Investment Companies Quarterly Roundup

Kindly sponsored by Baillie Gifford and Aberdeen Standard Investments

 Table of contents 

• In this issue
• Performance data
  • Positive movers
  • Negative movers
• Discounts and premiums
  • Getting more expensive
  • Getting cheaper
• Money in and out
  • Money in
  • Money out
• Major news stories
• Upcoming Events
• New research
• The legal bit

 Unprecedented times 

We have knitted together the impact on the investment companies from what is now widely considered to be the most severe pandemic in a century. The collapse in asset prices over the latter part of March, brought the curtain down on an up-market that lasted more than ten years. In amongst this, there were pockets, such as the technology sector, that held up well. For many industries, the worst is still to come, as we brace ourselves for the sharpest contraction to global growth since the US great depression.

Some sectors, such as biotech and healthcare, are clearly better positioned. Others in this bracket include infrastructure and renewables, where revenues are locked in. As well as commercial property, other sectors with heavy cyclical exposure, such as commodities and leasing, have been heavily re-priced.

Biotech is proving to be relatively resilient 

For a comprehensive collation of commentary from fund managers and chairman in response to covid-19, you can access our most recent economic and political roundup here.

 In this issue

Performance Data – the Brevan Howard hedge funds, BH Macro  and BH Global, fared well while technology held up well too. The worst affected sectors were aircraft leasing, energy, structured finance, small and mid-cap growth and equity income funds.

Major news stories – We have updates and responses from a raft of funds across the investment trust industry. Click here to access the news section.

Money in and out – We welcomed Nippon Active Value, which raised £103m in February. Predictably, it was otherwise very quiet.

 Performance data

Positive price returns over the first quarter were delivered by just 22 investment companies, from a total of more than 350. The median total NAV and market returns were (13.1%) and (23.3%). The was no precedent for the pace and uniformity by which markets collapsed over March, before a late rally propped up the US passing a $2tn stimulus package. The rally has continued through to the middle of April.

It was a particularly galling quarter for aircraft leasing companies, while the structured finance sector was hit hard by credit downgrades. Small and mid-cap strategies suffered with corporate earnings expected to take an enormous hit, a theme which also heavily impacted equity income funds, as companies struggle to meet dividend targets.

Positive performance was led by alternative sectors with lower exposure to the cyclical impact of covid-19. Secured regulated income flows found in the renewable and infrastructure sectors appear to be a boon, while the comparatively less affected technology sector has been faring well.

 Positive movers

Adamas Finance Asia rebounded as one of its key positions, Future Metal Holdings, announced at the end of 2019 that it had commenced dolomite production in China. Global volatility typically provides fertile conditions for macro-strategy hedge funds, benefitting the Brevan Howard-feeder funds, BH Macro GBP BH Global GBP. Sentiment towards Civitas Social Housing turned positive as investors recognised that some commentators had overstated the impact of regulatory concerns on performance. Allianz Technology held up well while Manchester & London, which also has a chunky allocation to technology, was one of the select few funds to deliver a positive market return. Sentiment towards Baillie Gifford’s later-stage private company fund, Schiehallion, remained steadfast through March. Pershing Square, an investor in a concentrated portfolio of US companies, realised astounding profits from hedges made in early March. Hedges purchased at an all-in cost of $27m were realised for $2.6bn. The durability of revenue streams for renewables companies, notwithstanding the collapse in the oil price and knock-on effect on power prices, explains the presence of Greencoat Renewables in the list.

Secured regulated income flows has increased the relative attractiveness of renewable and infrastructure funds

The best performing funds in NAV terms include many stocks flattered by holding largely US dollar assets in an environment of sterling weakness and whose assets are not often revalued. Riverstone Credit Opportunities, which lends to energy companies; Fair Oaks 2017, which has been forced to suspend its dividend; and  DP Aircraft, which is talking to its lenders after Norwegian defaulted on its lease payments, are all likely to see drops in NAV in time.

 Negative movers

Infrastructure India’s port asset was hit by covid-19 related a collapse in trade. Energy prices tumbled after Saudi Arabia unilaterally slashed supply of its oil in early March, making it a painful quarter for Riverstone Energy. DP Aircraft was the worst affected leasing company in price terms. Airlines around the world are struggling to meet their lease obligations, with many likely to require unprecedented government support to remain viable. JZ Capital made significant write downs of its property portfolio in Miami. Elsewhere, the gearing within the split capital trusts, Chelverton UK Dividend, Aberforth Split Level Income and Acorn Income magnified NAV declines. The value-style of investing was hit particularly hard by the prospect of a recession, affecting Temple Bar. Brazil had a very poor month, with real economy impact of the virus compounded by the collapse in the oil price, which weakened its currency. BlackRock Latin American and JPMorgan Brazil were most directly affected. Carador Income’s presence reflected sentiment towards several vehicles in collateralised loan obligations. The UK was one of the worst hit markets in the developed world, hitting JPMorgan Mid Cap and Jupiter UK Growth.

