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Investment Trust Watch: nemesis of JPMorgan knocks on small-cap trust’s door

Investment Trust Watch: nemesis of JPMorgan knocks on small-cap trust’s door

The UK investment trust sector has a new activist investor in the shape of Saba Capital Management, a New York based hedge fund with a side line in challenging closed-end funds on wide discounts.

Saba has emerged with a 6.2% stake in JPMorgan Smaller Companies (JMI) in what appears to be its first foray in the UK, according to our search of stock exchange announcements.

The stake makes Saba the third biggest shareholder in JMI, a £170 million investment trust whose shares trade 16% below net asset value, despite a decent track record under managers Georgina Brittain and Katen Patel.

Saba declined to comment on its purchase but has recent form as an activist in the US. Earlier this year its campaign against three heavily discounted funds run by Clough Capital Partners in Boston resulted in them buying back their shares at a price well above their market value.

Any tilt at JPMorgan over JMI would make a fascinating clash. The company’s founder Boaz Weinstein is best known for making up to $300 million betting against the investment bank when one of its traders lost over $6 billion on the notorious ‘Whale’ bet on credit default swaps five years ago.

However, Boaz (pictured), a former chess prodigy and star derivatives trader at Deutsche Bank, may not be squaring up for an immediate fight with JMI’s independent board of directors. In common with other discount hunters, such as City of London Investment Management, Boaz prefers a quieter approach to persuading investment company boards to take positive action to reduce their discounts. He recently told Institutional Investor’s Alpha magazine recently that ‘It doesn’t have to be contentious,’ adding, ‘otherwise you end up in an adversarial situation.’

Interestingly, Saba may have bought some of its holding from City of London which cut its position from 5.1% to 3.1% just before the hedge fund’s stake was first revealed in a stock exchange filing on 30 November. Another well-known value investor, 1607 Capital Partners, also reduced its holding to just under 3% in the summer, according to Thomson Reuters data.

With just over 14% of the trust’s shares held in JPMorgan Asset Management’s investor savings scheme, the investment group’s position looks relatively secure. However, with a discount that is significantly wider than the 11% average of UK smaller company trusts, it cannot afford to be complacent.

Under Brittain, JMI’s net asset value has grown by 171.5% over the past 10 years, which is slightly below the 179.6% from the Numis Smaller Companies index and behind the 210.7% average of rivals. Its total shareholder return of 193% beats the benchmark but lags the 264.4% sector average, according to Numis Securities.

Although wide, JMI's discount is not enough to merit inclusion in this week's list of 'cheap' trusts in our table below. The discount has narrowed from a one-year average of 19%, to give it a slightly expensive Z-score of 2.3.

Just to recap, a Z-score is a measure used by analysts to indicate if an investment trust is trading above or below its 12-month range. Broadly speaking, a Z-score of -2 or below shows a trust is getting comparatively inexpensive, while a score of 2 or more is becoming expensive compared to its own trading history.

 

'Cheap' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Yatra Capital (YATRA)  -29.4 21.9 -4.5
Hadrians Wall Secured Investments (HWSL)  5.2 8.9 -3.3
F&C UK Real Estate Investments (FCRE)  -2.1 4.2 -3.3
F&C Commercial Property (FCPT)  -3.6 4.7 -3.0
Amedeo Air Four Plus (AA4)  6.7 51.0 -3.0
Empiric Student Property (ESP)  -15.9 1.6 -2.7
LXI REIT (LXI)  0.2 6.0 -2.7
ScotGems (SGEM)  -4.7 1.9 -2.7
UK Mortgages (UKML)  2.8 7.0 -2.6
MedicX Fund (MXF)  10.1 20.2 -2.6
Hadrians Wall Secured Investments C (HWSC) -0.1 3.5 -2.5
Volta Finance (VTA)  -16.1 -11.7 -2.4
Eurocastle Investment (ECT)  -17.4 -1.2 -2.4
Alcentra European Floating Rate Income (AEFS)  -6.2 -3.0 -2.3
Sanditon Investment (SIT)  -6.6 -0.9 -2.2

Source: Numis Securities 14/12/17

This week's 'cheapest' share in Numis' list is Yatra Capital (YATRA), a tiny Jersey-based India property company listed on Amsterdam's Euronext exchange. It is in the process of selling its assets and is held by activist investor LIM Advisors.

More interesting for mainstream investors is the appearance of two F&C property trusts on small discounts. F&C UK Real Estate (FCRE) and F&C Commercial Property (FCPT) are nowhere near as cheap as they were after the Brexit vote last year when their shares dropped to 15-18% below NAV. They subsequently rebounded and prices of both hit a 10% premium above NAV earlier this year. They yield 5% and 4.5% respectively although FCPT's dividend is not currently fully covered by earnings. 

'Expensive' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Dunedin Enterprise (DNE)  -11.3 -41.8 4.3
Triple Point Social Housing REIT (SOHO)  6.6 4.5 3.2
Princess Private Equity £ (PEYS)  1.8 -3.4 3.0
JPEL Private Equity (JPEL)  -15.4 -20.9 2.9
Trinity Capital (TRC)  29.2 -54.9 2.9
Alternative Liquidity (ALF)  -66.8 -78.1 2.6
BB Biotech (BION)  3.6 -2.6 2.6
Summit Germany (SMTG)  23.8 11.1 2.6
Herald (HRI)  -10.8 -17.3 2.5
River & Mercantile UK Micro Cap (RMMC)  8.8 -1.8 2.5
JPMorgan Mid Cap (JMF)  -5.9 -10.8 2.4
JPMorgan Elect - Managed Growth (JPE)  -1.5 -3.2 2.4
JPMorgan European - Growth (JETG)  -5.4 -9.5 2.4
Templeton Emerging Markets (TEM)  -10.7 -12.9 2.4
Baker Steel Resources (BSRT)  -11.0 -26.9 2.4

Source: Numis Securities 14/12/17

Any nervousness  JPMorgan may have over the Smaller Companies trust will be offset by the pleasure of seeing three other trusts it manages make it into the list of 'dear' stocks with Z-scores of over 2. JPMorgan Mid Cap (JMF), Elect Managed Growth (JPE) and European Growth (JETG) have all seen their discounts narrow after a strong run this year.

It has been another good year for private equity trusts with JPEL Private Equity (JPEL) also seeing its discount improve to a comparatively narrrow 15%, while Princess (PEY) has moved to a small, but unusual premium. 

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