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The incredible shrinking fund on a 19% yield

The incredible shrinking fund on a 19% yield

Hardy investors prepared to go the extra mile can pick up a truly amazing bargain in a little-known Romanian investment company called Fondul Proprietatea (FPq.L).

Romania may seem an out-of-the way place to direct your savings but it is a highly interesting emerging market on the doorstep of Europe, a member of the European Union but not the eurozone.

Fondul, whose name means Property Fund in Romanian, has its main home on the Bucharest Stock Exchange but you don’t have to go that far as it has a secondary listing in London.

Offering exposure to the small but increasingly dynamic Romanian economy, Fondul’s London-listed shares are very cheap, trading at a steep 25% discount to their underlying asset value.

What excites the band of investors following the stock is its track record for chucking out cash as it benefits both from the country’s privatisation programme and seeks to improve shareholders’ returns.

Established in 2005 as a unique scheme to compensate people who had property seized under Communist rule, Fondul offers a 5-6% yield from a portfolio of public and private Romanian banks, energy companies, transport stocks and utilities.

It pays an annual dividend set at minimum of 5 Romanian cents a share. The currency, the Romanian leu (RON), is currently worth around a quarter of a US dollar or around a fifth of a pound.

Frequently, Fondul doubles shareholder pay-outs with special dividends to mop up unused investment income. This has lifted the yield to nearly 11% this year.

In addition it is very active in buying back its shares, both in the open market and through formal ‘tender’ offers to shareholders. The latter buy the shares at a price closer to their true net asset value (NAV), giving investors an uplift. Combined with the dividends, these could boost Fondul’s overall yield to as much as 19% this year, according to its fund manager Franklin Templeton.

The scale of Fondul’s distributions to shareholders is staggering. Combined with dividends, the company has paid RON 9.2 billion or US$2.57 billion (£2 billion) to investors since 2010 when Franklin Templeton won the contract to run the company. This has shrunk its assets by nearly half.

In a world where fund managers strive to attract money from investors, Franklin Templeton gets paid to do the opposite. Portfolio manager Greg Konieczny (pictured) grins like the Cheshire Cat when he describes how Fondul is effectively too big for Romania’s fledgling stock market. ‘I know it’s crazy for a fund manager to say it but it’s true!’

The result of this return of capital has been a dramatic re-rating in the shares, which at one point stood on a discount of over 60% below NAV. Recent performance has been volatile as falling oil prices hurt energy stocks. Since the shares started trading in London in April 2015 the share price has gained over 12% from $10.106 to $11.350 a share. That does not include the dividends and buybacks, though. Including these UK investors have received a 30% total return in the past year.

Liberum Capital analyst Myrto Charamis said: ‘If you’re looking for a return it is an amazing investment. Since 2010 when Templeton took it on it has returned 48% of net asset value.’

There are drawbacks, however. Fondul’s London-listed shares take the form of global depositary receipts (GDRs) which cannot be held in ISAs (individual savings accounts) or Sipps (self-invested personal pensions). This is because their main listing in Bucharest is not on HM Revenue & Customs’ list of approved stock exchanges.

This does not bar you from holding Fondul GDRs outside an ISA or Sipp in a general investment account, for example, and to use your annual allowances to minimise the capital gains and income taxes you may have to pay on the distributions.

You will also need a specialist stock broker to buy them because GDR trades are settled outside the London Stock Exchange’s Crest system. The Personal Investment Management & Financial Advice Association (PIMFA) website may be able to help you find a broker that uses the Clearstream system instead.

Fondul may be worth the effort though. A flotation of Hydroelectric, its biggest holding, has been delayed until next year but Konieczny says work is underway to sell other companies accounting for over a quarter of its assets.

‘On top of this, given the strong performance of the portfolio companies, we expect increased dividend income for the fund in 2017 of RON 556.4 million, 59% higher than dividends received in 2016 of RON 349.5,’ he said.

If this still sounds too much bother, you can find a global fund to do the work for you. US activist investor Elliott Associates is the largest holder with a 23% stake but does not offer a fund to UK investors. A better way to access Fondul is through British Empire (BTEM) and Utilico Emerging Markets (UEM) investment trusts which both hold smaller positions. These global funds like to invest in trusts and companies on wide discounts. Their own shares look cheap too with each on discounts of 11%.

This article was first published in the Telegraph on Saturday. 

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