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Investment Trust Watch: Qatar pays to survive
The heavily discounted Qatar Investment Fund shoots to the top of our 'expensive' table after securing its future with an unusual share offer.
One of the remarkable trends in investment trusts in recent years has been the number of closed-end funds that have moved to a premium in which their share prices trade above their underlying net asset value (NAV).
In a report this week analysts at Winterflood Securities highlighted how just over a third of investment trusts – 106 in total – stood at a premium at the end of October.
Nearly 30% of investment trusts investing in equities, or shares, enjoyed a premium rating, it found, largely the result of investors’ desperate search for income with interest rates approaching an unprecedented seven-year stretch at near zero lows.
But that doesn’t mean the problem of discounts – in which investment trust share prices lag their NAVs – has gone away. Many trusts with poor performance records or in difficult or misunderstood parts of the market continue to be massively undervalued, giving them an existential challenge.
Qatar survives continuation vote
This week provides a good example of a specialist fund having to dig deep to survive.
The Qatar Investment Fund (QIF), which invests in Qatar and other Gulf states, has shot to the top of Numis Securities list of ‘expensive’ trusts after a significant narrowing in its discount (see first table below).
At yesterday’s close QIF shares stood 3.7% below NAV, a big improvement on their 14% average discount of the past year. This gives it a Z-score of 4.3, well above the 2 mark at which analysts reckon a trust is moving significantly ahead of its normal range.
The cause of this re-rating was the overwhelming decision of shareholders to reject a discontinuation proposal and to keep the dollar-denominated trust going.
Shareholders, which include the City of London Investment Group as well as the Gulf state’s sovereign wealth fund, the Qatar Investment Authority, were not just motivated by their desire to preserve a fund devoted to the Middle East. They were also responding to an innovative tender offer from the trust’s chairman Nicholas Wilson.
Earlier this year Wilson told shareholders that if they voted to keep the trust going the trust would buy back between 10% and 15% of its shares, depending on the level of the discount.
Because QIF has been at an average 14% discount, that means the trust will buy back 14% of its shares. It will pay 1% below its ‘formula asset value” which is basically net asset value minus costs. That’s a big uplift and with the trust’s survival assured, the discount narrowed sharply.
Speaking after the annual general meeting in the Isle of Man yesterday, Wilson was pleased with the high turnout (81% of shareholders voted) and backing the trust received from 93% of investors who voted.
He said the graduated tender offer had given investors an incentive to stay in the fund even as the discount had widened. It also left the currently £118 million fund with sufficient size and liquidity to be viable going forward.
Lack of demand
QIF is an interesting fund. Performance has not been as badly affected by the slump in the oil price as you might expect. Over one year the shares are down 8% compared to a 24% slide in the country’s stock market. Over three years shareholders have gained 52%, more than double the 24% total return from the MSCI Qatar index.
Wilson said the fund manager, Leonard Joseph O’Brien at Epicure Managers Qatar, had done a very good job. He explained that this was not an oil fund – only the Qatari royal family can own the country’s oil reserves! Its biggest exposure – accounting for over half the fund – was to the banking sector, which he said was a good proxy for the economy. Qatar was making big strides in diversifying with a $200 billion infrastructure programme, that included preparing for the controversial 2022 World Cup, but lots more beside.
The problem for QIF – and other funds like it – is that although they can come up with clever ways to tackle the discount, these measures can be short lived if they don’t do something to increase investor demand.
This is the third tender offer QIF has made in recent years on top of quite an active share buyback programme. It looks to me that while shareholders ‘support’ the fund they are quite happy for it to ‘die by a thousand cuts’ – as the saying goes – if they get a regular chance to sell above the market price.
