Investment Trust Tips

AERI, FSF, SHIP, ORIT, BNKR, CREI, API, IEM, MRC, SSON, SST, JMI
Welcome to this week’s Watch List where you’ll find golden nuggets on trust discounts, dividends, tips and lots more…

Frank Buhagiar
22 Jan, 2024

Doceo

BARGAIN BASEMENT
Discount Watch: seven

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 19 January 2024 – four more than the previous week’s three.

Two of the seven were on the list last week: JPEL Private Equity (JPEL) from private equity; and Digital 9 Infrastructure (DGI9) from infrastructure.

That leaves five new names: Lindsell Train (LTI) from global; SDCL Energy Efficiency Income (SEIT) from renewable energy infrastructure; STS Global Income & Growth (STS) from global equity income; ICG-Longbow Senior Secured UK Property Debt Investment (LBOW) from debt; and Third Point Investors (TPOU) from hedge funds.

ON THE MOVE
Monthly Mover Watch: a swap

At the summit of Winterflood’s list of top-five monthly movers in the investment company space with last week’s number two HydrogenOne Capital Growth (HGEN) (+28.6%) overtaking previous leader Seraphim Space (SSIT) (+26.1%). Still no news out from the hydrogen investor since November 2023, so sticking by last week’s comment: “Put this one down to the positive effect of lower yields then or could there be a whiff of corporate activity in the air? HGEN has a sub £100m market cap after all and it’s not as if there hasn’t been any corporate activity in the renewables sector recently.” Similarly, no new news out from SSIT but shares have been reaching for the stars ever since the turn of the year – the space investor recently put out a monthly shareholder letter…

That leaves three newbies to report. In third, uranium investor Geiger Counter (GCL) (+17%). Strong share price run can be traced back to 11 January. No news out from the company, but take your pick in terms of uranium news out round about that day: the UK Government announced Biggest expansion of nuclear power for 70 years to create jobs, reduce bills and strengthen Britain’s energy security – Roadmap sets out how UK will increase nuclear generation by up to 4 times to 24GW by 2050; Reuters reported Saudi Arabia plans to use domestic uranium for nuclear fuel, and the Financial Times wrote a piece titled Uranium prices could power on after largest producer warns on supply. Small wonder that uranium prices have been well bid recently.

In fourth, Aquila European Renewables (AERI) (+12.6%). Shares still feeling the positive effects of December’s news that it has “…received unsolicited proposals from ORIT in relation to a possible combination on a to be defined formula asset value for formula asset value basis.” For ORIT read Octopus Renewables Infrastructure Trust. Finally, Foresight Sustainable Forestry (FSF) is in fifth (+12.4%) – the ongoing share buyback programme working its magic it seems.

Scottish Mortgage Watch: -4.5%

Scottish Mortgage’s (SMT) monthly share price loss as at Friday 19 January 2024 – last week the shares were up +2.9% on the month. Similar story with NAV – down -3.6% compared to the previous week’s +1.3% monthly gain. The wider global IT sector managed to finish down by only the tiniest of margins (-0.1%), although that was still a noticeable reduction on +2.6% seven days earlier.

THE CORPORATE BOX
Combination Watch: Custodian Property Income REIT (CREI) & abrdn Property Income (API)

Announced “that they have reached agreement on the terms and conditions of a recommended all-share merger pursuant to which CREI will acquire the entire issued and to be issued share capital of API…Under the terms of the Merger, Scheme Shareholders will receive: for each Scheme Share, 0.78 New CREI Shares…”

Comment from API Chair James Clifton-Brown: “Over the years, API’s manager, abrdn Fund Managers, has assembled an attractive portfolio on the company’s behalf, with a weighting to more favoured areas of the market, a diversified tenant base and a focus on ESG…The Merger will enable API Shareholders to retain exposure to the portfolio and its growth prospects at a significant premium to API’s share price, with the prospect of superior share liquidity and an enhanced and fully covered dividend. The API Board believes that, with increased scale and an enhanced capital structure, the Combined Group will be well positioned for the future.”

Borrowing Watch: 2.7%

The cost of borrowing at Bankers Trust (BNKR): “The £15 million 8% Debenture Stock matured on 31 October 2023 and was repaid in full…Following repayment of the debenture, the Company’s overall cost of borrowing has fallen to 2.7%, in line with the dividend yield on the portfolio.”

Dividend Watch: 17.6%

The increase in Tufton Oceanic Assets’ (SHIP) annual dividend target to $0.10 per share. Comment from Liberum: “…the percentage increase in the dividend, reflecting a yield of 10.0%, is one of the highest across alternative funds over the past year. The increase in the target dividend reduces the prospective dividend cover marginally, from 1.6x to 1.5x.”

6.02p – the new full year dividend target at Octopus Renewables Infrastructure Trust (ORIT): “This increase of 4.0% over FY 2023’s dividend target is in line with the increase to the Consumer Price Index (CPI) for the 12 months to 31 December 2023, and marks the third consecutive year the Company has increased its dividend target in line with inflation. The FY 2024 dividend target is expected to be fully covered by cashflows generated from the Company’s operating portfolios.”

