Funds on the Watch List this week include: SMT, SSIT, FSF,BSRT, GCL, SHIP, BIPS, DGI9, REI, GRID, HEIT, HSL, HOT, BRF

Welcome to this week’s Watch List where you’ll find golden nuggets on trust discounts, dividends, tips and lots more…

ByFrank Buhagiar•05 Feb, 2024

BARGAIN BASEMENT

Discount Watch:

Our estimate of the number of investment companies whose discounts hit 12-month highs (or lows depending on how you look at them) over the course of the week ended Friday 02 February 2024 – six more than the previous week’s eleven.

Nine of the 17 were on the list last week: SDCL Energy Efficiency Income (SEIT), Gresham House Energy Storage (GRID) and Harmony Energy Income (HEIT) from renewable energy infrastructure; Baillie Gifford Japan (BGFD) and Baillie Gifford Shin Nippon (BGS) from Japan; BlackRock Sustainable American Inc (BRSA) from North America equity income; Finsbury Growth & Income (FGT) from UK equity income; NB Distressed Debt (NBDD) from debt; and Custodian Property Income REIT (CREI) from property.

That leaves eight newbies: Martin Currie Global Portfolio (MNP) and Monks (MNKS) from global; Life Science REIT (LABS) and Residential Secure Income (RESI) from property; LMS Capital (LMS) from private equity; NB Monthly Income (NBMI) and VPC Specialty Lending Investments (VSL) from debt; and finally, VH Global Sustainable Opps (GSEO) from renewable energy infrastructure.

ON THE MOVE

Monthly Mover Watch: no change

At the top of Winterflood’s list of top-five monthly movers in the investment company space. Seraphim Space (SSIT) still sitting pretty in first place, although at +45.3% the monthly gain is marginally lower having been up +48.1% the previous week. Still no news out since the December shareholder letter. Soon be time for January’s missive…

No change either for second-placed Foresight Sustainable Forestry (FSF) – shares up 22.8% on the month. As with SSIT, still not much in the way of news…

In third, Geiger Counter (GCL) makes a reappearance after a short sabbatical. The company did recently publish its factsheet for December which showed that the fund is up 44% for the year on an NAV basis – seems that has been enough, along with buoyant uranium markets, to propel the uranium investor’s share price +15.9% higher.

Baker Steel Resources (BSRT) retains its top-five spot despite slipping one place to fourth. Shares did increase their gain on the month to +13.9% though -previously they were up +12.8%. Last week, the co. reported a +16.3% uplift in NAV per share for December.

Finally, a newbie in fifth – Tufton Oceanic Assets (SHIP) courtesy of a 10.2% share price gain. The company’s recent Q4 factsheet reported a 6.7% NAV total return for the quarter, while an investor call outlined plans to narrow the discount to net assets at which the shares are trading at. This includes realising its portfolio of assets from 2028, upping the 2024 target dividend by 17.6%, possibly a one-off capital return in Q2 equivalent to 5% and 10% of NAV, as well as ongoing buybacks.

Scottish Mortgage Watch:

The monthly share price performance at Scottish Mortgage (SMT) as at close of play on Friday 02 February 2024 – an improvement on last week’s -0.6% monthly deficit. NAV also improved, closing up +1.8% on the month having been flat the previous week. Finally, the wider global IT sector finished the week up +2.5%, an improvement on the +1.5% gain seven days earlier.

THE CORPORATE BOX

Wind-down Watch #1: Digital 9 Infrastructure (DGI9)

Announced news the market had arguably been expecting for some time: “Following careful consideration of the options available to the Company and after consultation with its financial advisers, as well as taking into account feedback received from a large number of shareholders and institutional investors, the Board has determined that it would be in the best interests of shareholders as a whole to put forward a proposal for a managed wind-down of the Company.”

Liberum is not surprised: “A managed wind-down has been widely expected for some months, particularly after it was announced in October 2023 that DGI9 would pursue the outright sale of Verne Global. The lack of clarity around the terms of the earn-out associated with the Verne deal has been the biggest hinderance to the market’s perception of it.”

Wind-down Watch #2: Real Estate Investors (REI)

Reminded investors that “The Board has previously stated an intention to accelerate its sales programme, through the sale of assets either on an individual or collective basis, on terms that represent value for shareholders. Given the ongoing substantial discount between the share price and NAV, combined with a lack of liquidity in its shares, the Board has concluded that it will conduct an orderly strategic sale of the Company’s portfolio over the next 3 years with the objective of maximising the return of capital to shareholders.”

Capital Allocation Watch #1: Gresham House Energy Storage (GRID)

Announced a new set of capital allocation priorities at the company. Summary from Winterflood: “Capital allocation focus: (i) CapEx, whereby managers will solely focus on the completion of the 2023 pipeline, together with duration extensions, financed mainly by cash on hand (>£40m as at 31 December); (ii) no dividend declared for Q4 in light of weak revenue environment, and intention to ‘recalibrate’ dividend target for 2024, as well as the policy on an ongoing basis to reflect predominantly merchant nature of its revenues; (iii) intention to commence a share buyback program, with initial buybacks not expected to exceed any reduction in the dividend…; and (iv) amendments to optimise debt facility (£335m, £110m drawn), including possible reduction in facility size, to reduce overall cost of funding. Disposal of subset of portfolio also ongoing.”

