REITs on the cheap

• 31 January 2025
• QuotedData

With REITs and property companies having been heavily discounted by the market over the past two-and-a-half years, and with share prices moving inversely in eerily close tandem with gilt yields – the sharks are no longer just circling; they are taking huge chunks out of the sector.

Seven REITs and property companies were lost to M&A activity in 2024 – all at substantial premiums to share prices. Meanwhile, the boards at a further six decided to give up in their fight against persistently wide discounts to net asset value (NAV).

Private equity seems to have got the taste for blood, having tucked into some tasty deals over the past couple of years, including Tritax EuroBox and Balanced Commercial Property Trust in 2024 and Industrials REIT and Ediston Property Investment Company in 2023 – all at discounts to NAVs.

With real estate share prices tanking further, as gilt yields spiked following the budget in October, more bait has been thrown into the sea; discounts to NAV widened to an average of 35.6% at the end of 2024.

Potential private equity targets

That leaves most companies in the sector vulnerable to private bids.

PRS REIT is almost certain to go, having put itself up for sale after shareholders (unhappy at the award of an unusually long contract to its manager) pushed for the resignation of its former chairman. It is a great shame that this company– operating in a sub-sector that is exhibiting phenomenal growth drivers for the long-term – will be lost from public markets.

The question mark was always what would happen after PRS finished developing out its landbank of build-to-rent family homes. The board wanted the manager to bring forward further sites for the next phase of development. Shareholders, however, grew tired of the persistently wide discount to NAV and the inaction of the board to close it.

Whoever comes in to seize control of the company is likely to be getting a bargain. While the single-family housing market is still fairly nascent in the UK, it is attracting large sums of institutional money. Just this week Kennedy Wilson and the Canada Pension Plan Investment Board acquired a portfolio of 650 homes across the UK for £213m (average £327,000 per home), and earlier in January Greykite bought 200 homes for an average of £300,000.

PRS REIT’s portfolio was valued at £1.14bn at June 2024, equating to an average of around £210,000 for its 5,477 homes. Granted, most of the portfolio is outside of the South East (where house prices are generally higher than the rest of the country), with the majority located in the North West (52%) compared to just 11% in the South East. But as Figure 1 shows, the value of its portfolio is well below the average house price in every region.

PRS REIT’s share price, which has climbed 14% since the board was requisitioned by shareholders but still trades at a discount to NAV of 19%, implies an average house price value of £192,000 across its portfolio. This seems to be far too cheap.

The rental portfolio is in rude health. In 2024, rents across the portfolio grew 11%, which matched the uplift in 2023. Rent collection was 99%, with just a very small portion in arrears, and occupancy is running at 97%. Meanwhile, the affordability of rents (average rent as a proportion of gross household income) is favourable at 23% – significantly better than Homes England’s guidance of less than 35%.

These portfolio characteristics are indicative of the dynamics at play in the private rented sector. Challenges in the home ownership market have continued to fuel demand in the rental sector, with the median house price to income ratio at historic highs of 8.1x at the end of 2023, according to the Office for National Statistics, while mortgage rates have also risen sharply over the last two years.

Meanwhile, the UK’s private rented residential sector has lost about 400,000 rental homes since 2016, according to CBRE, due to growing cost pressures in the buy-to-let sector and higher mortgage costs.

Merger targets

Of course, it is not just private equity circling. Smaller REITs are at the mercy of their larger peers – as was the case last year with LXI REIT (bought by LondonMetric) and UK Commercial Property REIT (snapped up by Tritax Big Box).

I expect LondonMetric to continue to be knocking on boardroom doors this year, having in the last few years also swallowed up CT Property Trust (in 2023) and A&J Mucklow (in 2019). One of the industrial and logistics players may be a target. Warehouse REIT is trading on a tempting discount to NAV of 38% – although I am not sure whether its majority multi-let industrial portfolio syncs well with LondonMetric’s more single-let logistics-focused portfolio. It may well be the target of private equity, though, such as Blackstone’s industrial property company Indurent (which is the rebadged Industrials REIT).

