one way or another. Absolutely, we may not have the same passion for a subject that the leader of a campaign might have. But we are increasingly happy (or indeed desirous) to have our views sought, and vote taken. In the same way, leaders of organisations are having to adapt. No-longer can they make decisions and feel insulated from the people who gave them the mandate. There is now a much wider grey area they have to navigate, and woe betide them if they alienate their electorate!
Companies: TPOU AGT AJOT
AVI Global (AGT- previously British Empire Trust) seeks to generate capital growth for investors through investment in a reasonably concentrated portfolio of listed companies whose shares trade at a discount to the manager’s estimate of fair value. AGT is managed by Joe Bauernfreund, CIO of Asset Value Investors. With a history stretching back over 130 years, this is one of the oldest trusts in the UK, and has seen gradual but ultimately substantial changes to the investment strategy over this time period. Under manager Joe Bauernfreund, who took over in 2015, AGT has evolved its investment strategy, looking to increase portfolio concentration, utilise attractive borrowing rates on long-term debt, and place a greater emphasis on identifying a catalyst for value realisation, amongst other factors. Holdings can be categorised as either: 1) closed-ended funds, 2) family-backed holding companies, or 3) asset-backed special situations, which currently consists primarily of Japanese cash-rich operating companies. The exposure to Japan has been gradually increasing in recent years, as AVI believes there is a substantial investment opportunity in their investment strategy in this area, so much so that they launched a separate investment vehicle focusing solely on this opportunity. Despite having outperformed its benchmark under the current manager, AGT has remained fairly stubbornly at a discount to NAV. The board has undertaken share buybacks, and there is evidence that they have been successful at reducing discount volatility in recent years, as detailed in the Discount section. On a look-through basis (i.e. factoring in the underlying discounts on the various holdings), there is a substantial double discount of c.37%. Whilst a number of AGT’s holdings are listed in the UK, it is truly global in its outlook, and has very low exposure to the UK on a look-through basis. This tends to make it sensitive to any fall in sterling (i.e. a decline in sterling tends to positively impact performance), though this is partially mitigated by borrowings in foreign currencies.
Japan’s Prime Minister Shinzo Abe is likely to be re-elected leader of the country’s Liberal Democratic Party on 20 September. Given the parliamentary strength of that party and the fragmentation of the opposition, this means he is likely to become the longest-serving prime minister in Japanese history. This unprecedented political stability has allowed Abe to implement radical corporate governance reforms, which have made Japan a much more attractive place to invest in the opinion of many managers, and which may not have been fully priced in to the market. For, despite the growing likelihood of the UK crashing out of the EU without a deal, and despite the fact a Marxist is closing in on Number 10 Downing Street, Japanese equities are still trading on a discount to British stocks. The reforms have not finished yet, and in the opinion of many managers working in the country will cause radical changes in Japan as a place for investment, which, along with Japan’s world-leading companies, makes the country an interesting place to consider.
British Empire invests in closed-ended funds, family-owned holding companies and asset-backed companies which they believe are trading well below intrinsic value, looking for situations with a catalyst to unlock the value. Frequently this catalyst is their own activism, and they are an activist shareholder in many of their holdings. The trust has top quartile NAV returns in the global sector over three years. Over the past year the trust has been boosted by holdings in Japan, where the managers find exciting opportunities in businesses with inefficient balance sheets and the opportunity for activist shareholders to unlock that value. The good returns follow a series of changes made by Joe Bauernfreund when he took over as sole named manager in October 2015: he has made the portfolio more concentrated, focused more on closed-ended funds with clearer routes to a narrowing discount, and taken on extra, cheaper gearing. The discount remains significantly wider than its sector peers, although there has been some narrowing in 2018.
Closed-ended funds have outperformed open-ended funds in the major equity sectors since 2000. Unlike the latter, investment trusts have outperformed their benchmarks net of fees too, according to research from academics at Cass Business School. According to research recently published by Andrew Clare and Simon Hayley, one major reason for trusts outperforming was that they hold more illiquid assets, namely smaller companies. They stripped out this effect in order to calculate the alphas generated by managers running these two types of investment fund (because overweighting higher beta areas, like small caps, should lead to extra returns irrespective of manager skill). However, they found that investment trusts still showed significant outperformance over their benchmarks and open-ended peers. Interestingly, gearing was not a reason for the outperformance, on their analysis, although market timing and share buybacks did contribute. The fact that closed-ended funds held significantly more in smaller companies is no accident: the structure allows managers to take larger positions in less liquid parts of the market and be truly long term about investment, both of which favour investing more in small and mid caps. While it makes sense to exclude a higher small cap weighting from the alpha attributed to a set of managers, as Clare and Hayley have done, when comparing the relative merits of open and closed ended funds it is clearly relevant. This is particularly true given that one cannot invest passively in small caps due to precisely the same liquidity issues. We drill into the details of the research before asking whether closed-ended funds will retain their advantages in the future. We find reason to be optimistic they will, and consider some trusts which display the key characteristics the research highlights.
