Investment Trust Dividends
U do not need to know how an engine works to drive a car.
All u need to know about RECI whilst they keep paying regular dividends.
Current yield 9.9%
Historically they have traded around their NAV, so as interest
rates fall the price may increase.
17% discount to NAV.
Investing in renewable energy infrastructure with investment trusts
Closed-ended are a simple way to access the attractive income and defensive potential of renewables infrastructure…
David Kimberley
Kepler
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Greencoat UK Wind. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Climate change, advances in technology and regulatory changes designed to foster the use of green energy have all contributed to increased investment in renewables infrastructure over the last decade.
That investment has been fuelled by demand from investors, who often find the potential for high, comparatively predictable levels of cashflow, which these investments typically produce, appealing.
However, for wealth managers or individual investors, investing in renewables infrastructure directly is close to impossible.
It’s for this reason that investment trusts have emerged as a popular way for investors to get exposure to the asset class.
Before looking at why that’s the case it’s worth examining what the attractions of renewables infrastructure investment are.
Ultimately the combination of attractive levels of income and the potential for capital growth are what investors like about the sector. However, there are several features of renewables investment that underpin those two factors, which also explain why that’s the case.
Renewable infrastructure is ultimately about selling energy. Demand for energy is less sensitive to changes in price or the state of the wider economy.
In other words, the price of energy can rise substantially without a commensurate drop off in demand. Similarly, even if there is an economic downturn, demand for energy is unlikely to subside dramatically.
This means that renewables provide a level of defensiveness to investors. Although the price of energy can fluctuate, the end investor can say with a level of certainty that demand for that energy is not going to subside substantially.
Although, as noted, the price of energy is hard to predict and can fluctuate, the point remains that there are comparatively low levels of volatility in renewable infrastructure’s cash flows.
Beyond the fact that this can make the sector more attractive to income investors, for the actual direct investor in the infrastructure, it often means that the leverage used to finance transactions can be acquired at more attractive rates than in other sectors.
Renewable energy infrastructure assets typically have long economic lives. They are usually capital intensive to set up, but once that is done, you typically have low operating costs, especially compared to hydrocarbons.
Again, this provides a degree of certainty to investors. They know that a given infrastructure asset has a certain useful life, over which time it can generate a fairly predictable amount of energy. This makes forecasting cashflows simpler than it would be compared to other asset classes.
Energy is a significant component that feeds into the inflation calculation. Rising prices boost the revenues of producers, and although this can eventually be counteracted by falling demand, demand is relatively inelastic. As such there is a natural inflation-hedging element to an investment in energy producers.
Additionally, many renewable energy providers also have contracts that contain direct inflation linkage. This means that if inflation does rise, renewable energy infrastructure operators’ cashflows increase in line with it. On the other hand, some renewable energy trusts fix the prices they receive for the energy they produce, so these revenues won’t rise along with wholesale energy prices.
The result is that the income renewable energy infrastructure assets produce can be much more resilient to the negative impact of inflation, and sometimes offer built-in upside sensitivity. A bit of research into each renewable infrastructure investment trust is necessary to understand its individual circumstances.
Renewables energy infrastructure performance has historically had a low correlation with traditional assets.
That is partly due to the stability of the cashflows, which such investments produce. Another factor is that capital valuations are appraisal-based, like private equity. This can ‘smooth’ out returns.
The result is that renewable energy infrastructure assets offer compelling diversification benefits to investors.
As noted, investing in renewable energy infrastructure directly is effectively off limits for individual investors and wealth managers.
Fundamentally this is due to cost. If you are a private investor or wealth manager, you simply aren’t going to have the huge sums – potentially hundreds of millions of pounds – needed to make a direct investment in infrastructure.
Even if you could, then the odds are you would not have the time or expertise to manage what is more akin to a company than a ‘normal’ fund management business, investing in traditional assets. You would need to identify and evaluate investment opportunities and then manage the operation of renewables sites once you had invested.
It’s for this reason that investors tend to either invest in the shares of renewable energy companies that provide a level of indirect exposure to the sector or in different types of funds that invest in the sector directly.
There are more than 20 different investment trusts listed on the London Stock Exchange today that invest in renewable energy infrastructure, reflecting the fact that closed-ended funds have emerged as a popular and simple way for investors to get exposure to the asset class.
There are several reasons for that, which are largely due to how investment trusts are structured and regulated.
Investment trusts are structured as companies that list on the London Stock Exchange. Investors that want to get exposure to a trust’s portfolio simply have to buy its shares.
The important point to remember here is that, even though the value of those shares may reflect the value of the trust’s holdings, the trading of those shares does not necessitate buying or selling assets for the underlying portfolio. The two are separate.
This is obviously a huge benefit for investors in more illiquid assets like renewable energy infrastructure.
Firstly, the shares can be bought and sold easily. The fund managers are not going to have to sell off holdings to facilitate this process.
Share prices are also far more affordable than direct investment. Moreover, investors can customise their order size accordingly, so that their exposure to the asset class fits with the diversification goals of their wider portfolio.
Investment trusts are required to pay out 85% of their income to shareholders. This makes them an attractive option for income investors, particularly in a highly cash generative sector like renewable energy infrastructure.
However, this also has another significant upside, namely that the remaining 15% can be kept in a revenue reserve. This can be used to smooth out dividend payments if there is any unexpected drop off in income.
Investment trusts are able to use gearing, sometimes known as leverage. This is borrowed money that can be used to enhance returns and deliver a higher yield. However, it must be noted that the converse of this is also true and gearing can exacerbate losses if the fund manager makes the wrong call.
As noted, for renewables investment specifically, leverage can often be used at relatively attractive rates because there is a higher level of certainty with the cashflows that the sector produces.