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 Discounts and premiums

 Getting more expensive

Gold was not spared when selling was at its most fervent over March. Gold has since regained ground, benefitting Golden Prospect Precious Metal. The trust has found favour over the past year as a gold has staged a recovery following some barren years. A near 45% decline in Blue Planet’s NAV was not quite matched by its shares and it was a similar story for Acorn Income, which finds itself exposed to the likelihood that UK corporate earnings will be severely impacted. Self-managed Rights & Issues held up better than the vast majority of the AIC’s UK smaller companies sector. It ended the quarter trading at a premium, perhaps reflecting relatively more exposure to defensive sectors such as healthcare and utilities.

 Getting cheaper

Many airlines face a fight for survival 

The Doric Nimrod funds were hit heavily, for similar reasons to the aforementioned DP Aircraft. Direct lending company, Riverstone Credit Opportunities Income, provides financing to the energy sector, where oil prices have tumbled and defaults could soar. While bank lending has been a lot more cautious since 2008, much of the slack has been taken up by the structured finance and direct lending markets, where competition for credits has led to more widespread covenant-lite structures. Fair Oaks Income suspended its dividend in late March, sending its shares sharply down. This came as the rules that govern the CLOs it invests prevented it from distributing income. Meanwhile. over January, SQN Asset Finance Income was hit by a write-down to one of its main loan assets, leading to an exodus in the shares. Commercial property has been heavily impacted around the world, with scores of companies withholding rent payments. Ediston Property share discount widening reflects the impact on UK commercial property. Electra Private Equity has two main investments, including the casual dining chain, TGI Fridays, which it had to shut in March. GCP Student Living suffered a material decline in its revenues, with many of student tenants returning to their homelands – the majority of its units are rented to international students.

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 Money in and out

There was only one new issue, with Nippon Active Value getting off the ground with a £103m launch (it was targeting £200m). Other potential launches, including Global Sustainable Farmland Income, were put on hold over March.

 Money coming in

In the absence of new issues and large placings, it was a low key quarter with renewable funds continuing to bring in the most capital, led by Sequoia Economic Infrastructure. The company’s £300m raise was £50m above its target, benefitting from the appeal of an established yield-focused strategy. The other active renewable energy infrastructure funds were JLEN Environmental Assets and Aquila European Renewables Income. Elsewhere, Bankers and Smithson took advantage of (what were at the time) premium to NAV valuations to grow the funds.

 Money going out

Pershing Square features regularly in this section, thanks to a significant commitment to narrow its discount through buy backs, while CVC Credit Partners European Opportunities (sterling line) and Baillie Gifford European Growth tendered shares over February, which in the latter’s case represented 10% of its share capital at the time. Elsewhere, Scottish Mortgage bought back shares as part of its policy of keeping the NAV and share price as close together as it can.

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 Major news stories

Portfolio developments:

• JLEN bought an anaerobic digestion plant in Scotland
• Hipgnosis adds Richie Sambora to its roster. Richie was most notably known as the lead guitarist and co-writer of the American rock band Bon Jovi
• Pershing Square booked astonishing profits on hedges it made between late February and early March
• CATCo Reinsurance Opportunities said it was helped by relatively lower levels of catastrophic activity over 2019
• Greencoa tRenewables is making its first investment into continental Europe with a 51.9MW France investment
• DP Aircraft I said that Norwegian had missed a lease payment
• US Solar announced its fourth acquisition, as well as maiden annual results
• We had annual results and a covid-19 view from Baillie Gifford Shin Nippon.
• We also had results (interim) and an update from VietNam Holding
• Schiehallion reported inaugural annual results
• Manchester and London beat its benchmark
• Greencoat UK Wind said says power generation was behind budget in 2019 while earnings were also impacted by falling power prices
• JZ Capital Partners updated on its real estate write-downs
• Amedeo Air Four Plus completed the sale of two A380s to Etihad for a net £130.9m
• Bluefield Solar said the impact of lower power prices was cushioned by fixed prices locked in 2018
• Merian Chrysalis reported inaugural annual results
• Hipgnosis acquired music catalogues from Brian Higgins, Ammar Malik and Blink-182. Hipgnosis also announced it had invested £214m of the proceeds of its C share fundraising from October 2019