What may be more of a match for LondonMetric is Urban Logistics REIT. However, it may prove costly to buy out the management team, whose contract was extended by three years in 2024.

The diversified ‘generalist’ REITs are all aware they need to grow to keep the sharks at bay. Custodian Property Income REIT, which missed out on abrdn Property Income Trust last year when the latter’s shareholders voted against the merger, is likely to be back on the prowl – although there is a diminishing number of targets for it to go for.

The consistently top performing AEW UK REIT could be vulnerable due to its size, at just £160m market cap, but shareholders would be reluctant to lose this company given that it has comfortably outperformed its peer group in all time periods over the last five years, whilst also paying one of the largest dividends.

Meanwhile, Picton Property (with a new chair at the helm in former Land Securities chief executive Francis Salway) is alert to the fact that it needs to grow (having launched a bid to merge with UK Commercial Property REIT in 2023, only to lose out to Tritax Big Box).

A combination of these diversified REITs would eradicate the size problem that has contributed to liquidity and persistent discounts to NAV.

Boards belatedly taking action

Boards are (belatedly in most cases) starting to take action to address wide discounts. Picton Property this week announced a £10m share buyback programme in a bid to tackle its 37% discount to NAV. This follows the launch of a similar programme by Schroder European REIT earlier in January and Urban Logistics REIT in December.

Meanwhile, the two trusts in Atrato Capital’s stable – Supermarket Income REIT and Social Housing REIT – are moving to a management fee based on share price performance rather than NAV, which we are a big fan of.

Although it could be argued that real estate discounts to NAV are a reflection of the uncertain macroeconomic environment, boards could have been more proactive. Let us hope it is not too late and we do not lose any more high-quality REITs on the cheap.

This website is for information purposes only and is not intended to encourage the reader to deal in any mentioned securities.

Why investing in dividend stocks is my favourite way of earning a second income

Instead of trying to start a business, Stephen Wright prefers to earn a second income by investing in some of the biggest and best in the world.

Posted by

Stephen Wright

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.Read More

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.

I think inflation is a real risk for the UK at the moment. And one of the best ways of trying to combat this could be figuring out a way of earning a second income. 

Warren Buffett says the best defence against inflation is being the best at something and the second best is owning shares in a quality business. I don’t see why people can’t look to do both. 

Passive income

A lot of businesses distribute part of their income to shareholders as dividends. And this provides people that own shares in these companies with a source of cash that’s genuinely passive.

This is different to starting a business from scratch, or buying a property to rent out. Both of these involve significant amounts of work, which can cut off other potential ways of making money. 

There’s also an issue about competition. If I wanted to try and start my own operation, I could find things difficult – or even impossible. 

The stock market

The best thing about the stock market is that it allows investors like me a chance to own part of some of the best businesses in the world. This includes companies like Lloyds Banking Group (LSE:LLOY).

The bank makes money by making loans and earning interest on them. And the regulated nature of this type of industry means I could never realistically hope to set up an operation like this by myself.

This is a competitive business and customers are mostly influenced by price, which means Lloyds can’t easily charge higher rates than its rivals. But it does have an important competitive advantage. 

What separates the best banks is being able to pay less interest on the cash it uses to make its loans. And with the largest consumer deposit base in the UK, Lloyds is in a stronger position than its rivals.

Strategic investing

Of course, there are risks with Lloyds. Its competitive position is strong, but there are some things – like the possibility of a sudden change in interest rates – that could still weigh on profits. 

Lower interest rates usually mean narrower margins. But a sharp rise in rates is also a risk, as savers expect better returns on their deposits instantly, while loans are mostly at fixed rates.

There isn’t really a way around this for Lloyds – it’s the kind of risk that has to be managed, rather than avoided. And for investors, the best way to do this is by building a diversified portfolio.

