In recent years smaller investment trusts have been under pressure. The demand for smaller vehicles has been reduced by two factors: the consolidation in the wealth management industry and the increasing prevalence of centralized buy lists used by DFMs and advisers. If a large amount of money is being managed to a model, then allocations can be impossible to deal into a small trust. Anecdotally, the lower limit of viable size for professionals has been rising. £200m is a more realistic cut off point than £100m, and even that is not enough for some. The lower charges and greater liquidity of larger vehicles also makes them more attractive in the current environment. The COVID-19 pandemic has unleashed forces which seem to be increasing this pressure. Lower demand for assets has been caused by concerns about market direction and worsening personal circumstances, reducing the ability or willingness to invest. This trend is visible in flat investment trust industry assets over the first half of 2020. In addition we see this trajectory in the widening of the average discount in the universe from c. 1.9% at the end of January to c. 8.6% by the end of June – even if certain assets seen as invulnerable to the crisis have bucked this trend. Wide discounts can bring the long-term viability of a vehicle into play. Whereas the lack of investment demand creates greater competition for capital, which could further starve the smallest trusts of attention. However there are many investors who do not have the same liquidity restrictions as large, consolidated wealth management businesses operating model portfolios or buy lists. These include wealth managers with greater discretion over which funds they can use for individual clients, and individual retail investors managing their own money. For them the 50% of investment trusts which have less than £200m in market cap offer a variety of opportunities, which their peers can’t or won’t access. While some smaller trusts follow similar strategies to larger trusts, others are clearly differentiated and offer a way to diversify asset exposure of sources of alpha. Moreover the pressures of the COVID-19 pandemic could lead to an alternative source of return: wind ups or mergers which close persistent discounts. There has been a spate of recent corporate actions which show that some boards are willing to take extreme action, including the merger of Perpetual Income & Growth and Murray Income. While these two trusts both have over £500m in net assets, we think the boards of some smaller trusts could be considering this approach. The board of the £24m JPMorgan Brazil has recommended that shareholders vote against continuation at its 17 September annual general meeting.
Companies: BRLA AIE BEE HOT AJOT MIGO CCJI
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
Since IPO in October 2018 to end of December 2019 (first full accounting period) AJOT has delivered a NAV total return of +14.3% vs +7.9% total return generated by the trust’s benchmark MSCI Japan Small Cap Index (both in sterling terms). This outperformance has been achieved by a high degree of corporate activity with ten companies announcing share buybacks over the period and three were subject to takeovers. AJOT has enjoyed an average premium rating of 3.5% since IPO and this has enabled the Board to issue a further 34.9m shares via tap issues at small premiums to the prevailing NAV. The company has recently stated that they are exploring further equity issuances to enable the manager to exploit further investment opportunities.
Companies: AVI Japan Opportunity Trust
This time last year the team at Kepler Trust Intelligence (KTI) chose their personal ‘top picks’ within the investment trust universe for 2019. The aim was for each member of the team to choose the trust they believed would perform best from an investor’s point of view; i.e. in share price terms rather than NAV. Any trust could be selected, regardless of whether it was equity-focused or not. Overall the year was a prosperous one for those brave enough to hang on throughout. The MSCI World Index (in sterling terms) rose by 22.4%, with the US the best-performing major market. The S&P 500 rose by 26.4%, while the FTSE 100 and FTSE 250 were up by 17.3% and 28.9% respectively. The DAX and MSCI Emerging and EURO STOXX 50 also increased. In terms of currencies the pound sterling ended the year roughly where it started relative to the dollar. This has masked what has actually been quite a volatile period for both currencies. The same pattern has been seen with sterling versus the yen, which started the year at around 140 and has ended at a similar level, around 143. What may surprise some investors is that sterling has appreciated relative to the euro by 5.9%; once more not without volatility, and with much of the gain coming in the second half of the year.