To sum that all up, investors tend to want exposure to renewable energy infrastructure because it often offers attractive levels of income, provides a level of defensiveness, and can act as a strong diversifier in a wider portfolio.
Investment trusts make investing in the sector much easier. The liquidity of trust shares mean it is far simpler for investors to buy and sell than it would be via direct holdings.
Moreover, the fact that equities are not ‘lumpy’ assets means order sizes can easily be customised to fit with the level of exposure an end investor wants. Again, this is simply not possible with direct investment.
Investment trust: Schroder Greencoat UK Wind
Launched: 2013
Manager: Stephen Lilley, Laurence Fumagalli (Matt Ridley)
Ongoing charges: 0.92% (2023)
Dividend policy: Pay an annual dividend increasing with RPI inflation
launched in 2013. Since then it has been the top performing renewable energy infrastructure investment trust listed on the London Stock Exchange. That holds true over the five years to 31/01/2024 as well.
Managers Stephen Lilley and Laurence Fumagalli have been with the trust since launch, having played a pivotal role in establishing it. However, Laurence will be stepping down at the end of Q1 2023. His replacement is Matt Ridley, who has two decades of experience investing in renewable energy infrastructure and was Head of Private Markets at Schroders Greencoat.
UKW is currently the largest renewable energy infrastructure trust listed on the London Stock Exchange, with a market cap of £3.3bn at the time of writing. The trust owns a diversified portfolio of wind farms that operate across the United Kingdom.
1) What is the trust’s goal?
UKW aims to provide investors with an annual dividend that increases in line with RPI inflation while preserving the capital value of its investment portfolio in the long on a real basis through reinvestment of excess cashflow.
2) What does the manager invest in?
UKW invests in a diversified portfolio of UK wind farms.
3) How many holdings does the trust normally have?
UK currently has 49 investments in wind farms around the UK. There is no ‘normal’ number of assets here given the illiquidity of the portfolio. Investments are made with diversification in mind, with the overarching goal of delivering RPI-linked dividend growth, alongside capital preservation.
Because wind farms only have a finite life, the trust must reinvest cash to both preserve the requisite cashflows and maintain the real value of the NAV.
4) What is the trust’s dividend policy?
UKW aims to pay a dividend that increases in line with RPI inflation. Dividends are paid on a quarterly basis.
5) What are the trust’s ongoing charges?
UKW’s ongoing charges were 0.92% for 2023. The management fee structure comprises 1% on NAV (not gross assets), with a further 0.2% paid in equity (new shares issued at NAV or bought in the market and awarded at NAV) for NAV below £500m. The fee declines to 0.9% (and an equity fee of 0.1%) on NAV over £500m, 0.8% (no equity fee) over £1bn of NAV and 0.7% over £3bn.
6) Does the trust have a performance fee?
No, UKW does not have a performance fee.
7) Does the trust use gearing? Is it structural or opportunity-led?
UKW primarily uses structural gearing to make its investments. Long-term debt is used by the managers to boost total returns. However, UKW makes use of short-term gearing as well. This is typically used to acquire assets, which is then repaid through raising new equity capital or via surplus cashflows.
IF we achieve this year’s target and
IF we compound at 7% the ‘pension’ could equate to 19k pa.
This is not a fcast or even a target, yet.
Daily Express
Pensioners could get over £7,000 a year guaranteed income in retirement – can you claim?
Story by Temie Laleye
Sales of annuities in 2023 hit their highest levels since the introduction of pension freedoms in 2014, research from the Association of British Insurers (ABI) has found.
ABI found sales were £1.5 billion in the last quarter of the year, after a strong third quarter when sales were £1.4 billion.
The number of annuities bought rose by a third to 72,200 as interest rate hikes led to providers offering much better deals.
Annuities provide a guaranteed income until you die.
But they were shunned for years due to poor rates and restrictive conditions, and after gaining a bad reputation on the back of annuity mis-selling scandals.
Figures from Hargreaves Lansdowne show that currently, a 65-year-old with a £100,000 pension can get up to £7,117 per year from an annuity.
On average there were 3.3 quotes per person in January 2024 up from 2.9 in January last year, indicative of people shopping around for the best deal.
Jack Williams, head of pensions and retirement, Hargreaves Lansdown explained the days of soaring annuity rates may be behind us for now, but the market remains buoyant with strong interest from people looking to secure a level of guaranteed income in retirement.
He said: “The relative calm we’ve seen as annuity rates have settled in recent months has encouraged people who otherwise may have hesitated to take the plunge for fear of missing out on a better rate later to take a look now.
“The average number of quotes people are generating is also on the rise, showing a willingness to look across the market to make sure they are getting the best product and rate for their needs, with nine in 10 people using our comparison service qualifying for an enhancement based on lifestyle or health.
“We are also seeing people use more of their pension to convert to income. With inflation on the way down and interest rate cuts potentially feeding through in the coming months, annuities look better value.”
For anyone considering whether to buy an annuity – or concerned about whether they are flexible enough to meet their needs – it is worth noting that individuals can slice and dice their pension and annuities in chunks throughout their retirement.
Britons can build guaranteed income as their needs evolve while leaving some of their pension invested where it can continue to grow.
Savers will benefit from higher annuity rates as they age and potentially improved enhancements depending on their wealth.
The pension freedom reforms in 2015 prompted most savers to keep their funds invested and live off withdrawals instead, despite the financial market risk involved.
However, the recent run of interest rate hikes to combat inflation means annuity providers can afford to fund much more attractive deals, prompting a resurgence in sales.
£££££££££££££££££££££££
U have to say goodbye to your 100k but a good option for some.
Of course when u want to retire the figure could be back to 3k.
That’s the gamble u are encouraged to take with your retirement.
