This year’s turn of events has divided businesses like never before. For some companies COVID-19 has been a life-threatening situation. But for others it has cemented their position in their industry, and brought forward several year’s of anticipated growth. The investment management industry is one of the few industries which has seen relatively little impact – good or bad. Indeed most financial services businesses were well set up for staff to work remotely, with little change to the efficiency or effectiveness of how they provide services to their customers. This is good news for UK Plc. According to the Investment Association (IA) 75% of UK households use an investment manager’s services, whether knowingly or unknowingly. The industry supports 115,000 jobs in the UK, including over 14,000 in Scotland. In fact it’s the largest industry of its kind in Europe, and the second largest in the world after America. Collectively members of the IA manage over £7.7 trillion on behalf of their clients globally, and 13% of global assets under management. Like with any business, owning a stake in an investment manager has its risks and opportunities. However, like many of the tech titans that have come to dominate equity indices (particularly in the US), investment management businesses are hugely scalable. Once a fund management business has got to critical
Companies: LTI MAJE TFG
“What a difference a quarter makes”, as Dinah Washington’s accountant used to sing. When last we updated on our investment trust picks for 2020 at the end of March, it is fair to say that collective optimism was thin on the ground. However, we all retained ultimate conviction in our selections (or else had grown so despairing at the market environment that we had settled into a kind of other-worldly fatalism), keeping faith that our initial logic had been ultimately sound. This has proved a good decision, with widespread rallies in financial markets and strong performance subsequently from the majority of our investment trust picks. All it took was a little optimism and long-termism from us, not to mention untold trillions of stimulus from governments and central banks around the world. It is fair to say that whoever wins this competition at the end of the year will be primarily thanking Jay Powell… Indeed, so strong has been the rally that two of us are actually in profit for 2020, without – even indirectly – enriching Elon Musk (thus meeting your author’s definition of an ethical investment). We can see below the contrast between Q1 and Q2 returns. They say understatement is a billion times better than exaggeration, so suffice to say there have been some fairly large divergences between the two quarters! And yet some discount opportunities seem to remain, with an average discount of 23.4% across our picks (albeit skewed somewhat by the massive 61.3% discount on Tetragon).
Companies: BRWM IEM JRS OCI TFG NBPU JMI
Tetragon Financial Group (TFG) aims to generate returns on equity of between 10% and 15% per year across cycles. The company has net assets of $2.2bn, and is traded on the specialist-fund segment of the LSE (primary listing on Euronext Amsterdam) with both a US-dollar and an unhedgedsterling share class. TFG invests in a diversified set of alternative assets, including bank loans, real estate, convertible bonds and event-driven equities via hedge funds. As at 30 April 2020 around 43% was invested in those asset types, while 53% was invested in private and public equities (the majority in private) and credit. TFG’s long-term returns have been strong, ranking tenth over ten years of the entire AIC listed-funds universe (as at 01/06/2020). Over the five years to 31/12/2019, the NAV per share total return has averaged 11.5% per annum, against 8.41% for the MSCI ACWI Index. Aside from this outperformance, it is worth noting that these returns have been achieved with correlation of only 0.21 to equities (Source: Morningstar). Since our initiation note, there have been two main developments to the portfolio. Ripple Labs now features in the top ten holdings (7.1% of NAV). Ripple is a private company, and uses blockchain technology to facilitate financial institutions’ transactions globally. Additionally, TFG has established Banyan Square Partners to advise on minority private-equity and venture-capital investments. Despite the NAV falling by only 7.6% over Q1 (before rebounding 2.8% in April), the discount has been adversely affected. Also, despite TFG possessing very different assets, the share price has de-rated as much as that of listed private-equity trusts. The discount stands at 61% (as at 29/05/2020).
Companies: Tetragon Financial Group
Tetragon Financial Group (TFG, Tetragon) achieved a 13.6% NAV/share total return and a 13.4% ROE in FY19, in line with its long-term target of 10–15%. The main driver of Tetragon’s performance was its asset management business (TFG Asset Management), which comprises managers with a total AUM attributable to Tetragon of US$27.4bn and generated an EBITDA of US$59.5m in FY19 (up 51% y-o-y). The late-2019 investment activity left Tetragon with a relatively low net cash position (4.1% of NAV at end-April). The shares trade at a three-year average discount to NAV of 44% (currently at 62.7%), which is relatively wide compared to peers given the company’s track record of delivering a 16% NAV TR pa over the last 10 years. The recent market sell-off has so far resulted in a 5.1% decrease in NAV (ytd to end-April 2020).
