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Why Seneca Global Income & Growth sold Civitas

Why Seneca Global Income & Growth sold Civitas

Seneca Global Income & Growth (SIGT) sold out of Civitas Social Housing (CSH) in February because the team believes the social housing investment company was too slow to disclose problems at First Priority Housing Association.

Earlier this year, it emerged that First Priority – one of Civitas’s housing association partners – had been censured by the Regulator of Social Housing for governance and financial failings.

‘One of Civitas' key housing association partners, First Priority Housing Association, announced that it was owed money by private care providers and local authorities. Although these debts pertained to assets outside Civitas' portfolio, they had created a cash flow problem for the housing association as a whole,’ SIGT’s investment team explained in the mult-asset trust’s results for the year to the end of April.

While Civitas had been quick to announce small purchases of assets that SIGT’s team felt were fairly immaterial, they noted the announcement to the London Stock Exchange concerning problems at First Priority came three weeks after the initial disclosure on the Housing and Communities Agency website.

‘We would prefer to invest with teams that are more conservative, and quick to respond to any news or development that might be construed as negative,’ the team added.

Civitas, which published its maiden annual results today, has recently taken steps to improve its due diligence on acquisitions and improve the information it gives investors on its portfolio. 

While the problems at First Priority alienated some investors, it has had its supporters with Hawksmoor Investment Managemement complaining Civitas had been the vicitim of misinformation.

Led by chief investment officer Peter Elston (pictured below), the multi-asset team also reduced SIGT’s position in Aberdeen Asian Income Fund (AIIF), formerly managed by veteran Hugh Young. Some of the proceeds were invested into Samarang Asian Prosperity. Here, manager Greg Fisher targets value opportunities in Asian small caps where there is no analyst coverage.

Performance drivers

Over the year to end of April, SIGT’s net asset value (NAV) rose by 5.7%, which compares to 7.7% by the benchmark, which is CPI plus 6% per annum (currently around 8.8%). At SIGT’s AGM in July of last year, shareholders approved a change to the investment objective and benchmark from three-month Libor plus 3% per annum (equating to 3.5%).

The team said its UK mid-cap exposure had held back performance over the period, with pub operator Marston’s (MARS) and Kier Group (KIE) featuring among the key performance detractors.

Bargain Booze owner Conviviality (CVRC), which went into administration in April of this year, was a surprise performer for SIGT, following the team’s decision to sell out last November. It initially entered the portfolio in January 2017 and in spite of its strong performance during this period, the team sold out after governance concerns caused them ‘to lose confidence in the company’.

Over the period, online stockbroker AJ Bell – which is held privately and is due to IPO later this year – was the top performer in the fund. Its value was written up from £7 to £8.30 per share.

The Aberdeen Private Equity fund was another performance contributor over the 12-month period. The board announced plans to sell its entire portfolio and distribute proceeds to investors, which led to an immediate closing of the discount and generated a 26% return.

‘On a negative note, the company's holding in the Assured fund slipped throughout the year and was further written down at the year end. It is becoming clearer that the cost of servicing the fund's holdings in life policies is rising, resulting in persistent decay of net asset value,’ the team added.

Although performance lagged the benchmark, the 5.7% NAV return was delivered with lower volatility than the FTSE All-Share Index. The team also declared a fourthinterim dividend of 1.64p per share, bringing total dividends of 6.38p per share for the year to 30 April 2018. This represents a 3.9% on last year’s payout.

AGM proposals

At the next AGM, the board is proposing to remove the annual continuation vote. They believe the discount control mechanism, which has been in place since June 2016, provides ample liquidity for shareholders wishing to exit the fund. In addition, as the bulk of the fund’s shareholders invest via advisers or online brokers, this means shareholder turnout at votes can be low.

‘In turn, this could give a relatively small shareholder an undue influence and cause mischief over a continuation vote,’ explained SIGT chairman Richard Ramsay.

At last year’s AGM the issue of new shares, equivalent of up to 20% of the outstanding shares, was approved. Shareholder approval was then granted at the general meeting in March to issue a further 10% of new shares to facilitate the discount control mechanism. In line with these moves, the board will propose to do the same again at the upcoming AGM via two resolutions.

‘The board acknowledges that some shareholders are concerned about their ownership percentage in the company being reduced, even if slightly, via non pre-emptive share issuance.

‘However, increasing the size of the company via the discount control mechanism adds value for shareholders in two ways: new shares are issued at a small premium to NAV thereby enhancing NAV per share; and, as the company grows in size that should lead to the reduction of the ongoing charges ratio by spreading fixed costs over a larger base,’ Ramsay said.

This was the case over the 12-month period, which saw the net issuance of 6.34 million shares worth £11.1 million. This brought the ongoing charges ratio down from 1.61% to 1.45%.

Over the past five years, SIGT’s share price has risen by 65%, which compares to 59.2% by the average fund in the Association of Investment Companies’ flexible investment sector. The £84 million fund currently trades on a 1.5% premium to NAV, which compares to a 9% discount across the sector.

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