Table of contents
The end of the third quarter saw the summer cheer replaced by a resignation that there was no imminent panacea to the pandemic. Still, markets held up well, and there are pockets of the world, across Asia and Africa, where normal activity has more or less resumed. For much of the world though, uncertainty still abounds. The US election is just weeks away and the post-Brexit future of the UK is no closer to finding resolution.
Discounts widened slightly over the third quarter. Most of the narrowing following March took place over the second quarter, so the current levels can be seen as an anchor for the time being, at about twice the level of discount as at the beginning of the year.
The growth capital sector closed the quarter valued at close to pre-pandemic levels. Realisations and the perceived unlocked value held within portfolios of high-potential private companies generated strong flows from investors.
Access to high-potential private companies through the growth capital sector was popular
For a comprehensive collation of commentary from fund managers and chairman in response to covid-19, you can access our most recent economic and political roundup here.
In this issue
Performance Data – Funds investing in high-potential private companies had a good month while China and Japan stood, from a top-down vantage point.
Major news stories – Witan Pacific became Baillie Gifford China Growth, taking the number of pure-China funds to three. Greencoat UK Wind launched a major fundraise, subsequently raising £400m. Elsewhere, JPMorgan Brazil lost its continuation vote and Secured Income published wind-down proposals.
Money in and out – Around £630m was raised in net terms over the third quarter, once again led by sectors providing alternative income. Towards the end of the quarter, there were signs that the market for new issues was returning with a vengeance, with several funds hoping to launch. Amongst existing funds, capital raising was led by the aforementioned Greencoat UK Wind and Hipgnosis Songs.
Out of a total of 327 investment companies (we excluded funds with market caps below £15m), third-quarter median total <span data-title="NAV" data-explanation="
An abbreviation for net asset value
” class=”glossary_term”>NAV and market returns amounted to 2.2% and 1.8% (the equivalent first-quarter figures were 13.4% and 18.8%). By in large it was another good quarter for markets, with the technology sector having a particularly strong August before finally slowing down over September.
Funds investing in high-potential private companies had a good month, on the back of some attractive realisations. China and Japan stood out in Asia, with China in particularly on course for a remarkable turnaround, as one of a select few countries likely to deliver economic growth this year.
Shares in FastForward Innovations surged over August – its investments in medical cannabis were seen as a particular bright spot. Chinese assets had an excellent quarter, with the economy’s resilience augmented by a considerable pickup in foreign capital and a new wave of interest from retail investors. JPMorgan China Growth and Income, Pacific Horizon, and Fidelity China Special Situations were the main beneficiaries. As we discuss in the following sections, the third quarter also saw the emergence of Baillie Gifford China Growth, a third pure China-fund. Baillie Gifford US Growth is having an outstanding year, driven by an e-commerce and tech stable headed by Shopify and Zoom. As of 30 September, Baillie Gifford US Growth is the best performing <span data-title="Investment company" data-explanation="
A company that is set up to make investments on behalf of its shareholders (also called a closed-end fund and, in specific circumstances, an investment trust).
Legally, an investment company is any company whose business consists wholly or partly in the making of investments. All investment trusts are investment companies but not all investment companies are investment trusts – they would have to satisfy the additional criteria listed above.
As companies, shares in investment trusts are issued as publicly traded shares that are listed on stock exchanges. A closed-end fund raises a prescribed amount of capital through an IPO by issuing a fixed number of shares.
” class=”glossary_term”>investment company by total market returns, over the year-to-date (YTD).
Merian Chrysalis had a strong quarter, initially building up a head of steam over July following the announcement that it had generated a significant return by partially realising its stake in TransferWise. Shares in UK Mortgages pushed up sharply over July, following a bid from M&G Investment Management (M&G), which was ultimately rejected. M&G’s bid was driven by a view that the market was materially undervaluing UK Mortgages. India Capital Growth was the best performing India fund in NAV and price terms, as Over August, India drew in monthly foreign fund inflows above $6bn. This was largely value-driven – India remains severely impacted by COVID-19, with the economic effect likely to last several years. UK smaller companies trust, Crystal Amber, led NAV returns, though returns by this metric were still down by (34.2%), over the YTD to 30 September. Baillie Gifford Shin Nippon led performance by Japan funds, though almost all Japan-focused strategies had a very strong close to the quarter.