Companies: KIT STS AJOT TRG MWY
AVI Japan Opportunity (AJOT) invests in Japanese small-cap stocks. The investment strategy aims to generate strong long-term returns through investment in companies which are both extremely cheap, and which retain significant excess cash and listed equity investments on their balance sheet. The trust uses shareholder activism to persuade management to make shareholder-friendly changes to governance in order to boost returns. The trust was launched in October 2018 and is managed by Joe Bauernfreund, also manager of the £1.05 bn AVI Global Trust. AVI launched AJOT specifically to access a particular opportunity set arising from changes in the regulatory approach to corporate governance in Japan, which they believe can catalyse a valuation re-rating amongst a group of very cheap stocks. AJOT is activist in its approach, and seeks to constructively deal with company management to improve shareholder returns. In this regard, they increasingly believe they are pushing on an open door. Not only have market regulators and the Japanese government (via the ‘third arrow’ of Abenomics) strongly encouraged businesses to reform in this manner, but, increasingly, huge institutional mandates in Japan are doing so as well. The portfolio itself trades on a discount to the wider Japanese small-cap market, which itself trades at a discount to other global markets. This is before balance sheets are made more efficient. Greater balance sheet efficiency would further increase the valuation opportunity, and AVI have opted for a closed-ended investment structure in order to best capture this opportunity. Further details of the valuation opportunity can be found in the Portfolio section. Having consistently traded at a premium since launch, the current AJOT premium stands at around 0.5% (as of 8 November 2019). Strong investor demand and the relatively small size of the portfolio have contributed to the persistence of the premium. AJOT operates a discount control mechanism, with significant capacity to buy back shares, and also offers investors the opportunity to realise their position at NAV (Net Asset Value) after four years have passed since launch.
The most terrifying words in the English language are, or were at least according to the late president of the United States Ronald Regan: "I'm from the government and I'm here to help." and for investors in global smaller companies, this could be prescient. Most investors into smaller caps are attracted by the prospect of exponential business growth. Young companies with innovative products are supposed to offer a disruptive threat to established companies, with huge potential markets to grow into. However, developments in society and politics could be calling into question the ability of smaller companies to generate the same excess returns in the coming decades. The chief issue is regulation: while regulation is often mooted as in the interest of society at large, there is evidence that in recent years the chief beneficiaries of regulation have been the large players in existing industries, who are better able to adapt to the increasing costs. In this study we consider how the regulatory burden is affecting markets around the world and what it means for investors in the various regions.
Companies: JUS USA JEO MINI AJOT
AVI Japan Opportunity Trust (AJOT LN) raised £80m of gross equity proceeds in October last year, and since the IPO has become fully invested plus entirely drawn on its RCF of £10m. AJOT has just completed a £13m follow-on fund raise which started trading yesterday. This allows the company to exploit further investment opportunities. They have already built a portfolio of 29 Japanese equities that share the following characteristics: high quality companies, with stable operating businesses, that are significantly overcapitalised. AVI believe that these companies offer considerable capital upside as potential corporate governance reform unlocks some of the long-trapped value from the myriad of cross holdings. Within the constraints of Japanese business culture, AVI have and will continue to engage with their investee companies to help them deliver enhanced shareholder value. In the seven months since IPO there have already been early signs of success.
If there is one way in which Japan leads the world it is in “Japanification”. That is - it effectively invented it! The concept of “secular stagnation” is the contention that the developed world is entering a period of systemically lower growth and lower inflation in comparison to past decades. One way of characterising “secular stagnation”, is that it is the outcome of similar pressures which the Japanese economy suffered in the 1990s and 2000s. The most important of these is demographic decline, while Japan also suffered a huge boom and bust which left “zombie” companies with high amounts of leverage and limited long-term viability, keeping GDP growth below its potential due to entrenched inefficiencies. In our view, Japanese companies have developed strategies and technologies which have the potential to become crucial for those in countries following it down this path. In this piece we consider the attractions and dangers of a long-term allocation to Japan and discuss why adding to exposure now, in a contrarian fashion, might be prudent. We also assess some of the more attractive trusts exposed to this opportunity