An Englishman, an Irishman and a Scotsman walk into a bar. But they can’t get past the front door because it’s been boarded up. And then they get floored by a soldier in a hazmat suit who is now part of a unit patrolling London because there’s a ban on public gatherings. It’s funny because it’s true, right? We aren’t quite at the stage where troops are patrolling London’s streets, but back in January, when we published our ‘top picks for 2020’, nobody could’ve predicted that by now we’d be locked in our homes, banned from meeting our friends and relatives, and facing the indefinite cessation of most economic activity until further notice. When all’s said and done, it’s been one hell of a month. In any sort of broad market move, some share prices move outside of what we might consider a rational boundary. As investment trust experts, it is our job to try and point these out. Clearly the advent of the apocalypse has made this job harder; the minute a share price or discount reaches a particular level, by the time we are in a position to publish anything, time (and prices) have moved on. So, with our feeble excuses made, we now return to the selection of trusts we put forward in January as our ‘top picks for 2020’; when we were all bored of headlines about Brexit, and snug behind the magical wall that protects us from respiratory conditions found only in far-flung parts of the Orient. Readers of a delicate constitution are advised to look away now.
Companies: IEM TFG NBPU BRWM OCI
Since we last reviewed our portfolio of discount opportunities, an awful lot has happened. The period from October to December saw a new Brexit deal, followed by the UK government winning a parliamentary majority to implement it. Both were bullish for UK and European markets, and led to a sharp rally in markets and a rapid narrowing of investment trust discounts. Globally, the mood was pretty optimistic for 2020; with a growing number of managers and commentators forecasting a rally in cyclical assets and a good year for markets. Some of our picks saw their discounts narrow in, such that we were even tempted to try to find other opportunities. But since then two major shocks have changed the picture entirely. The first was the assassination of Iranian general Qassem Suleimani, which led to fears of a wider conflagration between the USA and Iran. The second has been the ongoing coronavirus pandemic, which has had a more severe impact on markets, and looks likely to be a long-lasting situation with further economic pain to come. The overall average sector discount has widened, but not excessively (yet), as share prices have fallen only slightly more than NAV. Nevertheless there are some interesting opportunities emerging. As of market close on 13 March, the average discount was just under 7%; still significantly narrower than the level of c. 10% reached after the 2016 EU referendum (see chart below). The situation is changing every day, however. Good news about the progress of the virus around the world could lead to markets rallying and trust investors staying the course, while further bad news could see the discounts widen further in the short term. Last week’s budget and Bank of England rate cuts both gave some fuel for recovery, even if a slowing of the progress of the virus in Europe and the USA is likely to be necessary before the eventual relief rally begins.
Companies: SST BEE SJG TFG OCI
Last year the five-strong team at Kepler Trust Intelligence – including analysts and mere mortals – chose a trust each as our personal ‘top pick’ for 2019 and we will be reporting back on the performance of those trusts in early January, once the final numbers are in for this tumultuous year. In the meantime I can reveal that an investment of £5,000 spread equally across our selections, made on 1st January 2019, would at the time of writing be worth a cool £6,349 today and that performance puts us comfortably ahead of an equivalent investment in a passive fund; the iShares MSCI World ETF being our example, £5,000 invested there being worth £6,280 today. And so, buoyed by that success and a surfeit of mince pies and Babycham, the team at KTI – our ranks now swelled to seven – are back with more predictions for 2020, like lucky first-timers, staggering drunk on glory to the next roulette table with a pocket full of chips, confident in our mastery of the great game. For the benefit of those who take life too literally, it should be noted that this is a light-hearted article and these selections do not represent advice or any form of prediction. Don’t buy these trusts and then blame us if they don’t perform well – we aren’t telling you that they will and this isn’t ‘proper’ research.