Investors may be concerned about credit quality within KKV Secured Loan’s <span data-title="Portfolio" data-explanation="
” class=”glossary_term”>portfolio. In August, it announced that it may have to make further write-downs. After rallying over August, UK focused equity and property strategy had a poor September, as discourse shifted to the inevitability of the second wave of infections. Regional REIT, Standard Life Investments Property Income, Secure Income REIT, Henderson High Income, and Merchants were amongst the worst affected. As was Temple Bar, though it has since built up a head of steam (click here to access our initiation note). Riverstone Energy’s shares fell over July after its manager (Riverstone Holdings) completed a $1.1bn recapitalisation in Enviva, the world’s largest supplier of utility-grade renewable biomass fuel in the form of wood pellets.
The shares remain below where they were at the end of the second quarter. Over a quarter in which <span data-title="Private equity" data-explanation="
Private Equity refers to investments made wholly or mainly in companies that are not traded on a stock exchange. This means that private equity portfolios can be a lot less liquid (harder to turn into cash) than an equivalent equity fund. Some private equity companies invest directly, some make investments in funds (usually limited partnership or LP funds), and some invest in a mixture of the two.
” class=”glossary_term”>private equity companies fared relatively well, with median market returns well ahead of 9.3%, BMO Private Equity bucked the trend. Its discount widened to more average levels for the sector, which remains unloved. Aberdeen New Thai’s quarterly performance reflects the wider malaise of the Thai economy, which has a higher reliance on tourism than many of its regional peers and where political unrest is increasing.
Discounts and premiums
Across all 327 investment companies, the median level of discount, at the quarter-end, increased by (0.5%) to (10.7%). Many sectors remain under strain and in the case of many alternative asset sectors, the more periodic reporting of NAV means that the true impact of the pandemic will become clearer at the year-end.
Getting more expensive
We discussed FastForward Innovations, Merian Chrysalis, and UK Mortgages in the ‘winners and losers’ section. Baker Steel Resources’s narrowed sharply, as mining shares rebounded strongly. A key driver was the potential inflationary risks that might arise as a result of high spending and borrowing from governments. Shares in the direct lender, Honeycomb, have rebounded since late August, with cash collection holding up well. BlackRock Income and Growth was the second-best performing UK equity income fund over the YTD to 30 September.
Baillie Gifford China Growth emerged from what was previously Witan Pacific. <span data-title="Shareholders" data-explanation="
The investors in the equity of a company.
” class=”glossary_term”>Shareholders voted to abandon a Pan Asian strategy in favour of addressing a gap in the market for more China single-country funds. The portfolio will consist of 40 to 80 companies and up to 20% of the total assets may be invested in unquoteds. The fact that Augmentum Fintech ended the quarter trading at a <span data-title="Premium" data-explanation="
The amount by which the share price exceeds the net asset value, calculated as the share price divided by the net asset value and expressed as a percentage.
The share price of an investment trust can differ from the net asset value (NAV). If the current share price is above the NAV, the investment trust is said to be trading at a premium, i.e. it costs more to buy the shares than the underlying investments are worth.
” class=”glossary_term”>premium to NAV reflects a belief that there is potentially considerable unrealised value across its portfolio of fintech disrupters.
KKV Secured Loan, Crystal Amber, Riverstone Energy, and BMO Private Equity were discussed in the ‘winners and losers’ section. Growth capital fund Schiehallion ended the period with the 11th highest premium amongst the 327 funds – it began the quarter with the highest premium. Debt funds, M&G Credit Income, Blackstone/GSO Loan Financing, and Axiom European Financial Debt saw their discounts widen, reflecting concerns towards their exposure to some of the sectors that are most exposed to the pandemic.
Chelverton UK Dividend operates a split <span data-title="Capital structure" data-explanation="
” class=”glossary_term”>capital structure and has a heavy bias to smaller companies. As at 30 September, it had the third-lowest total NAV returns over the YTD, after Temple Bar and Aberforth Split Level Income.
Money in and out
Around £630m was raised in net terms over the third quarter, once again led by sectors providing alternative income. Nevertheless, the net capital raised was a considerable increase on the £330m brought in over the second quarter. Towards the end of the quarter, there were signs that the market for new issues was returning with a vengeance, with several funds hoping to launch. They include Buffetology Smaller Companies and Mailbox <span data-title="REIT" data-explanation="
An abbreviation for Real Estate Investment Trust
” class=”glossary_term”>REIT. Early in October, Home REIT, successfully launched, following a £240m <span data-title="IPO" data-explanation="
IPO is the abbreviation for Initial Public Offering
” class=”glossary_term”>IPO. It will build a portfolio of homeless accommodation across the UK – you can access our IPO note by clicking here.
