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Investment Trust Watch: European Assets really cheap!

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Investment Trust Watch: European Assets really cheap!

After some uncertainty following a share split last month European Assets (EAT), the high yielding smaller companies trust run by Sam Cosh at F&C Asset Management, has emerged as this week’s cheapest investment trust.

The figures at the top of our first table below have been adjusted for the recent ten-for-one share split which for a while distorted the Numis data. These show that at yesterday’s close the shares stood at 7% discount below net asset value (NAV), in contrast to their average modest premium of the past year to give them a truly inexpensive Z-score of -6.2.

Apologies for including it in last week’s ‘expensive’ table with an erroneous 81% average discount for the past year. We had excluded it in previous weeks due to the distortion of the share price split, but that one got through.

And just to recap, the Z-scores on which our ‘cheap’ and ‘expensive’ tables are based are a measure used by analysts to put investment trust discounts – shares trading below net asset value (NAV) – or premiums – when shares stand above NAV – into historical context. Roughly speaking a Z-score of -2 or below shows a trust is getting inexpensive and may provide a buying opportunity. By contrast, a Z-score of 2 or more is getting dear and may signal an opportunity to take profits.

Stifel analyst Iain Scouller picked up on European Assets’ low valuation in a note this week commenting:

‘Over 2017, European small-cap funds saw their discount narrow significantly but slowing NAV growth and the latest European political drama in Italy has heightened investor caution. As a result, European small-cap trusts have seen their discounts widen sharply. European Assets trades at a 7% discount, its widest level for at least a year. Historically this trust has traded around NAV, principally due to its chunky dividend yield (currently 6.6%) which is partly paid out of capital.’

It is also a favourite of Ian Cowie who holds it in his portfolio and who wrote in his column on this website in April of its ‘mouth-watering dividend income’, which compares well with the 2.6% average of its small, four-strong sector.

Cowie said he liked to shelter the shares in an ISA, to preserve their yield from the tax man, for which he was prepared to overlook its ‘relatively low growth’. Over five years EAT is the worst performing of four trusts in the AIC European Smaller Companies sector with a total shareholder return of 88.6%, well below the average of 143.6%.

Scouller also highlighted TR European Growth (TRG), managed by Ollie Beckett at Janus Henderson, the sector’s top-performer over five years with an impressive 178% total return. It is lurking just outside our ‘cheap’ table having de-rated this year with it shares near an 11% discount having traded at ‘par’ or NAV at the start of the year. This gives them a Z-score of -1.9, according to Numis. A similar trend has occurred at John Bennett’s Henderson European Focus (HEFT) on a 7.6% discount and -2.7 Z-score.

'Cheap' trusts Share price premium (- discount) to net asset value % Average 12-month premium (-discount) % Z-score
European Assets (EAT)  -7.2 0.9 -6.2
Origo Partners (OPP)  -91.4 -80.9 -3.0
Temple Bar (TMPL)  -6.8 -5.1 -2.9
Regional REIT (RGL)  -6.1 -1.9 -2.8
Aberdeen New Dawn (ABD)  -14.9 -12.8 -2.7
Henderson European Focus (HEFT)  -7.6 -0.7 -2.7
Invesco Income Growth (IVI)  -14.0 -10.8 -2.7
CATCo Reinsurance Opportunities Fund C (CATC)  -2.6 3.1 -2.6
Invesco Perpetual Enhanced Income (IPE) -0.9 4.5 -2.5
Alliance Trust (ATST)  -6.6 -5.7 -2.5
BlackRock World Mining (BRWM)  -14.4 -11.4 -2.5
Dunedin Income Growth (DIG)  -11.6 -10.0 -2.5
Crystal Amber (CRS)  -11.4 -2.7 -2.4
CVC Credit Partners Euro Opps - £ (CCPG)  -1.3 1.0 -2.4
Perpetual Income & Growth (PLI)  -11.4 -8.8 -2.4

Source: Numis Securities 7/6/18

Other notable ‘cheapsters’ in the table are Alastair Mundy’s Temple Bar (TMPL), where a combination of the manager’s out-of-favour value style and its high cash weighting are depressing the shares, now trading at nearly 7% below NAV and a -2.9 Z-score.

The appearance of Aberdeen New Dawn (ABD) in the table with a discount just below 15% is also interesting. The Hugh Young managed Asia Pacific ex-Japan trust has underperformed for several years. It has a mechanism that if its shares trade at an average of more than 15% in the three months to the end of April it will face a continuation vote at the following annual general meeting in August. That didn’t happen this year so it is safe for now but with discount hunters like City of London Investment Management holding over 20% of the shares, it can’t be complacent.

BlackRock World Mining (BRWM) may have clawed its way back from the dark days after the collapse of London Mining four years ago which led to a dividend cut two years later, but the shares, on a 14% discount and -2.5 Z-score, are getting close to being as lowly rated as they were back then.

CVC Credit Partners European Opportunities (CCPG) has traded at an average of a 1% premium in the past year. That gave it the platform from which to announce plans this week to issue £57 million of shares, news of which promptly sent it to a small discount and -2.4 Z-score. The fund hopes to tap into investor demand for a 5% yield supported by a portfolio of floating rate loans, whose returns and value should increase as interest rates rise.