Companies: JMI IEM TFG BRWM
Tetragon Financial Group Limited (Tetragon) invests in a broad range of alternative assets. It aims to generate returns on equity of between 10-15% per year across cycles, and seeks to distribute a proportion of these returns through a dividend. The company has net assets of $2.27bn, and is traded on the Specialist Fund Segment of the LSE (primary listing on Euronext Amsterdam) with both a US dollar and an unhedged sterling share class. Tetragon invests in a diversified set of alternative assets, including bank loans, real estate, credit, convertible bonds and infrastructure. As at 30 September 2019 around 62% was invested in those asset types, while 31% was invested, private equity style, in the equity of investment management companies who manage the funds through which Tetragon obtains its exposure. The balance (7%) was held in cash. In the Portfolio section we provide more detail on the underlying assets themselves. Tetragon aims to identify and invest in a range of uncorrelated alternative asset classes, using managers who can achieve the trust’s total return objectives. However, in also owning stakes in alternative asset management companies, Tetragon aims to leverage the depth and breadth of their investment platform, to grow assets and ultimately achieve strong returns from these investments too. The uplift in valuation from two of their holdings in investment management companies during the first half of 2019 reinforces this approach. The company’s objective (capital appreciation and distributable income) has been achieved so far. Tetragon’s NAV performance has been strong both in absolute terms and relative to equity and alternative funds. Putting this in the context of the broad investment trust universe, over five years the fund has generated a similar quantum of returns to Scottish Mortgage, but with the same volatility as RIT Capital. Importantly, Tetragon has exhibited NAV correlation to equity markets at a fraction of the level of those two trusts; over five years Tetragon has exhibited a correlation of just 0.16 against the MSCI ACWI. In terms of capital preservation, the maximum drawdown over five years is significantly lower than Scottish Mortgage or RIT Capital, at -8.5%. Not surprisingly, Tetragon’s alpha and Sharpe ratio statistics are better than the other two trusts, which in our view are both very good performers in their own right.
Tetragon Financial Group (TFG) achieved an 8.1% NAV total return in H119, with a 13.3% annualised return on equity (ROE), well within its 10–15% long-term target range. While its performance lagged global equity markets over the half year, the resilience of Tetragon’s NAV in H218 helped it to achieve a 14.3% NAV total return over the year to 30 June 2019, compared with 6.3% and -3.1% for the MSCI AC World and FTSE All-Share indices, respectively, all in US dollar terms. Despite strong NAV returns in 2019, Tetragon’s discount remains wide at 48.6%, offering significant scope for future narrowing to enhance shareholder returns, while its 5.9% dividend yield leads the AIC’s Flexible Investment sector.
At Hardman and Co, we try to answer the questions of why to invest in a company and what the risks are in doing so. For many investors, simply having a deep discount to NAV is a good enough answer to the first question. However, investors need to appreciate the risks and, in particular, the reasons why the shares are at a discount. Having understood those risks, investors need to be convinced that there is a catalyst for change on the part of the manager and how long (if at all) it will take for market sentiment to reflect this in a lower discount. In this report, we examine the companies with the largest discounts and review those very issues.
Companies: ADAM BC12 BGHL CGI HAN JZCP LMS MPO MVI MHN NSI NAS OCI PSHD RSE SIHL TFG TPOU UTL VIN ELTA ELX
There are more than 26,000 investment funds available to UK investors today, yet the average UK investor has just six funds of any kind in their investment portfolio. Clearly, then, investors must be filtering out a lot of potential investments before they make a decision, and an obvious way to do this is by choosing an appropriate sector - but here too, there is a somewhat daunting range to choose from. The AIC announced yesterday an “overhaul” of its sectors, in order that they are as “clear and helpful as possible” for investors, and there are now more than fifty of them to choose from. In our view, this move by the AIC recognises that investors are using labels to search for funds - and the more granular those labels are, the more likely investors are to find them useful; so full marks for effort. But examination of the 300 trusts that now sit in those sectors highlights a challenge which still remains; however refined a sector label is - many trusts don’t sit easily among their peers. This presents a problem. Filtering funds by sector helps see the wood for the trees, which is essential given the great ‘taiga’ we face as investors seeking one tree among 26,000. But it also means many investors routinely overlook great funds just because they sit in the ‘wrong sector’. The only way to really work out where these trusts are is hard graft - real analysis at a fund level. The good news is that, for investors who have the time to search for them, trusts like this often trade on a wider discount than might otherwise be the case, presenting an opportunity. The even better news is that we’ve done the legwork to find eight of them, so you don’t have to.
