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Investment Trust News

A 360 view of the latest results from CHRY, ASL, HSL, HOT, APEO, CMPI

Ah those were the days! According to Chrysalis, the number of IPOs in the UK prior to the GFC averaged 217 per annum. How does that compare to more recent averages? Clue – very well! Have a read of the latest Weekly 360 round-up for the answer…

ByFrank Buhagiar•02 Feb, 2024

Unwanted stat of the week

“At the point of the Company’s IPO, the Investment Adviser calculated that the average number of IPOs in the UK had fallen from 217 per annum prior to the GFC, to 94 per annum in the period from 2011 to 2017. In the five years since the Company’s IPO, the average has fallen further to 69.” Chrysalis Investments (CHRY) Investment Adviser’s Report.

A powerful indicator

Full-year results from Chrysalis Investments (CHRY). As Chair Andrew Haining explains: “NAV for the period to 30 September 2023 fell relatively modestly from 147.79p to 134.65p per share. In that period our exciting portfolio of high growth, tech enabled companies experienced a range of positive activity which we believe positions them strongly to benefit from a recovery in markets, which we would expect to see in 2024.” However, “Significant macro issues, which we are unable to influence, have moved sentiment in our asset class so substantially that it has gone from trading at a premium for three years to a discount over the last two…” All is not lost though, “As we look forward, we have good reason to be hopeful that realisations will occur in one or two of our investments during…the 2024 financial year, albeit this will depend on wider market conditions. We hope that these actions, together with the Capital Allocation process…will over time be reflected in a return to more normal market levels of discount/premium for the Company’s share price.”

The portfolio managers add: “The last two years have seen a significant change in market sentiment, the ramifications of which have triggered a widespread reconsideration of strategic priorities across both the Company’s investee companies, and in the Investment Adviser’s approach to running the Company. The Investment Adviser has worked hard with the portfolio companies over this time to extend cash funding runways and assist the quicker transition to more sustainable operating models. As a result, the Company’s portfolio contains a number of companies that are both mature in scale and, conceivably, moving into a window where an exit is a possibility. The recent strength in markets – triggered by yields falling in response to better inflation data – should be seen as encouraging. A backdrop of more optimistic markets should increase the possibility of exits for the Company’s investments…A commitment to return up to £100 million of capital to shareholders – representing approximately 25% of the Company’s market capitalisation at the time of writing – should be viewed as a powerful indicator of the Board and Investment Adviser’s ambition to manage the prevailing share price discount.”

Winterflood adds: “Continuation vote to be held at 15 March AGM. Board recommends continuation, based on shareholder consultation. The managers add that the portfolio is maturing (average holding period 3.6 years) and the market is ‘apparently’ more amenable to exits, with Klarna (7.1% of NAV) reportedly preparing for IPO. Proposed capital allocation policy: £100m capital return (likely via buybacks, subject to discount/premium) from realisations in excess of maintaining £50m cash buffer (current total liquidity £33m). Thereafter intend to return at least 25% of net realised gains against cost.”

Liberum is a buyer: “CHRY’s portfolio is as well-placed as it has been for quite some time with respect to the potential for shareholders to benefit from significant realisations. We believe the current share price does not capture the potential uplifts to NAV from liquidity events. The pathway is beginning to centre on a scenario where CHRY will be in a position to realise some of its core portfolio, particularly with respect to Starling Bank, wefox, Brandtech, and now Klarna, all of which are held at carrying values in excess of £90m. Were these to take place at valuations significantly in excess of NAV and the accompanying proceeds being returned to shareholders while a significant discount to NAV persists, this will be at a very high ROI and particularly impactful to NAV per share given the commitment to return the first £100m of realisations over the next three years, after satisfying the £50m cash buffer…Our TP of 118p reflects a 158p 12M NAV per share forecast and a 25% discount to NAV. 118p TP – BUY.”

Numis is positive too: “…the revised fees and capital allocation policy make the fund a much more attractive proposition. In addition, they have been active in engaging with shareholders, therefore we would expect their views to have been reflected in the various proposals. There has been significant progress in the portfolio with several companies performing well and being at a stage of maturity that makes realisation more likely, which will hand a lot more flexibility to the board, as well as providing valuation validation to shareholders. We would expect shareholders to give the company more time, and vote in favour of continuation, to deliver realisations and returns of capital. There has been significant rotation in the shareholder register, with the stake of Jupiter managed funds falling below 5%. The shares are trading at 81.5p this morning, representing a c.43% discount to the December NAV. We believe this offers significant value and a highly attractive investment opportunity.”

