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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.