Owning shares in businesses that are less exposed to interest rates risk can limit the overall effect on a portfolio. And the stock market offers a lot of opportunities for diversification. 

Dividends

At today’s prices, Lloyds shares have a 4.7% dividend yield. And for a business with advantages that are difficult for competitors to copy, I think that’s quite attractive.

The bank’s sensitivity to interest rates means I think investors should consider it as part of a diversified portfolio, rather than as an investment by itself. But that’s why the stock market is so valuable.

Your portfolio should be based on your risk/reward tolerance which should be influenced by the retirement date in your plan.

For new readers only, who are more than welcome to the blog. Don’t panic there are only 3.

Rule one. Buy Investment Trusts that pay a dividend, to buy more Investment Trusts that pay a dividend.

Rule two. Any share in the Snowball must be sold, even at a loss, if the dividend is drastically changed.

Rule 3. Remember the rules.

How to protect your portfolio from a tech market crash

Laith Khalaf  Thursday, January 30, 2025

UK investors might feel a million miles away from Silicon Valley, but their pensions and investment portfolios are probably brimming with US technology stocks. This has no doubt served them incredibly well in the past decade, and the Magnificent Seven may well continue to leave the rest of the market chomping at their heels.

But this week saw a wobble in stock prices stemming from Chinese AI app DeepSeek’s announcement of an AI model developed at a fraction of the typical cost, raising concerns about the necessity of substantial investments in AI infrastructure and leading to significant declines in tech stocks, particularly Nvidia. DeepSeek’s new large language model highlights the risks to incumbents in the tech sector from the AI arms race that is currently underway.

The artificial intelligence boom definitely dug the US tech sector out of a hole in 2022, and has so far been a rising tide that has lifted all boats. But it has also increased capital expenditure among the Magnificent Seven, while lessening revenue visibility. Alphabet’s chief executive Sundar Pichai said the risk of under-investing in AI is dramatically greater than the risk of over-investing. That may be so, but that’s not to say the latter doesn’t present any danger to stockholders. Ultimately if there is one big winner from the AI race, the also-rans may find the money they have spent along the way doesn’t generate the profits necessary to justify the premium valuations currently attached to them.

The tech risk in your tracker fund

Despite knocking over half a trillion dollars off the market value of Nvidia, the sell-off sparked by DeepSeek’s technology might prove to be short-lived, or relatively contained, or both. Certainly not all of the Magnificent Seven have so far been impacted to the same degree, with shares in Apple actually posting a decent increase on the day thanks to its relatively modest AI spending and the potential for cheaper AI to boost usage via mobile devices (see table below).

Even so, the wobble caused by DeepSeek does highlight the potential for the AI arms race to disrupt the hegemony currently enjoyed by the big US tech titans. The disruptive threat could come from an outsider, like DeepSeek, or from other companies within the Magnificent Seven taking a leading role in the AI industry at the expense of competitors.

The unveiling of the DeepSeek model also caused big share price movements in companies outside the Magnificent Seven but involved in the AI supply chain. However, the particular threat to investors presented by the Magnificent Seven is their hefty presence in the S&P 500, and by extension US and Global tracker funds.

The table below shows the proportion of a typical US tracker fund invested in these seven companies, notably the day before the DeepSeek impact, which will have reshuffled the pack a bit. Also included is Broadcom, which isn’t a Magnificent Seven stock, but is still a semi-conductor company that has rocketed on the back of the AI boom and now finds itself in the top 10 holdings of S&P 500 tracker funds.

	Share price performance 27th January 2025	% of S&P 500 tracker*
Apple	+3.2%	6.50%
Alphabet	-4.20%	4.11%
Amazon	+0.24%	4.24%
Meta	+1.91%	2.72%
Microsoft	-2.10%	6.37%
Nvidia	-17%	6.75%
Tesla	-2.30%	2.19%
Broadcom	-17.40%	2.21%

Sources: Refinitiv, iShares. *iShares Core S&P 500 ETF as at 24 January 2025.

