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Trust Tips: Numis' nine changes for cautious markets

Half-year review of investment trust recommendations sees Numis Securities' change two equity funds and seven in pricey 'alternative assets'.

Cautious calls

As with rival Winterflood, Numis Securities’ half-year review of its New Year investment trust recommendations is set against a backdrop of overall good performance, particularly from Europe, technology and UK smaller company funds, coupled with anxiety that toppy markets could make a sudden retreat.

‘With equity markets at record highs following an eight-year bull market, we remain wary about the potential for a correction at some stage during 2017,’ writes Charles Cade, head of investment companies research at Numis.

‘However, valuations do not appear to be in bubble territory, as investor sentiment is far from euphoric. In addition, economic growth prospects are improving (outside the UK) with global GDP growth of 3.4% and 3.6% predicted for 2017 and 2018, respectively, according to the IMF.’

While understanding some investors’ wish to take money off the table, Cade says his team’s preference is to favour investment companies under experienced active managers who take a long-term investment approach, rather than look over their shoulders at their stock market index benchmarks.

Numis has made two changes to its equity trust recommendations and seven to its favourites in ‘alternative assets’. Here it says it is increasingly hard to find good value trusts with many income-producing funds trading on high premiums above net asset value (NAV).

Next: Lindsell Train upgrade

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Lindsell Train upgrade

In January Numis repeated its ‘trading sale’ advice on Lindsell Train (LTI), concerned about the shares trading at a persistently high premium above their net asset value (NAV). It was a good call as the premium has since fallen to 17% with the shares down 15% this year despite strong underlying growth in its NAV.

Numis has now removed the ‘sell’ label but is far from positive on the £135 million trust run by star manager Nick Train (pictured). Although over half of LTI is invested in the quality, consumer franchise stocks that have made his Finsbury Growth & Income (FGT) trust famous, the trust is distinguished in having over a third (37%) of its assets in Train’s private fund management company Lindsell Train Limited.

Not wishing to dilute shareholders’ stake in the fund management company, Lindsell Train has consistently refused to issue new shares to sate investor demand and defuse a premium that hit 75% last year after the company entered the FTSE All Share index.

The share price premium combined with the portfolio’s strong underlying growth have made LTI the best performing investment trust. Over 10 years it has generated an astonishing 452% total shareholder return.

However, Numis is aware of the risks. ‘The fund’s long-term performance is impressive, helped by strong returns from the fund management group. However, we do not believe that there is any hidden value in the fund’s valuation of its stake, and the business has significant key man risk, in our view.’

Next: ‘Buy’ Bankers

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‘Buy’ Bankers

Global investment trust Bankers (BNKR) has been a favourite of Numis for some time although it has been nearly five years since it was dropped from the broker’s recommended list. This followed a sharp tightening in the discount, or gap between the share price and the trust’s underlying net asset value (NAV).

Last year the discount widened to 9% and with the shares still trading 6% below NAV, Numis has reinstated Bankers as a ‘core’ buy, saying the merger of its management group Henderson Global Investors with US rival Janus is not a distraction.

‘The fund benefits from an experienced solid management team, headed by Alex Crooke, and we do not believe that the recent merger with Janus will have any significant impact other than providing some additional research resources for US equities,’ it said. Bankers yields just over 2% in dividend income and has generated a 125% total shareholder return over five years.

Numis’ other global equity picks are: Caledonia Investments (CLDN), a ‘trading buy’ it spotted last summer which it has retained as the shares still stand on a 15% discount; and Monks (MNKS) and Witan (WTAN) which remain ‘core’ recommendations. For more defensive ‘multi-asset’ global funds, the broker continues to regard Capital Gearing (CGT) and RIT Capital Partners (RCP) as core holdings, and Aberdeen Diversified Income & Growth (ADIG) as a ‘trading buy’ on a 6% discount.

Next: ‘buy’ Syncona

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‘Buy’ Syncona

The first of three additions to Numis’ list of ‘alternative asset’ investment companies is Syncona (SYNC), a £1.1 billion life sciences formed in December when Battle Against Cancer Investment Trust (BACIT) bought the fund management arm of the Wellcome Trust.

Numis, which acts as Syncona’s corporate broker, rates it as a ‘core buy’, saying there has been encouraging progress in the £227 million life sciences portfolio this year, which is reflected in the shares’ 22% advance since the merger and their 25% premium to net asset value (NAV).

Although Numis is normally wary of trusts on high premiums it believes the underlying assets of Syncona are undervalued. ‘The fund benefits from a strong management team headed by Martin Murphy and a unique financing model where excess cash is invested in a fund of funds portfolio that has delivered net returns of 8.8% per annum over the past five years (as BACIT).

‘In addition, its strategy differs from VC [venture capital] investors or technology transfer businesses in that it seeks to build a focused portfolio of standalone life sciences companies, with the aim of backing the businesses through to commercialisation.’

