The list of the best and worst performing funds in share price terms during 2013 is dominated by highly geared property funds.
Alpha UK Multi Property (AUMP), Treveria, Mirland Development and Public Service Properties (up 356%, 200%, 106% and 98% respectively). At the other end are Invista European Real Estate (IERE), Argo and Alpha Pyrenees (down 83%, 61% and 60% respectively).
We are now well into the period when most of the debt raised during the boom years has to be repaid or refinanced. Those companies whose shares were priced as though this was going to be a struggle but have somehow managed to pull it off are benefiting and others where the outcome is more in doubt are suffering.
To give a couple of examples, at the start of 2013, AUMP’s share price was in the doldrums with its loan facilities fast maturing. The share price started to nudge upwards in June when it announced it was talking to one of its lenders.
It managed to secure temporary extensions on its loans as they matured. By November, although it reported a modest fall in net asset value (NAV), it was still talking and, at the start of December, was able to announce a refinancing with the aid of a loan from the fund’s manager.
It is paying higher interest rates than before but has avoided the worst, secured new five-year debt and its share price has moved from a 90% discount to a 62% discount. It still has a long way to go if, as it hopes, its finances are finally on a surer footing.
I wrote about IERE in June 2011, and wondered how fast the fund (which had just moved to a realisation strategy) would be able to sell off its portfolio and repay its debt. There was quite a bit to go for – the NAV was close to €0.60, today though it has more than halved as property values carried on falling.
IERE has managed to achieve some disposals but its loans now fall due and it is not yet in a position to repay them. Bank of Scotland sold the IERE loan to a fund affiliated with Cerberus. As part of that deal, IERE got an extension of the loan until April 2014 and will now have to try to negotiate a deal with the new owner. The shares are trading on more than a 90% discount. I have bought a few but it is a gamble really whether it can make the same sort of recovery as AUMP.
In price terms, looking slightly further down the list of top performers, 3i has had a remarkable rerating, largely on the back of Sherborne’s appearance on its register but also encouraged by the management’s moves to reinvigorate the business. I think the shares look expensive now.
Mining and resources funds feature quite heavily in the list of poor performers, in NAV as well as share price terms. Golden Prospect Precious Metals wins the wooden spoon for the worst performing fund over 2013 in NAV terms, down 55%, but Altus Resources, Praetorian Resources and Baker Steel Resources each lost more than 40% of their asset value in the year.
Many mining and resource funds are subscale now but they would probably argue that the time will soon come when investors should be thinking about taking advantage of low valuations in the sector. It will be interesting to see whether any of the existing funds can find ways of raising fresh capital to address this opportunity.
I have heard of at least one new resource fund looking to launch but, with the sector so out of favour, will investors be brave enough to back it?
The best performing funds in NAV terms are a mixed bunch. Top of the list is British American (BAF), an unusual and relatively small fund that is probably not well known to most people. Its largest holding, a biotech stock called Geron, tripled in value in the last few months of 2013, which contributed towards a doubling of its NAV over the year.
BAF’s share price may have overreacted, however, as it looks as though it is on quite a large premium. The biotech sector was in vogue in 2013 and this was reflected in decent performance generated by Biotech Growth Trust, up 63%, and slightly further down the list, International Biotech and Worldwide Healthcare – both up 44%.
A few split capital trusts feature in the top performers, aided by the gearing provided by their zero dividend preference shares. Aberforth Geared Income’s ordinary share NAV rose by 71% while Premier Energy & Water’s ordinary share NAV rose by 62%.
The Aberforth fund had the advantage of being geared into the UK small cap market. It’s one of the areas that did especially well in 2013 with many small cap funds featuring in the list of top performers. Also, Japan finally came good and the Baillie Gifford funds that most rewarded their shareholders.
I am finding it hard to read the runes for 2014. There are tentative signs of recovery in some developed markets and that should lead to the phasing out of quantitative easing and maybe even, by the end of the year, interest rate rises. How that will be reflected in share prices is hard to predict.
It was good to see the investment company sector expand in 2013 and especially to see a number of funds regularly issuing new shares to investors. Hopefully 2014 will see a continuation of this trend – expanding the number of large, liquid funds (and thereby expanding the sector’s appeal in a virtuous circle) and that, if the worst happens and markets take a tumble, boards are ready to buy in shares again to steady discounts and moderate share price volatility.
James Carthew is director of Sapient Research