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Trust Watch: ‘cracking value’ in Capital Gearing’s favourite small-cap star

Lindsell Train, Aberdeen New Dawn biotech and social housing funds feature in this week's roundup, but the highlight is the heavily discounted UK smaller companies trust backed by one of the UK's most cautious investors.

We’re back!

Apologies for the lack of a Trust Watch last week. I was busy fulfilling my promise to deliver an article on the social housing real estate investment trusts following the hard-hitting report by the sector's regulator. You may not be surprised to learn that both trusts at the centre of the storm feature in this week’s ‘cheap’ list.

Just to recap, the first two of our four tables rank investment trusts and investment companies by their ‘Z-scores’, which is a measure used by analysts to put their discounts – shares trading below net asset value (NAV) – or premiums – when shares stand above NAV – into historical context.

Roughly speaking a Z-score of -2 or below shows a trust is getting cheap compared to its own trading history and may provide a buying opportunity (first table). By contrast, a Z-score of 2 or more is getting dear and may signal an opportunity to take profits (second table).

Next: Capital Gearing loves Oryx

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We’re back!

Apologies for the lack of a Trust Watch last week. I was busy fulfilling my promise to deliver an article on the social housing real estate investment trusts following the hard-hitting report by the sector's regulator. You may not be surprised to learn that both trusts at the centre of the storm feature in this week’s ‘cheap’ list.

Just to recap, the first two of our four tables rank investment trusts and investment companies by their ‘Z-scores’, which is a measure used by analysts to put their discounts – shares trading below net asset value (NAV) – or premiums – when shares stand above NAV – into historical context.

Roughly speaking a Z-score of -2 or below shows a trust is getting cheap compared to its own trading history and may provide a buying opportunity (first table). By contrast, a Z-score of 2 or more is getting dear and may signal an opportunity to take profits (second table).

Next: Capital Gearing loves Oryx

If you would like to see the gallery slides all on one page, click here.

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'Cheap' trusts Share price premium (- discount) to net asset value % Average 12-month premium (- discount) % Z-score
Civitas Social Housing (CSH) -21.2 -2.6 -3.3
Triple Point Social Housing Reit (SOHO) -9.3 2.4 -3.3
SQN Asset Finance Income C (SQNX) -10.6 -5.1 -2.9
Hipgnosis Songs (SONG) 5.4 9.9 -2.8
Oryx International Growth (OIG) -21.0 -14.2 -2.7
AEW UK Long Lease Reit (AEWL) -13.6 -3.2 -2.5
VPC Specialty Lending (VSL) -20.0 -13.1 -2.4
Aberdeen Standard European Logistics Income (ASLI) -0.6 7.0 -2.4
BMO UK High Income - B Shares (BHIB) -10.8 -7.0 -2.3
JPMorgan Mid Cap (JMF) -10.7 -6.1 -2.2
Marble Point Loan Financing (MPLF) -5.7 4.3 -2.2
BMO Global Smaller Cos (BGSC) -4.7 -1.5 -2.1
Scottish (SCIN) -10.1 -8.9 -2.1
Edinburgh (EDIN) -10.4 -8.7 -2.1
Keystone (KIT) -13.9 -11.9 -2.1

Source: Numis Securities 17/4/19

Capital Gearing loves Oryx

Oryx International Growth (OIG) has been in the 'cheap' list for a few weeks but is worth highlighting again in fifth place as Chris Mills, manager of the micro-cap fund, has a big fan in Capital Gearing Trust (CGT), the absolute return fund successfully run by Peter Spiller for 37 years. I met Spiller and his right-hand man Alastair Lang this week. I knew they were keen investors in investment trusts, using discounts to get cheap access to markets and assets they liked. What I didn't realise is how much they rated Mills, holding around 6% of CGT in Oryx and its bigger sister North Atlantic Smaller Companies (NAS).

CGT is famous for its ultra-defensive approach that has seen its net asset value fall in only one year under Spiller's stewardship (a 2% dip in 2014). It has little in conventional equities but says nearly 45% of what it does hold is in Mills' two closed-end funds. Spiller and Lang are pressing Mills to do more to narrow the discount, which has widened to 21% below NAV to give the £109 million Guernsey investment company -2.7 Z-score. However, they praised his 'hands-on', private equity style engagement with turning round the companies in his portfolio. While NAS looks cheaper on a 25% discount the investment trust has a slightly dearer Z-score of -1.3, suggesting that it is Oryx - which Lang described as 'cracking value' - where the anomaly lies.