Money coming in
Amongst existing funds, Greencoat UK Wind led the way, raising £400m. The funds will be used for expansion and the pre-payment of debt. Hipgnosis Songs had a very busy quarter, signing up several new artists and songwriters on <span data-title="Board" data-explanation="
The board is the collective term for all the directors of a company. The Board is there to protect shareholders’ interests as well as ensure that the company does well. Read our guide to Boards and Directors
” class=”glossary_term”>board (refer to the news section for more on this). The latest round of fundraising has taken its <span data-title="Market capitalisation" data-explanation="
” class=”glossary_term”>market capitalisation comfortably above £1.2bn. Elsewhere, HICL Infrastructure, Aquila European Renewables Income and the global smaller companies sector fund, Smithson, also raised more than £100m.
Greencoat UK Wind raised £400m
Money going out
Major news stories
Managers and fees:
Here is a selection of what is coming up. Please refer to the Events section of our website for updates between now and when they are scheduled:
Master Investor – the UKs largest private investor show – 5 December 2020
Our Independent Guide to <span data-title="Quoted" data-explanation="
Quoted, when used to describe companies, means a company that is dealt on an exchange.
” class=”glossary_term”>quoted investment companies is an invaluable tool for anyone who wants to brush up on their knowledge of the investment companies’ sector.
Here is a list of research we published over the third quarter:
“Unlike many of its peers, Standard Life Investments Property Income (SLI) has a 52.7% portfolio weighting to the buoyant industrial sector, which has performed positively during the pandemic due to an acceleration in online retailing and is forecast to grow further. It has also been on the front foot in the investment market, taking advantage of buying opportunities that would not have existed six months ago. We explore these themes in our latest annual overview note.”
“Temple Bar Investment Trust’s (TMPL) board recently reiterated its commitment to a value style of investing. The management contract has been handed to Nick Purves and Ian Lance of RWC Partners, two managers with considerable experience of managing income portfolios using a value-style approach. The RWC team says that value stocks have never looked more unloved in the 30-odd years that they have been managing money.”
“We explored Home REIT’s prospects in a recently published IPO note. It is a newly-established closed-ended investment company. It is looking to raise £250m to acquire and create a portfolio of homeless accommodation across the UK, let on long-term <span data-title="Index" data-explanation="
A measure of the performance of a group of investments. Indices can be calculated on an equal weighted basis (taking the performance of each investment and multiplying it by one, divided by the number of investments, then adding together all of the results) or on a weighted average basis (usually done by taking the performance of each investment and multiplying it by the total value of the investment, divided by the total value of all the investments in the index, then adding together all of the results). Most indices are calculated on a weighted average basis.
” class=”glossary_term”>index-linked leases and delivering a much-needed positive social impact. It will aim to achieve a total shareholder return of 7.5% per annum over the medium term.”
“With 38.9% of Aberdeen Emerging Markets (AEMC) now allocated to China and 72.5% to wider Asia-Pacific, extensive exposure is provided to the region that has been the quickest to return to near-normal economic activity. AEMC continues to trade at what seems an excessively wide discount to its <span data-title="Peer group" data-explanation="
A peer group is a selection of similar funds or companies.
Peer group returns and rankings are often used to see if the investment managers are doing as good as or better job than their competitors. This is often done with reference to a benchmark that they may or may not share.
” class=”glossary_term”>peer group, particularly when also factoring in its <span data-title="Dividend" data-explanation="
” class=”glossary_term”>dividend yield and low <span data-title="Ongoing charges" data-explanation="
To compare the running costs of different investment companies the industry has devised a measure called the ongoing charges ratio which is a measure of the all the regular annual fees charged to the fund, the largest of which is usually the annual management fee. It excludes one-off items like performance fees.
The Key Information Document (KID) has been created to further synchronise information put out on charges by investment companies. Please read our Guide on the KID by clicking here
” class=”glossary_term”>ongoing charges.”
“Over three years, JPMorgan Japanese Investment Trust (JFJ) is the best-performing trust in its peer group of competing funds by some <span data-title="Margin" data-explanation="
Margin, in the context of accountancy, refers to the difference between the cost of providing a good or service and the price received for that good or service. Gross margin is that simple calculation. Net margin is the same calculation but adjusted for the businesses other day-to-day running costs.
