Quarterly investment companies roundup – Second quarter 2019
Global equities re-found momentum in June after a cautious April and May. How much longer this ten-year bull market can sustain itself continues to be the subject of much debate. The prospect of interest rate cuts in the US has re-invigorated sentiment for the time being, though several headwinds, including the US/China trade war and worsening relations between the US and Iran, lurk in the background.
Over the quarter, we published notes on Henderson Diversified Income, Ecofin Global Utilities and Infrastructure, Jupiter Emerging & Frontier Income, Seneca Global Income & Growth, Polar Capital Global Financials, North American Income, Standard Life Private Equity, Shires Income, CQS Natural Resources Growth and Income, Aberdeen New Dawn, Standard Life Investments Property Income and CG Asset Management.
In this issue
- Performance Data – Compared to the first quarter, outperformers came from a wider set of strategies; Montanaro European delivered an eye-catching benchmark beat.
- Major news stories – Leaf Clean Energy looked set to receive $114.5m in damages following a Delaware Supreme Court ruling while Greencoat UK Wind raised nearly £400m, further underlining appetite for exposure to clean-energy income.
- Money in and out – There were three major launches; Aquila European Renewables Income and Riverstone Credit Opportunities Income raised €154.3m and £80.9m respectively in May. US Solar Fund launched in April, raising £153m.
Discounts are wider than they were this time last year, reflecting mounting uncertainty. This may pause the longer-term trend towards a tightening of the median discount to NAV.
Rising interest and demand for clean energy strategies is emphasised by the relative widening in median premiums of renewable energy infrastructure funds against the global sector. By comparison, the commodities & natural resources sector ended the second quarter trading at a 23% discount.
Excluding new issues, nearly 80% of the investment companies sampled (market caps above £15m) over Q2 delivered positive price returns. The median return was 3.9%, versus 5.6% in Q1. Compared to the first quarter, where the outperformance of China and growth-focused strategies in particular stood out, the top performers table this time around includes a more diverse set of strategies.
Looking first at the positive moves:
- The surge in Leaf Clean Energy’s shares was in response to a favourable ruling by the Delaware Supreme Court relating to a contractual dispute case with Wind LLC.
- Ireland-focused Green REIT’s shares rallied after it put itself up for sale in a surprise move. The company attributed its decision to its shares trading at a material and persistent structural discount to NAV for over three years.
- Lindsell Train’s premium to NAV touched close to 100% at points, though it has come down sharply over recent days after Hargreaves Lansdown removed two of its open-ended funds from its wealth 50 recommendations list. Nick Train, manager of Lindsell Train, also warned investors over the risk of buying it at such a significant premium in his statement accompanying the fund’s annual report in June.
- Montanaro European’s 20.5% price return came off the back of an excellent set of results; it outperformed its index by 18.5% over its year-ending 31 March 2019.
- JPMorgan Russian has been on a steady upward trajectory for the past two or so years, supported by relative value and corporates generally delivering good earnings growth.
- Keeping with emerging markets, Aberdeen New Thai had a good end to the quarter (its shares were up 13.5% over Q2), though the almost $4bn foreign inflow into Thailand in June is thought to have been mainly influenced by central bank policy; the economic outlook remains poor.
On the negative side:
The well-documented crisis at Woodford Investment Management (WIM) reached a crescendo over Q2; elsewhere the potential for or actual shifts in government policy weighed against several funds.
- As well as reflecting sentiment around WIM generally, concerns around issues such as Woodford Patient Capital’s level of gearing and the value of many of its unquoted investments pushed down the shares.
- Berlin-focused residential and commercial property company, Phoenix Spree Deutschland, sold-off heavily in June after Berlin approved a five-year rent freeze.
- CATCo Reinsurance Opportunities’ challenges reflect an extremely difficult period for the industry following one of the worst years of insured losses in 2018. Discussing the volatile backdrop CATCo faced, the company’s investment manager, Jed Rhoads, had this to say: “Global insured losses during 2018 are estimated to be $80bn, the fourth costliest year on record, compared to 2017, the worst year on record which resulted in over $140bn of insured losses.”
- Civitas Social Housing and Triple Point Social Housing were affected by potential regulatory concerns over their leaseback models. More recently, Civitas has said that Regulator for Social Housing does not have inherent problems with the model.