Question of the week

“The UK small company and AIM sectors are full of vibrant companies that can be expected to lead the UK economy’s future growth. Therefore, to be invested in them at the current very depressed valuation levels will, we believe, prove rewarding over the medium to longer term. A question the Board of course asks is ‘when will this recovery happen?’. Unsurprisingly, there is never a very satisfactory answer as the outlook for the UK remains very uncertain.” Henderson Opportunities Trust (HOT) Chair Statement.

A historically wide level

Half-year Report from CT Global Managed Portfolio (CMPI). Chairman David Warnock has the numbers: “…NAV total return was -2.9% for the Income shares and -0.5% for the Growth shares. The total return for the benchmark index for both share classes, the FTSE All-Share Index, was +1.6%.” The Chair adds: “High inflation and rising interest rates were a considerable headwind, particularly for the wider alternatives sector. Investment companies in the renewables, core infrastructure, property, specialist property, credit and royalty income sub-sectors are sensitive to interest rates, gilt yields and discount rates for valuing their underlying assets. This led to declines in reported asset values and, in the main, the share prices of these investment companies moved to wider discounts. This affected mainly the Income Portfolio where a number of investment companies in these sub-sectors have been held for their attractive dividends and diversity of income…Another headwind was leadership within equity markets where in the case of the UK the share prices of larger companies continued to outperform smaller ones.”

In his outlook statement, the Chairman first provides a useful summary of what the fund invests in: “The key themes for both portfolios are: investment companies focused on UK equities with a bias to medium and smaller companies which offer interesting growth prospects at very attractive valuations; investment companies with secular growth characteristics typically with holdings in the technology and healthcare sectors; and private equity trusts which have strong underlying growth characteristics though are at very wide discounts.” Before going on to highlight how “In November, there was a change which is positive for equity markets and investment companies in particular. Inflation data in key economies appears at last to be trending meaningfully lower, which if sustained could pave the way for interest rates to be cut sooner than had been anticipated. Lower inflation and lower interest rates are a more favourable environment for equity markets and investment companies. Discounts are beginning to narrow; however, at around 15%, the average sector discount is still at a historically wide level.”

Winterflood writes: “Performance hit by exposure to interest rate sensitive asset classes, particularly in Income portfolio, as well as underperformance of small caps vs large caps. Discount widening across the investment trust sector also detracted, particularly in alternatives.”

Confidence of the week

“…we know that stockmarkets are cyclical and this gives us confidence that today’s valuations will at some point be the basis of good future returns.” Henderson Opportunities Trust (HOT) Chair Statement.

By no means an outlier

Annual Report from abrdn Private Equity Opportunities (APEO). Chair Alan Devine is heartened: “I am heartened that the APEO portfolio has continued to deliver a resilient annual NAV TR during the period of 5.4%, despite a currency FX headwind of -2.8%, and that the Company continues to regularly return capital to shareholders through its enhanced quarterly dividend, delivering a yield of 3.6% as at 30 September 2023…” As for share price total return, this “…increased by 11.7%, which I would normally consider a strong performance in isolation. However, I recognise that this performance is relative to a low base, in terms of the share price declines we saw in most equities and asset classes in 2022. The APEO share price total return underperformed the 13.8% total return from the FTSE All-Share Index over the period and the share price discount to NAV remained wide at 43.2%…” But as the Chair writes: “APEO’s share price performance is by no means an outlier in the investment trust landscape, and particularly the private equity investment trust sector…I personally find the current share price discount confusing given the quality of APEO’s underlying portfolio companies, the robustness of its valuation…and the long-term nature of its NAV growth.”

The Chair goes on to remind investors that: “…private equity…should be viewed over the long term, where new investment decisions are often made with a five-year time horizon in mind.” And while “The immediate road ahead remains uncertain…the governance model of private equity has proved many times in the past…that it facilitates nimble and active ownership and allows underlying businesses to adapt more quickly to changing market circumstances. Periods of uncertainty also tend to offer up new and different opportunities for investment, which private equity firms have proved adept at generating and completing. This is why I believe that private equity should be particularly attractive to investors at times like these, in order to capture the upside that usually follows…I remain convinced by the strategy of APEO, which is centred on investment selection conviction and focused principally on the European mid-market buyout segment of private equity, where there is a plentiful supply of private companies that are highly resilient niche market leaders or fast-growing disruptive businesses of the future.”