Next: ‘buy’ Oakley Capital

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‘Buy’ Oakley Capital

The once wide discounts on private equity investment trusts have tightened significantly this year, making Oakley Capital (OCL) an anomaly with its shares standing 25% below net asset value (NAV) and a ‘trading buy’ in Numis’ opinion.

The large discount reflects investor unhappiness with the company’s previous habit of issuing new shares below NAV, diluting their stakes. An absence of share buybacks to curb the discount and a lack of transparency over its portfolio, also left observers unimpressed.

However, the Oakley leopard is changing its spots, says Numis. Disclosure in the latest annual report was improved and the appointment of Stephen Tredger as investor relations director was coupled with a commitment by the board to buybacks and to not make dilutive share issues.

Headed by Peter Dubens and David Till, Oakley Capital specialises in backing medium-sized media and technology companies in the UK and western Europe, such as listings publisher Time Out. The portfolio has performed well and Oakley partners have been buying shares and hold 1.5%, says Numis.

Next: ‘switch’ from Schroder Real Estate

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‘Switch’ from Schroder Real Estate

Numis slapped a ‘trading buy’ on Schroder Real Estate (SREI) last year after its shares briefly dropped to a 20% discount below net asset value (NAV) after the EU referendum. This has now disappeared and with the trust’s 3.9% yield lower than its UK rivals coupled with Brexit economic uncertainty, Numis suggests investors diversify their property exposure with a switch to Schroder European Real Estate (SERE).

A corporate broking client of Numis, SERE is best known for its ‘winning cities’ strategy of buying high quality properties in fast-growing European conurbations such as Amsterdam, Berlin, Hamburg, Madrid, Munich, Paris and Stockholm.

Numis has made SERE a ‘core buy’ saying its £157 million portfolio of nine properties is targeting a fully-covered, euro yield of 5.5% for investors who bought its shares at 100p at its launch in December 2015. ‘Based on the most recent quarterly distribution, the annualised yield is 3.7% (4.8 euro cents), although we would expect this to rise to 4.6% (6 cents) from the end of Q3 [third quarter] 2017,’ said Numis.

‘With around €30 million of capital to deploy and a strong investment pipeline, we expect further progress towards the annual target in the near term,’ it added. At yesterday’s close of 119.5p the shares stood at a 1.5% premium to Numis’ estimated NAV per share of 117.7p.

Next: ‘agony’ over NB Floating Rate Income

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‘Agony’ over NB Global Floating Rate Income

Numis says it has ‘been agonising’ over its recommendation for NB Global Floating Rate Income (NBLS) but has decided to remove it from its ‘core buy’ list.

The investment company invests in US ‘senior’ corporate loans which rank high in the event of a company collapse and pay a floating rate of interest. This latter feature makes them attractive as US interest rates have slowly begun to rise from their post-crisis lows.

However, strong investor demand has hiked the price of loans and cut their yields with NBLS’ latest quarterly dividend its lowest yet at 0.84p per share. As a result NBLS’ sterling share class has seen its yield fall to 3.7% from 4.4% last year.

Although loan prospects are good, Numis says the costs of hedging out movements in the dollar against the pound will put the fund’s capital values under pressure, adding: ‘we believe that the return profile may be lower than some investors are expecting and are removing it as a “core buy”, albeit that the fund may still be attractive for risk-adverse investors.’

Next: too much Action at 3i

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Too much Action at 3i

Private equity giant 3i (III) is in excellent shape after five years of transformation under chief executive Simon Borrows. Moreover its £5.8 billion portfolio has been driven by a highly successful investment in Dutch discount retailer Action, which accounts for 29% of its assets.

The bad news says Numis is all that is in the share price. At the time of writing its report 3i had delivered a 32.5% total return this year and its shares stood at a 50% premium above net asset value (NAV).

Removing its ‘core buy’ rating the broker commented: ‘we would caution that a lot of the progress made by 3i is already reflected in the share price, and we believe the rating could be vulnerable to any setback in Action’s ambitious expansion plans in France/Germany or to a general market correction.’

Next: P2P pressure and improvement

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P2P: pressure and improvement

Numis has taken off its ‘trading buy’ tip on P2P Global Investments (P2P) following a 13% recovery in the share price this year.

At the start of the year the broker saw the company, which buys loans on peer-to-peer platforms and holds stakes in lenders, was coming under shareholder pressure over its disappointing performance. Even after this year’s rally the shares are down about 6% since its launch in May 2014.

The recent revival has been spurred by news of the merger between MW Eaglewood Europe, the manager of P2P, and Pollen Street Capital, the manager of its rival Honeycomb (HONY). This raises the prospect of the two funds being merged eventually given fund manager Invesco is their largest shareholder with 33% of P2P and 46% of Honeycomb.

‘P2P shares are currently trading on an 11% discount to NAV, which has narrowed from as wide as 25%, while Honeycomb is trading at a 17% premium to NAV, which looks expensive in our view,’ Numis said.

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