'Expensive' trusts Share price premium (- discount) to net asset value % Average 12-month premium (-discount) % Z-score
NAXS Nordic Access Buyout (NAXS)  -6.0 -16.4 4.5
Phaunos Timber (PTF)  -5.3 -17.0 4.4
NB Distressed Debt Investment (NBDD)  -7.0 -19.9 4.2
BlackRock Throgmorton Trust (THRG)  -6.9 -14.1 2.9
BlackRock North American Income (BRNA)  -1.5 -6.1 2.8
Ashmore Global Opportunities - US$ (AGOU)  -28.5 -34.7 2.5
Funding Circle SME Income (FCIF)  7.2 3.7 2.5
Schroder UK Growth (SDU)  -7.9 -11.7 2.5
BlackRock Smaller Companies (BRSC)  -6.6 -11.6 2.4
Pacific Horizon (PHI)  3.4 -6.1 2.3
Henderson Smaller Companies (HSL)  -7.2 -12.3 2.2
Cambium Global Timberland (TREE)  -40.6 -50.4 2.1
HBM Healthcare Investments (HBMN)  -5.0 -15.7 2.1
Terra Capital (TCA) -7.4 -16.3 2.1
NB Distressed Debt - Extended Life (NBDX)  -12.0 -16.7 2.1

Source: Numis Securities 7/6/18

Quickly turning to our list of ‘expensive’ trusts (above) it’s evident to see once again the impact of narrowing discounts on UK smaller companies funds, three of which are in our second table. Veteran trust picker Peter Spiller remarked on this trend in annual results for his Capital Gearing Trust (CGT) trust, in which he disclosed he had been reinvesting investment gains in cheap, index-tracking exchange traded funds.

Peer-to-peer and direct lending funds divide opinion a bit like Marmite, but 6% yielding Funding Circle SME Income (FCIF) is clearly in favour with its shares ascending to a 7% premium over NAV and a 2.5 Z-score.

But it is the previously distressed timber fund Phaunos (PTF) that grabs attention with a sharply reduced discount of 5% and Z-score of 4.4 following a bid approach from its former fund manager.

Week's big risers Share price (p) Week ago (p) Change
Geiger Counter (GCL) 22.90 19.75 15.9%
Georgia Capital (CGEO)  1100.00 980.30 12.2%
Phaunos Timber (PTF)  0.49 0.44 11.5%
NAXS Nordic Access Buyout (NAXS)  58.60 54.00 8.5%
Manchester & London (MNL)  530.00 489.50 8.3%
Ratos AB B (RATOB)  30.88 28.60 8.0%
VinaCapital Vietnam Opportunity (VOF)  346.00 322.00 7.5%
DeA Capital (DEA)  1.32 1.23 6.8%
BlackRock Throgmorton Trust (THRG)  566.00 530.00 6.8%
Pershing Square Holdings (PSH)  14.84 13.96 6.3%
Sherborne Investors (Guernsey) B (SIGB)  25.40 24.00 5.8%
Pershing Square Holdings £ (PSH £)  1104.00 1046.00 5.5%
Pacific Horizon (PHI)  392.00 372.00 5.4%
Ashmore Global Opportunities - £ (AGOL)  410.00 390.00 5.1%
JPMorgan Chinese (JMC)  327.00 311.50 5.0%

Source: Numis Securities 7/6/18

(continues) The approach pushed Phaunos shares up over 11% this week as investors hoped that the board would abandon its slow wind-up of the portfolio and sell the lot to Stafford Capital which was doing a good job to turn round the portfolio left in a mess by a previous manager until last September when shareholders voted to discontinue the company. A sale to Stafford could allow investors to get their cash out quicker.

Week's big fallers Share price (p) Week ago (p) Change
Origo Partners (OPP)  0.70 1.13 -37.8%
Myanmar Strategic Holdings (SHWE)  25.00 27.00 -7.4%
Baker Steel Resources (BSRT)  45.10 47.00 -4.0%
Regional REIT (RGL)  95.20 99.00 -3.8%
BlackRock Latin American (BRLA)  398.00 412.00 -3.4%
Sirius Real Estate (SRE)  66.40 68.60 -3.2%
Africa Opportunity (AOF)  0.79 0.82 -3.1%
SQN Asset Finance Income C (SQNX)  91.21 93.80 -2.8%
Downing Strategic Micro-Cap (DSM)  88.80 90.90 -2.3%
India Capital Growth (IGC)  95.30 97.50 -2.3%
Schroder European Real Estate (SERE)  111.50 114.00 -2.2%
Global Resources (GRIT)  9.75 9.95 -2.0%
F&C UK Real Estate Investments (FCRE) 101.50 103.50 -1.9%
BlackRock Frontiers (BRFI)  154.00 157.00 -1.9%
Sanditon Investment (SIT)  83.25 84.75 -1.8%

Source: Numis Securities 7/6/18

If you need any cautionary tales about China private equity funds then look at the 38% fall this week in Origo Partners (OPP) which last month disclosed the company holding the operating assets of one of its big investments in China Rice had been seized to satisfy the alleged non-payment of a debt. A substantial impairment on the investment is expected.

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