Henderson Alternative Strategies Trust (HAST) has announced its annual results for the year ended 30 September 2017. During the period, HAST provided an NAV total return of 10.8% and, reflecting a marked narrowing of the discount, a share price total return of 19.8%. The share price performance is superior to that of the company’s benchmark, the FTSE World Total Return Index, which the company says provided a total return of 15.4%. While the NAV performance is behind that of the benchmark, the company highlights that it is ahead of its above its informal, annualised, long-term NAV total return target of 8.0%.
Significant discount narrowing
The Company reports that its discount narrowed significantly over the year from 19.3% to 13.1%, and that the average discount during the year of 15.8% compares favourably with 19.9% in the prior financial year. The Board says that it believes that two consecutive years of significantly improved investment performance, combined with sustained marketing of the Company’s shares to both professional and retail investors, have been crucial in helping to address the Company’s discount. It also believes that a continuation of this investment performance should, over time, help to narrow the discount further. A further consideration is that the upcoming continuation vote (see below) may also have aided the discount narrowing.
January 2018 continuation vote
Shareholders are to be offered a continuation vote at the company’s AGM on 24 January 2018 (shareholders get a continuation vote every three years). The board recommends that shareholders vote in favour of continuation citing improved investment performance, its view that the company provides a “genuinely differentiated investment proposition” and the recent discount narrowing.
Performance
HAST makes allocations to five different investment categories, all of which made positive returns, during the year, as follows: specialist sector (3.5%), private equity (35%), hedge (2.0%), property (1.1%) and specialist geography (1.0%).
Specialist sector portfolio activity
The specialist sector is used to obtain exposure to any sector, usually through a proven specialist manager, and to what HAST’s managers believe to be good-quality assets which can meet the Company’s target return. At the year-end this investment category represented 29.3% of the Company’s total investments (2016: 32.5%) and contributed 3.5% to the Company’s gross total return.
At the start of the financial year, the largest weighting was in listed credit-related funds, most notably senior secured leveraged loans, but this was reduced during the year by exiting HAST’s holdings in Voya Prime Rate Trust and Carador Income Fund PLC and selling some of HAST’s position in Blackstone/GSO Loan Financing Limited. The managers say that, while the prospects for the senior secured leveraged loan market remain positive, they observed that loan valuations have, “increased significantly leaving limited scope thereby for further value growth in these funds above and beyond their already attractive cash yields”.
The largest investment during the period was a £4.6 million purchase of The Biotech Growth Trust. The managers say that they the biotech sector as significantly undervalued given the strong long-term growth drivers such as the developed world’s ageing population and the rapidly increasing healthcare spend in emerging markets. In addition, they expect to see regular merger and acquisition activity in the sector as large pharmaceutical companies seek access to innovative new treatments.
Private equity portfolio activity
At the year-end, Private Equity represented 29.1% of the Company’s total investments (2016: 29.3%) and contributed 3.5% to the Company’s gross total return. The managers say that the investments are well-diversified by asset type, investment strategy, vintage and geography.
The managers say that, some of HAST’s listed fund holdings such as Standard Life Private Equity Trust plc and Princess Private Equity Holding Limited performed strongly as they continued to benefit from attractively priced portfolio exits, often well above their carrying values. In response, the managers say that they decided to realise some profit by trimming both positions, and that the cash proceeds were put towards a new £2.6 million investment in Safeguard Scientifics Inc. The managers describe this as, “a long-established US-listed private equity vehicle with direct investments in, we believe, a significantly undervalued portfolio of healthcare, financial services and digital media companies seeking to exploit new technologies in their sectors”.
Of HAST’s unlisted private equity investments, the managers say that Mantra Secondary Opportunities continued to perform well. The fund has a six-year lock-up which is coming to the end of its three-year investment period. During the year a further USD 0.8 million was deployed under the Company’s USD 10 million commitment to the fund.
Hedge portfolio activity
The Hedge fund investment category is used mainly to access long/short strategies which aim to deliver equity-equivalent returns in rising markets but may be expected to outperform equities in falling markets. Hedge fund holdings were 22.4% of the Company’s total investments at the year-end (2016: 16.3%) and contributed 2.0% to the Company’s gross total return.
The managers say that, given their concerns regarding elevated equity market valuations they were keen to add exposure to the Hedge fund investment category during the year. However, they say that the identification of the right quality of managers and investment strategies is not easy in a sector which has seen many expensive failures. Two new investments were made during the period. The first was a £4.0 million investment in Sagil Latin American Opportunities Fund, a long/short fund investing mainly in Latin American equity instruments. The managers say that performance since they made the investment in Sagil has been outstanding. The second was a £4.2 million investment in the Helium Selection Fund, a boutique managed fund focused predominantly on merger arbitrage and event-driven investing in Europe and the US.
Looking forward, the managers say that they are currently seeking one or two additional investments to take the Hedge fund allocation up to the full 30% of portfolio value permitted under the Company’s investment limits.
Property portfolio activity
The Company’s Property investment category is designed to provide access to niche or specialist property opportunities. At the year-end it represented 9.4% of the Company’s total investments (2016: 11.9%) and contributed 1.1% to the Company’s gross total return. The managers say that, during the year, they were unable to find any new property funds of sufficient quality to add to the Company’s Property sleeve. As such, no new property investments were made, although HAST did make an additional £0.3 million investment in Summit Germany Limited, a UK-listed fund investing in German property. The managers say that Summit Germany delivered good returns during the year. The managers also sold HAST’s remaining holding in Ediston Property. They say that the fund is very well managed and had met their target returns so, with the uncertainties of the Brexit process beginning to weigh on the UK economy, they decided to make a final exit.
Specialist Geography portfolio activity
This investment category is used to obtain specialist equity or debt market exposure to particular countries or regions which reflects our macro-economic preferences within developed, emerging or frontier markets. Specialist Geography holdings represented 9.7% of the Company’s total investments at the year-end (2016: 10.0%) and contributed 1.0% to the Company’s gross total return.
The managers say that they made two new investments in the Specialist Geography category during the year. The first was a £3.8 million investment in Ashmore SICAV EM Local Currency Broad Bonds Fund, an unlisted daily-dealt fund managed by Ashmore Group, an emerging markets specialist. The fund invests in local currency debt instruments issued mainly by governments. The managers say that a number of emerging market currencies are now recovering from significant corrections and may be set for a period of stability against an improving global macro-economic backdrop. The fund’s current yield is also nearly 7%. The second was a £4.5 million investment in the KLS Sloane Robinson Emerging Market Equity Fund, an open-ended daily-dealt vehicle which invests in listed emerging market stocks with a strong bias towards Asia. The managers say that this replaced the Company’s holding in Genesis Emerging Markets Limited, a UK-listed vehicle which had delivered strong returns since their investment in early 2016.
Henderson Alternative Strategies benefits from marked discount narrowing : HAST