Investment Companies Monthly Roundup

Kindly sponsored by Baillie Gifford and abrdn

November 2022

Monthly  |  Investment companies

 

Winners and losers in October 2022

Many equity markets recovered some of the ground lost in September. The swift departure of Liz Truss and her unfunded tax cuts helped the UK stock market and sterling. North America did well, and European markets had a better month in October, and, within the region, small cap outperformed large cap. Signs of easing gas prices may have helped improve sentiment. Hints that the European Central Bank might be less aggressive about raising interest rates may also have helped.

On the negative side, China’s stock market was knocked by renewed COVID lockdowns and Xi Jingping securing backing for a hard-line leadership team. Vietnamese funds, which dominate the country specialist sector, sold off – attributed variously to fears of higher interest rates, slower global growth and domestic scandals at some companies. A weak China also had a knock-on effect on wider Asian indices. Higher mortgage rates are coming in the UK and investors have sold funds in the property – UK residential sector as a result. Energy price caps/windfall taxes are weighing on funds in the infrastructure securities market.

The rebound in US equities, especially smaller companies, over October helped push JPMorgan US Smaller Companies to the top of the performance tables for the month. A couple of other North American focused trusts, North American Income and Pershing Square, also feature. Lula’s victory in Brazil appears to have been taken well by investors, boosting BlackRock Latin American.

Geiger Counter rebounded – its NAV tends to be quite volatile but seems to be on a recovering trend. As OPEC+ agreed a production cut (see our Economic and Political roundup), oil prices bounced which boosted BlackRock Energy and Resources Income and CQS Natural Resources Growth and Income. We mentioned the uplift in European smaller companies stocks earlier, Montanaro European Smaller Companies was the chief beneficiary of this.

CQS Natural Resources Growth and Income also managed to shift to trading on a narrower discount, but still has further to go on that front we think. Dolphin Capital reported a lower NAV in the month but investors were encouraged by its agreement to sell its stake in the One&Only at Kea Island project. SME Credit Realisation was boosted by its latest plan to return capital to investors – £9.1m will be handed back shortly.

It was interesting to see the recovery in Warehouse REIT’s share price. We published a note on the possible overly pessimistic attitude of investors towards the logistics sector, reasoning that a tight market for logistics space would support rental growth. There seems to be some bargain hunting going on elsewhere in the property sectors as Alternative Income REIT and Value and Indexed Property Income both made the list of top-performing funds. Amedeo Air Four Plus remains on a very wide discount but slightly less wide that it was.

There is a strong pattern to the funds featuring in the lists of worst-performers – China, Vietnam and growth capital funds take most of the slots.

All four China funds and all three Vietnamese funds are amongst the worst-performing funds in NAV terms for the reasons outlined earlier. The general aversion to China seems to have impacted on Macau Property Opportunities and Asia Dragon too.

In the growth capital sector, share prices are falling in anticipation of steep falls in NAVs. Schiehallion held onto a premium rating for far longer than its peers, but sentiment is against these stocks. Seraphim Space announced inaugural results – running from launch to end June 2022 – in which it reported a modest rise in its NAV, reasonable progress in deploying its IPO proceeds, and an expanded management team. Its discount is about 50%, however.

 

Moves in discounts and premiums

JPMorgan Russian’s shares are a bet on an end to the war and/or the demise of Putin, but investors now need to be mindful of the trust’s plans to change its remit. SME Credit Realisation was bolstered by plans to return some capital to shareholders. The same thought may have occurred to Dolphin Capital investors, but the proceeds of its disposal will be used to pay off debt and the balance kept for working capital requirements. Ruffer’s discount at end September was an aberration and short-lived. Alternative Income REIT investors may have been encouraged by its annual results, which showed an uplift in NAV although that was as at 30 June 2022 before long-term interest rates shot up.

Schiehallion’s wider discount is more in line with peers – we have been puzzled as to how it was holding onto its premium rating for some time. Fears of falling house prices are affecting Residential Secure Income’s share price, we think. Oryx International Growth is thinly traded and it may be that modest selling pressure has triggered the spike in its discount. abrdn European Logistics Income lost its lead fund manager. Livermore Investments announced a sharp drop in its NAV at the end of September and this weighed on its share price during October.