The snowball started with 100k of seed capital, no
funds to be added to the portfolio, only enough cash
to pay the platform fees.
The initial aim was to provide a yield of 5% but as Investment
Trusts prices plummeted this was increased to 7%.
7% compounded doubles your dividend take in ten years.
The target is a ‘pension’ of 14k and u keep control of
your capital.
The capital is needed to provide the dividends for the ‘pension’
although if an unexpected cost happened, one position
could be sold off to provide funds, the equivalent to
taking 10 years of dividends in advance.
The figure received for the first quarter will be 3k,
do not scale to achieve the total for the year.
Dividends expected for April £837.00
This years fcast is 8k with a target of 9k.
The target may depend on by how much RGL reduce
their dividend by.
If 9k is re-invested at 7% plus the 10 year plan total
could be increased to a ‘pension’ of 16k.
If u have no plan, u have no final destination, so it’s
more likely you will fail.
The yield u receive is the yield at the time of your purchase,
hopefully gently increasing over the years.
As prices rise, the yield falls but there should be one or
two unloved Trusts that could provide a yield of 7%.
Welcome to this week’s Watch List where you’ll find golden nuggets on trust discounts, dividends, tips and lots more…
ByFrank Buhagiar•19 Feb, 2024
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 16 February 2024 – five more than the previous week’s 18.
Nine of the 23 were on the list last week: VH Global Sustainable Opps (GSEO), Aquila Energy Efficiency (AEET) and Harmony Energy Income (HEIT) from renewable energy infrastructure; Digital 9 Infrastructure (DGI9) from infrastructure; VPC Specialty Lending Investments (VSL) from debt; LMS Capital (LMS) from private equity; and Custodian Property Income REIT (CREI), Regional REIT (RGL) and Life Science REIT (LABS) from property.
That leaves 14 new names: Greencoat UK Wind (UKW), Greencoat Renewables (GRP), Bluefield Solar Income Fund (BSIF), NextEnergy Solar (NESF), Octopus Renewables Infrastructure (ORIT) and The Renewables Infrastructure Group (TRIG) from renewable energy infrastructure; STS Global Income & Growth (STS) from global equity income; abrdn Equity Income (AEI) from UK equity income; BlackRock Sustainable American Income (BRSA) from North America equity income; Jupiter Green (JGC) from environmental; Residential Secure Income (RESI) from property; Schroder Asian Total Return (ATR) from Asia Pacific; Montanaro UK Smaller Cos (MTU) from UK smallers; and finally, CQS Natural Resources Growth & Income (CYN) from natural resources.
ON THE MOVE
Monthly Mover Watch: Seraphim Space (SSIT)
Still sitting pretty at the top of Winterflood’s list of top-five monthly movers in the investment company space. That’s despite further shrinkage in its monthly share price gain – up +34.1% compared to +36.5% the previous week. No meaningful releases since the space investor’s January shareholder letter, but perhaps the successful launch of the Odysseus mission to the moon is helping to keep space on the radar…
Meanwhile, last week’s second and third placees have swapped places. Chrysalis (CHRY) is now in second after extending its gain on the month to +26.1% from +20.9% previously. The private equity investor still benefiting from a well-received set of Annual Results in which the company made positive noises on the chances of one or two IPOs among its holdings this year.
In third, Foresight Sustainable Forestry (FSF) courtesy of a +19.6% monthly gain, a tad lower than last week’s +22.4%. With no news out this year, the shares appear to be still benefitting from the peak interest rate narrative which started to gain traction in December 2023.
Manchester & London (MNL) also keeps its place among the top five. A +17.4% share price rise, an improvement on the +11.6% gain seven days earlier, enough to claim fourth spot. Investors following investment manager Mark Sheppard’s lead? Mr Sheppard has been topping up his stake in the fund recently…
Finally, new entry in fifth, Riverstone Energy (RSE) up +14.4%. Not hard to find an explanation here. The launch of a US$200 million tender offer, a good enough reason for the share price rise.
Scottish Mortgage Watch: +7.9%
The monthly share price performance at Scottish Mortgage (SMT) as at close of play on Friday 16 February 2024 – an improvement on last week’s +2.5% gain. NAV near enough doubled its monthly gain to +9.7% from +4.9% the previous week. Finally, the wider global IT sector joined the party too, finishing the week up +7.4% compared to +4.9% seven days earlier.
THE CORPORATE BOX
Merger Watch: Tritax Big Box (BBOX) & UK Commercial Property (UKCM)
Announced “…a possible all-share offer…for the entire issued and to be issued share capital of UKCM at an exchange ratio of: 0.444 new ordinary BBOX shares per UKCM share…Based on BBOX’s share price of 160.2 pence per share as at 9 February 2024, the Possible Offer implies a value of 71.1 pence per UKCM share and approximately £924 million for the entire issued share capital of UKCM, which represents…a premium of 10.8 per cent. to UKCM’s closing share price of 64.2 pence per share on 9 February 2024; and…a premium of 23.0 per cent. to UKCM’s 6-month volume weighted average share price of 57.8 pence per share as at 9 February 2024.”
Raise Watch: £40 million
The maximum amount JPMorgan Global Growth & Income (JGGI) is looking to raise via a Placing and Retail Offer. Summary from broker Winterflood: “JGGI has been approached by a large wealth manager who has indicated interest in the fund’s shares. In light of this and the ongoing demand in the market, the Board has decided to undertake a placing, with shares to be issued at a 0.60% premium to cum-income NAV per share, representing a modestly lower premium than that at which the fund normally undertakes issuance…The fundraising will be for an amount up to £40m to ensure the fund has sufficient capacity to continue its ongoing premium management issuance programme. In order to allow existing retail shareholders to participate in the fundraising, JGGI is undertaking the WRAP retail offer, which will be capped at €8m (or the equivalent amount in Sterling).”