Capital Allocation Watch #2: Harmony Energy Income (HEIT)

Unveiled its own plans for capital allocation too. Broker Liberum has the details: “The first quarterly dividend in relation to FY 24 (2p per share) was expected to be declared later this month…However the Board has decided to postpone this declaration. While the reasons for the recent low revenue environment are understood, and the market conditions are expected to improve, the short-term outlook remains uncertain…HEIT will also look to restructure its existing debt facilities (£130m of senior debt facilities) to reflect that 70% of the portfolio’s MW capacity is now operational, coupled with one or more asset sales. Any cash proceeds from such sales would be used, in priority, to reduce gearing and then to fund future dividend distributions for FY 24 and FY 25. The ambition of the Company remains the payment of 8 pence per share per annum. Any funds available after the payment of dividends could be used to repurchase shares.”

Dividend Watch: 7.5p

Henderson Smaller Companies’ (HSL) interim dividend: “Reflecting our confidence in the underlying portfolio and underpinned by performance since the period end, your Board has decided to pay a higher interim dividend of 7.5p per ordinary share (30 November 2022: 7.0p) due to strong income growth, and with a view to balancing interim and final dividends.”

35.5p – Henderson Opportunities’ (HOT) total dividends for the year: “We have declared a final dividend of 13.0p per share for the year ended 31 October 2023. This brings total dividends for the year to 35.5p and represents an increase of 4.4% over last year’s total dividend payment for the year of 34.0p. At the current share price of 1,002.5p (as at 30 January 2024) this represents a yield of 3.5%.”

MEDIA CITY

Tip Watch #1: This bond fund should make almost 10pc a year and you can buy it now without stamp duty

The bond fund in question? Invesco Bond Income Plus (BIPS). The prompt for the above Questor article? As The Telegraph’s tipster explains: “Invesco Bond Income Plus is offering new shares at a little below market price.” What’s the big deal? Not many trusts are issuing shares. According to Questor: “Investment trusts gave up selling new shares to investors last year during the stock market funk over rising interest rates and inflation, so the offer…of £15m of new shares by Invesco Bond Income Plus…has drawn attention to the listed bond fund.”

The article goes on to provide a fund overview: “With an aim of generating a high dividend yield, currently 6.8pc, and capital growth, BIPS holds nearly three quarters of its assets in high-yield bonds issued by companies with chequered credit histories, or from banks that shore up reserves of capital to use in a crisis. The remaining 28pc of the fund’s money goes into lower-yielding, but safer, ‘investment-grade’ bonds, mostly rated ‘BBB’.” Before pointing out that with “…the Bank Rate…at 5.25%…the fund’s lead manager, Rhys Davies, doesn’t have to take too much risk to generate the income for BIPS’ 11.5p per share dividend target this year.” And while, “Unlike many of the trusts tipped here, BIPS shares don’t trade at a discount…Davies says there is an investment opportunity because the prices of BIPS’ high yield-bonds have been depressed by interest rate rises.” That means “…the bonds will benefit from a ‘pull to par’ effect that should see their price gradually revert to £100 as the bonds’ maturity dates approach…”

As for that share issue, “…the first by an investment trust this year”, this has been “timed to attract former shareholders in the Henderson Diversified Income trust, who are receiving £54m from its merger with Henderson High Income. Other investors can also apply for the shares, which can be bought free of the usual 0.5pc stamp duty…The new shares will be priced 0.75pc above their net asset value…This makes them slightly cheaper than BIPS existing shares which stood at a 2pc premium to NAV when the issue was announced…”

Tip Watch #2: BlackRock Frontiers (BRFI)

Tipped by the Investors’ Chronicle. In An intrepid trust that could defy dollar weakness, the Chronicle first points out that “…BlackRock Frontiers Investment Trust (BRFI), which boasts a sector-leading dividend yield of 4.4 per cent, is trading on a discount of more than 7 per cent.” This, the tipster believes, seems “…out of step with the fact that emerging economies expanded last year, amid stalling developed world output.” Furthermore, “…the mere whiff of a weakening US dollar – now the more likely scenario in the coming year, as the Federal Reserve embarks on a rate-cutting cycle – tends to turn investors bullish on emerging markets. This is because a more fragile greenback creates an incentive to invest in less-developed countries (thanks to a combination of lower import costs, inflation and indebtedness).”

Step up BRFI: “As its name suggests, the trust invests in ‘frontier’ economies, which are not among the eight largest in the MSCI Emerging Markets index by market cap. This rules out not only China, but also India, Taiwan, Korea and Brazil.” As for the risks associated with emerging/frontier markets, the IC points out that “…many of the risks that are seen as inherent in emerging markets are present elsewhere. For instance…Monetary tightening in frontier economies has already outpaced developed markets, which BRFI’s managers said is beneficial, as ‘domestic economies should see a cyclical pick-up’.”

In terms of track record, according to the IC, this is “…strong. Over five years, BRFI’s NAV total return of 49 per cent is significantly ahead of the MSCI Emerging Markets Index’s 20 per cent. In 2023 alone, its NAV total return was 14.3 per cent in sterling, while the index was up just 2.2 per cent. Although its discount has narrowed in recent months, we’d argue that this prior history of outperformance means BlackRock Frontiers remains undervalued. Whether the trust is truly untethered from the fates of the world’s major economies remains to be seen. But it could certainly provide equity investors with a sought-after element of diversification.”