Register free for our breaking news email alerts with analysis and cutting edge commentary from our award winning team. Registration only takes a minute.

Numis: the sweet spots in ‘alternative’ investment companies

Numis Securities updates its recommendations for investment companies investing in ‘alternative’ asset classes such as property, infrastructure and debt.

Sweet spot

Numis Securities has updated its list of recommendations for investment companies investing in so-called ‘alternative’ ie, non-equity or bond asset classes, such as property, infrastructure and debt.

These alternative assets have proved very popular in recent years as investors have sought returns that are either not correlated, or linked, to mainstream stock markets, or offer reliable and high levels of income when interest rates remain low. After a surge of new launches and share issues, they now account for £77 billion or nearly half of the sector’s assets.

Charles Cade, head of investment companies research, said: ‘The sweet-spot for new issuance remains a yield of 5% or more with a total return of 7-10%, ideally from an asset class that offers some degree of inflation or interest rate protection,’ he said.

In making their recommendations the Numis analysts aim to identify investment companies they think will deliver attractive total returns for shareholders, either through a narrowing of any discount – or gap between a share price and its net asset value – or through strong performance from the underlying portfolio. They divide their choices between long-term ‘core’ holdings and shorter-term ‘trading’ opportunities.

Next: premium warning

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

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Sweet spot

Numis Securities has updated its list of recommendations for investment companies investing in so-called ‘alternative’ ie, non-equity or bond asset classes, such as property, infrastructure and debt.

These alternative assets have proved very popular in recent years as investors have sought returns that are either not correlated, or linked, to mainstream stock markets, or offer reliable and high levels of income when interest rates remain low. After a surge of new launches and share issues, they now account for £77 billion or nearly half of the sector’s assets.

Charles Cade, head of investment companies research, said: ‘The sweet-spot for new issuance remains a yield of 5% or more with a total return of 7-10%, ideally from an asset class that offers some degree of inflation or interest rate protection,’ he said.

In making their recommendations the Numis analysts aim to identify investment companies they think will deliver attractive total returns for shareholders, either through a narrowing of any discount – or gap between a share price and its net asset value – or through strong performance from the underlying portfolio. They divide their choices between long-term ‘core’ holdings and shorter-term ‘trading’ opportunities.

Next: premium warning

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

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Premium warning

Cade cautioned investors to be wary of listed funds with shares trading on big premiums above their net asset values (NAV) as these could be vulnerable to sudden change.

Last year saw a number of companies in the peer-to-peer and property spaces suffer rapid de-ratings after investors re-assessed their prospects.

‘For funds delivering a steady yield with low NAV volatility we believe that many investors have been pricing the funds more by reference to the yield the portfolio cash flows can support, than by reference to the NAV or the underlying risk/return of the portfolio.

‘In our view, this has resulted in excessive premiums in some asset classes, notably the listed infrastructure debt funds: GCP Infrastructure Investments (GCP) on a 13% premium and Sequoia Economic Infrastructure Income (SEQI) on a 12% premium.’

Since Numis published its report last month GCP’s premium has risen to 16% and SEQI’s has moderated to 9%, according to Morningstar data.

Next: Catastrophe mostly averted

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Catastrophe mostly averted

Numis updates its recommendations throughout the year. It removed CatCo Reinsurance Opportunities (CAT) in October as the extent of its exposure to hurricanes and California wildfires became apparent.

It went on to become one of the worst-performing investment companies of 2018, with the ordinary shares down 53% and its C-shares issued at the end of 2017 dropping 37%.

The shares de-rated due to ‘uncertainty over the level of provisions and news of an investigation by the US and Bermudian authorities into the level of loss reserves’ held by the trust, Cade said.

He added it was ‘difficult to see a future’ for the fund after a torrid few years and investors would still have to wait three years for a return of capital in the event of a wind-down.

Next: debt switch

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Debt switch

There were ‘no places to hide’ in debt last year as volatility returned to credit markets after a benign 2017, said Cade. The pace of rising US interest rates under Federal Reserve chairman Jerome Powell (pictured) worried investors and stressed all types of bonds and loans.

‘High yield and investment grade assets were among the weakest performers, whereas senior loans performed relatively well, despite a volatile end to the year,’ said Cade. ‘In 2019, there has been a strong rebound across most debt asset classes,’ he noted.

The most recent change to Numis’ recommendations was the removal of Alcentra European Floating Rate Income (AEFS) in favour of NB Global Floating Rate Income (NBLS), a corporate broking client that Cade said was less exposed to the sell-off in US high yield bonds and whose £634 million size offered more liquidity than the £137 million Alcentra.

Numis also added Blackstone GSO Loan Financing (BGLF) as a ‘trading buy’ due to its ‘wide discount’ of 16%. ‘The share price has been weak over the last year, down c.14% in euro total return,’ said Cade. ‘We believe the discount has the scope to narrow as sentiment to senior loans/collateralised loan obligations improves reflecting a recovery in the market early 2019.’

Funding Circle SME Income (FCIF) was dropped last year following its dividend cut and has fallen further as its performance has been hit by rising defaults.

Numis’ other ‘core’ debt picks are TwentyFour Select Monthly Income (SMIF), a diversified debt fund, and its stable mate TwentyFour Income (TFIF). Both are Numis corporate broking clients.

Next: private equity looking cheap

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Private equity looking cheap

The stock market slide in the fourth quarter of last year hit the share prices of most private equity investment trust, wiping out much of their gains for the year.

