It’s January and many investors will be looking at how their portfolios performed in 2012. Given how miserable many of us felt this time last year, it is perhaps surprising how well 2012 turned out.
The MSCI World Index ended the year up 11.4% on a total return basis. We have survived, for now, the Chinese slowdown, the US fiscal cliff (though some may be lamenting that the relief rally arrived in 2013 rather than at the tail end of 2012) and the economic muddle in Europe.
Of course, we are not yet out of the woods – 2012 appeared to be another year of procrastination when it came to resolving the West’s vast debt burden and doubtless we will see plenty more macroeconomic scares this year (and possibly for many years to come).
Fixation with macro outlook
I think many investors were fixated on the macro picture last year, particularly those flirting with calamity by trying to squeeze the last drops of performance out of the government bond markets before their inevitable collapse.
However, equity investors that focused on companies in reasonable shape – and, in most markets, those paying healthy and sustainable dividends – were rewarded and I think there is a good chance this pattern will persist in 2013.
As often happens, some of the best performing investment companies of 2012 were the penny stocks bouncing from lows – companies such as Loudwater, Ingenious Media Active Capital and Economic Lifestyle Property.
Loudwater raised £75 million in January 2007. The idea was to invest in pre-initial public offering (IPO) stocks but it was not long before the credit crisis hit and IPOs dried up. Loudwater found it had unwittingly become a long-term investor in these companies.
It decided to return cash to shareholders and gave back £13.8 million in 2008 but over the course of the next couple of years, disposals were hard to achieve, the net asset value (NAV) started to fall away and, unsurprisingly, the discount widened.
A sale early in 2011 freed up enough cash to let Loudwater return a further £4.5 million but in 2012 it made real progress. A string of sales was crowned by the sale of its stake in AgraQuest Inc in July for £27.3 million – four times its value in Loudwater’s books at the time and a substantial premium to the Loudwater’s market cap.
In November, Loudwater reckoned the combined value of the cash it had given back and the NAV of what was left in the fund was just over £70 million. Its discount was 21% at the end of the year, having been as wide as 79%.
Credit is due to Damille, which (as I highlighted in an article written just before the AgraQuest disposal) has a substantial stake in the fund and is now sitting on a handsome profit on its investment.
Ingenious Media (IMAC) is, in some ways, a similar story. I had a fairly public spat with the company some years ago when I was running Advance UK. IMAC was launched in 2006, took for ever to invest its cash and made some shockingly poor investments. Not everything in the portfolio was a dog, however. IMAC bought a stake in a pre-existing venture fund which, among other things owned a stake in Cream Holdings (the people behind the Creamfields dance music festival).
In July 2012, it sold this to Live Nation, making nine times its money. IMAC finished the year on a 34% discount (having been as wide as 81%). With the NAV at 14p per share at the last estimate, and having made returns of cash of 45p, IMAC has turned £1 into 59p.
Investors will be hoping there is more latent value in the portfolio and there might be – I always liked the look of IMAC’s stake in Brand Events, which runs events such as Taste London and Top Gear Live – but I would not recommend a speculative purchase on the back of this.
Economic Lifestyle Property launched in 2005 as a split capital fund investing in retirement properties. The fund was never very large and by 2007, it was obvious that it was not working.
In 2011 a tender offer at 18.26p returned a substantial chunk of available cash to shareholders. This year’s good news was the settlement of a legal claim that added 85% to the asset value. This one seems to be closer to wrapping itself up than the other two but is probably too small to bother about.
The next fund that caught my eye in the list was Acorn Income. It is another split capital fund (ords and zeros) investing in a mix of UK small caps and high income (mostly fixed interest) securities.
The NAV of the ordinary shares rose by 48% last year and, as the discount narrowed, the share price was up over 60%. It is a minnow, with a market cap for the ordinary shares of just £20 million and it has suffered in down markets. But over its life it has generated decent returns and, if it can continue to deliver, it deserves to be bigger.
James Carthew is a director of Sapient Research