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

First results of the New Year are in! BlackRock Income & Growth (BRIG), the quickest of the blocks with an +18.1% NAV return for the year. Chrysalis (CHRY), next with a +4.9% full-year NAV per share increase. Miton UK Microcap’s (MINI) third in, although its latest Half-year Report could well be its last – the Board has decided that the fund is now too small to be viable.

By Frank Buhagiar

BlackRock Income & Growth (BRIG) excited for the year ahead

 BRIG, the first of London’s investment companies to issue results in 2025. And a decent set of full-year numbers it was too: net asset value (NAV) per share came in at +18.1%, comfortably ahead of the FTSE All-Share Index’s +16.3%. The investment managers put the outperformance down to good stock picking, particularly in the financials sector – standout performers included 3i Group, Standard Chartered, NatWest and Intermediate Capital Group.

Despite the strong year, the investment managers see scope for further progress. That’s because “The UK stock market continues to remain depressed in valuation terms relative to other developed markets offering double-digit discounts across a range of valuation metrics.” If that’s not enough, the managers also highlight the market’s 3.7% dividend yield. So, “Whilst we anticipate economic and market volatility will persist throughout the year, we are excited by the opportunities this will likely create; by seeking to identify the companies that strengthen their long-term prospects as well as attractive turnaround situations.” The strong full-year performance wasn’t enough to prevent a 3.8% share price decline on the day of the results though. Mr Market, a demanding master at times.

Winterflood: “Share price TR +13.2%, as discount widened from 8.7% to 12.9%. Managers expect economic and market volatility to persist throughout the year, with potential for attractive ‘turnaround’ opportunities.”

Chrysalis Investments’ (CHRY) year of significant change

CHRY reported a +4.9% increase in NAV per share for the year thanks to higher valuations for some of the portfolio’s biggest holdings, notably Starling and Klarna. Overall performance would have been even stronger but for a write down in the holding of wefox. Much better showing from the shares which were up +50% during the year resulting in the share price discount to net assets shrinking from 54% to 34%.

Not bad given there’s been a lot going on at the growth capital investor. As Chair Andrew Haining notes “The year to 2024 has seen significant change for your Company, both in the way that it is run, and also in market sentiment surrounding its portfolio holdings.” The former refers to a change in investment adviser “I am delighted to say that this process has been seamless” and presumably the launch of the Capital Allocation Policy that is focused on “balancing shareholder returns with long-term growth”. The latter, meanwhile, a nod to “the return of some positivity in the stock market for ‘growth assets’ and thus an improving outlook for similar investments in private markets” as evidenced by recent realisations from the portfolio. The Chair is hoping the improved sentiment will result in “a successful IPO of Klarna this year.” Shares unchanged at the time of writing. Investors adopting the wait-and-see approach.

Liberum: “CHRY comes off a very strong Q4 2024, driven by better sentiment towards growth capital, the Graphcore and Featurespace realisations, a high-impact buyback programme to date, and Klarna moving closer to IPO. Ongoing implementation of the capital return programme and Klarna’s expected IPO in 2025 is the next key catalyst. We are BUYers with a 122p TP, reflecting a 20% discount to our 12M NAV forecast.”

Numis: “CHRY has committed to return an initial £100m to shareholders, with 25% of net profits on realisations returned thereafter. The results include commentary on the direction of the company, with the board highlighting the potential risks of a ‘de-facto wind down’. Therefore, it is considering how to balance future returns of capital beyond the existing capital allocation programme against risk factors such as increased portfolio concentration and reduced scale, which it believes may result in the discount widening again.”

Miton UK Microcap’s (MINI) valedictory results?