Buyback Watch: £20 million
The size of Bluefield Solar Income’s (BSIF) share buyback programme: “The Board notes the recent weakness in the Company’s share price and the significant discount that the current share price represents to the value of the Company’s assets…in the context of addressing what the Board views as the excessive discount at which the Company’s shares currently trade relative to the underlying NAV, the Board announces its intention to commence a share buyback programme. In the first instance it has allocated £20 million for the purchase of its own shares…following the release of the interims…”
Insider Watch: 25,000
The number of Finsbury Growth & Income (FGT) shares acquired by fund manager Nick Train: “…on 13 February 2024, Nick Train purchased 25,000 Ordinary Shares…at an average price of 844.00 pence per share. As a result of the transaction, Mr Train now holds interests in a total of 5,337,243 Ordinary Shares, representing an aggregate 2.8% of the Company’s issued share capital.”
Dividend Watch:
The number of consecutive years, City of London (CTY) is on course to grow its dividend by: “The Company’s diverse portfolio, strong cash flow and revenue reserve give the Board confidence that, in line with its objective to provide long-term income and capital growth, it will be able to increase the total annual dividend for the 58th consecutive year.”
52 – the number of consecutive years of dividend growth at Brunner (BUT): “…the total dividend for 2023, including the proposed final dividend, will be 22.7p. This represents an increase of 5.6% over the 2022 dividend of 21.5p and means Brunner has now reached 52 years of consecutive dividend increases, cementing its place near the top of the AIC’s ‘Dividend Heroes’ list.”
50 – the number of years in a row that Scottish American (SAIN) has increased its dividends: “The Board is recommending a final dividend which will bring the total dividends for the year to 14.10p per share, an increase of 2% over the previous year. The Company continues to meet its objective of growing dividends ahead of inflation over the long term, and the recommended dividend will also extend the Company’s record of raising its dividend to fifty consecutive years.”
MEDIA CITY
Tip Watch #1: Merger focuses minds on the tricky question of investing in China
The merger? “…the impending merger of Abrdn China Investment Company and Fidelity China Special Situations, two of the four UK-quoted investment trusts devoted to that country.” The mind that has been focused? The Times’ Tempus Column. As the article points out: “Fidelity, already by far the biggest of the quartet with net assets of over £1 billion, will dominate even more once it absorbs Abrdn China Investment’s £270 million portfolio…Its assets then will be transferred to Fidelity China Special Situations in return for that trust’s shares.”
Now, as the article goes on to say, it’s not been the best of times for the China funds: “The four China trusts’ shares have been sliding since early 2021, when Beijing began cracking down on its fast-growth internet companies, putting pressure on Ant, Alibaba and Tencent, all favourites of the UK trusts.” Despite this, “Abrdn China Investment investors should benefit from the switch to Fidelity…” which “…has returned 138.5 per cent over the past decade compared with Abrdn China Investment’s 10.5 per cent in the same period.” Furthermore, “There is a considerable overlap between the two trusts’ portfolios…”
In addition, Tempus thinks “Today’s depressed prices may look cheap in a year or two. Fidelity China Special Situations shares yield 4 per cent, compared with Abrdn China Investment Company’s 0.8 per cent, though that may turn off investors who see China as primarily a growth play…Advice: Hold”
Tip Watch #2: Balanced Commercial Property Trust (BCPT)
Tipped by The Investors’ Chronicle. In This unloved Reit is now a takeover target, the tipster first provides some background: “Balanced Commercial Property Trust (BCPT) is a generalist real estate investment trust (Reit)…As such, it is a pretty good barometer for UK real estate as a whole. In good times, such as between 2009 and 2018, its share price has performed well. However, things took a serious turn for the worse this decade as first Covid-19 and then high interest rates hit the UK. Like many Reits, BCPT is now trading at a hefty discount to net asset value, which reflects the lower returns expected by investors…BCPT’s recent performance has been poor: its share price has substantially underperformed the FTSE 350 Real Estate index and the FTSE All-Share index during the past five years.”
But it’s a different story “Over the past six months…” For “something has changed – and value and momentum investors should take note…At the time of writing, BCPT has achieved the best share price return of any of the top 45 Reits in the year to date. Once its monthly dividend is accounted for, it looks even more attractive. In other words, the stock has momentum and a generous dividend which is comfortably covered by cash…The year is still young, but BCPT looks well placed to lead the charge on any further Reit share price rally this year as interest rates stabilise and buyers return to the sector…” What’s more, while “The reversal of BCPT’s fortunes is largely due to the peaking of interest rates…underpinning its share price rally is solid trading…”
That’s because “…if you strip away valuation changes, BCPT posted an 11.2 per cent increase in core earnings. Put another way, BCPT’s rental revenue minus its day-to-day business costs – building maintenance costs, administrative procedures and asset manager costs – is rising. This non-IFRS figure is sometimes called ‘net rental income’, and the fact that BCPT’s is increasing is a sign of good asset and tenant management.” And it’s possible, “…if retail investors don’t buy into the bull case, private equity or another Reit might. Real estate takeover activity has picked up over the past two years as deep-pocketed buyers with long-term horizons have taken advantage of dire investor sentiment and heavy discounts to NAV…It’s impossible to say whether someone might have a go at buying BCPT, but the investment case for this stock is solid either way.”
Mirror mirror on the wall, which is the most popular investment company of them all?” Don’t have a Magic Mirror to hand? Not to worry, have a read of the latest Doceo Insights instead…
ByFrank Buhagiar•
“Mirror mirror on the wall, which is the most popular investment company of them all?” Perhaps what Snow White’s arch nemesis, the Evil Queen, would have been bursting at the seams to ask the Magic Mirror had she been either a) an investment company fund manager or b) the Board Chair of an investment company. But, seeing as she was neither, it’s left to others to ask the question “Which are the most popular investment trusts?” And then to look for an answer. So, with 2023 still relatively fresh in the memory, which were the most popular investment companies.
