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Investment company discounts and the October Effect

The October Effect suggests stock declines in October, but in London’s investment companies, there has been a spike in year-high discounts in week 40 of both 2023 and 2024. This may be tied to regional factors, such as anticipation of the UK Budget, or global market issues. While more data is needed, it still raises questions about a potential October Effect impacting UK investment companies.

By Frank Buhagiar

“The October Effect is a theory that stock prices decline in October. One basis for this belief is that nine of history’s 20 largest single-day percentage declines in the Dow Jones Industrial Average (DJIA) happened in the Halloween month.” (Forbes).Thankfully, so far at least, October 2024 hasn’t added to the tally of largest single-day market declines, but could there nevertheless be an October Effect of sorts at work in London’s investment company space today?

Below are two graphs showing the number of investment companies trading at year-high discounts to net assets – the first covers the first 42 weeks of 2023; the second the first 42 weeks of 2024. As can be seen, both graphs show a notable spike in the number of year-high discounts roundabout week 40 of the year. Week 40 coincides with the month of October.

2023

2024

Discounts widen one of two ways – when the value of net assets rises and share prices fail to keep up, or when share prices fall and the value of net assets stays constant or falls less. One swallow does not a summer make but could something be at work here? We’ve asked this question before. Back in May, we noted how the number of 52-wk high discounters topped out in weeks 11-13 (pretty much the month of March) in both 2023 and 2024. As the graphs above show, in both years, a significant drop in year-high discounts was then observed from week 13 onward – roundabout the end of March.

There is a theory here based on the thirteenth week of the year falling at around the change in the UK tax year – the time when investors scramble to utilise Individual Savings Accounts (ISA) subscriptions for the financial year about to end and when early-bird investors look to invest their new year ISA subs at the first opportunity.

As for what investors buy in their stocks and shares ISAs, according to MoneyWeek’s March 2024 article

  How to invest like an ISA millionaire?

Investment companies feature highly, particularly for the most successful ISA investors, the ISA Millionaires. MoneyWeek notes investment trusts account for 41.9% of those ISA Millionaire portfolios that use the interactive investor (ii) platform and 24.1% for all ISA accounts.

Not all investors leave it to the last minute to utilise annual ISA allowances but perhaps enough do to generate a sufficient pickup in demand, resulting in higher share prices and narrowing discounts. And perhaps enough use up their allowances in the first few weeks of the new tax year to keep the number of year-high discounters low. Clearly, more than two years’ worth of data required but, as our May piece concluded, “One to keep an eye on.”

In the meantime, we have another observation to consider. The spike seen in year-high discounts in Weeks 40(ish) of both 2023 and 2024. Coincidence or the October Effect?

The narrative has changed over the past year. Back in October 2023, concerns over higher-for-longer interest rates dominated sentiment. Unsurprisingly, those investment company sectors deemed most sensitive to interest rates contributed the most names to the October 2023 lists. Week ended Friday 27 October 2023, eight renewable energy infrastructure funds, four infrastructure names, eight property companies/REITs, two debt funds, one forestry and nine smaller companies trusts were all trading at year-high discounts. A total of 32 funds.

One year on and interest rates are on their way down in the UK, Europe, the US and other developed countries. The narrative is more how far and how fast rates fall. And this is reflected in the makeup of the 31 funds trading on 52-week high discounts week ended Friday 18 October 2024.Only two renewables are on the list. No infrastructure funds to be seen. Just one property company, Cuba-focused Ceiba Investments – country-specific reasons explain that year-high discount. One private equity company, JPEL Private Equity which is in run-off mode. And three smaller companies funds. Seven interest-rate sensitive sectors compared to 32 twelve months earlier.