Companies: Aberdeen Japan Investment Trust AVI Japan Opportunity Trust
AVI Japan Opportunity (AJOT) invests in Japanese small-cap stocks, aiming to generate high long-term returns by taking advantage of extremely cheap valuations in that part of the market but also using shareholder activism to supercharge returns. The £78m trust, launched in October 2018, is run by Joe Bauernfreund, also manager of the £900m British Empire Trust. Joe looks for asset-backed companies on low valuations where he can see a catalyst for a re-rating. In small cap Japan he has found what he believes is an outstanding opportunity. On a look-through basis, the companies in the portfolio have 78% of their market cap in cash or transferrable securities and are trading on 3.9 times EV/EBIT, compared to 8.7 times on the MSCI Japan Small Cap and 18.5 times on the S&P 1500 all-cap index. AJOT is an activist investor and aims to take advantage of the political and regulatory pressure on Japanese companies to increase the efficiency of their balance sheets. One of the “three arrows” of Abenomics is policies for growth, and in part this means a determined push to put idle corporate cash and cross-shareholdings to more productive use and thereby boost shareholder returns. In their view, AVI is therefore increasingly pushing on an open door. In the first six months of the trust’s life it has seen nine of its 29 portfolio companies make shareholder friendly moves, be that paying or increasing a dividend, buying back shares or other measures. NAV performance has also been solid, with the trust up 0.3% compared to a 1.6% loss for the MSCI Japan Small Cap index, to the end of March. Although it was aided by it not being fully invested during the global market downturn in November and December, most of the outperformance came when it was fully invested, illustrating the success of the stock-picking. Following the encouraging start, and to take full advantage of the current opportunity, the company drew down £10.4m in borrowings in April 2019, amounting to gearing of 12.5% of NAV. The trust has been trading on a premium since launch, in part helped by not being fully invested in the Q4 2018 market slump. The trust is now on a 3.2% premium. The board is yet to seek to address this, but the prospectus does allow for further share issuance if the trust is trading above NAV. AJOT will offer a liquidity option after four years and every two years thereafter, meaning that if returns are disappointing investors can redeem at close to NAV. There is no specific income objective. However, AJOT’s portfolio currently yields 2.1% (at NAV) and, to retain investment trust status, the board will have to pay out 85% of that after costs. Through 100% charging costs to capital, the majority of the portfolio yield will flow through to shareholders as dividends.
Last year set new records for the investment trust sector, with launches from Baillie Gifford, Fundsmith and Mobius Capital Partners amongst others adding to assets which reached a record of £189bn by the autumn. We look at the new funds which came to market and examine the progress of the most interesting so far…
Companies: OIT AIE AJOT MMIT SSON MERI
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FY20A results largely reflect a period prior to the Covid-19 lockdown, yet show Duke entering a more challenging FY21E with momentum. Yesterday's trading update demonstrated another notable rise in quarterly cash receipts for Q2/21, as royalty partner trading continues to improve. As some partners' forbearance measures will expire this month, Q3/21 receipts should continue this upwardly momentum. This opens the door to a return to cash dividends at some future point. Today, Duke also confirms it is now seeking new royalty partners, alongside follow-ons.
Companies: Duke Royalty
With the sale of the Singaporean operations for £1.6bn, the new CEO, Amanda Blanc, shows her intention to focus rapidly on its preferred markets (the UK, Ireland and Canada). The next candidate for sale is the French unit. This transaction is more complicated than the previous one, with the necessity to obtain the agreement of Afer, its key partner in France. With potential proceeds of £2.9bn, Aviva could reduce its debts significantly and allocate more capital to the UK bulk annuity business.
Companies: Aviva Plc
Oil posted its first back-to-back weekly loss since April's rout with the end of the summer driving season and concern about OPEC's production compliance weighing on prices.
Futures in New York edged up on Friday, but prices fell 6.1% this week coinciding with a retreat in U.S. equities. Traders are also examining data indicating the United Arab Emirates since July has been regularly exceeding its quota under a deal between the Organization of Petroleum Exporting Countries and its allies.
The uncertainty over how much supply OPEC+ is returning to the market adds another wrench in the recovery for oil prices still reeling from the pandemic-driven blow to consumption. While U.S. supplies had grown tighter in past months and producers were expected to restrain production amid a weak financial backdrop, stockpiles rose again last week for the first time since mid-July.