Unloved Civitas leads the ‘cheap’ list

Both Civitas Social Housing (CSH) and Triple Point Social Housing (SOHO) have shot to the top of our table after their shares dropped sharply in response to the Regulator for Social Housing questioning the ability of lease-based housing associations to deliver good outcomes to their vulnerable tenants. With their discounts widening greatly they both stood on -3.3 Z-scores at yesterday's close.

Their plight makes Residential Secure Income (RESI), which is not in the table, look interesting on a 14% discount and -1.1 Z-score given the company's clarification last week that it had never had exposure to the specialised supported housing sector criticised by the regulator.

Asset finance income

Sticking with 'alternative' income SQN Asset Finance Income (SQNX) C-shares could offer an opportunity in third place on a 10.6% discount and a -2.9 Z-score ahead of their conversion and merger with the company's ordinary shares in June. SQN's near-8% yield reflects a troubled history in the past two years, in particular the restructuring of its loan to US solar panel manufacturer Suniva. However, recent half-year results showed recovery was in progress. Peel Hunt analyst Anthony Leatham said the proposed conversion of the C-shares could be an 'important catalyst' in re-rating the shares.

Song fund sell-out

Fourth-placed Hipgnosis Songs (SONG) has succeeded in halving its premium with the rapid one-day £141.5 million share placing to institutions. The influx of new stock at 102p depressed the price which had hit 106p, making the shares cheaper to buy although there were some complaints from private investors who hadn't had time to respond.

Next: Lucky break for Aberdeen New Dawn

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'Expensive' trusts Share price premium (- discount) to net asset value % Average 12-month premium (- discount) % Z-score
Aberdeen New Dawn (ABD) -9.4 -13.4 3.4
BlackRock Latin American (BRLA) -9.6 -14.6 3.1
LXI Reit (LXI) 18.5 5.7 3.0
Foresight Solar (FSFL) 9.0 2.6 2.9
Reconstruction Capital II (RC2) -16.4 -22.8 2.8
Bluefield Solar Income (BSIF) 17.0 7.4 2.8
Lindsell Train (LTI) 82.7 45.6 2.8
Aberdeen New India (ANII) -11.2 -14.0 2.7
Fidelity China Special Situations (FCSS) -6.4 -11.6 2.7
Vinaland (VNL) 205.6 20.2 2.6
Gresham House Energy Storage (GRID) 7.1 5.4 2.6
DeA Capital (DEA) -16.4 -27.7 2.6
John Laing Environmental Assets (JLEN) 10.1 5.1 2.5
Lazard World Trust Fund (WTR) -8.1 -35.2 2.5
Primary Health Properties (PHP) 24.6 11.8 2.4

Source: Numis Securities 17/4/19

Lucky break for Aberdeen New Dawn

In their latest factsheet commentary the Hugh Young-led investment team at Aberdeen New Dawn (ADB) say they are 'circumspect' about this year's rebound in Asia following the sell-off at the end of last year. Shares in the £287 million Asia Pacific ex-Japan trust have raced over 18% higher this year, ahead of the 12.3% advance in their stock market benchmark and the 13.6% average return of rivals in their sector. The share price gain has also run ahead of the 14% underlying growth in its NAV, narrowing the discount on the shares to 9.4% from 13.4% to give a pricey Z-score of 3.4.

The managers may be cautious of the rally running out of steam but it is perfectly timed for the trust. It avoids having to hold a continuation vote at the next annual general meeting, which it is obliged to do if the shares trade at more than a 15% discount in the 90 days before 30 April. That looks unlikely to happen which means discount hunters City of London, Wells Capital Management and 1607 Capital Partners - who own nearly a quarter of the shares - won't get a chance to get all their money out at close to NAV. 

