The Results Round-Up – the week’s Investment Trust results
By Frank Buhagiar
Schroder Japan Trust (SJG) partying like its 1989
SJG posted a +10.3% NAV total return for the six months to 31 January 2024. That’s comfortably above the benchmark’s +9.1% increase. Share price couldn’t quite match that though, returning +5.8% over the period. In his statement, Chairman Philip Kay puts the outperformance down to “strong stock selection across machinery, glass and ceramics, and information and communication. From a style perspective, holdings of value stocks outperformed the growth portion of the portfolio. The use of financial leverage was also helpful to performance over the period.”
Looking ahead, Kay notes: “The Japanese equity market has enjoyed a strong start to 2024 and, symbolically, the Nikkei 225 Index has recently exceeded its previous high achieved in 1989. The Board remains very positive on the long-term equity market outlook because corporate Japan is in the middle of a major transformation which is already resulting in improved shareholder returns.” Now it’s true “there have been many false dawns when the performance of the Japanese equity market has failed to live up to investor expectations. But your Board believes that, this time, there are real positive structural shifts in motion.” Because of these, “we remain very positive on the long-term outlook for the Japanese market and are firmly of the view that the Company is the best vehicle through which to capitalise on the opportunities presented by corporate change and an improving fundamental backdrop.”
Winterflood: “Board will propose 25% tender offer at prevailing NAV less costs if SJG’s NAV TR fails to exceed benchmark by 2% p.a. over 4 years to 31 July 2024. From 1 August 2020 to 31 January 2024, SJG has returned +4.4% above the benchmark on an annualised basis.” A handy buffer then with three or so months to go.
HydrogenOne Capital Growth (HGEN) focusing on what it can control
HGEN’s NAV and share price had very different years. According to the hydrogen investor’s Annual Report, NAV “increased by 5.8% from £125.4 million at 31 December 2022 to £132.7 million at 31 December 2023 due to valuation uplifts in multiple portfolio companies. NAV per share increased to 102.99p at 31 December 2023”. By contrast, “the share price fell from 79.30p to 49.65p and the discount to NAV increased from 18% to 52% as rising interest rates put pressure on investment trust discounts”. Chairman Simon Hogan “had hoped to report an improved share price this year. However, the share price remains at a steep discount, despite an increase in NAV in 2023, as is the case for many listed funds presently.”
Hogan however remains upbeat: “The outlook for the clean hydrogen sector remains positive and we believe that the portfolio can generate attractive returns over time. We fully support the Investment Advisor’s strategy of investing in a diversified portfolio of hydrogen assets, across the value chain.” In the meantime, the focus is on what can be controlled “Whilst macro-economic factors are outside of our control, we believe that selective investment, stewardship of the portfolio, and divestments can positively impact our NAV, and improve the share price over time.”
Winterflood: “NAV per share +5.8% to 102.99p driven primarily by valuation uplifts to private assets as a result of roll-forward of DCF valuations and improving financial performance. Seven of the portfolio’s ten private companies are revenue generating. HGEN had cash of £4.7m and £2.3m invested in listed hydrogen companies at the period-end.”
Fair Oaks Income 2021 (FAIR) looks set fair
FAIR reported a +12.98% NAV Total Return for the year ended 31 December 2023. The share price FAIRed even better, generating a total return (with dividends reinvested) of +30.94%. For comparison, the total return for the JP Morgan US leveraged loan index in 2023 was +13.17%, the JP Morgan US high yield returned +13.77% and the JP Morgan US CLO B rated index +26.77%. The Investment Adviser believes, “the focus on originating and controlling CLO (Collatorised Loan Obligations) subordinated note investments has resulted in superior fundamental performance.” Lower fees have also helped: “Lower fees in primary investments also allowed the construction of more conservative portfolios with no need to ‘stretch for yield’. As a result, the Master Funds have benefited from below-average exposure to sectors such as retail or energy.”
And the Investment Adviser thinks FAIR is “well positioned to generate attractive risk-adjusted returns in 2024” Reasons cited include: “Interest rate expectations: Fed and ECB rate cuts may support investor demand for risk assets, potentially supporting CLO liabilities. The potential for lower CLO financing rates will support new CLO equity investments and the optimisation of the capital structure of existing CLO equity investments”. And the “Existing, high-quality portfolio: all CLO equity and debt investments made their scheduled distributions in 2023.” Because of the above, the Adviser continues to “believe that the high-quality portfolio of primarily first-lien, senior secured loans with attractive term, non-mark-to market financing represents one of the most attractive risk-adjusted opportunities available to investors in the current market environment.”
Liberum: “The shares trade close to par now and we believe the return outlook remains attractive. The underlying loans that fund the CLO equity and CLO liabilities are senior secured bank loans that sit above high yield debt and preferred stock. We are BUYers with a target price of $0.66.”
Numis: “Fair Oaks Income is an attractive investment for investors that are seeking to generate a high yield and have a relatively high-risk tolerance. We believe that the future looks positive for Fair Oaks Income, owing to its conservative, high quality portfolio with strong fundamentals, which results in a lower default rate relative to the market.”
Middlefield Canadian Income’s (MCT) doubling discount
MCT’s NAV Total Return for the year ended 31 December 2023 came in at -1.4%, a little way off the benchmark’s +3.9%. The North American equity income investor’s share price fared worse – total return of -10.7% as the discount more than doubled to 16.8% from 7.5%. Better news on the dividend front – the full-year payout came in at 5.2p, a 0.1p increase on 2022’s 5.1p. Okay, the smallest of rises but a rise is a rise. And MCT plans another for 2024, dividend per share for the year is expected to be 5.3p.
Winterflood: “Stock selection within Energy sector was biggest detractor. Utilities also detracted. Positive contribution from underweight exposure to Communications Services and stock selection in Real Estate”.
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