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
Recent years have seen companies opt to remain private for longer; due to their ability to access capital from alternative areas and to remain free of the increasingly burdensome requirements of being listed. The implosion of the Woodford Equity Income Fund as a result of liquidity problems has shone a negative light on open-ended funds holding stakes in private companies. However, the capacity to hold illiquid assets is one of the key characteristics of the investment trust structure. In this article we assess the advantages and disadvantages of holding minority stakes in private companies, and the impact that being re-valued periodically can have in a market characterised by wild swings in sentiment; which is perhaps of most relevance in the current market.
Companies: CHRY USA SMT FCSS RCP EWI AUGM
RIT Capital (RCP) has twin objectives: to generate long-term capital growth, and to protect shareholders’ capital. To this end, this self-managed trust invests in a broad range of asset classes and managers, each exhibiting differentiated returns. This, along with judicious management of risk (including currency) exposure, is how the trust aims to protect its investors in troubled economic environments. RCP now has net assets of close to £3bn. Having gone through various stages of evolution, it now has a senior management team that allocates and invests the trust’s capital. Lord Rothschild, whose family owns 21% of the trust, has this year announced he will step down as chairman of the trust, marking the final step in his succession planning which has been progressing over many years. The managers have four basic categories of investments: listed equities, private investments, absolute return and credit, and real assets. For a while now, the managers have been cautious on the outlook for equity markets, and so have been dialing back risk. As at the end of 2018, exposure to listed equities was 47% (the five-year range has been 35% - 70%). In reality the trust typically has a lower net exposure to equities, the difference being shorts (within hedge funds), any derivatives exposure and liquidity. RCP has long been a proponent of investing in private, unlisted companies on a minority basis – which is now becoming much more popular in the closed-end fund space. As we discuss below, it is one of the “six cylinders” that the managers hope to drive performance through, and has increased as a proportion of the portfolio over the year from 22% to nearly 26%. One of the distinctive features of the trust as an investment opportunity is the network of contacts that Lord Rothschild and the Executive Committee has developed over the years. This means that RCP can often obtain access to managers others can’t, either in closed funds or employing managers to run mandates solely on their behalf. Indeed, we understand that nine out of the team’s top ten current third-party managers are closed to new money. The portfolio is currently cautiously positioned, which helped it deliver a small positive total return last year, when almost all asset classes delivered negative returns. Over five years, RCP has comfortably beaten its absolute performance target of RPI +3%. Against the MSCI AC World Index, the NAV has struggled to keep up. However, this has to be seen in the light of the lower exposure to equities of the trust and, indeed, its raison d'être – which is to protect wealth as much as grow it. The trust has delivered it’s performance with volatility of 5.6% over five years, relative to the benchmark volatility of 9.2%. Against peers in the flexible investment trust and open-ended peer groups, RCP has handsomely outperformed. The trust has been trading on a premium to NAV since 2015. Demand for its shares has been strong during recent turbulent market and political conditions. The current high single digit premium (8% at the time of writing) reflects the current uncertain environment, and the attraction of a vehicle which aims to protect capital in difficult times, but grow capital in better times. It is worth noting that any sudden shock, either to RIT Capital itself, or global markets, could see this premium evaporate overnight, and thereby compound any NAV losses for shareholders.
Companies: RIT Capital Partners
NextEnergy Solar – Acquisitions | 3i Infrastructure – Partial syndication | RIT Capital Partners – Interims to 30 June 2018
Companies: NESF 3IN RCP
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
RIT Capital has twin objectives: to generate long term capital growth, and to protect shareholders’ capital. To this end, it invests in a broad range of asset classes, each exhibiting differentiated returns. This, along with judicious management of risk (including currency) exposure, is how the trust aims to protect its investors in troubled economic environments. The trust offers the opportunity to invest alongside Lord Rothschild and family, who own a fifth of the shares, and the management invests with the long-term perspective and focus on capital preservation of a family office. The range of assets and strategies employed is unique, and the network of contacts and relationships the company has, allows it access to managers, funds and private investments that the average investor would otherwise be unable to buy. The company is currently cautiously positioned, with management concerned about the distortions created in the markets and economy by QE and low interest rates. As a result, hedge funds and absolute return strategies are a significant part of the portfolio, government bonds and rates exposures at practically zero. The managers estimate that net equity exposure for the year has been c.44% on average. The trust has been trading on a premium to NAV since 2015, barring a small window where it traded at a small discount following the Brexit vote. The trust does not aim to outperform any benchmark, however sluggish performance relative to a fastrising market last year has seen the discount come down slightly to 5.1%, from an average of 6% last year.
