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IT Focus: 'buy' RIT; property trusts in hot water

A look at RIT Capital, Bilfinger Berger Global Infrastructure, Dunedin Enterprise and Fidelity Special Values.

by Caelainn Barr on Nov 15, 2012 at 10:58

Time to snap up RIT Capital shares?

RIT Capital has been in the doldrums since the departure of fund manager Micky Breuer-Weil in July and the publication of unimpressive valuation figures for its investment portfolio. Shares in the global growth investment trust have fallen over 13% since their year-to-date high of £13.10 on 10 July, slashing its market value from £2 billion to less than £1.8 billion. The shares currently trade at a 4% discount below the net asset value of its investments, well down on the 0.5% premium at which they have typically.

The trust is managed by J Rothschild Capital Management and under Breuer-Weil had a good long-term track record of 'multi-asset' investing in shares, hedge funds, property, private equity and government debt.

Mick Gilligan, head of research at Killik & Co, said: ‘This fund aims to deliver long-term capital growth, while preserving shareholders’ capital. It looks to achieve this via a diversified portfolio across a range of asset classes, both quoted and unquoted.

‘The last reported NAV, as at the end of August, was slightly disappointing. The shares, which have been weak since mid-summer, have continued to drift lower following the NAV release. RIT has a well-regarded management team that has strong alignment of interest with shareholders. The shares have traded at a small premium to NAV, on average, over the last five years. We would use the current weakness as a long-term buying opportunity.’

RIT has delivered a total return to shareholders of 13% over the past five years, ahead of the FTSE All Share's 11% total return. Ron Tabbouche, former head of investments at GAM, the Switzerland-based investment group, is its new fund manager.

Alex Wright takes over Fidelity Special Values

The focus of Fidelity Special Values trust is shifting since the change of manager over two months ago. Smaller companies expert Alex Wright stepped in to replace Sanjeev Shah and he is putting more of an emphasis on this area of the market, with 60% of the trust’s holdings now in companies with a market valuation of less than £1 billion, compared with 30% under Shah.

Wright also manages the Fidelity UK Smaller Companies fund, which has been the best performer in its sector, with total returns of 98% since launch compared with the Numis Small Cap Index's total return of 36%.

Tom Tuite Dalton, analyst at Oriel Securities, said: ‘Wright comes across as being a capable manager and with the board having just reported that it is “very mindful of the importance of the level of discount” and having expressed its readiness to buy back shares to prevent the discount widening further, it is certainly one to watch, and with a market capitalisation of over £300 million, it should also offer investors decent secondary market liquidity.’

The trust’s long-term performance remains modest. Over five years it has delivered a total return of 12% to shareholders, slightly better than the FTSE All-Share's total return of 11%. The shares currently trade at 568p, an 11.6% discount to its net asset value per share of 643p.

Bilfinger Berger Global Infrastructure on an ‘excessive premium’

The popularity of high-yielding infrastructure investment trusts remains intact, with trusts in the sector trading at an average premium of 8% to net asset value (NAV). Bilfinger Berger Global Infrastructure trust is no different, and following its interim statement the trust is on target to meet its full-year yield of 5.1% with a dividend of 5.5p.

Charles Cade, analyst at Numis Securities, commented: ‘The shares have been strong performers since launch, trading on an average premium to NAV of 5.2%, reflecting investor appetite for the low volatility of returns and predictable inflation-linked income offered by infrastructure funds.

‘The shares are currently priced at 108p which compares with the NAV at 30 June of 99p (ex 2.75p dividend), representing a premium of 9.5% to historic and 7.6% to our current estimate of 101p. We expect some growth in NAV during the second half, and anticipate an NAV at 12 December of 102p. However, we believe the current premium appears excessive.’

Dividend cuts on the horizon for property trusts

Property investment trusts could look to cut dividends in future if investment growth remains weak in the sector. F&C Commercial Property is the only property investment trust to have achieved a rise in the net asset value (NAV) of its holdings, and that was a barely noticeable increase of 0.1% in the last quarter.

The F&C trust has managed to deliver the best NAV performance of its peers for the past three quarters, selling off a number of its assets at a premium. However, the Schroder Real Estate investment trust lost 1.7% and IRP Property Investments’ NAV fell 3.9% in the same period. Picton Property Income also suffered, as its NAV fell 3.5% and its covered dividend may be in danger.

Simon Elliot, head of research at Winterflood, commented: ‘Picton Property Income trust had previously stated that it wished to pay a covered dividend and, with income falling in recent years, the 1p per quarter would not have been covered.

‘Dividend cover remains an issue for a number of funds, and we would highlight IRP Property Investments and ISIS Property Trust as the most likely contenders to have to cut dividends in the near future. Although both have cover of around 75%, there appears little scope to grow income. Consequently cover is more likely to fall in the near term than grow. With underlying asset values falling, this will prove a significant drag on NAVs.’

Increase in performance fees for Dunedin Enterprise approved

Shareholders of private equity investment trust Dunedin Enterprise have approved a one-off performance-related fee from July 2012 to December 2014. The fee is in place to ensure management sell off underperforming holdings as soon as possible.

The change of direction comes as the trust has opted to focus on UK mid-market buy-outs though Dunedin Capital Partners and has sold its investments in Capula, WFEL and Caption IV.

In its interim statement at the end of September the portfolio was valued at £102.2 million, a £7.7 million drop from the end of June. Its biggest writedowns came from software support group OSS and recruitment specialist Red Commerce.

George Crowe, associate at Numis Securities, added: ‘A total of £26.8 million has been returned to shareholders during 2012 through the tender offer or dividends. Since the new strategy was announced, the share price has performed strongly, rising 38.7% so far this year, and the discount to NAV has narrowed from 42% to 23%.’

The trust is currently trading at 409p, a 24% discount to its NAV of 539p.

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Look up the investment trusts

  • Fidelity Special Values (Ordinary Share)
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  • Bilfinger Berger Global Infras (Ordinary Share)
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  • RIT Capital Partners (Ordinary Share)
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  • F&C Commercial Property (Ordinary Share)
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  • Schroder Real Estate Invest (Ordinary Share)
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  • IRP Property Investments (Ordinary Share)
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  • Picton Property Income (Ordinary Share)
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  • Dunedin Enterprise (Ordinary Share)
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