At an index level, the impact of the sell-off was relatively muted, with the S&P 500 falling by 1.5% on Monday. A stumble, but by no means a catastrophe. US tech bulls could point to this market turbulence as an example of how the Magnificent Seven do not wax and wane in lockstep, and how actually we shouldn’t be too worried about their dominance of the index, and by extension tracker funds.

There is some truth in this, but the recent sell-off was pretty focused in terms of its cause and implications, stemming from the launch of a single new AI model. A wider technology sell-off would be less forgiving at an index level, as we saw in 2022.

This is especially the case seeing as US stock valuations are currently in the top 2% of readings, according to Robert Shiller’s CAPE index, a widely used measure of stock market valuation, which exhibits a high inverse correlation with subsequent market returns (see chart below). This measure has only been higher during two periods, the pandemic-induced tech melt-up of 2021 and the dotcom boom, which were followed by a substantial correction and a stock market crash, respectively. At the very least the DeepSeek shockwave serves as a timely prompt for investors to review their US technology exposure and make sure they’re happy with their current positioning.

US CAPE ratio at historic high:

Source: Shiller Data

UK investor exposure to the Magnificent Seven

The Global and North America fund sectors are two of the most popular destinations for UK investors, commanding £331 billion of assets under management, according to Investment Association data. Combined with the fact we’ve also seen elevated sales of passives compared to active funds in recent years, this will leave many UK investors with high exposure to Magnificent Seven stocks.

An S&P 500 tracker fund now has a third of its portfolio invested in these seven companies. A typical global tracker fund has around three-quarters of its portfolio invested in the US, and consequently just under a quarter of its portfolio invested in the Magnificent Seven.

Investors in these funds might well decide they want that level of exposure to the US tech sector. It has no doubt served them exceptionally well in recent years, and may continue to do so. But the current sell-off provides a timely nudge for investors to check in on their overall exposure to the US stock market, and in particular to the technology sector.

The strong performance of the US tech titans has resulted in their stature within US and global funds growing, and also means those funds now probably make up a bigger share of investors’ portfolios to boot. Consequently, investors may find they have more invested in these stocks than they ever intended.

How to protect your portfolio from a tech market crash

A correction in the tech stock prices may not be on the cards, but investors would be prudent to establish their overall exposure to the US technology sector, and assess if they are happy with it, or wish to dial it down. Those who choose the latter do need to acknowledge the risk that if the US technology sector continues to perform strongly, their portfolio may get left behind.

There are a number of ways to reduce exposure to Magnificent Seven stocks in a portfolio. Probably the simplest strategy is to diversify away from the US and into other regions such as the UK, Europe, Japan, or emerging markets. This can be achieved by choosing active funds in these regions, or passively through trackers and ETFs. While this strategy can be executed passively, it is still active at an asset allocation level if investors are moving away from a global tracker fund, which passively allocates money depending on stock size, towards a regional split decided by each investor. In other words, via an active allocation of capital.

For investors who want to shift away from the Magnificent Seven but still want to retain exposure to the wider US stock market, they might consider an active fund which has lower exposure. This may be achieved by investing in value managers or investing in US smaller companies.

Another option would be to seek out an equally weighted S&P 500 tracker, which allocates money to each of the stocks in the US index equally. While this strategy is passive in that it follows an automatic rules-based investment policy, it’s not passive in the sense that it doesn’t allocate money based on the size of a company, which is the more usual, if not universal, passive methodology.

The momentum-based approach has served the size-weighted index better in recent times. Over the past five years the S&P 500 index has returned 105% compared to 77.6% from the equal weighted version (source: FE, total return in GBP). Clearly that’s a period dominated by US mega cap tech outperformance, and weaker performance from the Magnificent Seven would hit the traditional size weighted index harder.