- The sell-off in Ceiba, the Cuba-focused trust, reflects the effects of Trump unwinding Obama’s work to warm relations. Moves by the Trump administration to further strengthen the US Cuban Embargo, which has included limiting remittances, further restricting travel by US persons to Cuba and allowing Title III of the extraterritorial Helms-Burton Act to come into force, have resulted in a decline in US travel to the island and are expected to have a negative impact on the Cuban economy.
- Reflecting the fact that company-specific factors largely drove underperformance this quarter, Ground Rent’s share price fell following the loss of a court hearing, rendering them at fault for a failure of a structural sealant at Beetham Tower in Manchester.
- Syncona’s 50% plus premium to NAV valuation fell in the period after the Wellcome Trust charity surprisingly reduced its stake in mid-March. Over Q2, the premium came down further. Fundamentally, though, the company has been performing very well – it announced a 37.9% return on NAV for the year ended 31 March 2019.
Money in and out of the sector
Four new issues made it to the market: Aquila European Renewables Income, Riverstone Credit Opportunities Income, US Solar Fund launched and Cameron Investors (£10m raise). Including the new issues, more than £3bn of new money was raised by investment companies over the second quarter.
Money coming in:
- US Solar Fund launched in April, raising £153m. Part of a growing cast of renewables funds, it is targeting a 7.5% annual shareholder return by providing pure-play exposure to the US solar sector.
- Aquila European Renewables Income also got off the ground, raising nearly EUR155m. It will provide EUR returns through a portfolio of hydropower, onshore wind and solar PV investments across continental Europe and Ireland.
- Riverstone launched a high-income strategy (targeting 8-10% yields) oil and gas loan fund, Riverstone Credit Opportunities Income, which raised just shy of £81m. The fund will make loans to small-medium sized energy exploration companies, filling a void left by traditional lenders retreating from smaller loans.
- Elsewhere, Greencoat UK Wind led capital raising by existing funds, bringing in £398m. Renewables Infrastructure was not far behind with £341.4m. This further underlined the market’s enthusiasm for renewables Greencoat has a portfolio of 34 operating UK wind farms, and at over £2bn, is the largest renewables investment company by market capitalisation.
- Sequoia Economic Infrastructure will deploy the £227.4m it raised in June towards a pipeline of economic infrastructure debt opportunities.
- Hipgnosis Songs has had no issues raising capital since its launch in 2018; it raised another £145.7 while also reporting its first results over Q2.
Money going out:
- Carador Income’s USD listing led outflows at £66.8; the company is going through a managed wind-down. Elsewhere, the NB funds continued to return capital. Biotech Growth, Third Point Offshore and USD Alliance Trust were the other fund to return more than £20m.
Significant rating changes
The table below looks at % changes in premiums/discounts (top 10 changes relative to NAV in both directions)
|1||Leaf Clean Energy||445.9||23.5||422.4|
|4||Oakley Capital Investments||(17.8)||(29.4)||11.6|
|6||John Laing Environmental||15.9||5.5||10.4|
|7||Gresham House Strategic||(12.8)||(22.9)||10.1|
|9||BH Macro USD||3.4||(6.2)||9.6|
Getting more expensive
- We touched on Leaf Clean Energy’s catalyst earlier and note that Morningstar is yet to reflect the compensation award in its NAV estimate.
- Renewables Infrastructure and John Laing Environmental’s premiums widened together, in a strong quarter for the sector.
- The US/India private equity investor, Kubera Cross-Border, led performance in price terms, though it remains at a discount to its year-on-year valuation.
- The market sold Phoenix Spree Deutschland after Berlin approved a five-year rent freeze.
- CATCo Reinsurance and the wider market for re-insurance has been heavily hit by successive years of global catastrophes in 2017 and 2018.
- We discussed Woodford Patient Capital, Syncona, Ceiba and social housing in the ‘performance’ section. Elsewhere, the multi strategy fund, Aberdeen Diversified Income & Growth, figures on the ‘getting cheaper’ list following increases in its NAV.
- Finally, Drum Income Plus REIT’s shares were down over the period, probably to some extent reflecting weak sentiment towards retail; more than half of Drum’s property portfolio in value terms comprises of retail and shopping centre assets.
The legal bit
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