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Carthew: revisiting the most newsworthy trusts of 2017

Carthew: revisiting the most newsworthy trusts of 2017

As 2018 gets underway, I thought that it might be worth revisiting some of the funds that I wrote about in 2017.

In January, I hailed the changes that Standard Life Private Equity was implementing to broaden its investment proposition and noting its narrowing discount. That trend continued through 2017 as the discount moved from circa 17% to below 10%.

In contrast, the median discount for the private equity sector barely moved (17.2% to 18%) over the year, but other funds, such as F&C Private Equity and Princess Private Equity, saw a marked narrowing of their discounts (the widening was generally amongst funds that are in the process of liquidating their portfolios).

I think it would be great if we could get back to a position when some of these funds could think about expanding. That might seem fanciful but the recent purchase of Aberdeen Private Equity’s entire portfolio (prior to its liquidation) at a modest premium to NAV highlights the latent value in these portfolios.

India’s narrowed discount

In March, I drew attention to India Capital Growth’s discount (then 21.1%) and the attractions of the Indian stock market. 2017 proved to be a fantastic year for investors in Indian equities as investors shrugged off the short-term depressive effect of the introduction of GST (India’s equivalent of VAT). All three Indian funds did well but the more mid/small cap focused portfolio of India Capital Growth benefited most and its discount narrowed to 9%.

Debt fund loss inevitable

In April, I took a look at some of the debt funds. I was trying to make the point that some losses are inevitable in these portfolios and they should not necessarily spook investors. The vast majority of debt funds had a good year; only three (NB Distressed Debt, NB Global Floating Rate and Ranger Direct Lending) lost money in share price terms.

Over in the leasing sector, SQN Asset Finance Income also lost money. It was hit by a new problem with the failure of Snoozebox, but is working on recovering value from this investment.

In December, SQN’s manager said it was confident of a positive resolution to its Suniva problem with more news expected by 26 January. In Ranger’s case its NAV continued to fall through the year, mainly as it increased its provisions against its Princeton/Argon Credit exposure.

We are waiting to see who the board is bringing in to beef up the management of the fund; hopefully this will help stem the losses and something will be done to address that fund’s very wide discount.

In May, I pointed out that Pershing Square had not covered itself in glory since launch, mainly on the back of its investment in Valeant. This blunder came back to haunt it again this month as Pershing settled a lawsuit related to the attempted acquisition of Allergan by Pershing and Valeant in 2014. Pershing’s share of the settlement was $193.75 million, $75 million of which had already been provided for. The additional hit to the NAV was 1.3%.

Sensing perhaps, the effect this news would have on Pershing Square’s shareholders, Bill Ackman and related parties are planning a $300 million tender for Pershing Square’s shares, topping up the $100 million they put in at launch. Long-term investors are unlikely to pile into the fund, however, until there is concrete evidence of improving NAV performance. At the end December, before the legal settlement, NAV was $17.41, 6% down on the year and well below the $25 launch level in 2014.

UK infrastructure sector on shaky ground

In June, I wrote about John Laing Infrastructure. Things looked relatively rosy then but the Labour Party Conference later in the year hung a pall over the whole infrastructure sector. JLIF’s own analysis suggested that it would be one of the worst hit funds if the PFI/PPP model was terminated. The shares have recovered from the lows but it is still the cheapest fund in the subsector based on its premium and it offers one of the highest yields.

Also, that month I wrote about China. Chinese funds did even better than Indian ones in 2017. I concluded the article by saying I would stick with my JP Morgan Chinese investment despite high valuations and I am glad I did, given that the NAV climbed by 20% between then and the end of the year and it turned out to be the best performing trust in 2017 in NAV terms (barring Amedeo Air Four Plus for which the NAV is distorted by accounting convention). I still think there is room for an additional China-focused trust but, the higher the market goes, the more nervous investors might get about the country.

Finally, an article in September explained my lack of enthusiasm for the launch of The People’s Trust. It seems mean to say so, but I am glad that it did not succeed. The sector deserves more attention from the general public and the mainstream press but not for an undersized, expensive fund with an odd investment approach

James Carthew is a director and head of investment trust research at Marten & Co

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