To those who regularly invest in investment trusts, discounts can often be part of the opportunity. But to others, discounts are an extra complication, not to mention an extra risk. The last six weeks has probably strengthened the prejudices of both sides on the topic. The recent bout of volatility has – in our opinion – more clearly exposed both the advantages and the disadvantages of investment trusts. Our perspective is that discounts are like a drunk friend. They are fun to have around, but at times they let you down, often when it matters most. Ultimately, the investment trust sector is defined by its discounts. The NAV is what the manager delivers, which is the reason why most of our research is focussed on the NAV. Whereas the share price return reflects the NAV with an accelerant (or detractor) – represented by the change in discount over the respective holding period. Why discounts narrow or widen is a matter of continuing debate and, in most cases, comes down to very specific factors applicable to each trust. We would argue that – with the exception of very broad patterns or trends – past movements in discounts are significantly less repeatable than past NAV performance. Fundamentally this is why we believe it is more helpful to use historic investment trust NAV returns as a prism through which to judge the performance characteristics of a trust, rather than historic share price returns. On the other hand, there are ways to incorporate discount analysis into an evaluation of the opportunity presented by an investment trust at any given point in time. We feel that understanding the historic volatility of the discount is fundamental to the task of analysing a trust’s discount, and of defining factors that will influence it in the future. In this article we attempt to quantify the reasons for discount volatility, and point to trusts which offer significantly less discount downside from the current level.
Companies: PLI BHGU SMT RCP TIGT MWY RICA JAM BRWM
BH Global is a Global Macro hedge fund that aims to deliver strong risk-adjusted NAV returns in all market conditions. It invests in the range of trading strategies offered by Brevan Howard across multiple asset classes. BH Global has a wider remit than its sister trust BH Macro, in being able to invest beyond developed-market interest rates and foreign exchange, and take more risk in a wider range of opportunities within markets including credit, equity and emerging markets. One of the attractions of BH Global is its historic tendency to generate returns irrespective of the direction of bond or equity markets. As we discuss in the Portfolio section, this is largely down to Brevan Howard’s strategy of harnessing a variety of different traders who use options to create trades with asymmetric return profiles. Whilst it is not specifically designed to do so, BH Global has often delivered strong returns when equity markets struggle. As we note in the Performance section, this has been particularly noteworthy since 1 February 2020, with NAV returns of 18% over the seven weeks to 21 April, relative to the MSCI ACWI in sterling of -11%, meaning outperformance of 29%. Over the longer term (the ten years to 31 March 2020), BH Global has delivered compounded NAV returns for investors of 4.8% p.a. It has achieved this with annualised volatility of 6% and a maximum drawdown of 4.6%. BH Global’s NAV has exhibited low correlation to equities since IPO (an average of 0.13 on a rolling 12-month basis since IPO), and also to bonds (an average of -0.04). Brevan Howard’s strong risk controls are built into the DNA of the organisation. Risk is controlled through strict risk limits at a trader and portfolio level. Looking at monthly data since inception, it is rare to see a month in which the NAV falls by more than 2%.
Companies: BH Global
The COVID-19 pandemic is far from over, but with March coming to a close we have perhaps seen the end of the first act. Most of the developed world is in various degrees of ‘lockdown’; anxiously watching poorly reported – and often poorly understood – numbers for indications that their government’s strategy is working. Meanwhile equity markets saw one of their worst ever quarters in Q1 2020, as whole swathes of the economy were shut down by government diktat. The speed with which the situation developed was remarkable; and it is fair to say that all managers would have been surprised, even if they had other reasons for being bearish. We take a look at how and why certain investment trusts have done well in absolute and relative terms amidst the carnage, and ask if the causes of the crisis can provide any indication how the situation might end, and which trusts might outperform.
Companies: BHGU BHMG RICA PSHD BGUK MWY USA BGEU SMT MNL ATT FGT TIGT
Investors returned to real life with a bump this month. As markets re-opened for the new year, shares tumbled around the world on renewed fears over the US-China trade wars among several other factors. The market sell off - which began in October - shows little sign of abating. It is understandable then that investors are increasingly looking for ways to protect portfolios. The large multi-asset macro absolute return funds, which many have been relying on for support in these sorts of circumstances, have largely been a disappointment which only increases the urgency of the search. In our view, there are a number of interesting options in the closed-ended space that may have flown under the radar. We take a look under the bonnet to try to discover why multi-asset macro funds have struggled and attempt to identify some possible closed-ended alternatives.
