Shares in Catco Reinsurance Opportunities (CAT) have tumbled over the last two weeks, as the spate of natural disasters hitting the US, the Caribbean and Mexico threatens to take its toll on the fund.
Investors first took fright over hurricane Harvey's potential impact on the fund, which provides reinsurers with protection against natural disasters.
Catco issued a statement saying that insured wind losses due to the hurricane would be in the 'low single digit billions' of dollars, with insured flood losses less certain, and provided the combined figure was less than $10 billion, 'the impact on the investment portfolio is not expected to be significant'.
But that was not enough to reassure shareholders, who are now worried about the potential impact of hurricane Irma, which has battered the Bahamas and is approaching Florida, and last night's earthquake in Mexico.
The shares have fallen 15% over the last two weeks, the biggest ever decline since its launch in December 2010.
All of that has been accounted for by the wiping out of their premium to net asset value (NAV) replaced by a discount that has widened as uncertainty has built.
The shares were trading on a 1.7% premium to NAV on 25 August, just as hurricane Harvey began to hit Texas, and yesterday closed at a 14.2% discount. That discount is now likely to have widened further, after today's 1% share price fall.
And investors still haven't priced in the absolute worst outcome for the fund. Jefferies analyst Matthew Hose pointed to Catco's own worst case single event estimates of 10% losses each for a Florida windstorm and a US Gulf windstorm, such as Irma and Harvey, and 2% for a Mexico earthquake.
It's worth highlighting the scale of the disasters needed to trigger these worst case scenarios: in the case of Harvey, Numis analysts have estimated losses would need to be bigger than those caused by 2005's hurricane Katrina.
The last fortnight's events have delivered a perfect storm for Catco. The fund is prized by multi-asset managers for its role as a portfolio diversifier, offering returns uncorrelated to the equity and bond markets.
But it also seeks to diversify its exposure to disasters, seeking a wide geographical spread to avoid being hit by multiple events at the same time. The events of the last two weeks shows that risk can never be removed, said Hose.
'As we have seen, despite events such as a hurricane making landfall in the US and a Mexican earthquake having no theoretical correlation, they are still able to occur within a relatively short space of time,' he said.
The big widening of the shares' discount means Catco has been thrown straight to the top of the list of 'cheap' investment trusts compiled by Numis Securities. Its current 14.2% discount contrasts with the marginal premium the shares have enjoyed over the last month, giving the shares a Z-score of -4.1.
Just to recap, a Z-score is a measure used by analysts to put a premium or discount on an investment trust into the context of its previous 12 months. Roughly speaking, an investment company or trust with a Z-score of -2 or below is ‘cheap’, while a score of 2 or more is viewed as expensive.
|'Cheap' trusts||Share price premium (- discount) to NAV %||12-month average premium (-discount) %||Z-score|
|CATCo Reinsurance Opportunities Fund (CAT)||-14.2||0.1||-4.1|
|SQN Asset Finance Income (SQN)||-1.1||11.1||-2.5|
|Investor AB (INVEB)||-25.6||-9.1||-2.2|
|Ashmore Global Opportunities - £ (AGOL)||-32.9||-24.3||-2.2|
|Fundsmith Emerging Equities (FEET)||-1.6||1.2||-2.1|
|Invesco Perpetual Select - Balanced Risk (IVPB)||-2.8||-1.1||-2.1|
|NAXS Nordic Access Buyout (NAXS)||-18.0||-12.3||-1.9|
|PRS REIT (PRSR)||4.7||6.0||-1.9|
|Troy Income & Growth (TIGT)||-0.6||0.7||-1.8|
|Draper Esprit (GROW)||-12.7||0.3||-1.8|
|Aberdeen Asian Smaller Cos (AAS)||-15.6||-14.1||-1.5|
|Invesco Perpetual UK Smaller Cos (IPU)||-7.7||-5.2||-1.5|
|Hadrians Wall Secured Investments C (HWSC)||4.1||4.7||-1.5|
|MedicX Fund (MXF)||18.9||21.8||-1.5|
Source: Numis Securities 7/9/17
But Catco illustrates the limitations of relying on Z-scores to identify 'cheap' trusts. Catco only updates its NAV every month, and investors face a much longer wait to find out the real impact of Harvey, Irma and Mexico's earthquake.
That's due to the long chain of events that needs to take place before insurance losses hit the fund. First the insured party makes a claim, which is then covered by the insurer, which in turn goes cap in hand to its reinsurer. Only when the reinsurer seeks compensation for its losses from Catco can the fund properly determine its exposure.
'Following a loss event it can take a significant amount of time before an estimate of Catco's exposure can be established,' said Hose.
'For example, following the Tohoku earthquake in March 2011, Catco did not make an initial provision in the NAV until January 2012, and a full provision was not established until July 2012. The corollary being that it is difficult for the shares to find any support in the NAV.'
|'Expensive' trusts||Share price premium (- discount) to NAV %||12-month average premium (-discount) %||Z-score|
|Lazard World Trust Fund (WTR)||-5.4||-12.4||4.0|
|Sherborne Investors (Guernsey) B (SIGB)||8.2||-7.6||3.7|
|Shires Income (SHRS)||-2.7||-10.8||3.7|
|TR European Growth (TRG)||-0.5||-11.7||3.0|
|European Real Estate (ERET)||9.0||-19.4||2.9|
|Aberdeen New Dawn (ABD)||-11.2||-13.5||2.5|
|British & American (BAF)||129.3||70.1||2.5|
|TR Property (TRY)||-4.3||-11.0||2.3|
|JPMorgan Asian (JAI)||-6.5||-11.4||2.3|
|JPMorgan Global Growth & Income (JPGI)||3.0||-4.6||2.3|
|Greencoat Renewables (GRP)||9.7||7.6||2.2|
|Foreign & Colonial IT (FRCL)||-5.3||-8.0||2.2|
|AXA Property (APT)||-5.8||-16.0||2.2|
|Better Capital 2009 (BCAP)||-49.6||-62.8||2.1|
Source: Numis Securities 7/9/17
While Catco has been one of the worst performing investment companies in 2017, the top performer over the last 12 months is now beginning to look 'expensive'.
Shares in TR European Growth (TRG) are now approaching their first premium to NAV in 16 years after a stunning year for Ollie Beckett's European small cap fund.
Over the last 12 months, Beckett is one of only five investment trust managers to have delivered NAV returns of over 40%.
The rerating this has triggered has seen the shares rise even further, up 66.2%, the best record of any investment trust in the land.
The shares closed 0.5% below NAV yesterday according to Numis, a dramatic narrowing of a discount that has reached as wide as 18.4% over the last 12 months. That gives the shares a Z-score of 3, placing them in the 'expensive' list.
Beckett has acknowledged the part played by a broad European economic recovery in his fund's strong performance, and a weak pound coupled with a strong euro has also helped to boost returns.
But shrewd stock picking has also played its part. None more so than his swoop on Swiss solar energy company Meyer Burger Technology. The shares were down 96% from a 2014 peak when Beckett invested in January, with the company having implemented numerous restructures as it battled the difficult solar energy market.
But they have more than doubled in price since then, shooting into the fund's top 10, boosted most recently by rumours of a tie-up with electric car maker Tesla.