Next: gaming the Establishment

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Big risers of the week Thursday's closing price (p) Previous Thursday's closing price (p) Change
JZ Capital Partners (JZCP) 475.00 443.00 7.2%
Establishment (ET/) 220.00 208.00 5.8%
Lindsell Train (LTI) 166250.00 157750.00 5.4%
Electra Private Equity (ELTA) 353.00 335.00 5.4%
JPMorgan Smaller Companies (JMI) 218.00 207.00 5.3%
Aberdeen New India (ANII) 481.50 458.00 5.1%
Fidelity Japan (FJV) 144.00 137.00 5.1%
F&C UK Real Estate (FCRE) 95.20 90.80 4.8%
Oakley Capital Investments (OCI) 206.50 197.00 4.8%
Montanaro UK Smaller Companies (MTU) 114.02 109.00 4.6%
3i Group (III) 1078.50 1031.50 4.6%
TR European Growth (TRG) 899.00 860.00 4.5%
Aberdeen New Dawn (ABD) 257.00 246.00 4.5%
Aurelius Equity Opportunities (AR4) 43.50 41.64 4.5%
Menhaden (MHN) 76.50 73.25 4.4%

Source: Numis Securities 17/4/19

Gaming the Establishment

Establishment (ET/) notched up a near 6% gain this week as the small, poorly-performing Asia-focused global trust unveiled the rollover options for shareholders ahead of its liquidation. This will see investors, who mainly include the Thornton family, get their money out at close to NAV, although they can also switch to Henderson International Income (HINT) or a new Asia fund being launched by fund manager Henry Thornton.

External investors who jumped on the stock when it announced the decision to close last November have done very well. Since then the discount has narrowed from 20% to 5.5% giving a 24% return on the shares.

Investors who brave the bubble on Nick Train and Michael Lindsell's Lindsell Train (LTI) also continue to do very well. Shares in the £332 million trust were up over 5% this week and have surged 37% this year and are up 62% over 12 months. Even more remarkable, the astonishingly high premium on their shares has hit a new all-time record with the stock closing yesterday at nearly 83% above net asset value, no doubt buoyed by investors' confidence in the star fund managers' abilities and the increasing value of their private fund management company in which the trust has a big stake.

They say a rising tide lifts all boats and maybe the markets rally is behind JZ Capital Partners (JZCP) 7.2% advance this week, placing the highly-geared investor in micro-cap stocks and property into first place in our table. The shares trade 41% below net asset value (NAV), a whopping discount that in part reflects investor dissatisfaction with its previous dilutive issuance of new shares below NAV.

Next: bad week for biotech

 

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Big fallers of the week Thursday's closing price (p) Previous Thursday's closing price (p) Change
RDL Realisation (RDL) 362.00 401.50 -9.8%
Worldwide Healthcare (EEH) 2575.00 2755.00 -6.5%
Biotech Growth Trust (BIOG) 704.00 752.00 -6.4%
Symphony International Holding (SIHL) 0.62 0.66 -5.7%
BB Healthcare (BBH) 132.50 140.50 -5.7%
BB Biotech (BION) 68.70 72.65 -5.4%
CATCo Reinsurance Opportunities Fund (CAT) 0.19 0.20 -5.0%
NextEnergy Solar (NESF) 119.50 124.50 -4.0%
Polar Capital Global Healthcare (PCGH) 204.50 213.00 -4.0%
Georgia Capital (CGEO) 1036.00 1078.00 -3.9%
International Biotechnology (IBT) 624.00 648.00 -3.7%
NewRiver Retail (NRR) 235.00 243.00 -3.3%
Geiger Counter (GCL) 19.55 20.20 -3.2%
Raven Property Group (RAV) 41.00 42.20 -2.8%
LMS Capital (LMS) 46.40 47.70 -2.7%

Source: Numis Securities 17/4/19

Bad week for biotech

This year's recovery in biotech and healthcare trusts after their mauling at the end of last year came to an abrupt halt this week as US politics returned to bite the sector hard. 

Democrat presidential candidate hopefuls - such as veteran left-winger Bernie Saunders - have backed a 'Medicare for All' campaign aimed at limiting the role of private health insurance in the country.

There's nothing too remarkable about that but what sent investors running was comments by Dave Wichmann, chief executive of United Health (UNH.N), who claimed the proposal to increase state provision would cause 'wholesale disruption' to healthcare, risk jobs and the economy 'without fundamentally increasing access to care'.

Hospital and insurance stocks fell, starting a wider rout in medical devices, biotech and pharmaceutical shares as investors feared a return to the volatility during the last presidential election when the sector became a political football.

As a result six of this week's big fallers were healthcare and biotech investment trusts, led by Worldwide Healthcare (WHH), which fell 6.5%. Shares in the £1.3 billion Orbimed fund are still up over 7% this year and have delivered a total return of 44.4% over three years. Supporters of the sector say medical advances and demographic changes still make it a high growth area but investors may have to get used to more turbulence as the US election cycle turns.

 

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