QuotedData’s Investment Companies Roundup – April 2023

April 2023

Monthly roundup  |  Investment companies

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Winners and losers in March 2023

Technology & technology innovation (renamed this month from technology & media) was one of only two sectors with positive returns for the month thanks to a considerable overweight to mega cap tech. Their outperformance appears to be a symptom of a dramatic fall in global bond yields precipitated by the collapse of SBV. Falling yields are driving investors back into longer duration stocks. However, flows out of cyclicals and more risky areas of the market suggest that they are also seeking the relative safety of highly liquid, cash printing companies like Apple, Microsoft, and Google. Europe was the other sector with positive returns with Fidelity European Trust contributing the lion’s share of the outperformance. The trust was a beneficiary of defensive positioning across staples and luxury assets as well as a falling USD, which also contributed to the returns of Asia Pacific and Japan. It was a surprise to see property – debt show up. However, this was more a function of some idiosyncrasies within the sector, namely the continued wind down of Starwood European Real Estate Finance.

UK residential property was the worst performing sector for the month as the two social housing specialists, Civitas Social Housing and Triple Point Social Housing REIT, saw their share prices fall by double-digits. This is despite Triple Point reporting a valuation uplift in 2022. The ongoing debacle at Home REIT, which is currently under investigation for bribery, among other things, may be (unfairly) impacting sentiment towards the social housing players. The UK property healthcare sector was next on the list and is made up of two aged care REITs which tend to be relatively uncorrelated to wider macro volatility, so it was somewhat of a surprise to see these feature. However, it is clear that the entire sector is under pressure as rising interest rates weigh on profitability while the regional banking crisis has also raised concerns around solvency given the amount of leverage in the industry. A bid in the sector (for Industrials REIT) could bolster sentiment in April.

Outside of property, a number of cyclically exposed companies also underperformed as markets began to price an increasing risk of recession following the banking crisis earlier in the month. SVB’s collapse and rising interest rates have also affected the ability for more risky sectors of the market to access capital. Healthcare is generally considered more defensive, and as such should have benefited from these flows, however biotech tends to fall outside of this characterisation, with companies generally requiring significant amounts of cash to maintain their R&D pipelines.

The performance of Globalworth Real Estate stands in contrast to the wider moves in the property sector discussed above, however, its share price gain needs to be put in the context of a 45% drop over the past year. Trian Investors 1 rose as it distributed more of its assets to shareholders. It will likely wind up later this month. A number of private equity funds continue to outperform despite wider public market volatility, although Symphony is relatively unique in that it targets high growth sectors in Asia. The company’s investments have benefited from the stability of equity markets in places such as India and Singapore which have been less impacted by broader market volatility. Global funds, including Manchester & London, Martin Currie Global Portfolio and Menhaden Resource Efficiency have benefited from their exposure to large cap US tech, for reasons discussed above. Commodities have had a relatively rough time of late, although they managed to gain some respite as the USD retreated. Gold, on the other hand, has vaulted higher – up over 20% over the past month – as central bankers are no longer able to fight inflation as hard as they might have liked due to concerns around financial stability, driving Golden Prospect Precious Metal’s outperformance.

Worst-performing

It’s not surprising to see a wide representation of REITs making up the worst performing list of funds, particularly in commercial property, which is facing a multitude of headwinds. As we briefly touched on above, the sector is highly leveraged while valuations look stretched at the same time as demand for rent falters. Add to this concerns around lender solvency and you get the rapid derating of the sector which we are seeing below. Phoenix Spree has a stock-specific problem in that weak sales of condominiums in Berlin are restricting its ability to pay a dividend. Outside of real estate, the overwhelming theme of the worst performers is the rotation away from risk; small caps, biotech growth, nascent renewable infrastructure, all of which have large capital requirements and relatively weak balance sheets reliant on external funding for growth. The fall in HydrogenOne’s share price seemed overdone to us – government money is pouring into the hydrogen sector, globally. Interestingly, Polar Capital Global Financials is the only pure play financial that shows up on any of our worst performer lists (despite having no exposure to the banks that ran into trouble), which is perhaps a reflection of how well policy makers have managed the SBV collapse and resulting collateral damage. The relative underperformance of companies that rely on funding from banks like SBV also highlights the risks associated with sectors leveraged to cheap capital. UK small cap seems to have taken another tumble in March. Some of that may relate to the SVB issue.

