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Investment Trust Watch: May Day! Jet funds hit turbulence

Investment Trust Watch: May Day! Jet funds hit turbulence

As we fly into the New Year a trio of alternative income funds that generate high yields from leasing jumbo jets to Emirates Airline are suffering a bout of turbulence.

The Doric Nimrod Air One (DNA), Air Two (DNA2) and Air Three (DNA3) have all landed on our first list of 'cheap' trusts for 2018 (see first table) after their shares were hit by concerns over the re-sale value of the planes they lease to the United Arab Emirates' national carrier.

Air One, the first and smallest of the three Guernsey investment companies advised by Nimrod Capital, trades at its first discount since its launch seven years ago. The shares have dropped from 117.5p last summer to 102.5p today, a fall that has eradicated a premium that saw them trade as much as 26% over net asset value at the end of September (article continues below).


'Cheap' trusts Share price premium (- discount) to net asset value % Average 12-month premium (- discount) % Z-score
Masawara (MASA)  -53.5 -35.7 -4.2
Doric Nimrod Air Two (DNA2)  17.4 57.4 -3.8
RM Secured Direct Lending (RMDL)  0.0 3.9 -3.6
Doric Nimrod Air One (DNA)  -2.9 31.7 -3.3
Hadrians Wall Secured Investments (HWSL)  3.8 8.6 -3.2
Doric Nimrod Air Three (DNA3)  34.6 85.3 -3.1
Yatra Capital (YATRA)  -26.9 18.6 -2.9
Ediston Property (EPIC)  -5.3 -0.1 -2.9
3i Infrastructure (3IN)  6.2 15.0 -2.6
F&C Commercial Property (FCPT)  -4.0 4.4 -2.6
UK Mortgages (UKML)  2.6 7.0 -2.6
Alcentra European Floating Rate Income (AEFS)  -6.8 -3.0 -2.4
SQN Asset Finance Income C (SQNX)  -7.7 2.8 -2.4
Invesco Perpetual Select - UK Growth (IVPU)  -3.2 -1.3 -2.4
Henderson High Income (HHI)  -2.8 0.3 -2.3

Source: Numis Securities 4/1/18

Air Two and Three have also hit air pockets, with their eye-watering share price premiums slumping in the past three months. According to Numis Securities data, Air Two's premium has fallen from 61% to just over 17% and Air Three's has collapsed from 94% to just under 35%.

That de-rating has left the three closed-end funds with 'Z-scores' below -3, putting them firmly into 'cheap' territory.

Just to recap, the Z-score is a measure used by analysts to put an investment trust share price in the context of its own history. Broadly speaking, a score of -2 or below is viewed as getting inexpensive, while a score of 2 or more is regarded as dear (see our second table below).

As if often the case, the sky-high premiums reached by these funds was based on their ability to pay solid dividends in an era of low interest rates. At their current deflated share prices, the quarterly payouts offer yields of over 8%.

Despite the security and US immigration challenges faced by Middle Eastern airlines last year, that income stream is not so far in question with air traffic increasing as the global economic recovery gathers pace.

What is causing more concern is the asset value of their planes. All three funds own Airbus A380 superjumbos (pictured), the world's largest airjets that can seat 853 passengers but are expensive to run. Launched about a decade ago, there has been no secondary market on which to base their residual values, which is important as investors could hope to see a return of capital when the planes are sold after their 12-year leases expire.

The prospect of this took a knock four months ago when Singapore Airlines announced it was taking its first A380 out of service and handing it back to a German leasing company rather than renew its 10-year deal. If a buyer can't be found the plane could reportedly be broken up for parts worth around $100 million compared to its original list price of $250 million. 

Meanwhile new sales of the giant craft are weak with Airbus anticipating to hand over only eight of the 12 planes it makes next year in 2019.

Concern was heightened when in November Emirates failed to announce a further purchase of the jets, of which it already owns 100, making it by far the biggest A380 fleet operator in the world (article continues below).

'Expensive' trusts Share price premium (- discount) to net asset value % Average 12-month premium (- discount) % Z-score
Alternative Liquidity (ALF)  -41.9 -76.6 4.8
Aberdeen Private Equity (APEF)  -2.0 -15.8 3.0
Dunedin Enterprise (DNE)  -12.1 -40.0 3.0
Baker Steel Resources (BSRT)  -2.5 -25.5 3.0
Pacific Alliance China Land (PACL)  -15.2 -19.0 2.9
North American Income (NAIT)  -4.7 -8.3 2.9
Tetragon Financial (TFG)  -32.2 -36.9 2.8
Henderson Diversified Income (HDIV)  6.0 3.1 2.7
Phoenix Spree Deutschland (PSDL)  32.6 17.4 2.5
Aberdeen Standard European Logistics Income (ASLI)  5.7 3.1 2.4
Rights & Issues IT (RIII)  -8.4 -11.4 2.4
BB Biotech (BION)  3.6 -2.4 2.3
Globalworth Real Estate (GWI)  10.6 -13.0 2.3
Edinburgh Dragon (EFM)  -10.8 -12.3 2.2
Shires Income (SHRS)  -1.7 -8.7 2.2

Source: Numis Securities 4/1/18

In half-year results last month, the boards of the three Doric funds - which share the same chairman and directors - said they continued to 'monitor these developments carefully'.

Doric Nimrod Air One has been the hardest hit of the three as it owns only one A380. whereas Air Two and Air Three own seven and four respectively.

So far there has been no stampede by the fund managers and pension funds that hold the three stocks, although Kames Capital and Artemis reduced their respective stakes in DNA2 and DNA3 in September and November.

Indeed, the fourth fund in the stable Amedeo Air Four Plus (AA4) raised £42 million in an oversubscribed share placing in November, indicating that investors still like the concept. 

Like the others, the three-year-old £680 million AA4 fund began life  focused on leasing six superjumbos to the Emirates. However, in the past two years it has moved away from the A380 and started leasing to the Etihad and Thai airlines as well. This makes it a more diverse portfolio, which if you like this sort of thing, might be more attractive. Its shares trade 7.7% above NAV, having de-rated from a premium of 78% last year, which gives it a Z-score of -2.3 to leave it just outside this week's table.

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