MINI’s latest Half-year Report could well be its last. That’s because redemption requests of 40.4% of the company’s issued share capital were received during the most recent annual redemption opportunity. This meant MINI’s market cap has fallen to a very mini-looking £20m. No surprise then that the Board has decided MINI is too small to remain viable and is looking at winding up the fund. As Chairman Ashe Windham writes, “This is my valedictory Chairman’s statement. The Company is now at a size which some investors consider to be too small from a liquidity perspective, particularly given the increasing demand from investors for larger listed funds.” The persistent and material share price discount to net assets was also cited. For the record, adjusted NAV per share fell 7.6% (including dividends re-invested) over the half year. So no going out with a bang then. Shares opened lower on the day too. The market perhaps awaiting more details on the proposed wind-up.

Winterflood: “The fund has received a proposal from Premier Miton regarding a rollover option into one of Premier Miton’s open-ended funds, which the Board is evaluating. It is expected that a cash exit alternative will also be offered. The winding up of the fund will be subject to shareholder approval and further announcements will be made in the coming weeks.”

The Tip Sheet

More top picks for 2025. MoneyWeek thinks things could be looking up for renewables and that now could be an opportune time to buy Greencoat UK Wind (UKW). Investors Chronicle meanwhile names four funds that could benefit from a recovery in the sector: UKW (again), Urban Logistics, Sirius Real Estate, Brown Advisory US Smallers. But in case a recovery proves elusive, the IC also tips Ruffer.

By Frank Buhagiar 07 Jan

MoneyWeek – Five stocks for 2025

Last week, The Times put forward five stocks to watch out for in 2025. One week on and it’s the turn of MoneyWeek. The article kicks off with an admission “Deciding where to invest for 2025 is a complex task; while opportunity abounds, there are various questions that investors will need to ask themselves.” Questions such as will the rally in big tech continue? Can the FTSE 100 build on 2024’s strong performance? How will the Autumn Budget impact the UK economy, and which stocks will benefit (or suffer) as a result? So, with these questions and more in mind, MoneyWeek has come up with a list of companies it believes are best placed to navigate what 2025 has in store. Among the MoneyWeek five, one of London’s investment companies – Greencoat UK Wind (UKW).

Fair to say, the renewables infrastructure fund, like the rest of the sector, had a tough 2024 with the share price ending the year off -15.7% “as the economic climate steered investors away from these kinds of longer-term, capital-intensive sectors.” But, as MoneyWeek points out, things could be looking up for the sector. “Infrastructure investments and green energy are likely to be key priorities for the Labour government, with significant investment promised in October’s Budget.” What’s more, that fall in its share price means that Greencoat is now trading at a 20.4% discount to NAV (net asset value), despite a dividend yield of 7.7%. Now could be an opportune moment to buy into this sector at a discounted rate.

Investors Chronicle – Investment Ideas of the Year 2025

Rather than come up with just five stocks for the year, The Investors Chronicle has gone one step further and put together five themed portfolios for the year made up of five listed companies each. One of these themes, rebounding trusts. For after a challenging few years for London’s investment companies which have seen share prices across the sector fall to chunky discounts to respective NAVs in response to the high interest rate environment, the tipster believes the tide is slowly turning. No surprise then that the majority of the five funds in the portfolio have seen their share prices among the hardest hit. “This year’s portfolio covers a broad range of sectors but trusts broadly fall into one bucket: recovery.”

Among the five, two property funds – Urban Logistics (SHED), a fund with a portfolio of warehouses in urban areas; and Sirius Real Estate (SRE), which invests in German business parks. Like property, renewable energy infrastructure, another sector that has found the going tough. And like MoneyWeek above, the IC plums for Greencoat UK Wind (UKW) to gain exposure to any potential recovery in a sector which “should be supported by Labour’s energy plans. Renewable assets are riskier than core infrastructure as there is an additional exposure to power prices to account for, but we remain confident.”

Next up, The Chronicle highlights Brown Advisory US Smaller Companies (BASC) as a way of tapping into a recovery in US small caps – after an extended period of underperformance, US small caps stand to benefit from falling interest rates and reshoring. Finally, should a recovery prove to be elusive and should interest rates remain stubbornly high, the IC’s final pick is Ruffer (RICA), the “multi-asset fund that holds some defensive stocks but also makes substantial use of bonds, gold and other alternative assets in the hope of defending shareholders from stock market crashes.” What you could call, a ‘just-in-case’ pick.