That means the bulk of the 31 names in the discount doldrums in Week 42 of 2024 are conventional equity funds. Seven invest in Asia Pacific equities. Another eight in UK stocks. Three from Europe. And two from global sectors. 20 out of 31. As for why this is the case, that may be down to region-specific reasons. Asia Pacific funds, for example, are exposed to the rollercoaster ride that is the Chinese stock market at present. September saw Chinese stocks fly on the back of what broker Winterflood describes as a “stimulus wave” unleashed by the authorities to kickstart the economy and stock market – China’s CSI 300 blue-chip index rallied more than 25% over nine consecutive days. A subsequent pause in the rollout of new stimuli then led to a severe bout of profit-taking – 9 October the CSI 300 dropped 7%. Asia Pacific funds therefore have good reason for featuring heavily in the Discount Watch. No need to call on the October Effect to explain that one.

The appearance of the three European funds on the list can also be explained by region-specific reasons. Last week, the European Central Bank cut interest rates for the third successive time to take the deposit rate down to 3.25%. Compared to the US and UK, where in both cases rates have been cut just once to date, Europe appears to be in a hurry to bring rates down. And for good reason too. Inflation may well have fallen back, but the economic outlook has deteriorated. Hence the muted reaction of European bond and equity markets to the latest cut. Markets too focused on the gloomy low-growth outlook for the region, especially for the larger economies of Germany, France and Italy. Against such a backdrop, no surprise to see European funds on the Discount Watch. As with Asia Pacific, hard to make a case for an October Effect when genuine economic concerns are weighing on sentiment.

That leaves the UK – the two global funds include Lindsell Train which is 77% invested in the UK and Scottish American which, aside from a 35% US weighting, is invested in the UK, Europe and Asia Pacific. Including Lindsell Train, the UK contingent stands at nine, the highest regional representation on the latest Discount Watch. This could be down to a key financial event – the UK Budget. The next Budget is due to be held on 30 October and as that date has been getting closer, the number of UK-focused funds sitting on year-high discounts has been increasing – from zero funds week ended Friday 04 October to two week ended Friday 11 October to nine (including  Lindsell Train) week ended Friday 18 October. Have investors been positioning themselves just in case the Chancellor unveils an unwelcome surprise or two?

What’s more, the last time there was a UK Budget (6 March 2024), a similar spike in UK names on year-high discounts was observed. Week ended 08 March 2024, eight UK funds hit discount-highs compared to just two a week earlier. Goes without saying more than just two years’ worth of data required, but as we said back in May, another to keep an eye on. But if the UK Budget theory does prove to have legs then it might explain an October Effect for the UK, at least for those years when the Budget is held in October/November. And that is more often than not. The 6 March 2024 Budget was something of an outlier. The Chancellor typically stands up at the despatch box in the autumn. A possible theory for an UK October Effect then.

Finally, back to the Forbes article.This goes on to dismiss the October Effect as “an oversimplification of financial market behavior”, citing Yardeni Research’s analysis of the monthly performance of the S&P 500 between 1928 and 2024 that shows the US index actually gained value during the month of October on 56 occasions, losing value 40 times. The October Effect in need of a rebrand as a more-often-than-not positive month perhaps. That may well be true for the US market. The jury is still out, however, for London’s investment companies and the Budget Effect.

The Results Round-Up – The Week’s Investment Trust Results

Six investment companies in this week’s results round-up – Schroder Oriental Income, VinaCapital Vietnam Opportunity, CQS Natural Resources Growth & Income, abrdn Asia Focus, HarbourVest Global Private Equity and BlackRock Smaller Cos – all posting positive returns, but which fund clocked up an +18.2% NAV per share total return for the full year?

By Frank Buhagiar

Schroder Oriental Income’s (SOI) 500%+ return

SOI’s +18.2% NAV per share total return for the full year, more than double the MSCI AC Pacific ex Japan Index’s +8.6% (sterling). SOI’s significant underweight allocation to China differentiates it from the benchmark. The outperformance is no one-off. According to Chairman, Paul Meader, £1 invested in the fund at the time of launch in 2005 would today be worth £6.38 assuming all dividends reinvested. The equivalent figure for the benchmark is £4.14. As for the FTSE 100, the figure stands at just £3.27.