Margin, in the context of derivatives trading, refers to an amount the holder of the derivative is required to pay as collateral so that the person on the other side of the contract can be sure of getting at least some of the money due to them.
” class=”glossary_term”>margin (see page 15). The trust’s remarkable performance record has been achieved by following a convection-driven stock-picking approach that focuses on quality and growth, two aspects that have been in demand in a world tackling COVID-19.”
“In common with other Asian-focused trusts, Aberdeen New Dawn (ABD) has recovered the ground it lost in the early stages of the COVID-19-related market fall and moved into positive territory for 2020. Some of the strongest returns of the past few months have come from stocks within an open-ended fund managed by Aberdeen Standard invested in China A-shares (shares <span data-title="Listed" data-explanation="
Listed, when used to describe a UK company, means a company that is listed on the main market of the London Stock Exchange. All listed companies can be described as quoted companies but not all UK quoted companies are listed.
” class=”glossary_term”>listed on China’s domestic stock markets in Shanghai and Shenzhen).”
“The COVID-19 pandemic has heavily impacted global uranium production, taking around 20% of global capacity offline. The net effect has been a rising uranium price (up 32% so far in 2020) and the managers of Geiger Counter (GCL) believe there is still much to go, as we explore in our annual overview note.”
“Following on from an exceptional year of performance for the ordinary shareholders of Premier Global Infrastructure Trust (PGIT) in 2019, the trust had a good start in 2020. Whilst it suffered heavily in the pandemic-related market crash, it has bounced back strongly (in both cases the moves were amplified by the <span data-title="Gearing" data-explanation="
Gearing – A measure of how much a company has borrowed, calculated as debt (excluding other short-term liabilities) divided by net assets and expressed either as a percentage or as a number where 100 = no gearing and 110 = 10% gearing. NB if in doubt, it is recommended that the investor should check.
” class=”glossary_term”>gearing effect of PGIT’s split capital structure).”
“Seneca Global Income & Growth Trust’s (SIGT’s) UK-biased value style and mid-cap exposure suffered heavily during the first quarter of 2020 as markets collapsed. However, the manager used the rout to take advantage of deep value opportunities and SIGT has benefitted as markets have rebounded. The manager believes there is much more to come.”
“Shires Income (SHRS) has been weathering the storm of dividend cuts better than many of its peers. Holding a portfolio of <span data-title="Preference shares" data-explanation="
Preference shares earn a preferred return, usually a fixed dividend, and usually also have a fixed entitlement on a winding up. They will usually get paid out before the ordinary shares on a winding up.
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” class=”glossary_term”>preference shares, which contribute over 30% to income generation – and, crucially, have not been affected by regulatory restrictions on dividends – has proved to be a major competitive advantage.”
“Henderson Diversified Income (HDIV) is managed with a distinct investment style which favours businesses with sustainable cash flows. The managers took advantage of HDIV’s closed-end structure to make some opportunistic investments and increase gearing close to the bottom of markets. These transactions help lay the foundations for future outperformance and underpin HDIV’s dividends.”
“Annualised returns over the past five years have been in the double- digits, while nearly half of SLPE’s portfolio is in the more resilient consumer staples, technology, and healthcare sectors. SLPE provides underlying company exposure to European success stories such as Action (non-food discounter) and TeamViewer (remote support software).”
“Grit Real Estate Income Group (GR1T) is flying the flag for African real estate investment. The significant growth potential of the continent’s emerging economies has always come with some degree of risk attached to it. However, Grit’s <span data-title="Investment strategy" data-explanation="
” class=”glossary_term”>investment strategy enables it to retain exposure to that growth potential, while substantially de-risking it by leasing property to blue-chip multinational corporations, including government embassies, on US dollar and euro-denominated leases.”
The legal bit
This note was prepared by Marten & Co (which is authorised and regulated by the <span data-title="Financial Conduct Authority" data-explanation="
The Financial Conduct Authority is the successor to the FSA in the UK and is the main regulator for the UK’s investment industry.
” class=”glossary_term”>Financial Conduct Authority).
This note is for information purposes only and is not intended to encourage the reader to deal in the security or securities mentioned within it.
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Volatility in the investment world is a descriptive term for how far the value of something moves up and down over a period of time.
” class=”glossary_term”>volatility and, in some cases, to a complete loss of an investment.