Watch List

Discount Watch

Alternative funds still dominating the list of investment companies trading at 52-week high discounts to net assets – seven of the 10 names on the latest Discount Watch are alternatives. But focus this week is on one of the few non-alternative trusts on the list – European Opportunities (EOT). What could be behind the European fund’s appearance on the Discount Watch?

By Frank Buhagiar

We estimate there to be 10 investment companies which saw their share prices trade at 52-week high discounts to net assets over the course of the week ended Friday 03 January 2025 – one more than the previous week’s nine. Please note, seeing as 2025 is just days old, the graph below shows the number of year-high discounters on a rolling rather than the usual year-to-date basis.

New year, same story and, to a large extent, same names on the list. Eight of last week’s nine make it onto the Discount Watch this time round and of the eight, seven belong to the alternatives camp: one from debt, two from property and four from renewables. Alternatives seemingly continue to be weighed down by concerns that higher bond yields may lead to higher discount rates which in turn could result in asset valuations taking a hit.

The above alternatives narrative, a frequent feature in the Discount Watch lately. So, in the interests of mixing it up, focus this week switches to one of the two new, non-alternative, additions to the list: European Opportunities (EOT). A look at the graph shows the share price took a turn for the worse week commencing Monday 18 December 2024, the same week (and day) activist investor Saba Capital called for the Boards of seven investment trusts to convene general meetings so that shareholders can vote on their plans to replace existing directors with their own nominees as part of their delivering value campaign. Now EOT, not among the Saba Seven. But the pair have locked horns before and, as at end of July 2024, Saba held a 4.7% stake in EOT. Question is this, is the weak share price performance down to concerns EOT could once again find itself in Saba’s sights? Or could it be down to disappointment that the fund wasn’t inSaba’s sights this time round?

The top five

Fund	Discount	Sector
HydrogenOne Capital Growth HGEN	-79.96%	Renewables
Ceiba Investments CBA	-74.95%	Property
VPC Specialty Lending Investments VSL	-55.27%	Debt
US Solar Fund USF	-53.58%	Renewables
Ecofin US Renewables RNEW	-52.83%	Renewables

The full list

Fund	Discount	Sector
VPC Specialty Lending Investments VSL	-55.27%	Debt
European Opportunities EOT	-13.96%	Europe
Scottish American SAIN	-12.37%	Global Equity Income
North Atlantic Smaller Cos NAS	-34.90%	Global Smaller Companies
Urban Logistics SHED	-35.25%	Property
Ceiba Investments CBA	-74.95%	Property
Gore Street Energy Storage GSF	-52.05%	Renewables
Ecofin US Renewables RNEW	-52.83%	Renewables
HydrogenOne Capital Growth HGEN	-79.96%	Renewables
US Solar Fund USF	-53.58%	Renewables

Not Naval gazing, that’s a different topic altogether.

2025 Income rating winners

08 Jan 2025

There are four trusts winning an Income rating this year, all of which have an enhanced yield, paying a fixed amount of NAV out as a dividend. Our ratings require trusts to have delivered on average 3% dividend growth over the past five years. The potential drawback with enhanced dividends is that if the NAV falls year-on-year, the dividend may fall too. Our ratings suggest that over the medium term, this doesn’t have to get in the way of providing attractive dividend growth. We note that one other rating winner,  Montanaro UK Smaller Companies (MTU), has also switched to an enhanced dividend policy, starting in 2025.

It is notable to see Aberforth Smaller Companies (ASL) win a rating this year. ASL is one of the few unabashedly ‘value’ equity strategies left in the investment trust sector, and has performed extremely well post-pandemic. Its strong performance on dividend growth and very high revenue reserves qualify it for an Income rating. It joins a number of UK small-cap trusts on the list this year. We think this reflects the deep value in the sector, with a historically successful growth market providing all sorts of companies with a handsome yield – and increasingly buybacks too.