Moves in discounts and premiums

The narrowing of the discounts for the two REITs is a result of a significant negative adjustment to NAV for both companies. It’s not clear what drove Chelverton’s higher premium however the company has taken it as an opportunity to issue more shares. Downing Renewables is riding the positive news from its annual results, reporting a NAV total return for 2022 of almost 20%. It probably also helped that a frustrated board authorised share buybacks on the trust. Even after its impressive share price rise over March, Globalworth remains on a very wide discount. This may reflect investors’ concerns over the prospects for eastern Europe’s economy as the was in Ukraine rumbles on.

At the other end of the scale, Digital 9 and HydrogenOne saw their discounts widen further, with both trading roughly 50% below NAV at the end of March. Despite this, the companies saw NAV uplifts through 2022 and both have released trading updates over the past month to reassure investors of the underlying health of their assets. Unfortunately, the weakness appears to be driven by wider macroeconomic conditions (chiefly rising interest rates) with the renewable infrastructure and growth capital sectors particularly weak over the last few months. Phoenix Spree Deutschland was discussed above.

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Money raised and returned

Money raised for the month was mostly a case of the usual suspects with City of London, Ruffer, and Merchants taking advantage of their respective premiums to raise capital. CTY in particular has picked up where it left off, having raised £65.5m at the back end of last year. BlackRock World Mining also features, capitalising on its impressive 2022 performance. The lack of new faces reflects what has been a relatively challenging environment for the trust universe over the last few months

For those companies returning cash, Trian headlines the list as it distributed its Unilever shares and goes through the process of winding up. RIT Capital Partners has also been aggressively buying back shares, after its shares fell to a discount almost on par with its pandemic nadir.

SLF Realisation left the sector during March and JPMorgan Global Growth & Income converted its C shares, which saw a total of 58,605,746 ordinary shares enter circulation.

Major news stories and QuotedData views over March 2023

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Research

AVI Global Trust (AGT) offers investors a unique opportunity to access a distinctive portfolio of good-quality  investments that are selected because the managers believe that they are trading at a discount to their intrinsic value. Thanks to recent market movements, AGT’s ‘double discount’ – its own share price discount to NAV plus the discount on the underlying portfolio – now sits on an  abnormally wide level. The management team has been  tactically increasing AGT’s market exposure to tap into these discount-opportunities. This gives AGT’s shareholders the potential to benefit from a powerful combination of NAV gains and discount closing. AGT has demonstrated the success of its approach, which has been the main driver of the trust’s highly-competitive near-to-mid-term performance. AGT’s NAV returns rank first in its peer group over three years to end February 2023 (see page 15).

JLEN Environmental Assets (JLEN) experienced an eventful but fruitful 2022. Volatile power prices, rampant inflation, rising interest rates and new taxes buffeted the renewables sector but generally acted as a tailwind for net  asset value (NAV) growth. Some of these issues will continue to affect the sector in 2023. We explore all of these from page 4 onwards. JLEN’s managers can have little influence on these big macroeconomic factors but they can, through their investment activity, lay the foundations for future NAV uplifts.

