Investment trusts specialising in alternative assets have had a strong run over 2017 so far but a number of compelling value opportunities can still be found in the space.
That is the conclusion of Numis’ latest outlook, which has seen P2P Global Investments, Electra Private Equity and ICG Enterprise added to the broker’s recommended list.
“We have made three additions to our recommended list for alternative asset investment companies this quarter, with one fund removed. Each of the additions are ‘trading’ buys as we seek to identify relative value opportunities at a time when value is hard to find,” Numis said.
The group has removed Princess Private Equity from the list after a strong period of performance saw the portfolio’s discount narrow to 4 per cent. Numis said the portfolio continues to perform well and it remains positive in its outlook for net asset value (NAV) growth, but feels there is currently better value on offer in the sector.
In the following article, we take a closer look at the three alternative investment trusts that have just been added to Numis’ recommended list.
P2P Global Investments
First up is this £697.5m trust, which resides in the IT Debt sector and is currently trading on a 22.1 per cent discount to NAV. P2P Global Investments - which offers exposure to alternative finance and related investments - is actually a re-entry to the list, as it was first added at the start of the year only to be removed when the discount narrowed to around 10 per cent.
Performance of trust vs sector since launch
Source: FE Analytics
“However, the share price is down circa 10 per cent over the last three months and the discount is now in excess of 20 per cent. NAV returns have been dull, but we see modest downside, with the potential for the discount to narrow if returns start to improve,” Numis said.
“The new manager, PSC Eaglewood [formed through the merger of former manager MW Eaglewood Europe and Pollen Street Capital], has undertaken a detailed review of the existing portfolio and presented its analysis and transition strategy to the board. As a result, the manager now has ‘increased confidence’ that the realigned portfolio will achieve its target returns of 6-8 per cent by the end of 2018.”
Over recent months, the portfolio’s weighting to European real estate and UK small- and medium-sized enterprises has been increased while the allocation to the US consumer – which has been a drag on returns – has been lowered.
Numis added that it expects the portfolio will look “a lot more” like that of Honeycomb Investment Trust, which is managed by Pollen Street Capital. In the broker’s view, this creates the potential for a merger between the two trusts.
P2P Global Investments has ongoing charges of 1.21 per cent, which increases to 1.33 per cent when its performance fee is included. It is yielding 5.4 per cent and is not geared, according to figures from the Association of Investment Companies (AIC).
Electra Private Equity
The second addition to the broker’s recommended list is the Electra Private Equity trust, which is managed by Electra Partners. The fund sits in the IT Private Equity sector, where it has made top quartile total returns over three-, five- and 10-year time frames.
Performance of trust vs sector over 10yrs
Source: FE Analytics
The trust is effectively controlled by activist investor Sherborne and its board is carrying out a review. After a series of realisations, there are now a relatively small number of investments remaining in the portfolio – with around half of assets now being cash.
“The board began the second phase of its strategic review in June and anticipates announcing the findings in Q4 2017. In our view, the likely outcome is a managed winddown and return of cash (Sherborne, the largest shareholder, has a policy to return capital on divestments to its own investors),” Numis said.
“The share price has been weak since the change in management and the current price of 1,670p represents a discount to estimated NAV of 17.1 per cent, although this rises to 34.3 per cent netting off the cash on the balance sheet. In our view, this offers value even though there are clearly question marks over the valuation of the remaining portfolio.”
Electra Private Equity has ongoing charges of 0.51 per cent, which increases to 1.20 per cent when its performance fee is included. It is not geared.
ICG Enterprise
The final alternative assets addition to Numis’ recommended list is ICG Enterprise, which also resides in the IT Private Equity sector. It has outperformed its average peer over one, three, five and 10 years.
This is another trust that has undergone a management change which Numis considers to be positive but is still sitting on a discount. Figures from the AIC show it is trading on a 16.3 per cent discount to NAV.
“We have been impressed by the changes at ICG Enterprise since the move in management from Graphite to ICG in February 2016,” the broker said.
Performance of trust vs sector over 10yrs
Source: FE Analytics
“In recent years, we feel that the fund had been struggling to find an identity, with its hybrid approach (European fund of funds and direct investment in Graphite Capital funds) caught between the major diversified listed private equity funds and the direct investment vehicles.”
However, Numis now believes there is a “much clearer strategy” for the trust: a focus on profitable, cash generative mid/large companies in developed markets; the potential for strong returns through high conviction investments balanced with more diversified exposure by investing in funds alongside leading global PE managers; and a policy to pay a minimum dividend of 20.0p per year.
ICG Enterprise has ongoing charges of 1.28 per cent, is yielding 2.6 per cent and is not geared, according to the AIC.