Some investors might decide the recent jitters in the highly valued US stock market are cause for a reduction in equity risk altogether. They might therefore consider upping exposure to more cautious multi-asset funds, money market funds, or indeed individual gilts, which confer certain tax advantages for those investing outside a SIPP or ISA.

If investors are adjusting their portfolios, there’s no need to throw the baby out with the bathwater. Managing a portfolio needn’t be an all-or-nothing endeavour, and investors can tilt their portfolio towards or away from any given region or sector without executing a wholesale switch. Given the importance of the Magnificent Seven to the global stock market, it may be unwise to ditch all exposure to these companies. But the potential for upheaval as the AI race progresses might mitigate in favour of a more thoughtful, nuanced approach to investing in these companies.

These articles are for information purposes only and are not a personal recommendation or advice. Past performance isn’t a guide to future performance, and some investments need to be held for the long term. Forecasts are not a reliable indicator of future performance.

AJ Bell

Discount Watch

We estimate the number of funds trading at year-high discounts to net assets jumped by eight to 24 last week. No surprise to learn that alternatives still dominate the list with 16 names – stubbornly high bond yields continue to weigh on sentiment and share prices.

By Frank Buhagiar

We estimate there to be 24 investment companies saw their share prices trade at 52-week high discounts to net assets over the course of the week ended Friday 24 January 2025 – eight more than the previous week’s 16. Usual graph below but, as it’s still early days for 2025, the number of year-high discounters is shown on a rolling rather than year-to-date basis.

A look at the top five table below tells the story. All five funds with the widest discounts to net assets are alternatives. In other words, week ended Friday 24 January 2025 saw a continuation of the theme that has dominated the Discount Watch in recent weeks, even months: share prices being marked down in anticipation that higher bond yields will lead to higher discount rates and lower asset valuations. Of the 24 funds on the list this week, 16 are alternatives: eight renewables; three from property; one from private equity plus another from growth capital; and three from infrastructure.

It’s a theme that looks likely to run for a while longer, at least until bond yields show signs of coming down.

Top five

Fund	Discount	Sector
Ceiba Investments CBA	-74.95%	Property
Gore Street Energy Storage GSF	-54.07%	Renewables
Ecofin US Renewables RNEW	-53.19%	Renewables
Foresight Environmental Infrastructure FGEN	-40.30%	Renewables
Octopus Renewables Infrastructure ORIT	-39.21%	Renewables

The full list

Fund	Discount	Sector
JPMorgan China Growth & Income JCGI	-16.15%	China
European Assets EAT	-14.84%	Europe
Schroder BSC Social Impact SBSI	-29.30%	Flexible
North Atlantic Smaller Cos NAS	-35.20%	Global Smaller Companies
Schroder British Opportunities SBO	-37.08%	Growth Capital
International Public Partnerships INPP	-26.30%	Infrastructure
HICL Infrastructure HICL	-31.23%	Infrastructure
BBGI Global Infrastructure BBGI	-21.69%	Infrastructure
Weiss Korea Opportunities WKOF	-11.04%	Korea
Literacy Capital BOOK	-16.78%	Private Equity
Supermarket Income REIT SUPR	-27.67%	Property
Care REIT CRT	-33.05%	Property
Ceiba Investments CBA	-74.95%	Property
Bluefield Solar Income BSIF	-33.43%	Renewables
Greencoat Renewables GRP	-31.90%	Renewables
Foresight Environmental Infrastructure FGEN	-40.30%	Renewables
Octopus Renewables Infrastructure ORIT	-39.21%	Renewables
Renewables Infrastructure Group TRIG	-34.84%	Renewables
Gore Street Energy Storage GSF	-54.07%	Renewables
Ecofin US Renewables RNEW	-53.19%	Renewables
Greencoat UK Wind UKW	-25.35%	Renewables
Merchants MRCH	-4.95%	UK Equity Income
Oryx International Growth OIG	-35.60%	UK Smallers Companies
Vietnam Enterprise VEIL	-24.43%	Vietnam

Fund Monitor

Herald’s (HRI) independent shareholders resoundingly reject Saba’s proposals. Message to the other six funds in the sights of the activist investor – mobilise shareholders to vote and Saba can be seen off. Elsewhere, a Supermarket Income REIT (SUPR) Director goes bargain-hunting, while CC Japan Income & Growth (CCJI) cuts its fees.