Companies: IIT MAJE ASIT ARR TFG
In our February article 'Sweet Treats', we launched our list of discount opportunities - trusts we felt had the potential to see their discounts close significantly and, in turn, supercharge investors' returns. Our list has had a good beginning to its life, with the majority seeing their discounts close slightly in the almost three months since, aided by a good period for the markets. The investment trust universe has seen its average price rise by 3.2% since 13 February, as the below graph shows. We can trace the rally in the market to the meeting of the Federal Reserve’s interest rate setting body, the FOMC, on the 20 March. Shortly after that meeting, global equity markets began their rise, as investors lowered their expectations for future interest rates.
Companies: ASCI HOT ASCI HOT RMMC OCI MHN TFG BEE
In 2018, Tetragon Financial Group (TFG) proved its ability to generate positive returns from a portfolio of alternative assets against a backdrop of negative returns across more traditional asset classes (including equities, bonds and commodities). Tetragon’s 12.1% return on equity (ROE) in 2018 is well within its long-term target range of 10–15%, and its 10.3% NAV total return compares with the negative 8.9% and 14.8% returns of the MSCI AC World and FTSE All-Share indices, in comparable US dollar terms. While its NAV progressed steadily higher, Tetragon’s share price declined broadly in line with global equity markets in 2018 and its discount reached 48.8% in early January 2019. However, this was turned to an advantage via the recently completed US$50m tender offer, which was 2.3% accretive to NAV per share, and the discount has subsequently narrowed. Maintaining a progressive dividend policy, Tetragon has a sector-leading 5.6% yield.
3i Infrastructure – New investment | Fair Oaks Income – Final redemption of 2014 shares | Tetragon – Final close of TCI III
Companies: 3IN FAIR TFG
Greencoat UK Wind – Finals to 31 December 2018 | Tetragon – Finals to 31 December 2018 | RM Secured Direct Lending – Proposed fundraising | Electra Private Equity – Dividend declaration
Companies: UKW TFG RMDL ELTA
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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.
To achieve YoY revenue growth over H1/20A despite the challenges of Covid-19 and its impact on the travel sector is testament to Equals' resilience and increasing focus on B2B and International payments services. While weaker gross profit and EBITDA margins have impacted profitability in H1/20, we see potential for an earnings recovery in H2/20 given cost reduction measures currently being undertaken. This should lead Equals to cash breakeven in Q4/20 and FCF positive by early FY21.
Companies: Equals Group Plc
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
In June, faced with the task of replacing its longstanding portfolio manager, Alistair Mundy, Temple Bar Investment Trust’s (TMPL’s) board reiterated its commitment to a value style of investing. The board has now opted to hand the management contract to Nick Purves and Ian Lance of RWC Partners, two managers with considerable experience of managing income portfolios using a value-style approach. Value investing, where managers buy stocks that are valued more cheaply than market averages – based on measures such as price/earnings, price/book and yield – is deeply out of favour. The RWC team says that value stocks have never looked more unloved in the 30- odd years that they have been managing money. In their view, this makes it imperative that TMPL investors keep faith with the strategy and it also means this is an attractive entry point for new investors. One important change, however, is a cut to TMPL’s dividend to a level that the RWC team believes will be more sustainable.
Companies: Temple Bar Investment Trust
Sigma Capital (“Sigma”) has partnered with global alternatives manager EQT to deliver and manage a £1bn GDV private-rented sector (“PRS”) housing fund focused on Greater London. EQT will invest £300m equity, complemented by debt (including a Homes England facility), to build 3,000 homes in 5 years. Sigma will generate fee income as development manager, a recurring fee income stream from managing completed assets, as well as participation in returns via a minority co-investment (£16m) and a profit share. We estimate that the fee income alone is worth £45m to Sigma in the first five years: 50% of the current market cap. Crucially, this is a step up in AuM bringing a high quality long-term recurring earnings stream. We will reforecast following interim results (expected tomorrow) to provide full context.
Companies: Sigma Capital Group Plc
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
HSBC’s future should be clarified as soon as the US and China come back to the negotiation table. This will not happen before the US elections are over. In the meantime, HSBC will continue to be instrumentalised and its share price will remain under pressure.