Companies: AGT SMT ASL RCP
British Empire Trust (BTEM) has a highly-active, benchmark agnostic portfolio of global equities that follows a value-orientated investment approach. The trust differs from most global funds due to the types of companies that it focuses on, which can broadly be split into three buckets: family-controlled holding companies, closedended funds and asset-backed special situations – and all of those companies have the common feature of owning portfolios of businesses or assets, either listed or unlisted, that can be independently valued. Manager Joe Bauernfreund, chief executive and chief investment officer of AVI, is supported by four analysts and has solely responsible for the portfolio since October 2015 (though Joe has worked on the portfolio since 2002). He honed the investment process at the time and this has been a major contributor to the trust’s recent outperformance. Though it has a strong long-term track record (having more than doubled the returns of its peers and the MSCI AC World index over 20 years to the end of December), it struggled in the years following the global financial crisis due to the underperformance of value stocks and the trust’s historic underweight to the US market. However, when Joe assumed sole responsibility for the portfolio, he honed the process, concentrating the portfolio and increasing exposure to stocks where there is a specific event or catalyst for value to be realised. Since October 2015 to the end of 2017, the trust’s NAV total returns have been 64% - meaning it has comfortably outperformed its average peer, the MSCI AC World index and its own benchmark, the MSCI AC World ex USA index over that time. Though much of that outperformance was generated in 2016 (a year when value investing made a brief return to form following a prolonged period of doldrums), the trust managed to outperform the MSCI AC World index over the course of 2017 with NAV returns of 14.9% despite a clear style headwind owing to the team’s stockpicking and recent increased exposure to Japan.
In a report early last year, we analysed the argument surrounding whether value investing (a style that has significantly underperformed relative to growth investing) was about to make a sustained comeback. Simply put, value investing involves buying shares in companies that the managers believe are ‘cheap’ relative to the wider market and their own histories. Many value managers, however, will only buy ‘cheap’ stocks where they have pinpointed a potential catalyst they believe will lead to share prices increasing (by analysing metrics such as cashflow, leverage, balance sheets and external factors) in order to avoid ‘value traps’ - stocks that are still in a period of decline or worse, are heading for total collapse. Growth investing, again put simply, means buying companies that are displaying above average earnings growth. Most growth managers will follow a GARP (growth at a reasonable price) approach, which means they don’t mind paying higher than average valuations for a stock if they believe future earnings growth is undervalued by the wider market. In recent times especially, value investing has become synonymous with more cyclical stocks such as mining, energy and banks, while growth investing has meant a focus on more defensive companies (with futures which aren’t dependent on economic growth) such as utilities, telecoms, tobacco and other consumer goods stocks. Those who predicting that value stocks were on the verge of a new era of outperformance were proved wrong (or too early), as they generally underperformed growth over the course of 2017. However, in our report last year (and with the proviso that the past is no guide to future returns), we found that had been a correlation between the relative performance of value versus growth stocks and the trajectory of UK government bond (or gilt) yields, with value generally underperforming when yields fell (or when bond prices rose) and outperforming when yields rose (or when bond prices fell). Government bonds have delivered almost unprecedented risk-adjusted returns over the past three decades due to factors such as credit boom prior to the global financial crisis and ultra-low interest rates over the past 10 years. However, many believed bond yields would rise last year (as they did in 2016) as inflation picked up in the UK following Brexit-induced weakness in sterling, coupled with Donald Trump’s commitment to economic stimulus. However, despite these two strong forces at work, 10-year gilt yields fell from their peak of 1.54% in late January 2017 to 1.26% by the end of the year (representing a fall of c.20%). We don’t claim to be experts in global fixed income markets, but the commonly-held view among those who do, is that bond yields will rise over the coming years (though as we mentioned last year, many have incorrectly called the collapse of the bond market for a number of years now…). While this might not be repeated, and again like last year, our analysis shows that value stocks have historically outperformed growth when bond yields have risen. However, as we highlight in this report, it is surprising how little exposure the ‘average’ UK investor has to “value” as a style, with the large majority of inflows into equity funds heading towards funds with a clear “growth” or “quality” bias. As such, if this long-anticipated revival in value investing does indeed occur – most investors look likely to miss out, or worse, be hit by capital losses.