RIT Capital has a long track record of outperformance and capital preservation and, while it regularly underperforms the MSCI World index during strong positive periods, the managers’ success in missing the troughs has added up to a formidable cumulative return in share price and NAV terms. Indeed, capital preservation is a major theme of the trust’s marketing, and since inception (1988), they claim to have participated in 76% of up moves in the equity market, and 39% of market down moves. This performance profile is highlighted over the past 20 years to the end of February, with RIT Capital Partners having delivered annualised NAV total returns of 9.4% per annum (compared to 5.4% from the FTSE All Share), but with a maximum drawdown – or the most an investor could have lost if they had bought and sold at the worst possible times during that 20 year period – of 24% (compared to 42% from the FTSE All Share). Examination of discrete performance further highlights this trend, as the trust has held up well during falling markets, particularly in 2008, when the trust’s NAV fell 11% compared to a 20% fall from global equities and a 16% loss from its peer group average. As one might expect, however, the trust’s cautious approach and focus on capital preservation comes at the cost of upside when markets are in high spirits, particularly if the managers don’t share that euphoria. Last year, in particular, was a case in point with the index up by more than double the amount delivered by the trust.
The original essay plan for this article was put together in January, and so it is with an unpleasant mix of irritation (because we didn’t publish it sooner) and impotent smugness (because we told you so, only we didn’t) that we have watched the market stumble in the last few days. Our view for some time has been that after almost nine years of gains and with global stock markets trading at all-time highs – the very broadly evident optimism towards risk assets which had gripped investors until very recently was somewhat misplaced. Before the tide turned on the back of US payrolls data last Friday, 2018 had seen the Dow Jones and FTSE 100 break out of their historic ranges, and record flows into index tracking ETFs. The economic backdrop in nearly all corners of the world appears stable and, in many cases, is improving (particularly in the US) while central bankers’ extraordinary monetary policies of ultra-low interest rates and money printing, as the FT recently put it, “look as though they might actually allow the world economy to take off again without having to endure a crash or a bout of hyperinflation first”. But as we have seen since stocks began to tumble in the US, then Asia and Europe, asset prices are not the same thing as the economy. Further, behind all the euphoria, there has been a consistent narrative among more sophisticated investors that a correction is inevitable and probably desirable, and that asset prices have become overly inflated during the ‘endless bull market’ which has driven them forward since the end of the credit crunch.
Companies: RICA PNL RCP ATR
RIT Capital Partners (RIT) has established a strong track record over many decades. Over the last five years, its share price total return has almost doubled and it has returned to trading at a premium. RITs investment style emphasises long-term thinking and the avoidance of permanent capital losses. In recent years, RIT has allocated capital away from equities towards uncorrelated strategies (ones whose price movements are not aligned with equities) thereby positioning itself in anticipation of a correction in equity markets.
RIT Capital Partners (RIT) has established a strong track record over many decades. Over the last five years, its share price has doubled and it has returned to trading at a premium. RITs investment style emphasises long-term thinking and the avoidance of permanent capital losses. In recent years, RIT has allocated capital away from equities towards uncorrelated strategies thereby positioning itself in anticipation of a sharp correction in markets.
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Although 2020 will probably go down in history as one of the most challenging years experienced during our lifetime, it will also likely be chronicled as one of the best years for the recognition and appreciation of science. As we entered 2020, the COVID-19 pandemic was in its infancy. However, it rapidly evolved through the exponential rise in infections and mortality globally. Much has been achieved during the past 12 months in the fight against COVID-19, but, as we enter 2021, there are considerable concerns about the emergence of a mutant version of the virus and the second wave that we are now facing.
Companies: AVO ARBB ARIX BBGI CLIG DNL FLTA ICGT OCI PCA PIN PHP RECI STX SCE TRX SHED VTA YEW
What’s new: Ahead of the publication of the Group’s interims results for the six months to 31 December 2020, CLIG has released a detailed trading update which reveals:
Group consolidated FuM of US$11.0 billion (£8.0 billion), which is twice the FuM of US$5.5 billion (£4.4 billion) at the Group’s year end on 30 June 2020;
The merger with Karpus Management Inc ("KMI") added c US$3.6 billion from 1 October 2020;
Investment performance across CLIG’s investment strategies was “strong”, following “significant discount narrowing” and “good NAV performance”;
Rebalancing of client portfolios resulted in US$ 290 million of net outflows.
Companies: City of London Investment Group PLC
AuM grew by +43% (+16% organic) to £29.4bn in Q3. Investment performance was strong (+£2.5bn) as COVID vaccine news propelled markets. Net inflows were maintained qoq (£792m). Sustainable was the stand out performer (+24%). AuM has broken through £30bn post-period end. Better than expected AuM drives +3% FY21e EPS and +5% in outer years. Continued distribution efforts in Sustainable, Global Equity and Multi-Asset funds stands to catalyse earnings. Alongside flow momentum, 12x FY22e PER is not reflecting this upside.
