Funds on the Watch List this week include: SMT, SSIT, FSF, HEIT, MNL, CHRY, PCT, RSE, WTAN, BPCR, THRG, TRIG, FEV, CTY

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

ByFrank Buhagiar•12 Feb, 2024

BARGAIN BASEMENT

Discount Watch: 18

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 09 February 2024 – one more than the previous week’s 17.

Half of the 18 were on the list last week: SDCL Energy Efficiency Income (SEIT), VH Global Sustainable Opps (GSEO) and Harmony Energy Income (HEIT) from renewable energy infrastructure; Baillie Gifford Shin Nippon (BGS) from Japan smallers; NB Distressed Debt (NBDD) and VPC Specialty Lending Investments (VSL) from debt; LMS Capital (LMS) from private equity; and Custodian Property Income REIT (CREI) and Life Science REIT (LABS) from property.

That leaves nine new additions: Regional REIT (RGL) from property; Aquila Energy Efficiency (AEET) from renewable energy infrastructure; BBGI Global Infrastructure (BBGI) and Digital 9 Infrastructure (DGI9) from infrastructure; Schroder Income Growth (SCF) from UK equity income; Worldwide Healthcare (WWH) from healthcare; Lindsell Train (LTI) from global; Menhaden Resource Efficiency (MHN) from environmental; and finally, Hipgnosis Songs (SONG) from music royalties.

ON THE MOVE

Monthly Mover Watch: Seraphim Space (SSIT) and Foresight Sustainable Forestry (FSF)

Keep hold of the number one and two spots on Winterflood’s list of top-five monthly movers in the investment company space. Seraphim Space (SSIT) still occupies pole position although, as with the previous week, the monthly gain has shrunk, this time to +36.5% compared to +45.3% seven days earlier – a January shareholder letter enough to keep interest in the space investor high.

Second-placed Foresight Sustainable Forestry (FSF) held on to the vast majority of its gains though. Last week, the shares were up 22.8% on the month. This week? Up +22.4%. No news out but a look at the graph shows how share price performance ticked upwards end of November/beginning of December – round about the time the peak interest rate narrative started gaining traction…

In third, Chrysalis (CHRY), courtesy of a 20.9% gain on the month – the recent Annual Results issued by the private equity investor included positive noises on the chances of one or two IPOs or other value-realising activity among its holdings getting away this year.

Another new entry in fourth, Polar Capital Technology (PCT) – shares up +12.5%. The tech investor been busy buying up its own shares. Finally, Manchester & London (MNL) takes the final top-five spot with an +11.6% rise. Investment manager Mark Sheppard has been topping up his stake in the fund.

Scottish Mortgage Watch: 2.5%

The monthly share price performance at Scottish Mortgage (SMT) as at close of play on Friday 09 February 2024 – an improvement on last week’s flat monthly showing. NAV also improved, extending its gain on the month from +1.8% to +4.9% the previous week. Finally, the wider global IT sector finished the week up +4.9%, an improvement on the +2.5% gain seen seven days earlier.

THE CORPORATE BOX

Tender Watch: US$200 million

The size of a proposed tender offer from Riverstone Energy (RSE): “The Company…proposes to return $200 million…of its excess capital to shareholders by means of a tender offer…at a price of £10.50 per ordinary share, a premium of approximately 31 per cent. to the closing market price per ordinary share of £8.00 on 7 February 2024 and represents a 16 per cent. discount to the unaudited net asset value per ordinary share of £12.53 as at 31 December 2023…The Company expects to launch the Tender Offer before the end of this month and that the Tender Offer will close during March. The precise number of ordinary shares that may be acquired in the Tender Offer…is expected will represent approximately 36 per cent. of the Company’s existing ordinary shares then in issue (excluding any ordinary shares held in treasury).”

Insider Watch: 2,850,000

The aggregate number of Harmony Energy Income (HEIT) shares acquired by “certain principals of Harmony Energy Advisors Limited…on 5 February 2024…at an average price of 39p per share. Following the acquisition of these shares, the principals of HEAL hold in aggregate 7,614,298 ordinary shares representing 3.35 per cent. of the Company’s issued share capital.”

Dividend Watch: 49

The number of consecutive years of dividend growth at Witan (WTAN). This follows the proposed payment of “a total dividend payment of 6.04p in respect of 2023 (2022: 5.80p)…The Company’s policy is that over the long term it intends (subject to market conditions) to grow the dividend in real terms, ahead of inflation. The increase of 4.1% this year is ahead of the 4.0% rate of consumer price index inflation in December 2023 and the dividend has grown substantially ahead of UK inflation over the past 5 and 10 years. The Company has increased the dividend every year for the last 49 years and the latest dividend is more than double that paid in 2013.”