By Frank Buhagiar

Herald shareholders resoundingly reject Saba

One down six to go after Herald (HRI) became the first of the seven trusts targeted by Saba Capital to see off the activist’s attempts to gain control of the fund and change its mandate from an investor in global tech to an investor in other investment trusts. And it was an outright rejection too. As per HRI’s press release, 65.10% of total votes cast were against Saba’s Requisitioned Resolutions. What’s more “Excluding the votes Saba cast in favour of their own Requisitioned Resolutions (being 14.1m votes, representing approximately 34.75% of the votes cast), only a further 59,221 Shares, representing just 0.15% of the votes cast, voted in favour of the Requisitioned Resolutions. This is a damning indictment of Saba’s proposals by the Company’s non-Saba Shareholders.”

As for the remaining six funds that are due to hold their general meetings in the coming weeks, no time to ease off the gas. One of the reasons why HRI was able to fend off Saba was thanks to a huge turnout by shareholders – over 80%. As Numis notes “with 99.8% of non-Saba votes being against the resolutions,” this represents “a pretty embarrassing rebuttal from independent shareholders for Saba Capital.” Although the broker notes “Saba remains a c.29% shareholder which still leaves the Board with a problem to solve.”

Supermarket Income REIT insider goes shopping

Supermarket Income REIT (SUPR) announced Non-executive Director, Roger Blundell acquired 100,000 SUPR Ordinary Shares on 16 January 2025 at a price of 69.9p a share, equating to an investment of £69,900. That’s Blundell first purchase of the fund’s shares but with the share price trading at a 28% discount to net assets, be interesting to see if he goes back for more.

CC Japan Income & Growth cuts fees

CC Japan Income & Growth (CCJI) unveiled a reduction in fees alongside its final results. Out goes the old structure of a flat fee of 0.75% per annum on net assets. In comes a new one calculated on a tiered basis of 0.75% per annum on the first £300m of net assets and 0.60% on net assets in excess of £300m. This way shareholders will be able to “share in the benefits of scale”. According to the press release, it also shows that the fund “demonstrably represents value for money”.

The Results Round-Up: The week’s investment trust results

Hat trick of funds this week: Henderson Smaller Companies HSL (along with the rest of the sector) finds the going tough because there’s too much doom and gloom; Patria Private Equity PPET reports a +24.9% share price total return in what was a ‘year of ‘transition’; and CT Global Managed Portfolio Trust CMPI/G is ready for some new news after a sedate first half for both the fund and the market.

By Frank Buhagiar

Henderson Smaller Companies (HSL) thinks there’s too much doom and gloom

HSL reported a -3.8% net asset value (NAV) total return for the latest half year. Neither the benchmark nor HSL’s peers fared much better: the Deutsche Numis Smaller Companies ex-Investment Companies Index managed to squeak into positive territory, up +0.8%, while the AIC UK Smaller Companies sector average NAV was down -1.1%. That points to challenging markets. As Chair Penny Freer notes “headwinds to performance, (were) driven primarily by rising bond yields which continue to hamper economic recovery and put pressure on company valuations.”