We think it is interesting to note the average Quality score of the Income rating winners is higher than the Growth rating winners (at 6.2 to 5.4). There are a couple of reasons this might be the case. First, it may reflect the fact that high quality earnings and dividend growth performance are intrinsically linked. Secondly, it is also true that our ratings value good downside performance, as we think that investors value this highly and it more reflects their understanding of risk than volatility. It is by design that a trust that delivered a return of X% annualised and dividend growth of Y% would score higher if the path of returns were steadier and saw more modest drawdowns, and a trust that had a much more volatile path to the same result would have a lower score. Finally, we would note that our style scores are all relative to the funds’ peers. As such, a Quality score over 5 means a score above average for the relevant investment trusts, not in relation to the underlying equity market. We believe the average quality score of the investment trust sector would be above that of the market, with quality being an important factor for many managers.

2025 INCOME RATED FUNDS

Source: Morningstar, Kepler calculations
Past performance is not a reliable indicator of future results

2025 Alternative Income rating winners

For the first time, the number of Alternative Income rated funds has fallen, reflecting the impact of an interest rate shock on the valuations of unlisted portfolios, financing costs and net cash yields. For this rating, we look across the relevant sectors for those trusts that have managed to deliver a flat or stable NAV along with dividend growth over the past five years. Only nine made the cut this time, down from 14 last year. The two battery storage funds that qualified in 2024 are among those dropping off. All our calculations are on NAV, not share price, and wide discounts on some of these trusts suggests investors may be wary of these NAVs too. On the other hand, stalwarts and early movers Greencoat UK Wind (UKW), Renewables Infrastructure Group (TRIG) and BBGI Global Infrastructure (BBGI) have navigated through the turmoil to retain their ratings in 2025. As can be seen in the table below, the solar funds are on particularly wide discounts, which is reflected in the very high yields on offer in the table below.

2025 ALTERNATIVE INCOME RATED FUNDS

Source: Morningstar
Past performance is not a reliable indicator of future results

We don’t apply a minimum yield requirement for these ratings, but they are formulated to focus on those portfolios designed to deliver a high income. Notably there is still a substantial yield pickup over gilts available from most of the trusts on our list, which reflects in part discounts. In fact, we tend to think it is this that is driving the discounts, rather than wariness of the NAVs, which interpretation may increase the attractiveness of the cheap share prices.

2025 dividends to date £359.00

Cash for re-investment £215.00

If your risk tolerance allows u to consider buying a position in FAIR, (see below) u could lessen the risk by pair trading with a lower risk share, no share is entirely risk free.

Annual financial results for the year ended 30 June 2024

This announcement contains regulated information

CHAIRMAN’S COMMENT

“City of London’s total return of 15.6% outperformed the FTSE All-Share Index. The dividend was increased for the 58^th consecutive year and fully covered by earnings per share.”

INVESTMENT OBJECTIVE

The Company’s objective is to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange. The Board fully recognises the importance of dividend income to shareholders.

CTY currently yields 4.8%, other dividend heroes could be researched.

FAIR/CTY. The blended yield would be 9%, ensuring a higher yield with a lessened risk profile.

Revisiting FAIR Oaks Income

The high yield (14.6%) world of CLOs

The Oak Bloke

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Dear reader

This is an idea from the OB 2024 (which are up 1.3% in 2025), and one of the highest yielding shares out there. In fact your broker asks you to “prove” you are sophisticated enough to buy this share.

This article recaps the principle of a “CLO” and examines performance and considers what 2025 might bring.

So you’ve heard of junk bonds, probably. What makes it “junk” exactly? Risk. BB rated or below is junk. Above BB is “investment grade”. The theory is lending to the government is perfectly safe, and then lending to business is risky. Those risks range from AAA down to CCC. Investment grade you’ll earn 5%-6%. Junk you’ll earn much more. 10%-17%. Some loans are “junkier” than others. The “junkiest” can be picked up for pennies in the pound. Bit like factoring. But is “junk” actually junk? Or is there brass where there’s muck?