Winterflood sounds positive: “In our view, portfolio valuation growth of +9.4% and EBITDA growth of +23% across the top 50 largest holdings simply does not match up to the level of stress currently implied by a 35% share price discount to NAV. This is compounded by the recent initiation of a share buyback programme, with the Board happy to ‘put their money where their valuations are’, and these results suggest they did so with good reason, given an average uplift of +18% achieved across £149.9m of realisations over the year (with further £53m secondary sales at book value, totalling 17% of NAV). Whether it can continue to deliver this remains the key challenge for the fund moving forwards…”

Numis is a fan: “We continue to believe that abrdn Private Equity is an attractive way to gain diversified exposure to a portfolio of leading buyout managers, although limited trading liquidity can be a drawback. APEO is differentiated from its fund of fund peers by paying a quarterly yield of 3.5% pa, partly financed from capital distributions, as well as its European bias…The shares currently trade on a c.34% discount to NAV and the fund is likely to start buying back shares, following partial realisations of its co-investment in Action, with buybacks expected to be up to €34.6m.”

JPMorgan is neutral: “Although discounts have narrowed a little for many of the listed private equity investment companies, they remain wide. An improvement in the exit market and delivering strong NAV growth may help this, but, in our view, so will a focus on capital allocation. And, with that in mind, we welcomed APEO’s commitment to share buybacks that will be significantly accretive to NAV per share due to the wide discount at which the shares trade. It is hard to justify new investments when there is a guaranteed risk-free way to increase the NAV. While APEO’s discount is wide, compared to its nearest peers, the implied discount on the unlisted assets of 31.7% is narrower than the peer average of 35.5%. We are Neutral.”

Spotlight of the week

“It is not straightforward to identify what will change to shine the spotlight on the value on offer in the UK – were it easy, after all, valuations would not now be so attractive.” Aberforth Smaller Companies (ASL) Manager’s Report.

On a more positive note

Half-year Report from Henderson Smaller Companies (HSL). Chair Penny Freer had this to say: “…NAV…total return fell by 7.7%…while the Numis Smaller Companies ex-Investment Companies Index (the ‘Benchmark’) was almost flat, and the AIC UK Smaller Companies sector average NAV declined by 3.7%. Your Company’s share price total return fell by 5.8% during the six months.” As for what lies behind the underperformance, this “…was largely due to compressed valuations and deratings in the challenging market environment for smaller UK businesses.” In addition, “Growth stocks continued to remain out of favour…” But “On a more positive note, it does seem as though October 2023 may have marked a low point of sentiment towards the UK equity market. Since then, we have had a well-received Autumn Statement from the UK Chancellor and the performance in the second quarter showed a marked improvement compared with returns achieved in the first quarter. The longer-term performance record of the Company remains consistently strong, reflecting an unchanged and proven investment strategy adopted by the Fund Manager and his team.”

And the Chair sounds confident for the future: “The Fund Manager has continued to follow a disciplined and unchanged long-term approach which is focused on bottom-up stock selection through a thorough assessment of a company’s market proposition, balance sheet strength and management. The Board is encouraged by the strong performance seen in the final months of the period under review and since the period end. In December 2023 your Company’s NAV rose by 12.4% compared with the Benchmark return of 9.4%, while the three-month NAV performance to 31 December 2023 was 12.5% compared with the Benchmark return of 8.3%, all on a total return basis. The Board remains confident in the Fund Manager’s ability to create a portfolio which will benefit from the opportunities that will progressively emerge as conditions continue to improve.”

Numis is positive: “Some of the recent underperformance has reversed post-period end and we note that the fund is the best performer in its peer group over the last three months…The long-term track record is still intact, and Henderson Smaller Companies remains one of our top picks within the UK smaller companies sector. We continue to rate the management team highly and believe that following a period of poor performance over the last two years, the manager is starting to reap the rewards of sticking to the Growth at a Reasonable Price investment approach and believe that it is well placed to continue its recent resurgence. We note that the portfolio is currently offering relative value, reflected by a forward PE ratio of 11.0x (at 31 December), which compares to a five-year average of 13.5x. As a result, we believe that this represents a compelling entry point to a high-quality, growth-biased portfolio.”