 

Money raised and returned

The turmoil in markets has made it hard for investment companies to raise money. One new IPO is on the way we think – a biotech fund is looking to launch – but Welkin China announced that its IPO would be delayed, maybe indefinitely we think.

TwentyFour Income Fund bucked the trend. It offered investors a realisation opportunity and was able to place all the shares tendered with new investors and raise an additional £34m at the same time. The other issuers were the usual suspects.

On the money out side, Gabelli Merger Plus+ held a tender offer. 29.8% of its shares were tendered and will be repurchased. The problem is that its share register is so concentrated after this that it cannot continue to qualify as an investment trust.

BioPharma Credit is performing well and it is not clear why it has been trading on a small discount. Nevertheless, the board stepped up to the plate and are using some of the money freed up by early loan repayments to buy back stock. Petershill has an ongoing share buyback programme.

 

Major news stories and QuotedData views over October 2022

Portfolio developments

Corporate news

Property news

QuotedData views

 

Upcoming events

Here is a selection of what is coming up. Please refer to the Events section of our website for updates between now and when they are scheduled:

 

Interviews

Have you been listening to our weekly news round-up shows? Every Friday at 11 am, we run through the more interesting bits of the week’s news and we usually have a special guest or two answering questions about a particular investment company.

Friday The news show Special Guest Topic
5 August FEET, JLEN Kamal Warraich Canaccord Genuity Wealth Mgmt
12 August BPCR, IIT, MKNS, TI1 David Smith Henderson High Income
19 August AXI BSIF Fiona Yang Invesco Asia
26 August DGI9, RWK, SHED Nick Brind Polar Capital Global Financials
2 September SDCL, TI1 Tim Levine Augmentum Fintech
9 September UK renewables Joe Bauernfreund AVI Japan Opportunity
16 September FEET Stuart Gray Alliance Trust
23 September CTY, MUT, SUPR, LXI Matthias Siller Baring Emerging EMEA Opportunities
30 September BSIF, discount rates Masaki Taketsume Schroder Japan Growth
7 October VNH, SONG Simon Farnsworth Life Science REIT
14 October TMI, HEIT Jonathan Maxwell SDCL Energy Efficiency
21 October HICL, DORE Ross Driver Foresight Solar Fund
28 October JPE, JRS Joe Bauernfreund AVI Japan Opportunity
 

Coming up
4 November Jason Baggaley abrdn Property Income
11 November James de Uphaugh Edinburgh Investment Trust
18 November Jeff O’Dwyer Schroder European Real Estate
25 November Bruce Stout Murray International

 

 

Research

Recently, Urban Logistics REIT’s (SHED’s) share price has fallen to a wide discount rating to its net asset value (NAV), as the rising cost of debt and concerns over a protracted recession have hit sentiment towards the logistics property sector. However, the long-term trends that have characterised growth in the sector remain and are even more acute in the ‘last mile’ sub-sector that SHED operates. Supply of logistics space is at record lows, while tenant demand is robust, with lettings for the first half of the year at record highs.

AVI Japan Opportunity Trust (AJOT) is delivering returns well ahead of comparable indices and competing funds. Perhaps encouraged by these good returns, AJOT’s shares have been tending to trade close to NAV.

In light of this, the board, following consultation with major shareholders, was able to dispense with the 2022 exit opportunity (a two-yearly exit opportunity at a price close to NAV has been a feature of the fund since launch). That means that AJOT’s managers still have considerable firepower to put behind their efforts to continue unlocking value from mispriced Japanese equities.

The sell-off of real estate investment trusts (REITs) has been breath-taking, with industrial and logistics-focused funds taking their fair share of pain. The major concern is that borrowing costs are now higher than the initial yields on their portfolios, implying an upward re-basing of property yields and a decline in portfolio values.

The average share price discount to net asset value (NAV) among the eight London-listed, industrial and logistics-focused companies has widened to 37.5%. Most were on hefty premiums just six months ago. But what these discount ratings seem to have failed to take into consideration is the off-setting effects of rental growth on valuations and the continued strong occupier market. While demand remains robust, the vacancy rate is the key metric for rental growth and lies at around 3% in the UK and Europe. This suggests substantial rental growth will continue.

 

 

Guide

Our independent guide to quoted investment companies is an invaluable tool for anyone who wants to brush up on their knowledge of the investment companies’ sector. Please register on www.quoteddata.com if you would like it emailed to you directly.

 

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

 

The Legal Bit

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