So a CLO is basically a packaging up and pooling of various loans into a vehicle which funds itself via what it calls equity and debt. The debt investors get diversification and credit-enhancement benefit, while CLO equity investors get higher returns.

Confused? If only I had someone like Margot Robbie to explain.

Now Margot, if you paid attention, explained CDOs and MBS Mortgage Backed Securities and just gave you quite a negative view of these. CLOs aren’t CDOs (which are based on residential mortgages) – CLOs are business loans instead. But the principle is similar. Hence the video.

So CLOs are bad?

Potentially yes. But this blog article “how CLOs” endured the great financial crisis” provides an excellent explanation of why the great short (poor man) Michael Burry wouldn’t (and to my knowledge didn’t) bet the house (so to speak ha ha) against CLOs.

CLOs or Collateralised Loan Obligations are managed by clever firms who, on your behalf, sniff out and buy a package of loans, but who also borrow money to enhance returns and manage risk. To “over collateralise” means to buy CLOs that come with a degree of protection. If defaults remain at X% then you don’t lose out. That’s called a cushion…. a margin of safety. It’s about 4%-5% in FAIR’s case. More on that when we speak about the Covid crisis later.

How do you even buy FAIR? Well you have to become a “sophisticated investor”. In plain English this means your broker will have a short, online questionnaire. Once you answer those satisfactorily this unlocks certain investments you couldn’t access before. Put them in your ISA or SIPP same as any other share. Each time you access FAIR’s web site you have to agree some T&Cs before they’ll let you see any info.

One of these “sophisticated” options are CLOs run, bought and managed by firms like Fair Oak Income. These invest in both equity and debt. They run a lot of mathematical models to control for risk and because loans are bought and sold much like stocks and shares they recycle funds into new CLOs and CLNs. The OCF charge is 1.29% so they make good money in this world.

The dividend yield is currently above 14%. And FAIR has been consistently churning out dividends since 2014. It’s fair to say you aren’t going to achieve great capital gains but if your objective is to generate income then this investment has quite some attraction.

Risk

While a huge black swan event would affect CLOs and rising levels of default could affect future returns it’s also the case that CLOs are generally managed to spread risk by geography, by industry and by specific lender. Your eggs aren’t in a single basket.

This is the industry diversification of FAIR. So quite some degree of diversification.

Generally things would have to get “really bad” to actually lose money as in above 5%. Below this level is called “Distress”.

A few years back we had elevated “Distress” during covid. Fair Oaks annual report shows us what happened next. Distress in green spiked and then fell. Defaults in blue rose and receded. Overcollateralisation meant FAIR – or FAIR shareholders – didn’t lose anything…. on that occasion.

In the event of things getting bad beyond Covid level bad, a further level of bad would be dividends are cut (but in 2020/2021 they weren’t). Level 2 bad would be capital loss. But this is rarer than you might think. The link to Clarion shows this statistic.

But the other perspective about “things getting bad” is that new loans get cheaper and more profitable (aka reinvestment spreads). For example Clarion tells us “Historically, wider reinvestment spreads can mitigate or exceed elevated loan losses during economic downturns. Reflecting this dynamic, total returns for CLOs rose in the years following the GFC.” (The GFC is not a Roald Dahl character but instead the Great Financial Crisis i.e. 2008-2009)

This is illustrated in Fair Oaks 2022 report – during Covid you could buy loans for “25% off” during the 1st lockdown. So a 20% yield jumps to a 27% yield, so losing 12% through defaults, is countered by +5% over collateralisation plus gaining +7% yield on new investments. So these are opposing forces which suddenly makes CLOs – and Black Swans – a bit less scary. In my mind at least. Especially if your mathematical models mean you build and conserve cash ahead of bad events and can therefore take advantage of said bad events by buying at 25% off.

The CLO Business Model

The above chart is basically what gives these outsize returns. If a business is being charged say 10% interest for a loan, then the price of the risk of that loan means you can buy that 10% loan for say 94p in the pound. By borrowing money a CLO equity holder can earn well over 20% through leverage. That’s roughly the business model.