Companies: XOM HES KOS JSE 88E ADV CAD CHAR ECHO ENOG EME I3E PMG RBD SQZ SOU TLW VGAS WTE PHAR
What’s new: CLIG results have beaten Zeus expectations at revenue, EPS and DPS. On 14 July CLIG provided an update which revealed $338m of net inflows (6% of opening FUM), outperformance of the Emerging Market and Developed strategies (98% of FuM) and 25% rise in FuM in 4Q to $5.5bn and an indication that the final dividend would be not less than last year. In our opinion, key features of CLIG’s full year results include:
4.4% rise in revenue to £33.3m (Zeus forecast: £32.0m);
6.1% fall in adj PBT to £10.7m (Zeus forecast: £10.3m), excluding gains/losses on seed investment 9.4% rise to £11.6m (FY19: £10.6m);
3.2% rise in adj EPS to 35.3p (Zeus forecast 32.5p);
11.1% rise in final DPS to 20.0p (Zeus forecast: 18p) with the total DPS of 30p (Zeus forecast: 28p) is 11.1% above the prior year excluding special DPS.
Net cash of £14.6m (Zeus forecast: £10.0m)
The acquisition of KMI is expected to complete on 1 October 2020.
Companies: City of London Investment Group Plc
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
Companies: AVO ARBB ARIX CLIG DNL GDR ICGT NSF PCA PIN PXC PHP RECI STX SCE TRX SHED VTA YEW
S4 Capital had an extraordinary week with strong interims and an impressive CMD accompanied by a further merger and topped off with winning its third Whopper. Interims were ahead of our expectations and we were particularly encouraged by LFL Gross Profit growth of +18% in July. The group announced the merger with Dare.Win, an award-winning digital creative agency which extends the geographical presence of MediaMonks to France. BMW and MINI consolidated its Pan-European account into a team led by MediaMonks, which is the third whopper account for S4 Capital, and notable in our view for being won in a pitch, rather than by land & expand, and being an automotive rather than technology client. The group held a three day CMD and our summary would be i) Day One demonstrated the compelling strategic logic and strict financial discipline underpinning the group ii) Day Two illustrated the already formidable partner/client list of S4 Capital, including Adobe, Amazon, Google and CAA and iii) Day Three highlighted the chemistry between the individual agencies brought together to form S4 Capital and the outstanding work that they produce. To reflect BMW and Dare.Win we raise our FY21 EPS forecast by +8% to 10.8p (was 10.0p) and continue to view 15p as a realistic target with further whoppers in prospect and the balance of the recent equity raise to deploy. On a 30x multiple, we raise our target price to 450p (was 375p) and retain our Buy recommendation.
Companies: S4 Capital Plc
Frontier IP has announced it has invested £320k in a £720k convertible loan financing of Nandi Proteins. Nandi Proteins is developing functional proteins for food ingredients aimed at reducing levels of fat, additives and gluten in processed foods addressing important social, health and environmental concerns about processed food. Frontier IP holds a 20.1% equity stake in Nandi Proteins; the last disclosed value of the holding was back in July 2017 at approx. £2.9m. Connected in part to the announcement today, we have used the opportunity to refresh our cash flow forecasts to reflect the net £2.1m proceeds of the July 2020 fundraise, the planned deployment of proceeds into bridge financing and refreshed our Sum-of-the-Parts valuation analysis to reflect the excellent portfolio progress made in FY’20. We anticipate a 50% increase in the unrealised profit on the revaluation of investments in FY’20e to £5.82m (vs. £3.0m prior estimate; £3.85m in FY’19). Applying the peer group multiple of 1.6x on Yr1 Book value of late-stage assets and incorporating the £2.1m proceeds and dilution associated with the July placing, implies an intrinsic value of 82p/share, 27% above the current share.
Companies: Frontier IP Group Plc
We believe now is an interesting time to invest in Northgate, with a new executive board and a capable management team in place who have already delivered progress on an ongoing turnaround as we await a full strategic review. The group now has a clear and well communicated capital allocation strategy in place and improved earnings quality, in our view. We believe that the growth opportunity in the UK, the value of the Spanish business and the progress made to date with the turnaround are not being reflected in the share price, which is currently 15.9% below book value (414p per share in FY19A rising to 468p in FY22E). We use a variety of valuation methods including P/B, SOTP, DDM and DCF modelling and arrive at an average implied share price of 450p, 29.0% above the current share price.
Companies: Redde Northgate Plc
Following a solid H120, HgCapital Trust (HGT) announced several portfolio transactions representing a considerable uplift to the carrying value at end March 2020 and translating into a c 12.0% ytd NAV total return (TR) to end August. On completion of these deals, HGT’s cash resources will improve significantly to £314m from £123m in early July, while its unfunded commitments will decline to £814m. Consequently, HGT’s commitment coverage ratio will improve markedly to c 39% vs 13% in early July.
