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Investment Trust Watch: three plays on toppy markets

With many investment trusts on all-time highs we look at what bargain hunters at Hawskmoor Investment Management have been bagging.

 
Investment Trust Watch: three plays on toppy markets

With stock markets edging ever higher finding clear-cut bargains is not straightforward so I thought I would check in with what the investment trust experts at Hawksmoor Fund Managers have been buying.

This week the Association of Investment Companies cited figures from Winterflood Securities to show that a quarter of investment trusts, or 71 closed-end funds, had seen their share prices hit record highs this month.

No surprise then that only three of the 15 trusts in Numis Securities ‘cheap’ list (see first table) have a Z-score of -2 or below, which is the point at which analysts reckon a trust becomes inexpensive.

Just to recap, a Z-score is a measure used by analysts to show whether an investment trust is trading significantly beyond its one-year range. It’s a useful figure to use alongside the discounts and premiums investors ordinarily look at to see how a trust share price compares to its net asset value (NAV).

While a Z-score of -2 or below is regarded as ‘cheap’, a score of 2 or more is viewed as ‘expensive’. Fitting in with the theme of rallying markets, all the ‘expensive’ trusts in our second table have Z-scores well above 2, making them dear.

Gresham House Strategic

Before we hear from Hawksmoor, though, it’s worth highlighting Gresham House Strategic (GHS ), ranked fourth in the first table. Shares in the AIM-listed UK smaller companies fund stand at a whopping discount of over 27% below their NAV, the widest in its sector.

The fact its Z-score doesn't exceed -2 with this big discount underscores its low rating, which is a result of a low profile among investors and the fact that over a third of the portfolio is sitting in cash following a reorganisation of the portfolio by Gresham House Asset Management (GHAM), which took it over in 2015 (it was previously known as Spark Venture, the technology incubator).

It’s one to watch though as Gresham House employs a similar private equity approach to smaller companies as rival Strategic Equity Capital (SEC ), whose fund manager GVO Investment Management was bought by Lord Rothschild’s RIT Capital Partners (RCP ) after a successful run a few years ago.

It is no accident the two share the same philosophy as GHAM’s founder Tony Dalwood used to work at GVO. The portfolio is managed by his colleague Graham Bird.

'Cheap' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Pacific Alliance China Land (PACL) -25.0 -17.6 -2.5
Drum Income Plus REIT (DRIP) 6.4 11.5 -2.0
Qannas Investments (QIL) -4.2 0.5 -2.0
Gresham House Strategic (GHS) -27.5 -22.7 -1.7
JPMorgan Mid Cap (JMF) -12.1 -6.5 -1.7
Investment Company (INV) -7.2 -2.2 -1.6
Axiom European Financial Debt (AXI) -4.9 2.5 -1.6
Qatar Investment Fund (QIF) -18.1 -14.0 -1.5
Schroder European Real Estate (SERE) -4.0 4.9 -1.4
NAXS Nordic Access Buyout (NAXS) -11.8 -8.0 -1.3
Kennedy Wilson Europe Real Estate (KWE) -21.9 -11.9 -1.3
Perpetual Income & Growth (PLI) -8.5 -5.7 -1.3
CATCo Reinsurance Opportunities C (CATC) -2.6 0.4 -1.3
Independent IT (IIT) -7.6 -1.5 -1.3
Law Debenture (LWDB) -12.0 -9.7 -1.2

Source: Numis Securities 26/1/17

Hawksmoor's idiosyncracies

Exeter-based Hawksmoor, which is chaired by Citywire Money columnist David Kempton, is one of the few 'multi-asset' managers to use investment trusts as a way of gaining exposure to interesting assets at cheap valuations. 

Both its Vanburgh and Distribution funds invest in other funds (ie, are 'fund of funds') and trading in and out of investment trusts as their discounts widen and narrow is a big factor in their good performance. 

In a quarterly update this week it told investors in its  funds that with both global equity and bond markets looking expensive it looked to 'expose investors to idiosyncratic risk - we're not relying on asset classes rising', said senior fund manager Ben Lockyer.

Henderson Alternative Strategies (HAST)

You don't get much more idiosyncratic than Henderson Alternative Strategies Trust (HAST ), a previously poorly peforming global fund of funds that Ian Barrass and James de Bunsen of Henderson Global Investors took over three years ago.

Their efforts at turning round the portfolio and getting the collection of 30 hard-to-access funds in to shape started to pay off last year with the shares rising 14.5% in the 12 months to September. While that was ahead of their 8% target it was below the 31% advance in FTSE World index.

Performance has continued to improve in recent months with an oversubscribed tender off to buy back 10% of its shares this week reducing the discount to 12%. This is much narrower than the 12-month average discount of 19.5% and gives it an expensive Z-score of 3.2, placing it near the top of our second table (see below).

Hawksmoor chief investment officer Richard Scott told me he had bought into HAST after meeting the managers a few months ago. He described it as 'an each-way bet as it is having much better performance with NAV but due to the long-term disappointing performance it stands at a big discount to NAV.'