1.20793 cents – the size of a special dividend announced by BioPharma Credit (BPCR). As JPMorgan explains: “This will take BPCR’s total dividends for 2023 to 10.21 cents per share of which 3.21 cents per share is special dividends. At the current share price of 93.00 cents per share…the dividend yield is 7.5%/11.0% ex/incl the special dividends.”

32.9% – the percentage increase in BlackRock Throgmorton’s (THRG) total dividends for the year: “The revenue return per share for the year amounted to 16.56 pence per share…an increase of 27.9%. The Board recognises that, although the Company’s objective is capital growth, shareholders value the dividends paid by the Company. The Directors are therefore pleased to declare a proposed final dividend of 11.45 pence per share for the year ended 30 November 2023 (2022: 8.50p). This, together with the interim dividend of 3.30 pence per share paid on 1 September 2023, gives a total dividend for the year of 14.75 pence per share, increasing the total dividend distributed to shareholders in the prior financial year by 32.9%…”

4% – the proposed increase in The Renewables Infrastructure Group’s (TRIG) full-year dividend: “The Board has set the dividend target for 2024 at 7.47p per share, representing a 4% growth on the 2023 dividend. This increase reflects strong cash generation, but also recognises inflation has reduced materially from its peak and that future cash flows are expected to be moderated by reductions in power prices…”

MEDIA CITY

Tip Watch#1: City of London (CTY)

Mentioned in despatches by The Times’ Tempus Column. In The investment group placing its trust in high-yield stocks, Tempus first highlights how “City of London is rare today in trading at a small premium to net assets. Most investment trusts have dived to wide discounts as appetite for active equity investing in general, and anything UK-related in particular, has dwindled…”

As the title of the article suggests, “The trust is chockful of large UK blue chips but with a significant ‘yield tilt’, in other words a preference for higher-yielding stocks and companies regarded as value plays. Oil companies, banks, insurers and tobacco abound.” But as Tempus points out “Last year was a disappointment. The company underperformed its benchmark, the FTSE All Share, by 3.4 per cent and lagged its peers by 4 per cent…burnt by heavy positions in poor performers such as Direct Line and Persimmon.” However, “Over longer periods, the record is stronger. By total share price return, City of London has beaten the UK equity income sector average over both five years and ten years.”

The tipster goes on to flag CTY’s cheap borrowings – “It is paying just 2.94 per cent on a £50 million note maturing in 2049, while its interest rate on another £30 million note is just 2.67 per cent. That’s a relatively low-risk way of spicing up returns…” – and the trust’s low fees – “Investors also get an edge because of the relatively low management charge of 0.325 per cent of assets managed.” But… “There are risks. Value investing may have made a bit of a comeback, but the emphasis is still on growth — as the eye-catching bounce in the US tech giants of the past 12 months attests. The kinds of companies City of London backs are often very much out of fashion.” Meanwhile, “Its commitment to dividend growth could become a two-edged sword if it forces it into too narrow a straitjacket of high-yielding stocks. In the pandemic it had to dip into reserves to keep the track record.” On balance then Tempus rates CTY as a Hold.

Tip Watch#2: Fidelity European Trust (FEV)

Is A bargain way to buy Europe’s best. That’s according to the Investors’ Chronicle. Short version of the investment case: “The managers of this discounted investment trust have proved their ability to pick the right companies time and time again”. The long version kicks off with an overview of the trust which “…looks for quality companies at a reasonable price using a rigorous investment process. It focuses on companies that can grow their dividends sustainably over a three to five-year horizon. While not an income-focused trust…managers Sam Morse and Marcel Stötzel use dividend growth as a metric to spot good companies. And by ‘good’, they mean businesses with positive fundamentals such as structural growth, disciplined use of capital and proven business models, which are also cash generative and have strong balance sheets. The portfolio is reasonably concentrated, with the top 10 holdings accounting for 46.2 per cent of the total, and the managers aim for low portfolio turnover, with a typical holding period for companies of three to five years.”

And as the article points out: “The strategy has paid off in spades in the past decade…The trust has comfortably outperformed its peers on a 10-year basis, and came second over five and three years. Reflecting its focus on dividend growers, it has also increased its own dividend by an average of 12.1 per cent a year over the past five years.” Looking ahead, despite identifying “…a series of risks for the continent, including geopolitics, the inverted yield curve and tighter credit conditions for companies…Morse and Stötzel argue that, in the long term, markets are driven by ‘real dividend growth of companies’, rather than by economic growth.” Luckily, “The European stock market has some solid businesses that operate around the world, not just in Europe, and the managers try to single them out.”

In conclusion, the Chronicle writes: “Fidelity European traded at a discount to net asset value (NAV) of 9 per cent on 5 February. With the average sector discount standing at 10 per cent, this is less cheap than some peers, perhaps unsurprisingly considering the trust’s strong track record. But the discount still represents an opportunity to get exposure to big European quality companies at a lower price. As the biggest trust in the sector, Fidelity European has a decent chance of seeing its discount close if market conditions improve, which would add to its NAV performance.”