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Trust Insider: thin pickings in deep discounts

by James Carthew on Jun 03, 2014 at 00:01

Trust Insider: thin pickings in deep discounts

Recently I have been wondering what to buy for my personal portfolio. Although the market is a little off its highs, we have had such a good run over the past two or three years that I think it is getting harder to find many funds that look especially cheap.

I started off by looking down the list of the worst performers so far this year, in the hope of spotting a fund that might be oversold. The list is headed (unfortunately, as I already own some!) by International Oil & Gas (down 57%).

I thought this company, which focuses on new technology in the oil and gas sector, was a great idea when it launched, but the fund has been hamstrung by a falling out between the principals within the management company.

Not only is the fund overshadowed by litigation brought by the former manager, but there have also been disappointments in the portfolio. As is often the case with venture funds, some of the companies had technology that initially looked very promising but they could not translate this into profitable businesses.

The bulk of the net asset value, estimated by the company at $3.81, is accounted for by just one company – Strata Energy Services – and that is “working with its primary lender to resolve covenant issues” after adverse weather in Canada affected its 2013 trading.

The litigation should, hopefully, be drawing to a conclusion and there is a chance that Strata will rebound in 2014; this will give a better picture of the true net asset value. International Oil & Gas is in realisation mode so I am hanging on in the hope that the 69% discount on the fund closes. I do not think I will be buying more however.

Indian set-up

Next on the list is Infrastructure India (-45%). The fund is trading at an 84% discount, but its board is not independent. A company related to the manager owns a majority of the shares and the manager’s contract runs until 2020. Its latest news was that it was borrowing $8 million from an affiliate of the manager at a 15% interest rate to shore up its Vikram logistics business (loans Vikram had taken out previously were starting to amortise; this should have been met by cashflows from the project but it is behind schedule).

Reconstruction Capital II (-36%) is also borrowing money from its manager – it is seeking to issue a convertible to repay this. In February, the fund took a big hit when it wrote down the value of one of its largest investments, East Point Holdings, to zero. It now trades on a 60%+ discount.

Political strife

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