57 – the number of consecutive years Bankers’ (BNKR) payout has increased: “The Board is…recommending a final quarterly dividend of 0.66p per share, resulting in total dividends per share for the year of 2.56p (2022: 2.328p), an increase over last year of 10%…This will be the Company’s 57th successive year of annual dividend growth. For the current financial year, the Board expects to recommend dividend growth of at least 5%, which would equate to a full year dividend of 2.69p per share.”

MEDIA CITY
Tip Watch #1: This stock survived a backlash – and now it’s about to deliver

The stock? Impax Environmental Markets (IEM). The backlash? According to the above Questor article in The Telegraph: “Sceptical investors have pulled money out of funds investing on environmental, social and governance (ESG) grounds…the backlash in which investors withdrew almost £3.7bn from ESG funds in April-November last year has proved difficult for a £1bn global investment trust focused on companies contributing to a green, zero-carbon economy.” ‘£1bn global investment trust’? Enter IEM. According to Questor, “More than half its assets are invested in waste management, energy efficiency and water infrastructure, with the remainder split across alternative energy, sustainable agriculture, transport and digital technology providers…the trust’s fund manager…says that for each $10m (£7.9m) invested in the strategy, enough clean, renewable energy is generated to power 360 homes and the equivalent of 1,410 households’ water consumption and 240 tonnes of domestic waste are saved.”

And yet… “after two difficult years following the tech stock surge in the Covid pandemic, investors have not done well. The trust trails its benchmark, the FT Environmental Technology (ET) index, over all time periods – although since launch the gap is narrow, with an average underlying investment return of 7.6pc a year, just behind 7.8pc from the index…” Questor, however, believes “The outlook is more positive, particularly as the shares have fallen 9pc below the value of the trust’s 63 investments. The discount is double the 5pc average of the past year and makes the shares cheap in contrast to November 2021 when the shares peaked at 576p to trade above Nav…”

Questor adds: “To be fair, that the shares have tumbled…has less to do with ESG controversies and reflects the toll rising interest rates took on its collection of medium-sized and smaller growth companies…Any cut in interest rates will…reassure investors about the returns that solar and wind projects can make, while over-stocking pressures that have blighted the solar and natural ingredients sectors should ease…With the trust buying back its shares and the fund managers recently making a ‘material’ increase in their personal stakes, it’s time for investors to follow suit and back a fund about to deliver on its good promises.”

Tip Watch #2: Why I’m buying smaller companies

That’s the title of John Baron’s latest Investors Chronicle piece. Baron starts his article with a little context: “Last year was another challenging year for the investment trust investor. It is still the case that discounts on average remain at their widest since the financial crash of 2008-09…Of the categories that underperformed, the extent to which sentiment trails the fundamentals is perhaps at its most pronounced in the smaller companies sector. As we enter 2024, this sector is set to have its moment in the sun.”

Why? Well, firstly “An overweight exposure to smaller companies has been one of the more reliable investment strategies in generating higher returns over time, relative to the wider market…There is an inherent logic to this. Elephants do not gallop. Many smaller companies operate in niche and growing markets, are nimble and exhibit faster growth in part because they are benefiting from the advance of technology. This is not just helping to reduce costs and open new markets, but is better enabling them to embrace the disruptive practices needed to compete with their larger brethren. There is no reason to suggest this will not continue over time.” But, as Baron points out, “…investors need to be invested for the long term to capture this smaller company outperformance. The fact they exhibit greater volatility can then be embraced as an opportunity. This is such a moment.”

That’s because “Recent analysis by MSCI of US equity returns over the past 70 years show smaller companies usually perform strongly immediately after a recession. On each occasion, they have performed better than larger ones by a margin on average of over 15 per cent during the following year – again reflecting their ‘nimbleness’ when responding to the changing economic environment. Although global economies have tended to avoid recessions, slowing growth rates and perhaps modest ‘technical recessions’ of two negative quarters of growth should usher in something of a rebound from which these companies should particularly benefit.” Baron goes on to highlight four funds:

Mercantile (MRC): “The company has a solid and consistent track record of outperformance of its benchmark (the FTSE All-Share ex FTSE 100 and investment companies) over both the short and long term, while the current level of payout equates to a yield of 3.5 per cent when bought. Confidence in the future is perhaps illustrated by the management nearly doubling the company’s gearing to c14 per cent recently. Significant in-house resource adds to the investment case.”

Smithson (SSON): “The manager seeks to take advantage of the often greater disconnect between sentiment and fundamentals in this segment of the market, which is down to there being less research available. The company has performed well relative to the MSCI World SMID (£) index.”

Scottish Oriental Smaller Companies (SST): “The universe of smaller companies in Asia has come a long way in recent decades and is now much larger, with longer listed track records and the regulations protecting minority shareholders better established. This is providing a more favourable hunting ground for experienced stockpickers, and is reflected in the managers overseeing a higher-conviction portfolio than has historically been the case. Meanwhile, valuations are more attractive than they have been for a while.”

JPMorgan UK Smaller Companies Investment Trust (JMI): “…boasts a long-term asset performance that is among the best in its peer group…should the proposed merger with JPMorgan Mid Cap Fund (JMF) proceed, the company will introduce an enhanced dividend policy, which will target a 4 per cent yield (of NAV) as at the end of the preceding financial year.”