That is of course the past. Can the fund keep up the strong performance? Meader sees “no reason why not. Asia remains a vibrant and growing region, largely unfettered by the headwinds, such as huge government debts and weak productivity growth, faced by Europe and North America. And issues that have troubled Asia in the past, like large current account deficits or poor corporate governance, are generally diminishing.” The numbers good for a penny and a half increase in the share price to 271.5p.

Numis: “The focus on income means the portfolio has significant sector overweights, in Financials (+10.4% at 30 September, excluding cash), while the fund is overweight Technology (+4.3%). It also has geographical biases (overweight in Singapore, whilst Hong Kong is favoured over China). We believe that the fund benefits from an experienced fund manager, Richard Sennitt, who has run open-ended Asian Income mandates at Schroders for over 20 years”.

VinaCapital Vietnam Opportunity (VOF) outperforms

VOF outperformed over the full year: NAV total return of +7.8% (USD terms) compared to the VN-Index’s +4.9%. Share price topped the lot, rising +17.6%. The strong performance though overshadowed by the passing of lead portfolio manager, Andy Ho, in June. VinaCapital CEO, Brook Taylor, has taken on the role of interim lead of the fund, while Andy Ho’s long-serving deputies, Khanh Vu and Dieu Phuong Nguyen, continue as co-lead managers. The two lead managers expressed their “sincere thanks to our diligent and dedicated investment team who have worked tirelessly through this recent period of volatility and personnel challenges”. Shares closed down 4p at 456p on the day of the results.

Numis: “We remain positive on the outlook for Vietnam, which has benefited from diversification away from China. The outlook is supported by a strong and balanced economy, a young, educated population of c.100m and competitive labour costs, with a growing middle class which is driving growth in domestic demand for goods and services. We believe that the shares look attractive on a c.21% discount, supportive by substantial buybacks.”

CQS Natural Resources Growth & Income’s (CYN) capital performance

CYN’s +7.2% NAV per share total return for the year pretty much in line with the MSCI World Metals and Mining Index’s (sterling adjusted) +7.3%, although some way off the +17.4% return of the MSCI World Energy Index (sterling adjusted). Tables reversed over the longer term: over five years, NAV per share has returned +118.7% compared to +73% for the MSCI World Metals and Mining Index and 64% for the MSCI World Energy Index. The investment managers used capital letters to highlight the year’s main drivers “A FOCUS ON ENERGY, GOLD, SHIPPING AND URANIUM HAS DELIVERED IMPROVED TOTAL RETURN”. Encouragingly, as Chair, Helen Green, notes, the new year has got off to a good start “Against a backdrop of global tensions, the Company has continued to perform well since the Company’s year end and remains strongly positioned to benefit from demand in resources, energy, and shipping.” Shares closed down 3p at 190.75p, investors adopting the wait-and-see approach.

Winterfloo:d “Exploration & production, crude shipping and coal represent c.30% of NAV; industrial metals 9%; precious metals >30%; energy transition c.17% (primarily uranium).”

abrdn Asia Focus’ (AAS) sees potential in Asian smaller companies

AAS’ full year NAV and share price rose +7.9% and +8.8% respectively. That compares to the MSCI AC Asia ex Japan Small Cap Index’s +14.1% (sterling) total return and the MSCI AC Asia ex Japan Index’s +7.6%. Chair, Krishna Shanmuganathan, notes the “absolute returns have been reasonable relative to a broader peer group of Asian funds, and your Manager maintains a preference for more diversified exposure to the region versus the small cap index which has become increasingly concentrated across fewer markets.”

It’s an approach that has served the fund well in the past. As the Chair points out over the long term, the NAV has averaged annual growth of +11.9% since inception, “an outstanding level of sustained performance, and reflective of your Manager’s ability to invest in hand-picked smaller companies in Asia that are difficult to access for UK investors.” What’s more, the portfolio managers sound confident for the future “we see much potential in Asian smaller companies, and our portfolio of well-researched Asian small caps offers a unique investing opportunity.” Investors liked what they heard, shares added 3p to close at 283p on the day.