Companies: HSBC Holdings 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
In line interim results to 30 June 2020 show the strength of this business amid a difficult environment. This is the first step in what should be an exciting growth trajectory toward a larger, scaled up business with high recurring revenues and ownership of the full supply chain in the personal injury and clinical negligence market for clients requiring long-term, risk-adjusted returns. We reiterate our TP of 50p, noting further upside potential as acquisitions are completed.
Companies: Frenkel Topping Group Plc
Today's news & views, plus announcements from VOD, POLY, SMDS, BLND, BYG, WEIR, DC, SNR, SHI, INTU, IHR, CNC, ARE, INCE
Companies: INTU SHI INCE
The impressive full year 2019 results included some eye-catching numbers, including a record PBT of £40.1m (nearly 3x FY18 @ £14.3m), £620m of reserves acquired over 16 legacy deals, and $842m of (estimated) Contracted Premium in the Program business – on track to breach $1bn in FY20 as previously guided and $1.5bn-$2bn in 2022-2023.
Companies: Randall & Quilter Investment Holdings Ltd.
Mercia’s FY20 results reflect continued progress, delivering on management’s three-year strategy. AUM climbed 58% to £0.8bn, while FUM rose 73% to £658m. Following the acquisition of the NVM VCT fund management business, the company is operationally profitable on a monthly basis, with annual revenues exceeding operating costs for the first time in FY20. Net assets rose 12% to £141.5m, with the direct investment portfolio stalled at £87.5m reflecting the impact of COVID-19 fair value adjustments and a £15.7m net investment. The group remains well-placed for a downturn with £30m of unrestricted balance sheet cash and £320m of group cash. Post period end the group exited The Native Antigen Company, with £5.2m in cash (8.4x return, 65% IRR) expected. Despite the group’s progress, Mercia’s shares continue to trade at a material discount to NAV (0.60x), even before considering the embedded value of the third-party fund management business (> 4.5p at 3% of AUM).
Companies: Mercia Asset Management Plc
Activity was limited by housebuilding shutdown in H1 as a result of COVID. Sigma remained profitable and, with a strong balance sheet, has weathered the storm. With yesterday’s launch of the £1bn EQT London fund, a material step change is expected for the coming financial year. We reinstate forecasts; updating for EQT and revised expectations post-COVID. We revisit our valuation: a “sum of the parts” approach, assuming no additional AuM, implies an intrinsic value of 200p/share.
Trident Royalties Plc (AIM: TRR) has, this morning, announced the acquisition of a 1.5% Net Smelter Royalty (NSR) over the resourcestage Lake Rebecca Gold Project located in the highly prospective Eastern Goldfields province in Western Australia. The royalty package is being acquired from a private seller for a total consideration of A$8.0 million (c. US$5.63 million), comprising of A$7.0 million in cash and A$1.0 million in new ordinary shares in Trident. The acquisition is Trident’s fifth overall and its third gold deal. As per strategic guidance the company is moving fast assembling a diversified portfolio with a paying cashflow stream from iron ore and copper production and several strategic gold royalties with the potential for near term revenues. The market is paying attention with TRR shares up 49.8% since its IPO on AIM in June this year. There is clearly more to come with c. US$7.5 million of uncommitted cash as well as the potential for debt funding and the ability to use equity as acquisition consideration. The Lake Rebecca Gold Project operated and wholly owned by Apollo Consolidated (ASX: AOP), is located 150km ENE of Kalgoorlie in the Eastern Goldfields Province of the Yilgarn Craton. The Project, envisaged as a simple open pit operation, is close to existing gold infrastructure namely Saracen Mineral Holdings Limited’s (ASX: SAR) Carosue Dam Operation whose processing plant is in the process of being upgraded to increase throughput to 3.2 Mtpa.
Companies: Trident Royalties Plc
L&G released operating profit from continuing divisions of £2,514m, up 17% yoy. All business units posted an upward trend in earnings. The profit excludes the mortality release of £155m and the Mature Savings and General Insurance businesses (£11m). Net profit stood at £1,834m. The proposed dividend is 12.64p/share, bringing the annual dividend to 17.57p. The Solvency II ratio stood at 184%. We keep our positive opinion on L&G, the business model of which allows it to benefit from increasing numbers of deaths.