Residential rebound

In the year’s third quarter, US inflation continued to fall, forming a positive economic picture for the country, with strong wage growth and low unemployment. In the lead up to the Federal Reserve’s rate cut on 18 September, the first in four years, the technology sector underwent a sell-off that saw Nvidia’s share price fall 13% from its peak. Activist funds such as Elliot Management expressed their concerns of an AI bubble, contributing to a series of share price falls for the ‘Magnificent 7’ stocks. Smaller companies in the US seemed to benefit from the selloff, aided by rate cut expectations.

Sensitive to the Bank of England’s August rate cuts and aided by corporate activity, the UK’s property sectors enjoyed significant returns, particularly residential property. These gains were also supported by a generally improving post-election outlook.

The ongoing housing crisis and weakened demand that has troubled China’s economy for some years was met with a brief but strong rally following stimulus boosts by the government.

Japan’s third quarter was marked by significant growth in the yen against the dollar, alongside growing interest rates. What followed was dampening demand for its exports, yet the country’s consumer sentiment remained resilient.

The gold price continued to climb, but despite the broadening conflict in the Middle East, the oil price fell. In the US, Europe and UK, bond yields fell (prices rose), reflecting the moves in inflation and interest rates.

New research

So far in Q3, we have published notes on: Caledonia Investments, Foresight Environmental Infrastructure, AVI Japan Opportunity, GCP Infrastructure, Baillie Gifford UK Growth Trust, Seraphim Space Investment Trust, Rights and Issues Investment Trust, Montanaro European smaller companies, Geiger Counter Limited, Henderson High Income, Alliance Trust, Oakley Capital Investments, Gulf Investment Fund and JPMorgan Japanese Investment Trust.

At a glance

All investment companies median discount

After the discount narrowing of Q2, as the chart highlights, in Q3 discounts were contained within a narrower band (11.6%–13.2%). The median discount was 12.87% at the end of June and 12.54% on 30/09/24. The brief period of heightened volatility at the beginning of August coincided with the yen’s sharp rise, an unwinding of positions funded by borrowing in yen and a mini panic about the US economy which calmed down soon after.

Time period 30 September 2023 to 30 September 2024

Source: Morningstar, Marten & Co

UK – commercial property median discount

Falling interest rates and a reasonably robust economy have been supporting a recovery in the property – UK commercial sector. However, the real driver of narrowing discounts has been corporate activity, with bids for a number of trusts including LXI REIT, UK Commercial Property, and Balanced Commercial Property, plus a wind down at abrdn Property Income.

Time period 30 September 2023 to 30 September 2024

Source: Morningstar, Marten & Co

Source: Bloomberg

Winners and losers

Best performing sectors over Q3 2024 by total price return

Source: Morningstar, Marten & Co. Note: inclusive of sectors with at least two companies. Note: many alternative asset sector funds release NAV performance on a quarterly basis

Significant sales of aircraft made by Doric Nimrod funds upheld the Leasing sector’s lead at the top of the list.

As mentioned, UK property sectors were some of the major beneficiaries of the Bank of England’s August rate cuts, given their pronounced sensitivity to loosening monetary policy. In tandem with lowering bond yields, the appeal of commercial property grew with higher rents. In the field of healthcare, evaluations of the sector’s structural conditions (growing demand) have corresponded with renewed interest. Across the channel, opportunities arose from falling interest rates that sparked rising prices, seeing European property companies welcome healthier cash flows.

Contrary to the pattern of recent years, Chinese equities were given a powerful uplift in the wake of government stimulus, including interest rate cuts. It is thought that this sudden interjection was an attempt by the CCP to fulfil its 5% annual growth target. In response, the CSI 300, the broad-based index of China’s largest companies, surged by 27% from its mid-September lows, only to fall back again as investors questioned the lasting impact of the stimulus.

Worst performing sectors over Q3 2024 by total price return

Source: Morningstar, Marten & Co. Note: inclusive of sectors with at least two companies. *many alternative asset sector funds release NAV performance on a quarterly basis

In terms of the worst performing sectors, technology funds with significant exposure to ‘the Magnificent 7’ were struck by a large selloff at the end of July, prompted by worries over high valuations and worse than expected quarterly results. For instance, the market capitalisations of Alphabet and Microsoft dropped by 6%, as investors took profits from stocks that had benefitted from the AI buzz.

A substantial part of the Property – rest of world sector’s performance was caused by Ceiba Investments’ exposure to macroeconomic elements specific to Cuba. This included the reduced numbers of Russian tourists due to the Ukraine war and ailing efforts from the government to reform the economy. Another fund, Macau Property Opportunities, experienced a fall in NAV, blaming the discounting of properties by local developers to improve their cash flows.

Japanese funds were hit as investors unwound trades financed by cheap yen in the wake of interest rates rises. A stronger yen was also seen as bad news for some of the country’s major exporters. In September, the country’s exports fell for the first time in ten months, due to a strengthened yen and less demand from neighbouring China amid its economic uncertainty. Whilst the price of gold rallied, China’s economic weakness negatively influenced the Commodities and natural resources sector, although the stimulus provided some support, with steel prices rebounding, for example. Geopolitical risks have disrupted end markets.

Top 10 performers by fund

Source: Morningstar, Marten & Co. Note: excludes trusts with market caps below £15m at 30/09/24

The process of Crystal Amber’s wind up saw its portfolio become highly concentrated, with Morphic, a biopharmaceutical company, increasingly dominant. Following Crystal Amber’s £59m revaluation of Morphic, the fund’s share price surged on 31^st July.