Corporate news:

• QuotedData update on the structured finance debt sector
• TwentyFour Income updated on the European CLO and asset backed market
• We had an update from Polar Capital Global Financials
• Gore Street Energy Storage said the covid-19 impact was limited so far and reaffirmed its dividend target
• DP Aircraft I suspended its dividend. We also heard from Amedeo Air Four Plus
• Foresight Solar updated on covid-19 and reaffirmed its 2020 dividend target. We also heard similarly from Bluefield Solar
• We heard from Impact Healthcare, BB Healthcare and JLEN Environmental (click on each company to access the articles)
• 3i Infrastructure said its portfolio impact had been limited
• BlackRock World Mining offered a relatively sanguine take
• Ashoka India Equity offered its take on the virus’s impact on India
• QuotedData reflected on Augmentum Fintech’s capital markets day
• Sequoia Economic Infrastructure Income said it was targeting £250m in an equity raise. It ultimately raised £300m
• Hadrian’s Wall Secured Investments’s board recommended a managed wind-down
• Pollen Street Secured Lending was the subject of a £675m takeover bid and fell out with its manager
• Nippon Active Value IPOed with a £103m raise
• A private placement by Scottish Mortgage raised £188m
• Henderson Alternative Strategies said it would seek approval for a realisation process

Managers and fees:

• European Assets lowered its management fee by 5bps
• JPMorgan European Smaller Companies also reduced its management fee
• Strategic Equity Capital announced a manager change
• Jupiter UK Growth announced Merian’s Richard Buxton as lead manager
• JLEN Environmental Assets announced a restructuring in its management arrangement and a placing proposal
• Fidelity Special Values got a new co-manager

Property:

• Covid-19 – not all doom and gloom for retail property
• Cuba-focused Ceiba Investments suspended its 2019 dividend
• Empiric Student Property suspended its dividend
• We had an update from Macau Property Opportunities
• GCP Student said it would pay dividends despite reduced revenues
• Intu said it would seek covenant waivers
• There was an update from the Malaysia and Vietnam-focused property development company, Aseana Properties

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 Events

• EP Global Opportunities AGM 2020, 22 April 2020
• Aberdeen Emerging AGM 2020. 21 April 2020
• Premier Global Infrastructure AGM 2020, 22 April 2020
• Mobius AGM 2020, 23 April 2020
• Witan AGM 2020, 29 April 2020
• Greencoat UK Wind AGM 2020, 30 April 2020
• Symphony International AGM 2020, 30 April 2020
• BlackRock World Mining AGM 2020, 30 April 2020
• Mello 2020, 20 May 2020 (update to follow)
• Riverstone Credit Opportunities Income AGM 2020, 21 May 2020
• Secure Income REIT AGM 2020, 21 May 2020
• JPMorgan US Smaller Companies AGM 2020, 26 May 2020
• Dunedin Income Growth AGM 2020, 16 July 2020
• Polar Capital Technology AGM 2020, 2 September 2020
• UK Investor Show, 26 September 2020
• The London Investor Show, 30 October 2020
• Sustainable & Social Investing Conference, 3 December 2020

Master Investor – the UKs largest private investor show – 5 December 2020

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 New research

Here is a list of research we published over the first quarter:

• Strategic Equity Capital – Focused on fundamentals
• Civitas Social Housing – Proved its mettle
• International Biotechnology Trust – Trust in biotech
• Herald Investment Trust – Change is a coming
• Montanaro UK Smaller Companies – Reputation restored
• Aberdeen Emerging Markets – Focused on returns
• CG Asset Management – More than a port in a storm
• Premier Global Infrastructure Trust – Don’t stop me now
• Polar Capital Global Financials Trust – New lease of life
• Aberdeen New Dawn – Illuminating value
• Shires Income – Building on a great 2019
• GCP Infrastructure – Stable income, uncertain times
• Standard Life Investments Property Income Trust – Adding value in cautious times
• QuotedData’s Investment Companies Annual Review – 2019
• QuotedData’s Real Estate Annual Review – 2019

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 The legal bit

This note was prepared by Marten & Co (which is authorised and regulated by the Financial Conduct Authority).

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First Quarter 2020 Investment Companies Review