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Numis: Barnett & Templeton trusts join 2019 ‘strugglers’

Numis Securities adds Mark Barnett's Edinburgh and Perpetual Income & Growth trusts and Templeton Emerging Markets to list of closed-end funds it believes will come under shareholder pressure this year.

Trusts under pressure

Invesco Perpetual’s Mark Barnett has suffered the embarrassment of having his two equity income investment trusts added to a list of 'struggling' trusts compiled by Numis Securities.

In their annual review of corporate activity in the investment companies sector, Numis analysts highlighted investment companies and investment trusts that could either face pressure to wind up this year or be pushed to take other steps to improve performance, such as buying back their shares or changing fund manager.

These under-pressure funds range from specialist investment trusts that have shrunk to below £100 million and risk being viewed as too small to continue.

But they also include big, poorly performing trusts such as Barnett's £1.2 billion Edinburgh (EDIN) and £759 million Perpetual Income & Growth (PLI).

The significance of Numis' hit-list is that, whichever camp they fall in, shares in the trusts trade at significant discounts below their net asset values (NAVs). Any action they take to narrow these discounts and improve shareholder returns could therefore present a buying opportunity if you are a value investor who likes to pick up bargains. But be warned, some of these trusts are not straightfoward investments.

Next: ‘crucial’ year for Barnett’s trusts     

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Trusts under pressure

Invesco Perpetual’s Mark Barnett has suffered the embarrassment of having his two equity income investment trusts added to a list of 'struggling' trusts compiled by Numis Securities.

In their annual review of corporate activity in the investment companies sector, Numis analysts highlighted investment companies and investment trusts that could either face pressure to wind up this year or be pushed to take other steps to improve performance, such as buying back their shares or changing fund manager.

These under-pressure funds range from specialist investment trusts that have shrunk to below £100 million and risk being viewed as too small to continue.

But they also include big, poorly performing trusts such as Barnett's £1.2 billion Edinburgh (EDIN) and £759 million Perpetual Income & Growth (PLI).

The significance of Numis' hit-list is that, whichever camp they fall in, shares in the trusts trade at significant discounts below their net asset values (NAVs). Any action they take to narrow these discounts and improve shareholder returns could therefore present a buying opportunity if you are a value investor who likes to pick up bargains. But be warned, some of these trusts are not straightfoward investments.

Next: ‘crucial’ year for Barnett’s trusts     

To see all the slides on one page, click here.

 

 

 

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‘Crucial’ year for Barnett’s trusts

The underperformance of Edinburgh and Perpetual Income & Growth – flagship trusts for fund manager Invesco – has become acute. Both lag the FTSE All-Share over one, three and five years and although they beat the index over 10 years, they trail the average shareholder return of trusts in their UK Equity Income sector in the past decade.

Not surprisingly investors have looked elsewhere and shares in both trusts have fallen to wide discounts. Edinburgh trades 7% below net asset value and Perpetual Income stands 11% below NAV compared to the 3% average discount in their peer group.

To be fair both discounts have narrowed in recent months as some investors have spotted a bargain, betting that Barnett (pictured) – a former protégé of similarly fallen star manager Neil Woodford – will experience a revival, particularly if the Brexit clouds hanging over the UK stock market are banished this year.

This slight improvement comes after both trusts made their first-ever purchases of their own shares in the summer. By removing excess stock from the market, share buybacks are designed to narrow discounts. With value investors such as 1607 Capital Partners and Wells Capital Management building up positions in the trusts, Charles Cade, Numis’ head of investment companies research, indicated more measures likes this could follow.

‘Any fund that is persistently underperforming and trading at a wider discount than its peers is likely to face pressure to take steps to tackle these issues. In our view, this includes Invesco’s UK funds, Edinburgh IT and Perpetual Income & Growth, which face a crucial year in terms of maintaining investor confidence. Mark Barnett believes that there is substantial value is UK domestic businesses and tobacco stocks, but performance has suffered over the past few years, and his open-ended funds continue to see outflows,’ said Cade.

Next: CatCo catastrophe

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CatCo catastrophe

CatCo Reinsurance (CAT) faced a ‘torrid’ year last year due to a combination of hurricanes and Californian wildfires that saw its ordinary shares fall 53% and the C-shares – which invest in a separate pool of assets – drop 37%.