Companies: AGT WTR ASL TMPL GVP
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Cenkos’s first half results demonstrated the benefits of its flexible operating model and strength of its client relationships. While challenges related to COVID-19 are set to continue, Cenkos’s focus is on growth companies and its fund-raising year-to-date has had a greater emphasis on corporates financing M&A and growth opportunities rather than for defensive purposes. This should prove more sustainable although, as always, the timing of transactions in the encouraging pipeline reported remains uncertain.
Companies: Cenkos Securities plc
Avation is a lessor of 46 commercial aircraft to a diversified airline client base. This morning, the group has released results for the 12-months to 30 June 2020, which illustrate the challenges faced by its customer base as a result of Covid-19, as well as the corrective actions taken by the Board that have resulted in profitability being maintained in the year as a whole. Loan repayment deferrals of c.$24.4m were obtained in the period, in comparison to $13.1m short-term rent deferrals being granted to airline customers and thus emphasising management's focus on liquidity during an unprecedented period for global airlines. Avation again reports that it is currently reviewing alternatives in relation to the 6.5% senior notes due in May 2021. Whilst at this point our forecasts remain under review, and near term challenges remain across the industry, we believe that demand for aircraft from lessors such as Avation will increase in time as a result of airlines being even more reliant upon aircraft leasing firms due to the retirement of older aircraft during 2020 in combination with much weaker balance sheets that are unable to support direct aircraft purchases.
Companies: Avation PLC
Record’s Q221 trading update confirmed that its new $8bn dynamic hedging mandate has started and that, prior to this, assets under management equivalent (AUME) expanded by 4% in the quarter. The group continues to work on developing new products and is deploying technology to enhance its ability to deliver these and existing products cost effectively.
Companies: Record plc
Primary Health Properties (LON:PHP) is a real estate investment trust (REIT) that holds a portfolio of 510 primary health facilities in the UK (92% of the portfolio by value) and Ireland (8%). The business model is to manage the properties for rental income and to grow the portfolio over time. The
Companies: PHP PP51 PHPRF
In another upbeat update, GHT has confirmed that the business is tracking in line, in turn being driven by strong traction with key customer, ANZ. Here, new sales have driven a 20% increase in contracted customer revenue to >£11m in FY21. As a strategic partner (deeply involved with GHT in bringing new Clareti banking services to market) this extra investment is very encouraging, as it’s indicative of these services‘ strong future potential. Also announced today – GHT state that its transition to a recurring subscription model (commenced just two years ago) is now complete and that ARR now stands at £11.9m, ~+16% annualised organic growth since FY20 y/e. In a tough new business environment, we view this as a highly credible performance. It’s also worth noting that management reference remaining pipeline opportunities, these would further benefit strong forwards visibility – already £22.4m for FY21. Given this – and also as sign of confidence – today we reinstate FY21 forecasts. We look for a reacceleration in top-line growth: +16% y/y to £28.7m at a Group level, in turn driven by c.+24% organic growth in Clareti, to £20m. For valuation – with Clareti still in its relative infancy – we continue to view a sales multiple as most appropriate. Here, we note that peers typically trade in a 5-7x range vs. GHT at 4x our FY21 estimate. This suggests 25-75% upside to fair value for this disruptive company, with a multi-year growth opportunity still ahead.
Companies: Gresham House
As expected following the US banks’ releases, Barclays’ third quarter results saw a sharp reduction in provisions build-up while the emergence of delinquencies has been delayed by the State’s supporting measures. Management continues to expect a reduction in the cost of risk next year. It remains to be seen if this guidance is capable of withstanding new lockdowns or a no-deal Brexit.
Companies: Barclays PLC
Following on quickly from its impressive full year results, these interim results confirm that our confidence for growth in the Program Management business was not misplaced.Contracted Premium increased 95% YoY (and 12% ahead of December 2019) to $925m –a stone's throw away from the $1bn 2020 guidance set in 2018. At the same time, Gross Written Premium (GWP) grew 42.6% to £247.2m, resulting in Economic EBITDA turning positive, at £0.8m compared to a loss of £0.3m in 1H19
Companies: Randall & Quilter Investment Holdings Ltd.