Despite the difficult first half, Freer believes, “there is evidence that too much doom and gloom has been priced into the market following the Budget.” For “Whilst interest rates may be cut more slowly, in contrast to the last decade, their relatively high starting point provides a strong and stimulating lever for policy makers to pull on should economic activity slow further.” And then there are valuations. According to the fund managers “the equity market is trading below its long-term averages.” That may be partly down to uncertainty “around short-term economic conditions.” Not that the fund managers sound too concerned “we think that the portfolio is well positioned both to withstand current challenging economic conditions and to participate in any potential upswing.” A portfolio for all seasons then. Market hedging its bets too – shares edged a penny higher to close at 810p.

Winterflood: “Underperformance attributed to stock selection, gearing and expenses. Negative contribution from stock selection including rising bond yields having detrimental impact on valuations of HSL’s predominantly pro-cyclical and interest rate sensitive portfolio. In addition, a ‘small number’ of company-specific issues impacted performance; the managers believe these issues are temporary or more than fully reflected in share prices and expect these companies to recover over time.”

Numis: “HSL remains one of our top picks within the UK smaller companies sector. The managers, Neil Hermon and Indri van Hien, follow a stock-picking approach focused on growth at a reasonable price (GARP). We rate the experienced management team highly, despite a period of poor performance, and welcome the news of Indriatti’s appointment as co-PM. The fund retains its strong long term track record, with NAV total returns of 1,215% (12.3% pa) compared to 792% (10.3% pa) for its benchmark, since Neil’s appointment in November 2002. The shares are currently trading on a c.12% discount to NAV, which we think is a good entry point for an attractively valued portfolio.”

Patria Private Equity’s (PPET) busy year

PPET’s share price total return of +24.9% stole the show in the latest full-year results. That compares to the NAV total return which, at +2.4%, was lower than the long-term average. Foreign exchange movements largely to blame. Strip these out and the portfolio return in local currency terms was +8.8%. Not bad going then, particularly as Chair Alan Devine notes, “The last 12 months have been a year of transition since our Manager had a change in ownership and, as a result, the Board rebranded the Company to Patria Private Equity Trust plc.” And if that wasn’t enough, “At the same time, we appointed a new corporate broker, launched a share buyback programme and conducted a successful secondary sale of a non-core portfolio of fund investments.” Phew.

Looking ahead, Devine is feeling “optimistic about PPET going forward.” Optimism is centred around a pick-up in private equity investment activity, as “Increased activity will drive portfolio company exits and cash distributions and should in theory act as a tailwind to NAV growth, since exits are typically realised at an uplift to prior valuation.” And, as the investment manager points out, “The PPET portfolio continues to perform resiliently and remains well-positioned for a pick-up in activity levels. As such, we are excited about the potential for PPET as we look forward to 2025.” Finally, good to see the Chair beating the drum for investment trusts “I continue to believe that investment trusts are the best way for smaller investors to access private equity, due to features like daily liquidity, the evergreen nature of the portfolios and long-term track records”. Well said, sir. Market liked what it heard too – shares tacked on 5p to close at 562p.

JPMorgan: “The valuation multiples for most of the portfolio seem reasonable and they have delivered good revenue and EBITDA growth and are not excessively leveraged. The current price of 553pps implies a headline discount of 29.9%. Taking into account listeds, and also look-through fund level debt, the implied discount on the unlisted is similar at 29.3%. This remains a little narrower than peers and so we see no reason to change our Neutral recommendation.”

Numis: “Key performance drivers included uplifts on exits (26% average uplift) and double-digit portfolio earnings growth (18%) which covers c.64% of the portfolio. It is positive to see PPET buying back more shares in recent months, helped by an improved balance sheet given the sale of a secondary portfolio of fund investments. The secondary sale completed at a c.5% discount, which demonstrates the value in the Listed PE sector, with PPET’s shares currently trading on a c.29% discount to our estimated NAV, which we believe is excessive and offers value, along with a number of other LPE ICs.”

