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Investment Trust Watch: catastrophe, property or bust!

Looking for an alternative to equities and bonds? Three of this week's cheapest trusts could offer an answer if you can get hold of them.

 
Investment Trust Watch: catastrophe, property or bust!

With both shares and bonds looking expensive right now, there is a case to be made for other ‘alternative’ assets, which is why it is interesting to see three, diverse trusts at the top of our ‘cheap’ list that could be put in this camp.

You don’t get much more alternative than catastrophe insurance, which is what the C shares in CATCo Reinsurance Opportunities (CATC ) offer exposure to. The idea is that catastrophes are rare events and – if you get your underwriting right –can make good money taking in premiums in between shelling out for claims.

This London-listed feeder for a Bermuda-based fund has been prominent in our first table for a few weeks. A note today from Numis Securities, the company’s broker, offers an explanation for why its shares have been out of favour, with their price falling to a 6.4% discount below net asset value (NAV) after the fund’s NAV took a 2.1% hit in December.

The current discount compares to the average 0.4% premium above NAV that the stock has stood at in the past year, giving it a Z-score of -2.9.

Just to recap, a Z-score is a measure used by analysts to determine whether an investment trust is trading significantly beyond its one-year range. Roughly speaking, a Z-score of -2 or below is ‘cheap’ while a score of 2 or more is ‘expensive’.

According to Numis, December is often a busy month for claims as companies wait for the year end to file their losses. Moreover, 2016 was beset with a large number of catastrophes such as the wildfires that plagued Canada in the summer, hurricane Matthew that hit South Carolina in October and the earthquake that struck New Zealand the following month.

The fall in December means the NAV of the dollar-denominated C shares rose 7.3% last year, below its target return of Libor (the inter-bank lending rate currently at 1%) plus 9-12%. Numis says the portfolio has hit its target since its 2010 launch with a 9.7% annual return and reckons the shares are suitable for investors seeking returns unconnected to equity and bonds markets.

Ranger looks for recovery

Shares in Ranger Direct Lending (RDL ) have suffered from the wrong kind of un-correlation of late, with the shares retreating on a pre-Christmas announcement of the bankruptcy of Argon Credit, a US lender that it had advanced $28.3 million.

Today the high yield fund said the SME Credit Line Platform through which it had lent the money had got hold of the collateral backing the loans and it would update investors once it knew how much it could recover. The shares – which are 35% held by Invesco Perpetual and yield over 10% - rose nearly 3% to £10.64 today. This should narrow the discount that at Thursday’s close stood at a wide 17%, giving a Z-score of -2.2.

Coincidentally, Perpetual Income & Growth (PLI ) and Edinburgh (EDIN ), the two equity income trusts run by Invesco’s Mark Barnett, hold some of Ranger’s shares and have seen their own stock near ‘bargain’ territory with their discounts widening, putting them on Z-scores of -1.9 and -1.7 respectively. 

A dripping drum

Lastly, Drum Income Plus Reit (DRIP ), a UK property fund offering a 5.9% yield and a quarterly dividend, might look more interesting for income investors encouraged by Danielle Levy’s article on commercial property prospects earlier today.

The fund, which invests in small commercial properties in the regions outside prime city centres such as London, has been steadily getting cheaper since hitting an exorbitant-looking 19% premium above NAV last April. The premium has now slipped to 6.5% above Numis’ estimate of the NAV, which makes them relatively cheap. However, stock in this small £37 million fund could be hard to get hold of given Tcam Asset Management in Edinburgh own 80% of the shares.

'Cheap' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
CATCo Reinsurance Opportunities C (CATC) -6.4 0.4 -2.9
Ranger Direct Lending (RDL) -16.9 -9.8 -2.2
Drum Income Plus REIT (DRIP) 6.5 11.6 -2.1
Perpetual Income & Growth (PLI) -9.8 -5.5 -1.9
NAXS Nordic Access Buyout (NAXS) -13.3 -7.9 -1.9
Investment Company (INV) -7.4 -2.1 -1.8
Edinburgh IT (EDIN) -5.0 -2.1 -1.7
JPMorgan Mid Cap (JMF) -11.5 -6.3 -1.6
Axiom European Financial Debt (AXI) -4.4 2.7 -1.6
Qannas Investments (QIL) -3.0 0.7 -1.5
LMS Capital (LMS) -42.1 -34.2 -1.5
Standard Life Equity Income (SLET) -8.4 -3.7 -1.5
North Atlantic Smaller (NAS) -19.0 -16.1 -1.4
Kennedy Wilson Europe Real Estate (KWE) -22.3 -11.4 -1.4
Dunedin Smaller Companies (DNDL) -20.8 -17.8 -1.3

Source: Numis Securities 19/1/2017

'Expensive' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Prospect Japan (PJF) -9.4 -26.7 3.8
Artemis Alpha (ATS) -17.6 -23.7 3.4
Fidelity Asian Values (FAS) -4.9 -11.3 3.3
Better Capital 2012 (BC12) -52.2 -65.9 3.3
Eurocastle Investment (EC2) 2.5 -13.9 3.0
Scottish IT (SCIN) -7.9 -11.5 3.0
Global Resources (GRIT) -45.9 -74.8 3.0
Aberdeen Latin American Income (ALAI) -8.9 -12.8 2.9
Alliance Trust (ATST) -4.7 -10.0 2.8
HBM Healthcare Investments (HBMN) -23.2 -29.5 2.7
Altamir Amboise (LTA) -30.4 -40.9 2.7
Africa Opportunity C (AOFC) -15.2 -22.2 2.5
Monks (MNKS) -4.0 -10.1 2.5
Aberdeen Japan (AJIT) -7.3 -11.9 2.4
Aberdeen Private Equity (APEF) -20.5 -30.7 2.4

Source: Numis Securities 19/1/2017

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