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Investment Trust Watch: Bennett's chilling warning
'Sell everything and hold cash' warns highly-rated fund manager John Bennett, as he scraps borrowing from his trust in bid for safety.
It's not often that a fund manager warns you off buying their fund. But John Bennett, the highly-rated manager of the Henderson European Focus (HEFT ) investment trust, is so bearish about the prospects for markets that he was warned investors to 'sell everything and hold cash'.
Bennett made the comments in a meeting with analysts yesterday. And while he hasn't quite done that with his trust, Bennett has been implementing some defensive moves.
Yesterday he removed the fund's gearing, or borrowing, which had stood at 7% at the end of December, and the trust holds around 1.5% in cash, a level that Bennett may increase.
Bennett has long been cautious over the prospects for European markets. Last year he warned that he was struggling to find bargains given elevated stock prices as a result of the European Central Bank's money-printing quantitative easing efforts.
But those fears now appear to have become more acute. According to analysts at Winterflood, who published a note on their meeting with the manager yesterday, 'he is anticipating a global recession in international trade with a lengthy capital goods bear market. In his view, China has overcapacity in many sectors, which will create oversupply globally and lead to deflation'.
Bennett (pictured) is even considering buying protection against market falls through a 'put' option, which gives an investor the right to sell an investment at a fixed price for a certain period. It is a technique that has been employed by UK investment trusts Acorn Income (AIF ) and Diverse Income (DIVI ) to protect against market falls.
But he also cautioned that forecasting the direction of markets was akin to guesswork, particularly given central bank interventions. As if to prove his point, Japan stunned the market this morning by introducing negative interest rates.
Paradoxically, only investors who disagree with Bennett's bearish view are likely to want to invest in his trust. Returns have been underwhelming over the last year, with the shares down 5.5% over 12 months, worse than the 4.5% loss from the index, as Bennett's value-conscious style has found itself out of favour.
But those who believe value investing is due a comeback may be attracted by the erosion of the premium on HEFT's shares since the turn of the year. According to data from Numis Securities, the trust was trading at a 2.4% discount to net asset value (NAV) at Thursday's close, giving it a Z-score of -2.5.
Just to recap the Z-score is a measure used by analysts to tell if an investment trust is trading outside its historical range. Z-scores are useful because they can prevent investors from simply buying a trust because the shares are on a discount below their net asset value. A big discount does not necessarily mean cheap if the shares are habitually undervalued. Roughly speaking a Z-score of -2 or below is considered ‘cheap’ while a score of 2 or above is ‘expensive’.
But HEFT doesn't even make it into the top 15 'cheap' investment trust list compiled by Numis. That list is dominated by renewable energy infrastructure trusts, whose discounts have widened amid a bleaker outlook for power prices.
|'Cheap' trusts||Share price premium (- discount) to NAV %||12-month average %||Z-score|
|CVC Credit Partners Euro Opps - Euro (CCPE)||-4.9||0.3||-4.4|
|Fair Oaks Income (FAIR )||-3.5||5.7||-4.1|
|NextEnergy Solar (NESF )||-9.2||2.2||-3.8|
|Carador Income Fund (CIFU )||-13.2||-3.4||-3.4|
|John Laing Environmental Assets (JLEN )||-3.2||5.0||-3.3|
|JPMorgan Global Emerging Markets Income (JEMI )||-10.8||-2.1||-3.3|
|Hansa Trust A (HANA )||-32.4||-28.5||-3.2|
|Gabelli Value Plus (GVP )||-9.6||2.3||-3.2|
|Artemis Alpha (ATS )||-25.9||-17.9||-3.2|
|Pantheon International (PIN )||-27.0||-17.0||-3.1|
|Foresight Solar (FSFL )||-2.6||2.0||-3.0|
|North American Income (NAIT )||-13.3||-9.7||-3.0|
|Ranger Direct Lending (RDL )||-5.1||5.5||-2.8|
|Macau Property Opportunities (MPO )||-45.8||-32.5||-2.7|
|EP Global Opportunities (EPG )||-6.5||-1.4||-2.7|
NextEnergy Solar (NESF ) yesterday announced a £10 million writedown to its net asset value due to a 6.1% downgrade in its long-term power price forecasts, sending its shares to a 3.5% discount to net asset value. With the trust having traded on an average premium of 2.2% over the last year, that gives it a Z-score of -3.8.
Other trusts in the sector, which has tended to trade at a premium over the last year, have also fallen to a discount. Shares in John Laing Environmental Assets (JLEN ) are trading at a 3.2% discount, giving it a -3.3 Z-score, while Foresight Solar (FSFL ) is trading 2.6% below NAV, resulting in a Z-score of 3.
The impact of these share price falls can be seen in the yield of these trusts, which has reached as high as 7.4% in the case of Foresight Solar, 6.7% for NextEnergy Solar and 6.2% for John Laing Environmental Assets.
That may look enticing, but more problems could lie ahead, according to Jefferies analyst Matthew Hose. Discounts pose a particular problem for these funds as they effectively preclude them from raising equity to repay debt, leaving them 'geared'.
'This will exacerbate the impact on the NAV of any reduction in power price forecasts and - all things being equal - will result in a higher level of gearing going forward,' he said. 'Falling power prices have the potential to create a negative feedback loop for the renewable infrastructure funds.'
|'Expensive' trusts||Share price premium (- discount) to NAV %||12-month average %||Z-score|
|Aurora Russia (AURR )||1.1||-43.1||2.7|
|Burford Capital (BUR)||79.9||39.2||2.7|
|Axiom European Financial Debt (AXI)||7.1||4.2||2.5|
|JPMorgan Elect - Managed Income (JPEI )||-0.2||-2.5||2.4|
|Mercantile (MRC )||-7.2||-10.4||2.4|
|British & American (BAF )||60.8||22.6||2.4|
|BB Biotech (BION.S)||-9.6||-17.3||2.2|
|European Real Estate (ERET )||-15.0||-38.9||2.2|
|AXA Property (APT )||-8.5||-18.1||2.2|
|SQN Asset Finance Income C (SQNC )||6.4||4.7||2.1|
|Independent (IIT )||1.8||-5.6||2.1|
|Lindsell Train (LTI )||33.3||20.2||2.0|
|Seneca Global Income & Growth (SIGT )||2.7||-2.7||1.9|
|Alliance Trust (ATST )||-8.5||-11.6||1.9|
|Schroder Global Real Estate (SGRE )||-3.7||-7.4||1.9|
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by Gavin Lumsden on Sep 30, 2016 at 17:23