In December its fund manager also revealed its policy of holding reserves had come under regulatory scrutiny.

The shares now trade on discounts of 44% and 32% respectively, leaving the ‘future of the fund in doubt’, said Cade after the company offered investors a chance to get their money back half-way through the insurance calendar.

‘The board has indicated it will offer an opportunity to elect for a redemption share class in the second quarter of 2019, which is expected to become effective shortly prior to the 2019 mid-year renewals,’ he said.

However, he cautioned it would take several years for the insurance contracts to be unwound and for investors to receive their money.

CatCo is due to pay a dividend in the first quarter but Cade said the amount of capital released ‘may be limited, with a significant amount expected to be trapped in sidepockets until there is greater clarity on losses’.

Next: Templeton ‘beauty parade’?

 

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Templeton ‘beauty parade’?

Most of the under-pressure trusts identified by Numis invest in emerging markets, which endured a tough 2018 as rising US interest rates and a strong dollar battered the stock markets of developing countries.

By far the biggest of these is the £1.7 billion Templeton Emerging Markets (TEM) investment trust, or Temit, whose board – Cade believed – could be provoked into inviting other fund managers to pitch for the management contract at a ‘beauty parade’ if performance does not improve.

Last year the trust was rocked by instability at its fund manager Franklin Templeton when Carlos Hardenberg – who had replaced its founding fund manager Mark Mobius three years earlier – quit to rejoin his mentor at his new firm.

Deputy manager Chetan Sehgal took over the trust and while he hadn’t altered the investment approach or made large adjustments to the portfolio, Cade said there had been significant changes to the overall emerging market team with restructuring at Franklin Templeton, which he believed had concerned some investors.

Performance has struggled with net asset value falling 12.2% last year compared to the 9.3% decline in its benchmark MSCI Emerging Markets index. Despite buying back £153 million of shares, the trust traded at an 11% discount, wider than the 8% of its sector.

‘If the fund continues to underperform, we believe that the board of Temit could consider holding beauty parade at some stage,’ said Cade. ‘Given the size of the mandate, we believe this would attract considerable interest from leading management groups,’ he added.

Next: Make or break for Aberdeen Frontier

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Make or break for Aberdeen Frontier

The Devan Kaloo-managed £34 million Aberdeen Frontier Markets (AFMC) currently trades at a discount of nearly 11% so Cade said it was no surprise a recent tender to buy back 15% of its shares at a 2% discount to net asset value (NAV) was heavily oversubscribed.

The analyst said NAV performance had been ‘dull’ since March 2017 when the company switched from investing in other frontier markets funds to investing directly in countries yet to achieve ‘emering’ market status.

Shareholders will be offered a full cash exit at NAV less costs if the share price total return from 1 July 2018 to 30 June 2020 does not beat the MSCI Frontier Markets index. If performance continues in the same vein, this could become a reality meaning the wind-up of the trust.

Last year Mark Gordon-James, one of its senior investment managers, admitted the next two years were 'make or break' for the trust.

Next: Aberdeen Latin American shrinks

 

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Aberdeen Latin American shrinks

Another sub-scale Devan Kaloo trust feeling the heat is the £41 million Aberdeen Latin American Income (ALAI). Although the trust pays an attractive 5.1% yield, its small size means the expenses eat up a bigger proportion of returns, prompting the manager to recently cap its annual charges at 2%. The shares trade at a discount of 14% leaving the trust worth less than the £52 million it raised at its flotation in August 2010.

In his latest monthly commentary Kaloo (pictured) said Latin America had been hit by US-China trade tensions, rising interest rates, the recent slide in oil prices as well as more specific country problems.

Smaller trusts may find it difficult to attract investors and are limited in their ability to buy back shares, said Cade. ‘Share buybacks/ tenders are rarely a solution for small funds as shrinking the fund exacerbates the problem of size,’ he explained.

‘The future of funds below a £100 million market capitalisation is questionable if there is no viable strategy to attract demand in future. This may involve a change in manager/mandate or a liquidation,’ he said.