CT Global Managed Portfolio Trust (CMPI/G) ready for some new news

CMPI / CMPG reported a +0.6% NAV total return for the Income shares and a +1.9% return for the Growth shares for the half year, the latter in line with the FTSE All-Share’s +1.9%. In his statement, Chairman David Warnock lists a number of uncertainties – inflation, interest rates and the economic impact of the UK and US elections. But as Warnock points out, “None of these observations is new news and so should be discounted already by stock markets. As ever, markets respond in either direction to events or news that is not discounted.”

Having said that, markets could well have a fair bit of new news to digest soon. “With a new and seemingly quite unpredictable US President having taken office, the potential for new news is even higher than usual.” Just as well then that “The Board and Manager believe the portfolios comprise quality investment companies and are well diversified. In particularly uncertain times, these characteristics should encourage investors, whatever new news appears.” Market waiting to see what this new news will be – both classes of shares were unmoved on results day.

Winterflood: “Growth Shares: NAV TR +1.9%, in line with performance of FTSE All Share. Principal contributors were investment trusts exposed to US stock market. Key contributors were JPMorgan American (JAM), Allianz Technology Trust* (ATT) and Polar Capital Technology (PCT). Income Shares: NAV TR +0.6% vs FTSE All Share +1.9%. Underperformance driven by lack of exposure to investment trusts invested in US stock market.”

This passive income plan is boring and unimaginative. That’s why it actually works !

Christopher Ruane explains how he is keeping things simple when it comes to earning passive income streams, using a proven technique.

Posted by Christopher Ruane

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. 

Passive income plans can come in all sorts of weird and wacky forms.

But the whole point of passive income is that should be (more or less) effortless.

Learning about a new business and setting it up does not seem passive to me. Nor is it guaranteed to generate income – in fact, it could eat up money instead of producing it.

So my own approach is based on a few basic principles – I want it to be passive and I want to have a strong chance of earning income.

Why reinvent the wheel?

Many businesses already know how to generate income.

In fact, they generate so much more income than they need for their own business needs that they give some of it to shareholders on a regular basis, in the form of dividends.

An example is Games Workshop (LSE: GAW).

At the start of June, it had £108m of cash and cash equivalents. Over the next six months, its operations generated £133m of cash. Even after spending on product development and sending a cheque to the taxman, Games Workshop divvied up £61m among its shareholders.

Yet it still ended the period with around £18m more in cash and cash equivalents than it began with.

In recent years, the FTSE 100 company has paid shareholders five dividends a year. All they need to do is spend money buying the share, sit back, and let the money roll in.

Taking a smart approach to income generation

But there are risks. Games Workshop’s concentrated manufacturing footprint means that if a key factory goes offline for any reason, sales could fall sharply. It plans a new factory in Nottingham, due to be completed next year.

Even a great, proven business can run into difficulties. So the savvy investor spreads money across multiple businesses to help mitigate the risk that one will do badly and reduce or cancel its dividends.

That does not necessarily take a lot of money – it is possible to buy shares even with a modest budget.

How much money could someone earn?

I use this strategy myself but I do not own Games Workshop shares, even though I think its fantasy universe and intellectual property are excellent competitive advantages.

Why ? The share looks pricy to me.

It also has a dividend yield of 3.6%, meaning that if I invest £1,000 today I would hopefully earn £36 per year of passive income.

That is not bad: in fact it is in line with the FTSE 100 average. But I am earning much higher yields owning other shares, like 8.6%-yielding Legal & General and M&G, with its 9.5% yield.

Those are different companies to Games Workshop and each has their own risks as well as positive points. But by carefully selecting a diversified range of companies, I earn passive income from the hard work and proven business models of large blue-chip firms.

That need not be complicated.

An investor can start with how much they can spare, set up a share-dealing account or Stocks and Shares ISA then – having learnt something about key stock market concepts like valuation – start looking for income shares to buy.

Changes to the portfolio.

ADIP and LTI leave the portfolio

Added to the portfolio ORIT, PEYS, TORO, RCOI

The added Trusts are not buy recommendations but Trusts to DYOR.

I will publish some information next week to assist your decision making.