Companies: Hgcapital Trust
Artemis Alpha Trust (ATS LN) has undergone a radical transformation over the past two years following a comprehensive strategic review. In April 2018, the trust held around 90 stocks with approximately 25% of NAV held in unquoted positions. Following the implementation of the review, Kartik Kumar (who has been with Artemis since 2012) was appointed lead manager alongside John Dodd remaining in place with an overseeing role. Kartik has since significantly reduced the number of stocks to a much more concentrated high conviction portfolio of just 36 stocks, and has significantly reduced the unquoted exposure to only 7%. This shift in focus has at the same time improved portfolio liquidity by moving up the market capitalisation scale.
Companies: Artemis Alpha Trust
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
Companies: Legal & General Group Plc
Avation is a lessor of commercial aircraft to a diversified airline client base. In relation to the ongoing administration process of Virgin Australia, Avation has this morning announced that following the successful placing of five of the original thirteen aircraft that were on lease to the airline (two Fokker 100s plus three ATR 72-500s, with the latter having gone to two new customers), the remaining eight aircraft will be returned to Avation, being made up of three ATR 72-500s and five ATR 72-600s. Additionally, subject to approval at a creditors' meeting scheduled for 4 September 2020, the expected return to unsecured creditors is now anticipated at between 9-13% being paid prior to 30 June 2021.
Companies: Avation Plc
Deltic Energy is entering an exciting phase in its development based on its fully funded joint-venture projects with Shell. Preparations are now underway for an exploration well to test the Pensacola Zechstein prospect in the SNS (Southern North Sea). Deltic has indicated that it expects the current contingent well commitment to become firm on schedule by December 1, 2020. Drilling, according to Deltic, should follow in H2 2021. We see scope for positive news flow over the next few months, not least from the evaluation of Shell’s recently obtained processed 3-D seismic over Pensacola. Following Pensacola, the Selene prospect is scheduled to be drilled in mid-2022. The recent 32nd Round UKCS licence awards greatly expands Deltic’s exploration potential in the CNS and particularly the SNS Carboniferous fairway. Here some highly prospective acreage has been obtained.
Companies: Deltic Energy Plc
Belvoir’s H1 results evidence both strategic progress and profits growth. Given the challenges presented by COVID-19, this bodes very well for the group’s long-term growth potential. H1 adj. EPS grew +16%, the acquisition of Lovelle contributed well and in July the group entered into a strategic alliance with The Nottingham Building Society. Cash flow remained strong and the progressive dividend policy has been reinstated, with a 3.4p interim declared plus an additional 2p, as partial compensation for the missed 2019 final. With the resilience of lettings and the current record activity levels in sales and new mortgages the Board is optimistic that full-year results will hit its pre-COVID expectations and we make no changes to our PBT/EPS forecasts. Our target price of 233p (48% upside) assumes a 10% discount to the small/mid cap market. Given the above average performance in H1 and continued evidence that the long-term growth strategy is yielding value we see good upside to this target over time.
Companies: Belvoir Group Plc
S4 Capital has reported interim results that are ahead of our expectations and indicates an acceleration in the pace of recovery in Q3. LFL Gross Profit rose +12.2% in H1, with Q1 +18.8% and Q2 +6.5%. Encouragingly, after the trough of +3% in April, recovery accelerated to +5% in May, +11% in June and July was an impressive +18% ahead. PBT and EPS were both slightly better than our forecasts, while the group delivered a particularly impressive cash performance leaving it with net cash in June even before the £113m July placing. While we maintain our FY20 LFL Gross Profit growth forecast of +14% (Q3 +12%, Q4 +18%), the strong July result makes this look conservative. Further, the group awaits the outcome of two 'whopper' pitches each worth $20m+ with one due 'very shortly' and it can now see the pathway to 20 whoppers. S4 Capital is in a growth sweetspot and has already started to deploy the funds from the July placing to build capability in eCommerce (Orca Pacific) and econometrics/media optimisation (Brightblue). There are a number of moving parts in our forecasts and overall we retain our EPS estimates of 7p for this year, rising to 10p in 2021. We believe landing the whoppers combined with further M&A as the group deploys its recent equity raise & increased debt facility could see EPS of 15p next year.