To lay down first. In the absence of a fully functioning Magic Mirror, popular in whose eyes? Institutions/wealth managers? Retail investors? Or all the above?
For the purposes of this exercise, retail investors get to play the part of the Magic Mirror. That’s because retail is an increasingly important target audience for investment companies, particularly those at the smaller end of the spectrum. Why? Because wealth managers are getting bigger, possibly too big to invest in a large proportion of investment companies. Broker Winterflood touched on this very subject when commenting on last year’s mega-merger between wealth managers Rathbones and Investec Wealth & Investment UK:
“This has created one of the largest discretionary wealth managers in the UK, with £100bn in combined assets under management. As two significant owners of investment trusts, the announcement led to some concerns that there could be forced selling, or at least subdued future demand, if the merger led to the combined entity owning more than 30% of a fund’s shares (the threshold that would normally require a bid to be made under Takeover Panel rules). While this does not appear to have materialised to a significant extent, we note that cost pressures may well lead to more consolidation in the wealth management industry. As a result, we expect an increased focus on larger, more liquid investment trusts from these groups, particularly those with centralised investment propositions, and additional scrutiny on the relevance of sub-scale funds.”
Big wealth managers require big investment companies to invest their clients’ money in. All fine and dandy for investment companies of scale. Not so for the rest of the sector. For those funds deemed sub-scale, new investors may have to be found. One pool of potential buyers that investment companies can target: retail. With individual investors potentially becoming more important to London’s investment companies, this popularity contest will therefore be retail-centric.
For the second year in a row, City of London (CTY) finds itself in top spot. What’s more with a market cap of £2 billion, chances are it remains on the radar of the larger wealth managers. Same is true for most of the names in the table’s top 10. Second-placed JPMorgan Global Growth & Income (JGGI), something of a consolidator within the global equity income sector in recent years – market cap well north of £2 billion; Scottish Mortgage (SMT) in third – market cap of £11 billion; Murray International (MYI) in fifth (£1.5 billion market cap); Alliance (ATST) (£3.3 billion); F&C (FCIT) (£5 billion); and Bankers (BNKR) (£1.2 billion).
To be fair, two of the three non-£1 billion+ top 10ers are not far off joining the billionaire club themselves: fourth-placed Merchants (MRCH) £800 million market cap; while ninth-placed Scottish American (SAIN) is even closer – market cap is just under £900 million.
And £1 billion market caps can be found among those companies occupying the 11 to 20 spots too: BlackRock World Mining (BRWM); Law Debenture (LWBD); Caledonia (CLDN); and Greencoat UK Wind (UKW).
A degree of positive correlation between fund size and number of clicks on the AIC website, it seems. Let’s face it though, scoring highly on the AIC’s page view charts is a good start, but in the words of Tom Cruise in the 1996 film Jerry Maguire…
Show me the money!
For surely the ultimate test of popularity is to see which funds retail investors have been buying the most. Easier said than done, as retail investors typically use different platforms to buy and sell funds. Major platforms such as AJ Bell, Fidelity and ii, for example. Oh, to have a single table that aggregated buying activity across all three platforms so that an overall picture can be formed…
Enter Numis, the fairy godmother in this tale. For the broker has done precisely that: “We seek to give an indication of which Investment Companies (ICs) have consistently featured amongst the most popular ICs on the major retail platforms for which we have information, namely: AJ Bell, Fidelity and ii. We note that this does not consider the relative volumes traded on each platform or over time, rather it is based on the number of appearances on the most bought lists…Every month, for each platform, the top-ranking fund is assigned a score of 10, decreasing to 1 for the 10th ranking fund. The scores have been summed across each month to calculate a total ranking for 2023.” All sounds reasonable.
Before the big reveal though, Numis tantalisingly notes: “Looking across the whole of 2023, there is a significant degree of consistency across the lists and over time. This is to be expected as many investors will have built large positions in specific trusts over many years. It is typically long-established ICs with equity-oriented strategies that dominate the ‘most bought’ lists.” This can be clearly seen in the table below, along with the winner of course…
A final flourish
Winner revealed maybe, but here’s a thought – how many funds in the AIC’s top-20 view list make it into Numis’ table showing the 15 most bought funds?
Answer, a clear majority. In all nine of Numis’ top 15 appear in the AIC’s list:
Scottish Mortgage
City of London
JPMorgan Global Growth & Income
Greencoat UK Wind
F&C IT
BlackRock World Mining
Alliance
Merchants
Murray International
And the similarities don’t stop there. For the top-three names on both lists are also the same: Scottish Mortgage, City of London and JPMorgan Global Growth & Income – although in slightly different order.
Worth also taking a look at the funds that made it into Numis’ top 15 but not the AIC’s top 20:
Fidelity European
Fidelity Special Values
Renewables Infrastructure Group
Fidelity China
Polar Capital Technology
Personal Assets
As can be seen, half of the above funds herald from the Fidelity stable – remember Fidelity, one of the three feeder platforms used by Numis to compile the master list. Certainly, Numis is not surprised: “Fidelity’s list unsurprisingly comprised many of its own trusts, with Fidelity European (ten appearances), Fidelity Special values (nine), and Fidelity China (eight) making multiple appearances…”
Exclude the Fidelity names and both lists have a lot more in common than not. One might even go as far as to say, the two lists (Magic) Mirror each other rather well…
We have a winner. Scottish Mortgage (SMT) may have lost top spot in terms of London’s largest investment company to 3i Group (III) in recent years, but the fund’s long-term track record and philosophy still attracts the retail investor. Bravo Scottish Mortgage!