Do the sums add up?

Looking at the 2022 and 2021 accounts you can see there’s a fair value through P&L gain in 1 year and a loss in another. Roughly speaking “distributions” which are the loan repayments fund the dividend and then fair gains and losses increase or decrease the capital.

To my mind, looking at FAIR’s P&L there are actual returns “distributions” funding the dividend so this isn’t a snake eating its own tail. It’s also true, however, these are complicated accounts so isn’t as simple as buying and selling widgets. See my back of a fag packet assessment further on.

Why FAIR and not another CLO operator?

I can’t answer that. There are several out there all delivering a high dividend. BGLF was another reader idea. Fair is one of the highest yielders. One could argue lower yielders potentially offers higher chances of capital growth. This video gives you a glimpse into the world of CLOs.

Oak Bloke Rationale for FAIR

1. Speaking personally I was impressed with the CVs of the managers.
2. I was also impressed that when you dig beyond the “junk bond” label you are lending to a wide range of businesses and the likes of Virgin Media, Ineos and McAfee. Default percentages start to feel a little less scary when you think it’s businesses like these. The label “Junk” feels inaccurate. Remember, too, bond holders get dibs over equity holders. (Although it’s also true that BB loans are going to be behind “Investment Grade” or Senior Loans – or indeed Tax owed to government for example)

3. Buy backs. The fact that when a discount opens up FAIR aggressively buy back shares which also boosts value and delivers capital gains as well as dividend returns.
4. What also appealed to me is the idea there’s “hidden value”. And what I mean is simply this. Please show me a single occasion where CLOs get any kind of positive write up by any other investment analyst? Okay, okay, Hardman’s coverage of Volta is the exception. Watching Serge Demay of Volta being interviewed helped me feel more comfortable about CLOs.

For most investment writers this topic area is difficult & complicated. Far easier to talk about the likes of a company selling widgets. When writing an article about FAIR it’s an easy cop out to focus negatively on the risk – writing such an article is almost the simplest way to explain (and dismiss) Fair Oaks or CLOs like this.

But otherwise all articles are negative, negative, negative. Risk, risk, risk. Go and search for yourself – here’s a link to Google news for Fair Oaks. 

A bit of back of a Fag Packet Maths: (based on the 2022 accounts)

8c dividends cost $36m/year. So 90 cents distributed is about $405m cumulatively.

$432m original share capital and -$170m negative retained earnings (that sounds scary doesn’t it?) is $260m net (and $240m as at the last accounts 30/06/24).

So in 8 years, FAIR has more or less returned ALL capital (okay 93.75% $432m-$405m if you’re being picky). Plus still has assets of $260m (which is about 55p a share) and that 55p is like a profit. Okay dividend distributions eats into that number, but it’s still a profit. Not a snake eating itself which was the reason to do that maths and to think about that $170m apparent LOSS. So what I’m saying is if you’d bought FAIR on day 1 (in 2014) you’d still be quids in still in 2025.

This analysis is my attempt to explain the opprotunity and gives the good and bad of Fair Oaks income. Hopefully it helps also demystify this complicated area a little bit and gives you a starting point for your own research and to consider whether you should become a “sophisticated” investor.

Prospects for 2025

I ran through the different metrics over the past 4 years to get an idea of how FAIR fares over time.

CLO Equity at the end of 2024 offers increasing yields but can be bought at lower levels. While Mezzanine debt is in front of equity the low default rates and a reasonable average 3%-4% OC Test Cushion offers quite some comfort.

I personally continue to hold FAIR and it is nice to see the dividend roll in each quarter. I don’t expect it to deliver capital returns, in fact my analysis expects some limited amount of capital losses, but as a tasty dividend machine the dials appear to point to still point green in 2025. In fact those growing CLO equity yields look positively ripe.

Regards

The Oak Bloke

Disclaimers:

This is not advice, make your own investment decisions.

Micro cap and Nano cap holdings might have a higher risk and higher volatility than companies that are traditionally defined as “blue chip”