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Jefferies' gems: seven investment trusts for 2013
by Sarah Miloudi on Jan 15, 2013 at 07:00
Jefferies investment company analysts Mark Ambrose and Louisa Symington-Mills believe these seven closed-end funds are the ones to back over the year ahead.
Deeply discounted Altamir offers investors exposure to a portfolio of direct company investments made by Apax France and Apax Partners, the private equity and venture capital firm.
While Altamir Amboise trades at a discount significantly wider than many of its private equity rivals, Jefferies believes this should not be a turn off for investors. On one hand, adjusting for Altamir Amboise's cash balance of roughly 23% of its net asset value the discount on investment rises to around 55%, other factors feed into this and are 'not portfolio specific concerns', explained Mark Ambrose and Louisa Symington-Mills. 'We believe the company suffers from a very low profile amongst the LPE investor base (in spite of its high profile general partners, Apax Partners LLP and Apax Partners France), partly due to the fact that the company’s historic focus on French-speaking Europe has encouraged a largely local shareholder register,' the analysts said.
Catalysts for change include the appointment of a new investor relations director, which should help boost the company's brand and increase participation at shareholder votes, as well as improving dividend prospects and the broadening out of the fund's portfolio to include mid and large cap buyouts across Europe and North America.
NB Distressed Debt Investment fund
NB Distressed Debt has a relatively accute focus, delivering returns for investors by snapping up distressed senior and senior secured debt of 'good companies with bad balance sheets', where the businesses are backed by tangible assets like power stations or planes.
Looking solely at the fund's discount, NB Distressed Debt might not appear a stand out pick. It trades at a 6.3% discount to net asset value, which is not wide in absolute terms. In its favour, however, is the manager's active strategy of accumulating debt positions and working closely with companies to repair their balance sheets. Jefferies feels that with its discount of just about 6%, there is significant value embedded in the trust. Combined with decent visibility of its holdings this makes NB Distressed Debt a compelling buy.
A vehicle that may be unfamiliar to many, PCA Vietnam is a hybrid fund invested in a combination of private and public equity in Vietnam and was launched in December 2006 with a seven-year lifespan. Eagle eyed investors will have noticed this means the lifetime of the fund is almost at an end, but its managers and board have already confirmed that all its assets should be sold by the time 2013 enters its second half.
The past two years have already seen a steady stream of exits, and in 2011 these were made at a substantial premium and returned $34.5 million through a combination of buybacks and a dividend. This trend continued in 2012, when further exits were made and a dividend of roughly 40% of net asset value was paid in November.
Renaissance Infrastructure Equities
There was something of a clean up at Renaissance Infrastructure last year, with a restructuring resulting in the transfer of liquid assets into an open-end Ucits scheme in exchange for shares, while lliquid assets, amounting to roughly 29% of net asset value, were retained by the investment company.
Renaissance Infrastructure Equities is in the process of exiting its illiquid positions, with the proceeds used to subscribe for additional Ucits units. Once this process is complete, the fund will be wound up and investors given a final distribution of units within the ucits scheme.
This might sound like a complex process to some investors, though the Jefferies analysts point out there is scope to make gains. 'Renaissance Infrastructure Equities is currently quoted at a discount of 11% to NAV, which still leaves room for discount contraction over the remaining life of the closed-end fund,' they said, adding this would give an internal rate of return of 28% before fees. Adding to this, exits from the illiquid investments have generally been at material premia to carrying values, and this hints at an uplift in net asset value.
'In our view, Renaissance Infrastructure represents an attractive endgame play or a cheap entry point into the open-ended Ucits vehicle - a unique product providing exposure to companies benefitting from a Russian infrastructurespending 'super-cycle',' Ambrose and Symington-Mills said.
Third Point Offshore Investors
Investors effectively gain access to the Third Point Master Fund, a vehicle which has been closed to new investors since July 2011. Through its investment company, Third Point aims to deliver returns for investors by seeking out event-driven, value-oriented situations. Its managers can take either a long or short position, depending on the catalyst they expect to unlock value.
'In spite of the listed fund’s strong NAV track record (+112% from 1 June 2009 to 2 January 2013, sterling class estimate, encompassing a +21% gain in the master fund for CY12), the discount to NAV (now -17.1 % in the $ share class) is now wider than at the start of 2012,' Ambrose and Symington-Mills said, believing demand for the vehicle should be greater based on its returns. This can, however, be seen as a buy trigger for potential shareholders and Third Point's discount is not only wide given its performance, but wider than the listed hedge fund sector's 10.5% average.
Moreover, Third Point's board has decided to tighten up its discount control, and in the final quarter of 2012 unveiled a string of measures to achieve this, including a US$60 million capital return. 'With a sense that the board and manager arecommitted to reducing the discount to NAV, and that continuing portfolio performance could fuel cash in shareholders’ pockets, we believe the shares are set to re-rate,' Ambrose and Symington-Mills said.
Vietnam Resource Investments
The opportunity in Vietnam Resource Investments is an unusual one but it is not one that hinges on the performance of local stockmarkets. Until recently, the fund operated as an OTC-traded vehicle, but decided to change its strategy to one of realisation. Roughly speaking, Jefferies says Vietnam Resource Investments has one remaining investment 15% stake in Masan Resources that accounts for 99% of its net asset value. Masan Resources owns the Nui Phao tungsten mine, which is due to go into production in 1H 2013, and Vietnam Resource 's position in it is subject to the conditions of a call and a put option.
'Based on a price Mount Kellett paid to acquire a 20% stake in Masan Resources in 2010, Masan Group’s call option is in-the-money. We therefore expect Masan to exercise this before the final date (23 September 2013). If not, VRI exercises the put option and Masan Group would effectively issue new shares 37% below the current share price. Importantly, the opportunity is not contingent on Vietnamese markets, mining results or resource prices. In our view, it is based on one of a limited number of scenarios playing out and the risks are Vietnamese Dong exposure and execution,' Ambrose and Symington-Mills explained.
Vostok Nafta Investments
Vostok Nafta has recently become more active in the private equity space and last year it returned a significant chunk of capital, in the region of 50% of net asset value. Combined with write-ups in the private equity holdings, the portfolio has become much more concentrated. The top three holdings - credit card company Tinkoff, classified ads site Avito and Black Earth Farming, a significant supplier of sunflower seeds and potatoes - now account for 85% of of the portfolio and have been posting strong profits and robust plans for growth.
Although these holdings have already seen write-ups, Jefferies' analysts expect more to follow on the back of 'stellar' growth and upcoming industry inflection points. 'In our view, NAV growth will drive performance in 2013, backed up by active share repurchases as and when the company has available cash,' Ambrose and Symington-Mills said.