InvestmentsInsightsAll VideosCompare Funds
A 360 view of the latest results from RCOI, RII, PIN, HRI, JMG
Question: which fund would have made you 22 times your money had you bought its shares at inception in 1994? Answer…can be found in the latest Doceo Weekly 360 round-up of investment company results and broker commentary…
ByFrank Buhagiar•23 Feb, 2024
Belief of the week
“…we have always believed that the success of our business goes beyond financial returns.” Riverstone Credit Opportunities Income (RCOI) Investment Manager’s Statement.
Consistently robust earnings
Riverstone Credit Opportunities Income (RCOI) reported a full-year “NAV total return of 6.4% and NAV total return of 40.1% since inception in May 2019.” No surprise then that Chairman Reuben Jeffery, III is “…pleased with the financial performance of the Company and the beneficial impact its loans are having on the journey towards greater environmental sustainability in global infrastructure.” As the Chairman explains: “The Company has a unique focus on short duration lending, which benefits from the current interest rate environment…” Furthermore, “…the re-balancing of the portfolio to energy-transition focused investments is now complete. As of 31 December 2023, all of the loans in the portfolio and over 95% of the Company’s SPVs’ underlying investments were either Green Loans or Sustainability-Linked Loans. Therefore, all loans in the Company’s portfolio are supporting the advancement of decarbonisation or enhancing sustainability across the broader energy complex.”
And, as the Chairman writes, “The Board is pleased with our diversified and dynamic portfolio of investments and the current pipeline of new opportunities, which we believe have the potential to continue to deliver attractive value to shareholders…We are finding that businesses at the forefront of energy transition view our first lien, short-duration, floating rate product as being highly attractive and a good fit for their development plans…” As for the discount “We are keenly aware of the persistent discount at which the shares trade, and the Board does not believe this reflects the value of the portfolio. As ever we continue to work assiduously with the manager on a number of initiatives to reduce the discount including active asset management and proactive and frequent engagement with equity market participants.”
Numis notes: “…the Chair of Riverstone Credit Opportunities Income (RCOI) highlights the upcoming realisation opportunity in May 2024 and comments that if net assets fall below $50m (currently $77m) then the fund will amend its investment objectives and adopt a realisation strategy. The exit opportunity is for the entire share capital, at NAV less costs. The shares currently trade on a c.20% discount to NAV. The shareholder register includes a number of value orientated investors including Almitas (9.3% of share capital) and Metage (7.4%).”
Backwards and forwards of the week
“…market sentiment shifted from relative optimism to doom and gloom and back again.” Rights & Issues Investment Trust (RII) Investment Manager’s Review.
A degree of balance
Full-year numbers from Rights & Issues Investment Trust (RII). As Chairman Dr Andrew J Hosty writes: “Overall shareholders achieved a return of 2.4% compared to 3.8% for our chosen benchmark.” While the new(ish) investment managers at Jupiter add: “Given the concentrated nature of the portfolio, relative performance is largely a result of individual stock returns…we have been working to reduce the level of concentration in the portfolio by bringing down some of the largest position sizes. We also set out to dispose some of the very smallest companies in the portfolio and introduce some new positions based on our team’s well established investment process…” Progress is being made: “At the start of the year the Company held positions in 22 stocks with the top five positions accounting for 50% of NAV and the top ten for 76%. As at the end of December 2023, the Company had investments in 22 stocks, but the top five positions accounted for 43% of NAV and the top ten for 68%.”
The investment managers continue: “…we are pleased that the investment portfolio is now broadly in the shape we intended. We believe we have added some attractive long-term investments which will complement the existing collection of quality businesses the Company owns and add thematic balance…While it is too early to say for certain that inflation is under control, there have been encouraging recent signs of a return towards central bank targets. This in turn should allow interest rates to moderate towards long-term norms and hence remove a source of significant uncertainty for companies and markets alike. While we are more confident in this outlook than we were six months ago, we do not expect a straight-line recovery and recognise the scope for significant bumps along the road. As such we continue to feel that a degree of balance is appropriate in portfolios and will continue to reflect this in the Company’s holdings. Looking further ahead, we believe that the UK mid- and small-cap equity market is attractively valued and hence offers an exciting opportunity for long-term investors as it emerges from this period of volatility.”
Winterflood writes: “Dan Nickols and Matt Cable of Jupiter have managed fund for just over 12 months. Board has consulted with number of shareholders regarding potential share split, but ‘clear and significant majority’ thought costs outweighed benefits, hence Board has placed ‘indefinite pause’ on plans.”
The less easy option of the week
“…we have been working on ideas to stimulate further demand for our shares at a price that more accurately reflects the NAV per share. It would be very easy to excuse inactivity on this front by blaming everything on cyclical causes resulting from the ebb and flow seen through different market environments…” Pantheon International (PIN) Chairman Statement.
All weather
Pantheon International’s (PIN) NAV per share and share price rose 3.1% and 8.1% respectively during the half year. According to the Half-year Report: “Valuation gains in the portfolio and NAV accretion from share buybacks were partially offset by unfavourable currency movements, given that PIP’s portfolio is predominantly USD-denominated.” Over the longer term: “Annualised NAV per share growth over the last 10 years was 13.8%. The NAV performance beats the public market benchmarks over the last three, five and ten years and since the Company’s inception in 1987.”