Next: Brazil trust ‘unique’ but unloved

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‘Unique’ but unloved

The tiny JPMorgan Brazil (JPB) is valued at just £22 million due to its shares trading nearly 19% below their net asset value (NAV).

Cade said it had a ‘unique mandate as the only Brazilian-focused investment trust’ and benefited from the experienced management of Luis Carrillo and Sophie Bosch de Hood.

The managers' focus on stocks exposed to Brazil's domestic economy meant it missed out in the rally in commodity exporters last year.

Carillo says the sell-off in emerging markets has created ‘increasingly attractive’ valuations. The election of far-right but business friendly president Jair Bolsonaro has boosted the portfolio as Brazil's currency and stock market rallied. The manager said further gains would depend on the new government delivering its economic reforms.

Cade welcomed the trust's rebound with NAV jumping 32% in the past six months. ‘However, the fund’s viability is still questionable,’ he said.

Next: last trust standing

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Last trust standing

Unlike BlackRock Emerging Europe (BEEP), which was forced to wind up last year, Baring Emerging Europe (BEE) has managed to hold on despite its shares trading at a wide 14% discount below net asset value (NAV).

The £86 million company operates in a region that is ‘out of favour’, evidenced by its wide discount despite ongoing share buybacks and an enhanced yield of 5.1%, said Cade.

‘The fund triggers a 25% tender if the average discount exceeds 12% over the four years to 30 September 2020 or if performance does not exceed the MSCI Emerging Europe 10/40 index by an average of 1% per annum over the same period,’ said Cade.

In his latest update, fund manager Matthias Siller was reasonably optimistic due to what he called the ‘substantial improvement in real household income growth’ that has ‘placed central European economies on a positive growth trajectory’.

Next: Genesis looks for growth

 

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Genesis looks for growth

Like Templeton, size is not yet an issue for Genesis Emerging Markets (GSS) although that could change if the £781 million trust is required to mount further share buyback offers like last year.

Genesis, which trades on a discount of 11%, returned £101 million through a 10% tender offer at a 3.5% discount last year. Its board said it would offer a further tender of up to 25% of its shares if investment returns continue to underperform.

The tender is just one in a number of steps the board has taken to boost investor demand, including cutting the management fee to 0.95% and introducing a dividend yield of 2.3% last year.

Still, the investor register is primarily made up of institutional investors, including Strathclyde Pension and City of London, with 'buy-and-hold' private investors keeping a wide berth.

‘The fund has a low profile given its size and it has traded on a persistently wide discount,’ said Cade, who added that it was ‘unclear if [the] steps taken by Genesis will be sufficient’.

Next: HarbourVest needs discount controls

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HarbourVest needs discount controls

We finish with HarbourVest Global Private Equity (HVPE), a big investment trust that doesn't face questions about its future but which could come under pressure to narrow its discount this year, according to Cade. 

Private equity investment trusts invest in unlisted companies that have not floated on the stock market, either directly in the businesses or indirectly through other specialist private equity funds.

HVPE takes the 'fund of funds' route, investing in the private equity funds of its Boston-based manager HarbourVest to give itself a highly diverse exposure to thousands of individual companies.

Like almost all other private equity trusts, HarbourVest shares trade on a big 25% discount to net asset value, which partly reflects the caution investors still feel to a sector that bombed in the 2008 financial crisis.

Performance in the past decade has been good though, and in the past three years HarbourVest has taken steps to make itself more attractive to UK investors. It has moved its listing from Amsterdam to London, adopted a sterling share class (previously it just had dollar-denominated shares) and gave shareholders full voting rights, a series that saw it shortlisted for Citywire's first 'Best Board' award in 2017, although it did not win.

However, the recent widening discounts in the sector as investors worry about the impact of global stock markets on the portfolios, presented the £1.1 billion trust with a problem, said Cade.

The analyst said that unlike many of its rivals HarbourVest had no formal strategy to counter wide discounts. 

‘We believe that there will be pressure on these funds to return capital through buybacks/tenders if discounts continue to exceed 20%,’ he said.

‘Most listed private equity funds already have a distribution policy in terms of share buybacks and/or dividends, with the notable exception being HarbourVest Global, which is trading on a 25% discount to its last published NAV at the end of November.’

 

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