Bold assumption of the week

“…it would be bold to assume that the recent easing of price pressures means that inflation will return to the very low single digit rates of the pre-pandemic period.” Aberforth Smaller Companies (ASL) Manager’s Report.

Well positioned to prosper

Henderson Opportunities Trust (HOT), another from the Henderson stable to report. As Chair Wendy Colquhoun writes: “Against a backdrop of high interest rates and persistent inflation, continued and significant market volatility and negative sentiment towards the UK equity market and smaller companies in particular, it has been a very disappointing year for the Company in both absolute and relative terms. The NAV total return for the year was -9.3% and the share price total return over the period was -12.2%. In comparison, over the same period the FTSE All-Share Index, the Company’s benchmark index, rose by 5.9%, the FTSE 250 Index of medium-sized companies fell by 1.3%, the FTSE SmallCap Index rose by 1.3% and the AIM All-Share Index of the smallest listed UK businesses fell by 14.1%.” All a matter of timing though for “…the Company’s share price delivered a total return of 10.8% in November and 5.4% in December, outperforming the 3.0% and 0.9% return from the FTSE All-Share in those months respectively.”

As for the outlook: “In due course (and if this is not already starting to happen) the UK market will anticipate a recovery of the economy and smaller company share prices are likely to rebound. The Company’s portfolio of quality companies is well positioned to prosper in these circumstances and the Board shares the Fund Managers’ belief that there is considerable potential for gains in coming years when the current clouds affecting the economic outlook eventually clear. This should benefit shareholders over the medium to longer term.”

Note from Winterflood: “A key driver of underperformance was weak sentiment to domestic smaller companies (FTSE 250 -1.3%), to which the fund was overweight.”

Hope of the week

“We are hoping that in the above reports we are talking about a period that has passed.” Henderson Opportunities Trust (HOT) Fund Manager’s Report.

A powerful and welcome rally

Aberforth Smaller Companies (ASL) makes it a hat-trick of results from UK equity trusts with a small-cap tilt. Unlike the two Henderson funds, ASL’s results run to 31 December 2023 which makes quite a difference, as Chairman Richard Davidson explains: “…net asset value total return in the twelve months to 31 December 2023 was +8.2%…ASCoT’s share price total return was +8.0%.” This compares to the 10.1% “…total return from the Numis Smaller Companies Index (excluding investment companies) (NSCI (XIC))…Larger UK companies, represented by the FTSE All-Share, were up by 7.9% in total return terms. It was a volatile year for financial markets as they wrestled with inflation and its implications for monetary policy. A positive outturn for 2023 seemed unlikely as late as November. But then favourable inflation data in both the UK and the US encouraged the view that the next move in interest rates would be downwards. This triggered a powerful and welcome rally into the year end. In the UK, this has so far been led by the mid cap stocks, to which ASCoT has a relatively low exposure.”

Over to the investment managers for the outlook: “US interest rates are likely to dictate the near-term mood of global financial markets, the UK’s included. But equity returns over time are heavily influenced by starting valuations, which stockmarkets can take to extreme levels in their fits of despondency and elation.” With this in mind “…the low valuations ascribed to UK equities, smaller companies and, in particular, ASCoT’s portfolio bode well for returns over the medium term…while acknowledging the present debate about the relevance of the UK stockmarket, the Managers retain confidence in its ability to reflect fairer valuations in due course. Awaiting a general re-rating of the UK listed companies, ASCoT is well placed to prosper in the meantime.”

Numis writes: “Aberforth Smaller Companies modestly lagged the index during the period despite its value bias, which principally reflects that the portfolio is focused on the smaller end of the small cap segment, which lagged the slightly larger companies in the benchmark in the ‘Santa rally’. A higher interest rate environment has been favourable for the fund’s distinct value style in recent years, reflected in relative outperformance versus its more ‘growthy’ peers and the fund is the best performer in its peer group over three years…The managers have stuck to their value style through both the good times and the bad – so investors know what they are getting in terms of approach, and this differentiates the fund in a peer group that is growth biased.”

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