|'Expensive' trusts||Share price premium to NAV (- discount) %||12-month average premium (- discount) %||Z-score|
|Qatar Investment Fund (QIF)||-3.7||-14.3||4.3|
|Ecofin Water & Power Opportunities (ECWO)||-11.8||-19.6||3.3|
|RAB Special Situations (RSS)||2.9||-22.4||3.1|
|Alliance Trust (ATST)||-9.9||-12.4||2.6|
|JPMorgan Smaller Companies (JMI)||-11.6||-15.8||2.4|
|City Natural Resources High Yield (CYN)||-12.5||-20.5||2.4|
|RIT Capital Partners (RCP)||3.8||-1.3||2.4|
|Golden Prospect Precious Metals (GPM)||-2.2||-12.5||2.3|
|Trinity Capital (TRC)||-12.8||-29.2||2.3|
|Crystal Amber (CRS)||5.8||-0.9||2.3|
|Burford Capital (BUR)||57.3||29.6||2.3|
|Oryx International Growth (OIG)||-4.9||-15.4||2.2|
|Invesco Perpetual Select - UK Growth (IVPU)||3.6||-0.4||2.2|
Source: Numis Securities
Elsewhere in the expensive table, Ecofin Water & Power saw its discount narrow as its share price rose 4.4% over the week despite a 5% drop in the NAV.
RAB Special Situations (RSS) has moved to a premium while Alliance Trust (ATST) will be pleased it has just about lowered its discount below 10% after buying back more than £20 million of shares in recent weeks.
Smaller company funds remain in favour, with Oryx International Growth’s (OIG) discount moving in and Invesco Perpetual UK Smaller Companies (IVPU) standing at a small premium, the first time it has done that in a very long time.
|'Cheap' trusts||Share price premium to NAV (- discount) %||12-month average premium (- discount) %||Z-score|
|Custodian REIT (CREI)||1.6||6.6||-3.7|
|Cambium Global Timberland (TREE)||-61.4||-36.1||-3.5|
|Qannas Investments (QIL)||-8.9||3.1||-3.1|
|Duet Real Estate Finance (DREF)||-24.6||-7.5||-3.0|
|DW Catalyst - £ (DWCG)||-13.0||-3.2||-2.8|
|BH Macro - £ (BHMG)||-7.6||-4.4||-2.8|
|DW Catalyst - US$ (DWCU)||-13.2||-3.2||-2.7|
|AcenciA Debt Strategies (ACD)||-14.7||-7.6||-2.6|
|Better Capital 2012 (BC12)||-45.8||-31.2||-2.5|
|Ranger Direct Lending (RDL)||3.5||7.4||-2.4|
|Nimrod Sea Assets (NSA)||-34.9||-0.8||-2.4|
|VPC Specialty Lending (VSL)||-2.5||2.6||-2.4|
|P2P Global Investment (P2P)||-4.5||9.4||-2.3|
|Eurocastle Investment (ECT)||-2.1||4.1||-2.3|
|Aberdeen Japan (AJIT)||-11.9||-4.4||-2.2|
Source: Numis Securities
Custodian REIT (CREI) continues to be the ‘cheapest’ trust after the property fund's share placing reduced its premium and put it on a -3.7 Z-score.
Cambium Global Timberland (TREE) remains unloved on a huge discount of over 61%.
And Better Capital 2012 (BC12) saw its discount widen to 46% after the shares fell 22% to 42.5p after last Friday’s profits warning from Jon Moulton’s private equity fund.
Aberdeen Japan (AJIT) saw its discount widen a bit, giving it a modestly cheap Z-score of 2-2. Otherwise, it was a good week for Japan funds with Prospect Japan (PJF), Baillie Gifford Shin Nippon (BGS), Baillie Gifford Japan (BGFD), JPMorgan Japanese (JFJ), Atlantis Japan Growth (AJG) and Aberdeen Japan notching up NAV gains of between 4.6% for Prospect and 1.9% for Aberdeen.
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- JPMorgan Smaller Companies (Ordinary Share)
- RIT Capital Partners (Ordinary Share)
- Golden Prospect Precious Metal (Ordinary Share)
- Crystal Amber (Ordinary Share)
- Oryx International Growth (Ordinary Share)
- Invesco Perp Select UK Equity (Ordinary Share)
- Custodian REIT Plc (Ordinary Share)
- Cambium Global Timberland (Ordinary Share)
- Qannas Investments (Ordinary Share)
- Duet Real Estate Finance (Ordinary Share)
- DW Catalyst GBP (Ordinary Share)
- BH Macro GBP (Ordinary Share)
- DW Catalyst USD (Ordinary Share)
- AcenciA Debt Strategies (Ordinary Share)
- Better Capital PCC 2012 (Ordinary Share)
- Ranger Direct Lending Fund (Ordinary Share)
- VPC Specialty Lending Invest (Ordinary Share)
- P2P Global Investments (Ordinary Share)
- Aberdeen Japan (Ordinary Share)
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