Companies: Liontrust Asset Management PLC
Urban Logistics REIT (“REIT”) has acquired another high quality “last mile” asset in the Wirral for £16.3m (5.0% NIY). The 169k sqft site is let to a subsidiary of Culina. It is leased through to 2032 and has clear rental progression, with an uplift on commencement of a reversionary lease in 2022 and a rent review in 2027. 99% rents for the Jan-Mar quarter have already been collected – highlighting the resilience in the tenant base/income. We do not change forecasts, already assuming full deployment by year end. We estimate that c.£75m capital capacity remains. We note a 6%+ dividend yield in FY22e – a 12m period of full capital deployment – and note that the discount ignores embedded NAV growth potential.
Companies: Urban Logistics REIT plc
Further media reports that Dr Martens, the British Boot brand is planning an IPO on the LSE. It is currently owned by PE group, Permira who is expected to sell down its stake at the IPO. March 2020 YE the group had revenues of £672m and EBITDA of £184m. Deal size TBC. Upon Admission to AIM, Nightcap will acquire The London Cocktail Club Limited (the "London Cocktail Club"), which is an award winning independent operator of ten individually themed cocktail bars in nine London locations and one location in Bristol. Offer TBC Due mid Jan. HSS Hire Group, HSS.L transfer from Main to Aim. Mkt Cap c. £70m. Recently raised £52.6m. Leading supplier of tool and equipment for hire in the United Kingdom and Ireland and has provided equipment hire services in the United Kingdom for more than 60 years, primarily focusing on the B2B market. Due 14 Jan. VH Global Sustainable Energy Opportunities plc, a closed-ended investment Company focused on making sustainable energy infrastructure investments, today announces intends to launch an initial public offering of shares on the Official List (Premium) of the Main Market of the London Stock Exchange. Due by Early Feb.
Companies: IUG CBP KAT APP RST DIS NICL BOKU CNIC HE1
Hipgnosis Songs Fund, is independently valued by Massarsky, who in December chose to reduce the discount rate on the revenues generated by the portfolio from 9% to 8.5%, due to strong evidence of growth in streaming numbers and the stable nature of the revenue stream. This produced a NAV of 125.35p as at the 30 September interim period end. It is worth noting the recent publication of significant changes in the discount rate as announced by Professor Aswath Damodaran of the Stern Business School in New York for the Entertainment Industry to 4.82% from 7.83% in January 2020. Combined with recent evidence that music streaming revenues in 2020 are now larger than the entire music market in 2016, we believe this is an encouraging backdrop for potential further reductions in the discount rate being applied by Massarsky going forward
Companies: Hipgnosis Songs Fund C Shares
Henderson Opportunities Trust (HOT) has performed strongly since experiencing sharp NAV and share price declines in the Q120 market sell-off, powering to the top of the AIC UK All Companies sector over the past 12 months with an NAV total return of c 40% in the second half of 2020. Managers James Henderson and Laura Foll say performance has benefited from holding a number of ‘next-generation leaders’ in the UK. The portfolio is esoteric in its make-up and seeks to avoid being overly exposed to trends in the global and domestic economy. The managers continue to see good value opportunities across the UK market, particularly on AIM, and say their intention to maintain gearing at a ‘decent’ level (c 10–15%) is indicative of feeling the portfolio and market offer good value.
Companies: Henderson Opportunities Trust
Allied Minds has announced that Joe Pignato has decided to step down as CEO and from the board with immediate effect. However, he will continue to support the company as CFO for an interim period as the board continues its search for a permanent CFO. As part of a streamlining process, Allied Minds will now become a board-led company with no immediate intention to appoint a new CEO. The chairman and NEDs (experienced VCs and private company investors) will represent Allied Minds on portfolio company boards (including Federated Wireless, BridgeComm and Spin Memory) with an intention to accelerate realisations where possible.
Companies: Allied Minds PLC
Cornish Metals (TSX-V: CUSN) intends to list on AIM. The Company is proposing to raise £5 million by way of private placement of new Common Shares (the "Fundraising") to advance the United Downs copper-tin project. The Company expects that Admission will become effective in February 2021. The Company's Common Shares will continue to be listed and trade on the TSX-V in Canada. Further media reports that Dr Martens, the British Boot brand is planning an IPO on the LSE. It is currently owned by PE group, Permira who is expected to sell down its stake at the IPO. March 2020 YE the group had revenues of £672m and EBITDA of £184m. Deal size TBC. VH Global Sustainable Energy Opportunities plc, a closed-ended investment Company focused on making sustainable energy infrastructure investments, today announces intends to launch an initial public offering of shares on the Official List (Premium) of the Main Market of the London Stock Exchange. Due by Early Feb. Moonpig, the digital greeting card company, is planning an IPO with a potential valuation of £1bln, according to multiple media reports. Further details expected to be announced over the next two weeks.