Comment from Chair John Singer CBE: “The past six months have clearly been an extremely busy period for PIP, which included a substantial share buyback programme of up to £200m, involving a tender offer, and a reworking of our capital structure. These activities are enabling us to fulfil our purpose, which remains to deliver excellent risk-adjusted long-term capital appreciation to a growing shareholder base of institutions and individuals, through easier access to diversified and well selected private companies, while offering the daily liquidity of a quoted stock.” The managers add: “PIP has been designed to provide an ‘all weather’, high quality portfolio that can withstand macroeconomic volatility and market cycles. The majority of PIP’s portfolio is invested in buyouts of profitable and differentiated businesses, with technology and healthcare companies making up a considerable slice of PIP’s exposure. Our preference is to ‘lean in’ to the dynamic parts of the economy, while avoiding cyclical businesses, and this underpins our strategy in generating stable, attractive risk-adjusted returns over the long term…”
Jefferies is a buyer: “Even beyond further positive declarations on share buybacks/capital allocation, there are a number of encouraging data points from within the underlying portfolio, which continues to generate healthy EBITDA growth and positive net cash flows.”
JPMorgan is staying overweight too: “If we adjust for net PIN level leverage of 5%, and the listed holdings (8%), which we mark to market, the implied discount on the unlisted portfolio is 35.2%, which is broadly in line with peers. But we retain a preference for PIN due to its proactive capital allocation policy, and overall quality of the portfolio, which is demonstrating good earnings growth. Thus we see no reason to change our Overweight recommendation, with the shares remaining in our model portfolio.”
Performance stat of the week
“Had you bought shares at inception in 1994, you would have made 22 times your money, a compound annual return comfortably into double figures.” Herald (HRI) Chairman Statement.
More sensible valuation levels
Finals from Herald (HRI). Chairman Andrew Joy gives a performance overview: “Growth in the Company’s NAV per share was 5.7% against stronger returns from the global stock markets…the main cause of the Company’s sluggish relative performance is illustrated by the divergence between the performance of the Company’s larger stocks and smaller ones, which was extreme in 2023. The 39 investments with a market cap of greater than $3bn delivered returns of 72.1% in the year against -9.2% for the 283 companies capitalised at less than $3bn. This reflects a similar, if less exaggerated, divergence within the wider stock markets of the world…The divergence was enhanced by the fact that 40% or so of the Company’s holdings by value are in the UK. With 2023 seeing an underperformance in wider markets for the UK against the rest of the world, the Company’s portfolio suffered from a ‘double whammy’ of focus on smaller stocks and the UK.”
Looking ahead, the Chairman notes: “The Company has entered 2024 with over £100m cash and near cash, representing some 8.5% of net asset value. Having avoided over-priced opportunities in recent years, this cash will allow the Company to take advantage of placings and perhaps IPOs at the more sensible valuation levels now prevailing…the Company has taken advantage of many takeover bids for its holdings, not unusually at 100% or more of the undisturbed price, and these have been the primary source of the Company’s current liquidity.” Investment manager Katie Potts adds “Although the macro environment is uncertain, we retain our belief in the growth prospects for the technology and communications sectors and that we will continue to discover entrepreneurial management teams that merit backing with the Company’s capital.”
Comment from Numis: “The results highlight a weak period for Herald IT compared to the global technology market, reflecting the bias towards small cap companies in a mega cap dominated environment. Herald IT’s mandate is differentiated from Polar Capital Technology and Allianz Technology…Herald IT focuses on a diversified portfolio of smaller quoted technology/media companies, with 40% of portfolio in the UK, and 30% in the US…The fund has a relatively low profile and the shares currently trade on a c.12.5% discount. It will be interesting to see if the fund faces pressure from activist investor, Saba Capital, which has disclosed a c.12% stake. The chair highlights…the long-term rationale for the vehicle, which utilises the investment companies’ structure to invest in a relatively illiquid portfolio of small caps, that it does not believe could be successfully executed in an open-ended fund.”
View of the week
“Part of the reason for the Company’s success is that it can take a long-term view of growth and value, and not be looking over its shoulder for short-term liquidity.” Herald (HRI) Chairman Statement.
Strong long-term performance
Chairman Aidan Lisser had this to say about JPMorgan Emerging Markets’ (JMG) half-year performance: “…NAV…total return…was 3.2%, while the total return to shareholders was 2.8%. This compares with a 4.4% increase in the benchmark, the MSCI Emerging Markets Index with net dividends reinvested, in sterling terms…Relative performance was adversely impacted by exposure to India, the Company’s largest overweight position, where the returns of portfolio holdings lagged the market as a whole, despite their strong fundamentals. The unexpected and continued weakness in Chinese consumer demand also detracted…On the positive side, returns were supported by the good performance of positions in South Africa, Argentina and Mexico.” Long-term track record remains intact though: “The Company has delivered an average annualised total return of 6.1% over the past five years and 8.1% over the past ten years on an NAV basis, outpacing the MSCI Index, which returned 3.7% per annum over five years and 5.4% over ten years, on the same basis.”
As for the outlook, the Chairman writes: “…the long-term case for investment in emerging markets remains strong, thanks to their superior economic growth prospects, and favourable demographics, which will continue to drive incomes and consumption. And there are many high-quality, innovative, disruptive businesses in these markets capable of capitalising on the various investment opportunities such economic vibrancy generates. While the Company’s Portfolio Managers monitor short-term macroeconomic and political developments, and longer-term structural themes, they do not attempt to predict events or top-down trends, but instead concentrate on identifying those companies that are best-placed to endure and grow regardless of the macroeconomic or political environment…There may be periods, such as the past six months, when the Company underperforms the Benchmark…However the strong long-term performance track record of outright gains and outperformance attests to the strategy’s effectiveness in maximising total returns over the long run…” What’s more, “Hargreaves Lansdown, one of the largest UK retail investment platforms, has recently nominated your Company as one of its ‘five funds to watch in 2024’.”
Winterflood points out: “Board introducing 5-year performance-related conditional tender offer. If NAV TR does not exceed benchmark over 5 years from 1 July 2024, shareholders will be able to redeem up to 25% of their holdings.”