‘In our view, this has created a value opportunity for investors as we do not expect NAVs to be impacted significantly. Valuation multiples may be a little lower, but we believe that this will be more than offset by strong portfolio earnings growth for most funds,’ said Cade.

However, the sector’s most remarkable de-rating occurred earlier in the year when the £9.2 billion private equity giant 3i Group (III) fell from a 46% premium last May to a small discount at the start of this year. At the time of the Numis report 3i had rebounded to a 7% premium which the broker described as ‘attractive’ although it did not add the stock to its list. Since then the rally has continued as investors realise the strength of its assets which include its biggest stake in rapidly growing Dutch discount retailer Action (pictured). The shares now stand at an 18% premium having shot up 22% this year.

Numis already recommends several private equity funds, such as Princess Private Equity (PEY), a corporate broking client that replaced Pantheon International (PIN) last April and stands on a 13% discount. It also rates fund of funds Harbourvest Global Private Equity (HVPE) on a 20% discount; HgCapital Trust (HGT), a direct investor in private equity on a 2.5% discount, and ICG Enterprise (ICGT), a corporate broking client, that combines both approaches and sits on an 18% discount.

Lastly, Numis has had Oakley Capital Investments (OCI) as a ‘trading’ buy since July 2017 as the media-focused portfolio endeavours to narrow its wide 30% discount.

Next: Infrastructure reinstatement

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Infrastructure reinstatement

Despite a volatile year for social infrastructure funds, hit by the collapse of Carillion (pictured) and then boosted by the takeover of John Laing Infrastructure, Numis has made only one change, reinstating International Public Partnerships (INPP), a corporate broking client, after it was temporarily removed from the list last October as Numis worked on its £116 million fund raise.

Its other long-term ‘core’ recommendations include HICL Infrastructure (HICL) and, in the renewable energy space, Bluefield Solar Income (BSIF), a corporate broking client, and Greencoat UK Wind (UKW), both recommended for the past over four-and-a-half years.

Noting the high premiums on the last two, which have seen Bluefield shares rise to 17% above NAV and Greencoat 10% above asset value, Cade said: ‘We believe that investors looking to add to positions in these funds may be able to do so at lower prices through future secondary fundraisings (tap issues or C shares), rather than by buying shares at current market levels.’

Next: Property picks

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Property picks

Numis made no new changes to its property recommendations.  

‘Against the relatively weak market backdrop for commercial real estate we do not expect the focus to move away from specialist property funds,’ said Cade. ‘We believe portfolios with an industrial or alternative bias should continue to outperform.’

The broker added Secure Income Reit (SIR) to its list in October as it raised £315 million to purchase two off-market portfolios of hotels and other leisure properties.

Regional Reit (RGL) and Stenprop (STP) were also added as ‘trading buys’ in July. Cade said the trusts had ‘relatively high’ income yields meaning the discounts are ‘attractive for those looking to diversify income’ although it was ‘difficult to see a major catalyst for discounts to narrow significantly in 2019, meaning investors will have to take a longer term view on total returns’.

Regional pays a yield of 7.8% and was added ‘on valuation grounds’ while Stenprop, which trades on an 18% discount, is ‘well-resourced’ and can scale its operations as it sells down its European property portfolio and buys multi-let warehouses in the UK.

Next: Syncona ‘volatility’ and hedge fund switch

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Syncona ‘volatility’ and hedge fund switch

Numis lists two ‘specialist’ trusts in its recommendations: Riverstone Energy (RSE), which invests in North American oil and gas start-ups, and Syncona (SYNC), the UK’s largest listed healthcare fund and a Numis broking client. There are no changes to either but on Syncona Cade noted the high 33% premium after its strong perforamnce in the past two years and commented:

‘We believe that the share price may face some volatility given that it has a concentrated portfolio of early-stage life science investments (two of which are quoted on Nasdaq). However, we continue to believe that the company is an attractive investment that has substantial upside over the next few years.’

Stefan Hamill, a Numis’ healthcare & life sciences analyst rates the stock a ‘buy’ with a 320p price target compared to its current price of 279.5p. The premium has subsequently increased to 42%.

Wrapping up with hedge funds, Numis’ two unchanged recommendations reflect the two sides of the market. Last year it opted for the risk diversification and reduction of Brevan Howard’s BH Macro (BHMG), which replaced sister fund BH Global (BHGU) as a ‘core buy’ after its shares fell to a wide discount before re-rating and returning 18% last year.

Its two-year ‘trading’ buy recommendation of Bill Ackman’s Pershing Square (PSH) has come good after a big rally in the shares in the past year. Despite reservations about the level of charges, Numis is holding on as the manager comes under pressure to tackle the stock’s 25% discount.

 

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Play Citywire 20: Investec's du Toit on managing the 'jerk factor'

Citywire 20: Investec's du Toit on managing the 'jerk factor'

Investec boss Hendrik du Toit believes he has become far more decisive over the last 20 years, especially when it comes to managing 'jerk' factor.

Play Citywire 20: Hugh Young's bleak lesson

Citywire 20: Hugh Young's bleak lesson

In the latest video to mark Citywire's 20th birthday, Aberdeen Standard Investments Asia head reminisces about one of the toughest periods in his career.

Play IWD 2019 video: fund and wealth figures define diversity

IWD 2019 video: fund and wealth figures define diversity

To mark International Women's Day, we have spoken to a variety of top fund houses and wealth managers about their definition of diversity, and how they hope to achieve a more inclusive workplace.

Read More
Wealth Manager on Twitter