Winterflood: “Asian smaller companies are forecast to generate earnings growth of c.41% in 2024, while trading at a c.24% discount to US small caps.”

HarbourVest Global Private Equity’s (HVPE) share price disconnect

HVPE’s +3% NAV per share growth for the half year, some way behind the FTSE All-World Total Return (FTSE AW TR) Index’s +12.6%. Not enough to dent the fund’s clear outperformance over ten years: NAV per share is up +239% while the FTSE AW TR has only managed +144% (USD). All good stuff then, at least in terms of NAV.

The share price rose +12.7% over the half year to £26.10 after the discount to NAV narrowed from 42% to 34%. But since period end, the share price has fallen back to £23.20. Chair, Ed Warner, thinks the share price has got it wrong “HVPE’s portfolio investments have proven remarkably resilient over the past few challenging years, which speaks to their quality. We view the future for HVPE with confidence and believe that the share price in no way reflects the performance by the Company over many years and the opportunities that we believe lie ahead.” Market is a believer too, marking the shares +1.5% higher by close of play.

Jefferies: “The fund’s prospects remain intrinsically linked to exit activity, not least because of how the ultimate size of the 2024/2025 distribution pool balance is contingent on near-term realisations.”

Numis: “HVPE’s shares trade on a c.44% discount, which we believe is too wide for a high quality manager”.

Winterflood: “In our view, HVPE’s current discount of 41% implies a level of valuation scepticism that does not align with uplifts of +29% across 86% of transaction value during the period.”

BlackRock Smaller Companies’ (BRSC) ahead of the wider market

BRSC’s Half-year Report showed just how well UK small caps fared in the six months to 31 August: NAV up +13.9%, share price up +17.0%, Deutsche Numis Smaller Companies plus AIM (excluding Investment Companies) Index up +13.2%. All comfortably ahead of the wider market: the FTSE 100 Index was up +12.5% while the FTSE 250 Index rose by +12.6%. The opening paragraph of the Investment Manager’s Report, however, suggests it was not all plain sailing “The first six months of this financial year have offered so much that it is even more challenging than normal to find a pithy introduction.” Easy to see why given the macroeconomic/geopolitical challenges faced.

The investment managers don’t appear to be fans of the new Labour Government either “Sadly, their early statements have generated increased uncertainty as the market tries to understand how the government will shape policy to fill the ‘£22 billion black hole’.” Better news elsewhere though “On a global basis the more recent economic data suggests a soft landing is still the likely outcome.” And then there is always valuations to fall back on “the valuation of UK small and mid-cap companies is attractive on an historic basis. As we move through this near-term noise, the opportunity presented by the UK small and mid-cap market should be revealed”. Shares tacked on +1.8% on the day – market not too concerned by what the Labour Government has in store, it seems.

Winterflood: “During HY, the managers added to Leisure names in anticipation of increased spending as a result of rising consumer confidence, as well as companies in the housebuilding and related sectors in light of lower interest rate expectations and the new government’s housing policies.”

A FTSE 250 share and an ETF I’d buy for a second income

by Royston Wild

The Motley Fool

Investing in UK shares is, in my view, one of the best ways to make a large and reliable second income. I also believe that buying dividend-paying exchange-traded funds (ETFs) can be an effective way to reach the same goal.

NextEnergy Solar Fund

Electricity is one of modern society’s essential commodities. And so investing in one of the London stock market’s energy producers can be a great way to source a dividend income.

NextEnergy Solar Fund (LSE:NESF) is one such company on my watchlist right now. As the name implies, this particular operator focuses its attention on renewable energy.

Today it owns and operates more than 100 solar farms across the UK, Italy, Spain and Portugal. It also has a small handful of energy storage assets up and running and in development.

Owning renewable energy stocks has advantages and disadvantages. In this case, power generation can take a dip when the sun’s rays are less strong, in turn impacting the amount of electricity it can sell to energy providers.