Numis sees value: “The shares are currently trading at a c.12% discount to NAV, yielding 1.6%, which we believe offers value for a manager with a strong long-term record, and an ongoing buyback programme which tends to average repurchases at a c.10% discount. JPMorgan Emerging Markets has been managed by Austin Forey since 1994 using a consistent approach with a low portfolio turnover. He, alongside co-manager John Citron, invests in quality growth companies, with a particular focus on well managed businesses with strong market positions and positive cash flows. The approach means that the portfolio is generally underweight Cyclicals and Resources, in favour of Consumer, IT and Financials stocks.”
Hope of the week
“We must be optimistic and keep our fingers crossed that the regulations evolve such that we disclose costs, rather than double count.” Pantheon International (PIN) Chairman Statement.
MoneyWeek
PERSONAL FINANCE PENSIONS
What pension providers don’t tell you about your retirement money
Check the small print from your pension provider or risk losing thousands.
BY MERRYN SOMERSET WEBB
The money pages of the weekend papers are often pretty miserable. But one piece in the Financial Times particularly stands out.
Claer Barrett told us about Martin, a 59-year-old forced into early retirement after developing a disability. He checked up on the value of his pension in June 2021 and found it was worth £200,000. He checked again in October 2023 and that number was £134,000. A third was gone.
What on earth, you might ask, went wrong?
The answer, says Barrett, is “lifestyling”, a system used by pension-fund managers to cut the risk in portfolios as their beneficiaries age. When you are young, your manager invests your money in equities – after all, if things go wrong, you have plenty of time to make the money back, and history shows very few ten-year periods and even fewer 20-year periods in which equity investors don’t come out ahead. However, as you head towards retirement age, your risk of losing money in the equity market rises – there are plenty of five-year periods in which equity investors do not come out ahead. With that in mind, your provider moves your money into something safer as you age. That is, bonds.
I have a small pension, from a past employment, with Aviva, which, ten years before my retirement date, “aims to avoid large falls in the value of your pension by having a greater amount of money in less risky assets such as government and corporate bonds”. By the time you hit retirement, the odds are your fund will be entirely invested in various bond funds – as it looks like mine will be. This sounds good – and for years worked pretty well.
But as Martin found out, it doesn’t always work. Far from it. When interest rates rise, the capital value of bonds falls (to create a higher yield).
In the UK the bank rate has gone from nearly nothing to 5.25% over a matter of just two years. And here we are. Bond prices have nosedived. Last year some bond funds saw losses of 30% (just as bond prices rise when interest rates fall, they fall as interest rates rise). Martin was being lifestyled into a bond fund that fell 50% as rates rose.
So much for avoiding large falls in the value of your pension pot.
PENSION POT MISTAKES TO AVOID
1. You cannot and should not place blind trust in your pension provider
In the main, they do an adequate job, albeit at slightly too high a cost but when it comes to lifestyling, they have failed significantly. That the bond market was in a bubble – that rates could really go no lower and may well go rather higher – should have been no surprise at all. This was well flagged across the markets and in the press (MoneyWeek warned on it several times).
In sticking with lifestyling even as an obvious bond bubble built, the managers made portfolios more rather than less risky. That’s really not OK.
2. Inertia
Most of us end up in a default fund of some kind, structured based on the expectation that we will buy an annuity with our lifestyle pot when we retire.
The existence of one default encourages inertia: we mostly don’t buy annuities any more (we keep our pot and enter drawdown), but without being forced into choices we can easily just accept bad options (as I may have). The pension managers should perhaps encourage us to think a little more. That said, more of us should take the time to read the small print.
Aviva is careful to let its clients know the risks:
They move your money automatically on set dates, “so your money may not be moved at the time that gives the best return on your investment”.
They’ll be moving the money into lower-return assets over time, so “there is a greater possibility that the investment funds we move your money into may not cover your charges”.
And “there’s no guarantee that any of these strategies will prove beneficial to your pension pot”.
HOW TO SAFEGUARD YOUR PENSION?
Having read that small print, what should you do?
One answer is nothing. You might think the worst is over for the bond market. Inflation has been coming down (perhaps it was “transitory” after all) and that suggests that interest rates will, too – and that bond prices will be at least more stable.
But that inflation will fall back to 2% and stay there is very far from a given. Rising geopolitical conflict, and in particular the supply-chain disruption resulting from conflict in the Red Sea, could easily bring us another nasty bout of inflation – in our new world it is hard to be clear that the equity-bond shift will once again be consistently low-risk.
You might also ask yourself why, if you are not buying an annuity, you want to de-risk in the first place. You want your pension fund to provide you with an income for life. That means you need to hang on to significant equity exposure indefinitely (the dividends available on UK equities being, as one independent financial adviser puts it, “nature’s annuity”).
Once you have retired you should also question the wisdom of holding bond funds at all rather than just a couple of individual gilts. Hold these to redemption and you will definitely get your money back. You don’t have that reassurance with a corporate bond and you don’t have it with a bond fund, either.
As an aside, remember that if you are creating an income outside a self-invested personal pension (SIPP), capital gains on a bond fund will be subject to capital gains tax, whereas those on an individual gilt will not be.
NEXT STEPS
Step one, then, is to check on your pension – and how it is invested. Not all providers’ websites are good for this. You might need to telephone to ask what you have and what the other options are. You might be able to shift to a fund with less embedded risk for now and then find a way to de-risk your own portfolio (with gilts, for example) later.
Finally, if you are particularly lazy and simply want to avoid being lifestyled into bonds in the shorter term, you can go on to your provider’s website and change your retirement age. The later you make it, the longer until the automatic lifestyling kicks in. That might give you a bit more time to consider matters.
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