Sometimes it really pays to invest in the shares of fund managers rather than in the funds they run. For example, in the past five years you could have doubled your money in Schroders (SDR), gained 115% in Jupiter Fund Management (JUP), done even better with Hargreaves Lansdown (HRGV), the investment broker with a funds arm, whose stock has advanced 159%, or pocketed a whopping 313% in the recovery of Liontrust (LIO).
Anything like that would be manna from heaven for the managers of Henderson Alternative Strategies Trust (HAST) as they seek to convince investors to vote for the investment trust’s continuation this month.
Ahead of the shareholder vote on 24 January co-managers Ian Barrass and James de Bunsen are keen to discuss their bright ideas, yesterday revealing a new stake in AIM-listed Sigma Capital Group (SISGM).
Sigma is not a conventional fund manager like the groups mentioned earlier, describing itself as a residential development and urban regeneration specialist. The £78 million company is small and not well known but Barrass and de Bunsen believe this will change as excitement builds over its role managing the PRS Real Estate Investment Trust (PRSR).
PRS, the only fund run by Sigma, was one of the biggest investment trust launches last year, attracting £250 million from investors – and a 10% stake from the government – to invest in the supply of desperately needed new homes for people to rent, although wealth manager John Spiers was unconvinced.
The disclosure of HAST’s 1% position in Sigma was well-timed. PRS today published a business update revealing it had committed all the money raised at its stock market flotation in May. This will lead to 1,720 new homes in the north-west, Midlands and south Yorkshire, 264 which have been completed and let, on which it will earn rent.
Talks are underway to borrow £200 million to build another 1,380 homes on identified sites, which would support PRS’ aim to pay a 6% dividend yield to shareholders.
A further £450 million of new development opportunities have also been identified. This makes it likely PRS will seek to raise more money with new share issues in future, particularly as the stock is sought after and trades at a 8% premium over net asset value.
All this is good news for Sigma which earns a 1% annual fee for managing PRS’s assets, with the percentage sliding to 0.7% as the trust grows. It also earns a 4% development fee for the cost of supplying new properties for PRS to rent out, further accelerating its growth as PRS expands.
Today the company issued its own trading statement, saying it expected full-year profits before tax to be slightly ahead of expectations at around £4 million, with further increases expected for the next financial year.
Its shares gained 5.7% or 5p to 92.5p, boosting the value of the £1.3 million (1.7%) stake HAST has bought in the past month.
‘It’s got very strong visibility of earnings growth that is not recognised by the market,’ Barrass (pictured) said yesterday.
He added that Sigma had appeared on their radar after colleagues at Janus Henderson bought £30 million of PRS shares in its initial public offer (IPO). Barrass praised its offering of good quality homes on reasonable rents as a ‘fantastic product’.
De Bunsen said they had plumped for the fund manager rather than the fund because PRS’ dividend aspirations didn’t match HAST’s informal target of an 8% annual return.
Has HAST done enough?
HAST’s annual returns have improved in the past two years, much to the relief of the managers who spent three years struggling to turn round the portfolio of investment companies and hedge funds after replacing the previous manager SVM in 2013.
Results published last month showed that in the year to 30 September, its net asset value grew by 10.8%, ahead of its informal target of 8% but behind the 15.4% return in its formal benchmark, the FTSE World index.
Fortunately for them, the share price did better with a total return including the annual dividend of 19.8% as investors bought in, attracted by the improving returns from a defensive portfolio combined with the prospect of a windfall should shareholders vote to discontinue the trust this month.
The shares currently trade at 303p, a 13% discount to their net asset value of 349.5p, according to Morningstar. In the event of a windup and a disposal of HAST’s holdings, investors could expect to get a pay-out closer to NAV, although breakup costs would erode some of this.
One shareholder, Hawksmoor, last year described the trust as an ‘each way bet’ for this reason.
HAST holds around 30 core positions in five categories, all of which generated positive returns last year, particularly specialist funds, such as Polar Capital Global Financials (PCFT) and Worldwide Healthcare Trust (WWH), and private equity funds such as Baring Vostok and Princess Private Equity (PEY).
Among their other trades, the managers revealed they had:
- Sold Ediston Property (EPIC) – having held it since its launch in 2014 and been very pleased with its performance, HAST exited last year due to concerns over the impact of Brexit on the UK economy;
- Bought £4.6 million shares in Biotech Growth (BIOG) after its shares dropped after the retirement of Sam Isaly, founder of its manager Orbimed and also manager of Worldwide Healthcare, over allegations of sexual harassment;
- Took some profits after strong performance in Standard Life Private Equity (SLPE) and Princess Private Equity and invested the proceeds in Safeguard Scientific, a US private equity fund focused on healthcare, financials and media which the managers believe trades at a significant discount to its true value.
- Switched from Genesis Emerging Markets (GSS) investment trust to the KLS Sloane Robinson Emerging Market Equity hedge fund;
- Took profits in star manager Alister Hibbert’s BlackRock European hedge fund, which returned 22% last year, and topped up a holding in the Majedie Tortoise hedge fund run by Matthew Smith and Tom Morris. Despite suffering its worst ever year in 2017, with a loss of about 10%, the HAST managers believe it could do better if the current bull market expires.