BH Global is a feeder into the Brevan Howard Multi-Strategy Master Fund. The MultiStrategy Master Fund is a macro hedge fund, and aims to deliver strong risk-adjusted NAV returns in all market conditions. It aims to achieve this by gaining exposure to the range of trading strategies offered by Brevan Howard across multiple asset classes. Allocations to these different strategies, traders and asset classes are managed by Brevan Howard’s investment committee. BH Global is differentiated to sister fund BH Macro, in that it has a potentially wider mandate and has historically had a more balanced portfolio with lower volatility and less concentrated exposure. BH Global accesses trades through a variety of means, but mainly though investing in BH’s range of offshore hedge funds. The BH Master Fund (of which BH Macro is a direct feeder) is now once again the largest allocation within the portfolio at 46% of NAV. The Direct Investment Portfolio (DIP) currently consists of allocations to six traders, and represents 45% of assets. The DIP was one of the key drivers of returns during 2017, which was a more difficult time for the BH Master Fund. The current portfolio represents the shifting opportunity set and the investment committee’s expectations of the potential returns on offer. As market conditions change then the exposures will change - at times being more similar to BH Macro, and at times having very different biases. Currently, the majority of exposure (as is the case with BH Macro) is to “Macro” and “Rates”, but the performance in 2017, where BH Global had c. 60% of NAV invested in the DIP, illustrates how the two companies’ underlying exposures can differ at times. Whatever their specific trading style or area of focus, Brevan Howard’s traders try to exploit pricing anomalies, and to provide investors with asymmetric pay-off profiles over defined periods in the future. These trades are typically leveraged (using margin), and might typically generate proportionately high returns if the trade works out, but should it not, then the maximum loss might be the cost of putting the trade on. The markets that the traders have exposure to, as well as the way they construct trades, means that the fund has demonstrated low correlation to equities and bonds. The most recent example of this was the “European stress” trade which BH Global had exposure to leading into May 2018, which had minimal downside, but demonstrated huge upside and the NAV rose by 5.4% in the month. This marked a welcome return to form for the managers. Looking at monthly data since inception, it is rare to see a month in which the NAV falls by more than 2%, which reflects the fact that the risk management team tend to dial down traders’ risk exposure after significant falls from a peak. Brevan Howard emphasises that its team aims to control the risk they are taking in terms of actual losses incurred, and not volatility or VAR which they view as backward looking and therefore less helpful. Overall the managers believe risk is defined as permanent loss of capital which forms the backbone of their approach. Since inception, the only negative year for BH Global was in 2015, which in our view illustrates Brevan Howard’s strong risk controls at work. The solid showing in 2018, with a return of 5.4% in the GBP share class, is perhaps made all the more noteworthy for the corresponding negative returns delivered by equities. In a rising interest rate environment, it appears that global multi-asset macro funds have been struggling. The performance differential opening up during 2018 between BH Global and Standard Life GARS is illustrative. With the strong performance in 2018, BH Global has seen the discount narrow, and at the time of writing, the shares trade on a narrow discount to NAV of c. 3%. The board has stated that whilst it hasn’t bought shares back since June 2018, it remains alert to discount volatility.
BH Global – Interims to 30 June 2018 | Electra Private Equity – Strategic review update
Companies: BH Global Electra Private Equity
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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
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
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
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
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.
RECI released its quarterly investor update on 17 August and factsheet on 8 September. This note updates investors with the key developments in both these documents. The key messages are i) robust performance of existing portfolio through COVID-19, ii) full interest and capital repayments expected on bond portfolio, iii) strong volume in investment pipeline, iv) lower-risk business is being added, v) pricing on new business 2%-5% above pre-COVID-19 levels like-for-like, vi) low gearing, and vii) stable dividends. All this appears anomalous with the 17% discount to NAV.
Companies: Real Estate Credit Investments