Pantheon Infrastructure (PINT) has been   busy   assembling   a   diverse   portfolio   of   11 investments   in   infrastructure  projects,  located in  developed  markets.  The  majority  of  these  have  explicit  inflation-linkage built  into  their  structure or  implicit  protection  through  regulation  or  market  position.  In  addition,  the  company is substantially hedged against foreign exchange movements. Whilst  it  is  still  early  days  for  the  trust,  the  NAV  has  made  positive  progress.PINT’s  ambition  is  to  generate  NAV  total  returns  of  between  8%  and  10% per annum over the long term. This is intended to come in the form of  both  capital  and  income  growth.  For  this  financial  year,  the  trust  is  targeting a dividend of 4p per share.PINT  still  has    about  £72m  of  funds  available  to  deploy  into new investments  (see  page  16).  The  manager  says  that  the  tailwinds  that  support the demand for new infrastructure, and the growth opportunities that  accompany  it,  remain  strong  across  all  the  sub-sectors  the  company  is  active  in.  Once  PINT’s  discount  is  eliminated,  we  would  expect to see the company grow through share issuance.

Oakley  Capital  Investments  (OCI)  invests  in  private  equity  funds  managed  by  Oakley  Capital  Limited  (Oakley).  OCI  is,  as  we  show  on  page 22, the best-performing fund in its peer group over five years. As evidenced by its latest full-year results, this has been achieved in spite of a difficult macroeconomic backdrop.  OCI believes that this can be attributed to three core factors:•the expertise that its adviser has built in a focused group of sectors (technology, consumer, education) over 20 years of private equity investing;•a unique investment origination strategy, which continues to unearth opportunities that others cannot access (seven new investments were made last year); •and a set of proven value-creation strategies that help accelerate the earnings growth of the companies that OCI backs (22% EBITDA growth on average over 2022, accounting for around two-thirds of OCI’s NAV growth over 2022). The  success  of  the  approach  is  evidenced  by  OCI’s  23%  compound annual growth rate of its net asset value (NAV) over five years.

India Capital Growth’s (IGC’s) adviser, Gaurav Narain, says that at a time  when  many  economies  and  equity  markets  are  struggling,  there are  many  reasons  to  be  optimistic  about  the  outlook  for  the  Indian economy. Although down in sterling absolute terms during the last 12 months, the Indian market made progress in local currency terms and has  performed  well  relative  to  its  emerging  market  peers,  benefitting from  a  good  run  in  the  second  half  of  2022  from  which  IGC  also benefitted. Despite the recent market setback so far this year, Gaurav thinks there is more upside to come, noting that business confidence is high (both the  services  and  manufacturing  purchasing  managers  indexes  (PMIs) were over 55 at the end of February and have been around this level for some time – see page 6). Gaurav notes that valuations remain elevated even after the recent setback, but recent market volatility has thrown up opportunities and IGC’s own discount  to  net  asset  value (NAV)  offers value, particularly with a redemption opportunity where the exit discount is  set  at  a  maximum  3%  of  NAV  and  the  additional  resource  that  the manager’s  absorption  into  AssetCo Plc  should  bring  (see pages  4 and 5).

JPMorgan  Japanese  Investment  Trust  (JFJ)  has  a  large  exposure  to  good quality companies that are at the forefront of the modernisation of the Japanese economy. The portfolio embraces businesses in robotics, ecommerce,  digitalisation,  healthcare,  and  renewables.  It  also  backs  some  great  Japanese  brands  and  businesses  that  are  helping  the  economy adapt to an ageing population. These are ‘growth’ stocks and, as we discussed in our last note, even though  Japan  has  not,  as  yet,  experienced  the  interest  rate  rises  that  triggered the selloff in growth stocks in other markets, their share prices have plunged, and this has impacted on JFJ’s performance.The trust’s managers, Nicholas Weindling and Miyako Urabe, highlight the valuation opportunity that this has created; Japan was out of favour before  this  fall,  the  stocks  in  the  portfolio  are  cheaper  yet  still  boast  superior   earnings   growth   prospects   than   the   average   Japanese   company,  and  the  yen  is  undervalued  (a stronger yen  relative  to  the  pound would boost JFJ’s returns). This could be a good chance to back a former sector-leading trust, while underlying valuations look cheap.

Appendix 1 – median performance by sector, ranked by 2022 year to date price total return

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