For funds focused on Chinese equities, the government’s stimulus boost led to heightened returns. The sudden gains of technology companies Alibaba and Tencent contributed to the share price hikes of Baillie Gifford China Growth Trust, JPMorgan China Growth & Income and Fidelity China Special Situations. All three of these funds saw their share prices jump by over 22%. Even across the Pacific, Middlefield Canadian Income said its portfolio stood to benefit from Chinese stimulus.

Golden Prospect Precious Metal’s NAV increases were propelled by an all-time high price of gold in late September. Investors have sought the shelter of gold due to macro concerns, led by the escalating conflicts in the Middle East, in addition to fears of a potential recession.

In similar fashion to property funds, infrastructure focused trusts such as Ecofin Global Utilities experienced NAV increases supported by sensitivity to interest rate cuts. In the case of Ecofin, growing demand for power is boosting the trust’s returns.

Japanese smaller companies funds such as JPMorgan Japan Small Cap Growth & Income and Nippon Active Value outperformed large cap focused Japanese trusts. Small caps are less exposed to exporters and the yen carry trade. Returns were not derailed by the volatility associated with the surprise change in leadership, as new Prime Minister Shigeru Ishiba called an election.

PRS REIT had the largest share price jump over the third quarter, as shareholders won out in their battle to remove the chairman and appoint two new directors. A strategic overhaul now looks likely once a new chairman is installed. For Balanced Commercial Property, its recommendation of a cash offer from Starwood Capital, whose £673.5m cash offer was at a significant premium to its share price, triggered these returns. In the case of abrdn Property Income Trust, the news of proposed accelerated wind up in a sale of the portfolio to GoldenTree Asset Management led to a narrowing of its discount.

The revaluation of Dignity, Castlenau’s largest investment, led to a 30% surge in its share price in the first few days of July. The increase in Chrysalis’ share price was triggered by its sale of portfolio companies Graphcore and later in the quarter, Featurespace. The holdings are expected to raise $56m and £89m, respectively.

Following an announcement on 21^st August that Doric Nimrod Air Two was selling over £153m of aircraft assets to Emirates, the fund’s share price rose by 13%. Doric Nimrod Air Three investors took comfort from this.

Bottom 10 performers by fund

In terms of the worst performing funds, Riverstone Energy’s significant drop in NAV is related to falling oil prices.

Geiger Counter’s NAV was affected by a generally disappointing backdrop for the uranium price, as investors worry about new supply coming to the market.

For AI/technology focused funds like Manchester & London, Allianz Technology Trust and Polar Capital Technology, the US tech selloff that struck in July knocked their NAVs.

Carrying on from previous months, JPMorgan Emerging Europe, Middle East and Africa’s share price has continued to suffer from concerns about the true value of its legacy Russian holdings.

Source: Morningstar, Marten & Co. Note: excludes trusts with market caps below £15m at 30/09/24

Ecofin US Renewables Infrastructure’s failure to secure a bidder for its assets in its wind up led to sharp falls in its share price and NAV. Also in the renewable energy infrastructure sector, Gresham House Energy Storage revealed in its half year results that its operational revenues fell by 12.8% year on year, reflecting the issues that the battery sector has had in benefiting from the capacity market. Additional woes for share prices in the sector included Digital 9 Infrastructure, which slashed its NAV, and then incentivised its new manager to achieve an even lower realisation value.

Despite earlier gains in July, Schiehallion Fund took a blow from the tech selloff in August. As some investors became more risk averse, HydrogenOne Capital Growth, Schroders Capital Global Innovation Trust and Symphony International Holding saw their discounts widen.

The withdrawal of the IPO of Pershing Square USA from the New York Stock Exchange was disappointing news for shareholders in Pershing Square Holdings, who had hoped to benefit from lower performance fees.

More expensive/cheaper

Source: Morningstar, Marten & Co. Note: excludes trusts with market caps below £25m at 30/09/24

Getting more expensive

UK property trusts dominated the list of narrowing discounts, largely related to corporate activity, with the change in leadership at PRS REIT, and bids for Balanced Commercial Property and Tritax EuroBox. Elsewhere in the sector, higher rents and lower borrowing costs elevated returns. Outside of the sector, revaluations/sales of major assets (A380s for the Doric Nimrod funds, Dignity for Castlenau, Graphcore and Featurespace for Chrysalis) led to considerable uplifts.

Getting cheaper

Difficulties in securing buyers for assets widened discounts for Ecofin US Renewables Infrastructure and Digital 9 Infrastructure. Investor nerves hit growth capital funds such as Schiehallion, HydrogenOne Capital Growth, and Augmentum Fintech. At the bottom of the list, Apax Global Alpha’s widening discount likely reflects its relatively poor returns in recent years.

Money raised and returned

Source: Morningstar, Marten & Co. Note 1) value of shares issued/repurchased as at 30 September 2024

Money coming in

Once again, there were no new IPOs.

Regional REIT raised money via a rights issue. JPMorgan Global Growth & Income, Ashoka India Equity, and TwentyFour Select Monthly Income benefitted from regular share issuance, while Odyssean held a placing and retail offer.

Money going out

In terms of money going out Scottish Mortgage passed the target £1bn mark in its share buyback programme. Similarly, Smithson, F&C, and Finsbury Growth and Income are regular repurchasers of stock.

JPMorgan European Discovery made a tender offer for 15% of its shares, with cash being distributed to its shareholders during September.

Over the quarter, we said goodbye to Hipgnosis Songs Fund, Marble Point Loan Financing, Foresight Sustainable Forestry, and NB Global Monthly Income. Henderson EuroTrust merged with Henderson European Focus, Aberforth Split Level Income was reconstructed to become Aberforth Geared Value and Income. Witan agreed to merge with Alliance Trust.

Major news stories over Q3 2024

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Appendix 1 – median performance by share price return over Q3 2024

Source: Morningstar, Marten & Co. Note: all figures represent median values of the constituent funds from each sector. To 30/09/24

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