With the trust facing a continuation vote later this year, Barrass and de Bunsen are under pressure to keep up the good work. If they succeed, the discount will probably narrow further, if they don't it may be wound up and shareholders given the full asset value minus costs. There could be more gains to come.

Standard Life Equity Income (SLET)

A more recent Hawskmoor purchase, Scott disclosed, was Thomas Moore's Standard Life Equity Income Trust (SLET ), which appeared in last week's 'cheap' list on an 8% discount and -1.5 Z-score. It's been a really tough 12 months for the fund whose big holdings in smaller and medium-sized stocks suffered from the Brexit vote, while the portfolio held none of the oil and mining stocks that have done well.

Also weighing down the stock last month was the final expiration of subscription shares given to shareholders in 2010. In anticipation of 3.9 million new shares hitting the market this month, the shares fell to a discount of 9% to NAV before Christmas, giving Hawksmoor its buying opportunity and which Winterflood Securities at the time described as an 'attractive entry point'.  

The discount has since narrowed to 7% and the Z-score improved to -1.1 meaning the bargain is not as good as it was but arguably it's still a low level to get the skills of a previously highly rated fund manager. Until the EU referendum Moore had been consistently rated for five years by Citywire for the performance of his Standard Life Investments UK Equity fund and in the 18 months before the Brexit vote held our top AAA rating. He is currently unrated but may bounce back if conditions return to his favour. 

Ranger Direct a 'leader'

Another recent feature of this column has been Ranger Direct Lending (RDL ), whose rating was hit by pre-Christmas news of the bankruptcy of of a US lender to which it had a small exposure.

Scott said Hawksmoor had topped up a small holding after being reassured by Ranger that it would recover its money and the quarterly dividends supporting its 8.9% yield would not be affected. 'Ben [Conway] has done a lot of work on it. We've got a toe in the water and do think it is the clear leader in its sector.' 

Ranger is the best performing of the new breed of direct lending or peer-to-peer funds with a 20% total shareholder return over one year. In the past week the discount has narrowed from 17% to 12.5%, a bit wider than the 12-month average of 10%, giving it a Z-score of -0.8, according to Numis.

'Expensive' trusts Share price premium (- discount) to net asset value % 12-month average premium (- discount) % Z-score
Better Capital 2012 (BC12) -44.9 -65.7 4.4
Fidelity Asian Values (FAS) -4.1 -11.1 3.2
Henderson Alternative Strategies (HAST) -11.9 -19.5 3.2
HBM Healthcare Investments (HBMN) -21.9 -29.2 3.0
Prospect Japan (PJF) -11.3 -26.5 3.0
Eurocastle Investment (ECT) 3.5 -13.7 3.0
Symphony International Holding (SIHL) -30.2 -42.4 2.8
Alliance Trust (ATST) -4.9 -9.9 2.5
Aberdeen Private Equity (APEF) -19.4 -30.4 2.5
Apax Global Alpha (APAX) -7.7 -16.6 2.5
BlackRock Frontiers (BRFI) 4.8 -0.7 2.5
Ratos AB B (RATOB) 67.3 33.2 2.5
Africa Opportunity C (AOFC) -14.9 -22.0 2.4
Altamir Amboise (LTA) -30.8 -40.7 2.3
Foresight Solar (FSFL) 8.5 0.0 2.3

Source: Numis Securities 26/1/17

No shock to see Alliance Trust (ATST), which I hold in my pension, in our second table. Its discount has halved to 5% in response to determined share buy backs from the board and today's news that activist Elliott Associates, its largest investor, has agreed to sell its 19.5% stake bodes well for next month's vote on the proposed new 'multi-manager' strategy and, if that is successful, perhaps its long-term future. 

4 comments so far. Why not have your say?

Micawber

Jan 27, 2017 at 17:50

Thanks for flagging up Gresham House Strategic..... a quick look reveals its ongoing charge is...10.52% . Any comment on that, Gavin?

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Gavin Lumsden (Citywire)

Jan 27, 2017 at 18:11

Yes that's not so cool is it? In addition to a 1.5% annual management charge GHAM get a performance fee of 15% of excess returns over 7%. It's not capped and half is paid in shares, according to Numis Securities info. Thanks for spotting that Micawber.

report this

masud

Jan 27, 2017 at 20:20

Thank You, Micawber, I was recently deciding on GHS.

report this

PeterBill

Jan 30, 2017 at 10:11

Thanks Micawber, for the heads up on charges on GHS.

Regarding SLET, I've been a long term holder and as such, was issued with subscription shares (1 sub for 5 shares) - I added more sub shares at a low price, which I converted to the shares recently, increasing my holding in SLET at a discount.

Perhaps a look at the various subscription shares in issue (and the underlying IT) can be future article. PCFT issued some, (PCFS) which seems good value at the moment, but beware as subs are like warrants, they could expire worthless.

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