But on balance, I think the benefits of me owning this dividend share may outweigh the risks, and significantly too. Profits here could boom over the next decade as Europe transitions from fossil fuels towards clean energy.

Its broad footprint spanning Northern and Southern Europe also reduces the risk of weather-related disruption on group profits.

Today, NextEnergy provides a 10.9% forward dividend yield. This is one of the biggest on the FTSE 250, and underlines the share’s appeal as a top dividend stock.

iShares MSCI Europe Quality Dividend ESG ETF

Investing in a dividend-paying exchange-traded fund (ETF) can also provide a path to a reliable second income. One I’d happily buy for my own portfolio today is the iShares MSCI Europe Quality Dividend ESGETF (LSE:EQDS).

This particular iShares product includes industrial giant Schneider Electric, financial services provider Zurich and drinks manufacturer Diageo. In total, it has cash spread across 70 different businesses.

During the past five years, the fund has delivered an average annual return of 9.1%. This is far above the 5.8% return that iShares’ FTSE 100-backed fund has delivered over the same timeframe.

The ETF’s focus on Europe means it has less geographical diversification compared to a more global fund. If the region’s core economies (like Germany) continue struggling, it might deliver sub-par returns compared with the latter.

But on balance, I think it’s still a good way for me to try and source a dependable passive income. And today its forward dividend yield is a healthy 4%.

The holy grail of investing is to have a share sitting in your account at zero cost that produces a regular income.

The working example is Next Energy but as always best to DYOR.

The first port of call is

Not that one though, is to check the dividend history of the share u are researching.

The Trust has a progressive dividend policy and the yield is 10.69 %.

The next check is their latest dividend fcast

Dividend:

·     Attractive high dividend yield of c.10%, as at closing share price on 9 August 2024.

·   Total dividends declared of 2.10p per ordinary share for the Q1 period ended 30 June 2024 (30 June 2023: 2.08p).

·     Target dividend of 8.43p per ordinary share for the year ending 31 March 2025 (31 March 2024: 8.35p).

·     Forecasted target dividend cover of between 1.1x-1.3x for the year ending 31 March 2025.

·     Total ordinary dividends declared since IPO of £357m.

Dividend fcast is the dividend is covered and no stated intention to reduce the fcast.

Remember these are only fcasts, so they need to be monitored as the company updates their news.

If the company continues with a progressive dividend policy and we assume the dividend is re-invested in another high yielder, before ten years u should receive all your capital back. With NESF providing income at zero cost and another position providing income also.

One thing to consider that NESF is considered to be a wasting asset with a current life of around 24 years. GL

Current 2024 dividend total, including dividends xd but not yet received is

£9,393.00.

Which is above next year’s fcast, although it’s not that straight forward.

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gemmacadwallader@yahoo.de
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Whilst there may be spelling issues with information copied from various sources, there are no spelling ‘mistakes’ with my content. I use u for you as I have done for years before texting was even thought about, it’s a habit from my Royal Navy days as a communicator.

Quote 9
The experts do not have dependable ways of selecting and concentrating on the most promising companies in the most promising industries.

Graham reserved particular scorn for ‘expert’ market forecasts, though he understood investors are addicted to them:

Quote 10
For years, the financial services have been making stock-market forecasts without anyone taking this activity very seriously. Like everyone else in the field, they are sometimes right and sometimes wrong. Wherever possible, they hedge their opinions to avoid the risk of being proved completely wrong. (There is a well-developed art of Delphic phrasing that adjusts itself successfully to whatever the future brings.) In our view—perhaps a prejudiced one—this segment of their work has no real significance except for the light it throws on human nature in the securities markets. Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied.

The reason Graham felt market predictions were valueless hasn’t changed. It’s because you can’t expect exceptional results when everyone else has the same information:

I’ve booked £450 ‘profit’ with SOHO, remembering a profit is not a profit until the underlying position is sold.

The total Snowball profit for SOHO is currently £4,432.41