Tatton has reported an in-line H1 financial performance: revenue totalled £11.0m (vs N+1Se £10.9m) and £5.0m adj. EBIT (50% N+1S FY21e). AuM grew by 3.4% to £7.8bn as net inflows continued throughout H1 (+£328m) – a positive performance given the backdrop. Paradigm, particularly in Mortgages, has been resilient post-lockdown. Having delivered 50% of our earnings forecast for FY21e, there is potential for upside. However, we leave our forecasts unchanged and a margin for safety as we remain alive to potential external risks/volatility.
Companies: Tatton Asset Management Plc
The interims confirmed that Covid-19 was minimally disruptive operationally in H1 20 and, ironically, may have improved both of R&Q’s divisions’ mediumterm trading outlooks. As the pandemic and other industry events have generated significant losses for insurers, they have created the current ‘hardening’ market driving demand for Legacy and Program Management.
Agronomics has announced it has conditionally raised £10.0m gross from an equity issue at a price of 6.0p, which represents a 6.8% premium to the most recently reported NAV per share of 5.62p. Assuming the company's post-raise cash balance is £8.15m, after repaying a £1.9m bridging facility, we estimate the new NAV per share to be c5.7p. We see significant potential in the cultivated meat sector and believe Agronomics is well positioned to support this developing sector and generate strong returns from these investments. We see upside in Agronomics' portfolio and have today initiated coverage with a Buy recommendation.
Companies: Agronomics Limited
ANGLE plc (AGL.L): Acceptance of FDA submission | Feedback plc (FDBK.L*): Partnership agreement | Open Orphan (ORPH.L): Human Challenge Study Model contract with UK Government
Companies: AGL FDBK ORPH
Agronomics is an investment company building a portfolio of investments in the developing alternative protein sector. The company is focused on early stage investments, offering attractive valuations and significant upside potential. Importantly, we believe Agronomics represents an opportunity for public investors to gain access to early stage private companies, which might not otherwise be available. We expect the cultivated meat sector to be driven by a number of global mega trends that will increase public awareness of the issues the sector is aiming to overcome. We see strong upside in Agronomics' existing portfolio and initiate coverage with a Buy recommendation.
Secure Trust Bank (STB) reported H120 PBT of £5.1m (vs £18.1m a year ago) and a 3.0% ROE. Income grew 4% y-o-y, but impairments almost doubled, and payment holiday charges also hurt. STB notes that since the lockdown ended, business has been rebounding. Its robust capital (CET 13.5%), business model and proven agility allow it to react to the changing lending environment. STB currently trades on a P/BV of 0.49x, reflecting sentiment more than fundamentals given its profitability track record and successful model. Our fair value estimate is 1,704p per share, down from 2,428p..
Companies: Secure Trust Bank Plc
Litigation Capital Management has announced FY20 results with gross profit up 7% to A$21.7m and PBT of A$9.2m, slightly behind expectations albeit the Group had already flagged that delays to 3 cases during the year would result in resolutions in FY21, thereby impacting FY20 results. That said, excellent strategic progress through the year and good news flow as well as increasing scale suggests more value to come. Reiterate buy
Companies: Litigation Capital Management Ltd
There was an eclectic mix of property companies to feature in the top price movers for September. Top of the tree was private rented sector and residential development specialist Sigma Capital Group, with a 34.2% rise. The group launched a £1bn joint venture with EQT Real Estate, the real estate platform of global investment firm EQT, to deliver 3,000 private rental homes in Greater London. Micro-cap investor Panther Securities also hit double-digit gains, while Macau Property Opportunities saw an uplift in its share price after announcing debt refinancing and a disposal. CLS Holdings, the investor in offices in Germany, France and the UK, continued to see a recovery in its share price – which has risen 15.1% in the last three months. Off the back of solid results, Berlin residential landlord Phoenix Spree Deutschland saw its share price gain 7.2%. Schroder REIT’s share price rose 6.6% in the month as it embarked on a share buyback programme, while Irish commercial property investor Yew Grove REIT also saw positive shareholder reaction to amending its investment strategy to increase its target loan to value ratio to 40%.
Companies: SUPR DIGS CRC PSDL ASEI TPON RLE UKCM BREI BCPT RGL SIR SLI TOWN CAL