Companies: ZPHR PANR PRSM SENS CYAN G4M ITX CRCL FEN ZIN
CVC Credit Partners European Opportunities (CCPEOL) has achieved a total NAV return of 1.9% (target 8% annual return) in the last 12 months. Its index outperformance was helped by sector rotation early in the COVID-19 crisis and by staying positive on the market. The manager sees the greatest opportunity in the upper CCC and lower B segments and in structured finance. CCPEOL remains optimistic in the credit opportunities segment, despite the market recovery. It expects 2021 will bring more leveraged loan issuance from broader industrial segments, thus providing greater investment prospects. Portfolio resilience led CCPEOL to raise its annual dividend from 4p/4c per share to 4.5p/4.5c in September 2020.
Companies: CVC Credit Partners Europn Opprtnity
Interim results demonstrate YoY growth and a resilient outcome that has exceeded management's expectations from the start of the Covid-19 pandemic. This is testament to the degree of recurring revenue generated across the business. FY21 trading looks to be more challenging, as notably lower new insurance sales post-lockdown will translate into lower premium income. A number of organic opportunities are being worked on to fill the shortfall. Rising UK redundancies and their impact on policyholder retentions creates great uncertainty, hence our forecasts remain withdrawn and recommendation remains Under Review.
Companies: Personal Group Holdings Plc
I once sat through a three-hour performance of Samuel Beckett’s Waiting for Godot at the Theatre Royal which, despite the best efforts of Ian McKellen and Patrick Stewart – both of whom I like very much – to this day remains one of the dreariest experiences of my life. It is on that note that we welcome 2021, with all the promise it holds, and return to our ‘top picks’ for 2020, a year which is probably best summarised (for those of us lucky enough to have been not directly impacted by the virus) by the Lord Chamberlain’s censor in his review of the first performance of Godot in 1955 – in which he described having to ‘endure hours [and hours] of angry boredom’. As always, these ‘picks’ do not represent advice, and should in no way be relied upon as such; they have been chosen on a lighthearted basis with no thought given to their suitability for your personal circumstances.
Companies: TFG IPU IEM HOT OCI BRWM JRS RICA BHMG BRLA JMI GPM MINI SMT
Redde Northgate has come through the COVID crisis in very good shape so far. We expect minimal impact on the former Northgate business from “lockdown 2.0”, a strong recovery in profits and a re-rating as normality returns and Redde reverts to mean. We could see further useful earnings upside from acquisitions such as Nationwide and revenue synergies not yet included. The Group is transforming itself into a mobility business which is higher returning, more diversified and has sustainable compounding growth prospects.
Companies: Redde Northgate PLC
Trident Royalties plc is a relatively new royalty and streaming company focused on building a diversified portfolio of royalty assets to broadly mirror the mining sector. Unlike the majority of other royalty companies which are focused on gold/silver in the Americas, Trident’s aim is to unearth value with low-cost acquisitions across multiple commodities in tier 1 and lower risk mining jurisdictions. Acquisition of the Pukaqaqa royalty marks the 6th transaction since listing on AIM in June 2020 reflecting the company’s fast-paced growth strategy. TRR's shares are up over 100% since IPO.
Trident is superbly positioned to exploit the gap in the royalty/streaming space. With producing cash-generative royalties already under its belt and an active pipeline of new opportunities, Trident is firmly pursuing an aggressive yet disciplined growth trajectory. Scale will bring higher royalty income, increased diversity and lower risk, the convergence of which should help unlock premium valuation multiples. In the current volatile markets, picking individual mining equities is challenging but Trident offers ground-floor entry into what looks likely to become a major royalty player in London. We have analysed the evolution of royalty peers and investing early appears to be the key. We see TRR’s current share price and value as unchallenging versus peers given the company is already a significant revenue generator. We initiate coverage with a 47p/sh price target.
Companies: Trident Royalties Plc
The Biotech Growth Trust (BIOG) is managed by Geoff Hsu, who is able to draw on the considerable resources of specialist healthcare investor OrbiMed Capital. While biotech stocks have rallied strongly following the coronavirus-led stock market sell-off earlier in 2020, the manager believes they could have further to go. He is confident that a successful COVID-19 vaccine will be developed and positive fundamentals are supportive for the biotech sector’s future performance. Repositioning of BIOG’s portfolio during FY20 has been accretive to the trust’s returns in recent quarters; it has now outperformed its benchmark NASDAQ Biotechnology index over the past one, three, five and 10 years, and investors have also enjoyed very solid absolute total returns of more than 20% pa over the past decade.
Companies: The Biotech Growth Trust