Modest gains for EP Global Opportunities in 2021 – EP Global Opportunities reports that its NAV total return for 2021 was 5.1% and its return to shareholders 4.6%. Revenue per share fell to 4.4p from 4.9p as the manager held onto cash. The fall in income underlying that was even greater as the calculation of revenue per share was flattered by an increase in the amount of the running costs charged against capital. Without this, the revenue would have been just 3.0p. The dividend for 2021 has been set at 5.0p, using some of the trust’s revenue reserve.
What you don’t see above is any reference to a benchmark index. FYI, the return on the MSCI All Countries World Index was 20.0% for the period and the trust remains towards the bottom of peer group league tables over the long term.
The manager was ” very cautious” over 2021, too early perhaps, but this has helped cushion the trust against the falls that have been incurred so far over 2022. At the end of December, 27.7% of the portfolio was in cash, some of that may have been absorbed by the tender offer (see below).
New approach
As we have detailed in past news items, the trust has made the shift to becoming internally managed and broadened the range of permitted investments. A tender offer in February shrank the trust by 20%.
Two new large investments have been made – Templeton European Long-Short Equity SIF, which at 7.6% of net assets is now the largest investment, and a capital commitment to the Volunteer Park Capital Fund SCSp. a Luxembourg Special Limited Partnership, investing in boutique investment management companies. Much of this was funded by selling the trust’s technology exposure (down to just 2.2% at the end of 2021).
Last year, shareholders gave the board permission to reissue shares from treasury at a 2% discount and it is asking for the same permission this year. This is unusual.
Extract from the manager’s report
“The positive contributors to returns came from a range of companies with the largest being Shanghai Fosun Pharmaceutical which rose sharply on various rumours of combinations with other pharmaceutical providers. Although we remained comfortable with the original underlying investment thesis, such was the level of share price advance that we sold the holding. Two other holdings that performed well and were sold were Antofagasta and Nokia. Antofagasta is a high-quality copper producer where future supply-demand characteristics are supportive for a company with low-cost production. However, such was the enthusiasm in the market for copper that the share price rose to a level where much of this positive outlook was discounted and the shares were sold. Should this enthusiasm wane then it is likely we would seek to reinvest. Nokia was a slightly different investment proposition having worked its way through difficulties in network product development and its share price had recovered accordingly. The other area where we saw good returns was in energy where the holdings of ENI and TotalEnergies which had been added when the market was unduly pessimistic on oil prices reacted to supply shortages and rising crude prices. On the negative side two of the worst performers were Fresenius Medical Care and Ubisoft Entertainment. In both cases we remain confident on the outlook and have maintained the positions.
There are two other holdings worth mentioning since they both fall into the category of being somewhat different from what the Company has invested in before, and with the second investment mentioned below becoming possible as a result of the changes in investment objective and investment policy. The first of the two is the Templeton European Long-Short Equity SIF. This fund invests in stocks on a traditional valuation basis but offsets this by taking short positions in companies where it is believed that there are fundamental issues in the underlying business model. In extended rising markets these flaws can often be ignored but when a more critical appraisal returns the results can be swift and damaging. Since we believe that the market will shift from ignoring risk to becoming much more attentive such a fund has the ability to rise even against the backdrop of serious negative equity market returns. The other investment worth noting is the Volunteer Park Capital Fund SCSp. This fund invests in established general partners of private capital funds focussing on high quality businesses able to provide strong collateral. The collateral element is important given the previous comments about excessive valuations in assets generally. The opportunity exists because the fund focusses on the small to low-mid segment of the market where other potential funders are put off by the level of due diligence required relative to the potential investment that can be made. This investment was made just prior to the end of the year before the fund closed on our assessment that the fund’s existing investment portfolio gave a high degree of confidence about the future returns. These two holdings are expected to provide strong diversification to the portfolio with reasonable prospects of achieving positive returns even against the backdrop of significant declines in asset markets generally. The Company also held US Treasury Inflation Protected Securities (TIPS) in anticipation of a rising inflation trend. These positions were reduced prior to the year end and exited fully post year end. These sales were not prompted by confidence on the inflation outlook, but rather the potential returns given the lack of an embedded positive real interest rate. The changes to the portfolio, in particular the addition of the Templeton European Long-Short Equity SIF and the Volunteer Park Capital Fund SCSp provided a potentially superior offset.
Given the concerns over asset valuations the Company retained a high cash balance. Whilst this can be an uncomfortable position it is important to retain the ability to invest in new opportunities that market turmoil might present.”
EPG : Modest gains for EP Global Opportunities in 2021