Important: What follows is not a recommendation to buy or sell shares in any companies or trusts. I am just a private investor, storing and sharing my notes. Read my disclaimer.
I have the impression the stock market has currently taken a dislike to private equity and unlisted holdings, as well as any ambiguity or a lack of transparency (although the latter is usually partly in the eye of the beholder).
It won’t be like this forever. A few years ago, the big growth and income investment trusts were trading at a sizeable discount, whereas now they’re all on a premium. Investors today want income. Fashions change.
I suspect that someday, all other things being equal, the following companies will be more favoured and the discounts will be smaller – hopefully because the Net Asset Value (NAV) at least held up, and the share price rose.
But nobody can be sure – the discount could narrow instead because the NAV falls – and I certainly have no timetable in mind in most cases. As ever do your own research and make your own mind up if you’re interested in pursuing these discount to asset plays.
Many commercial property companies are now trading close to NAV again, but not Daejan. It’s a property company run and partly owned by the founding Freshwater family. It owns commercial and residential property in the UK and the US, and it tends to issue very scanty releases. I get the impression most of its portfolio is not prime, though I think it has some prime assets, including in London. A good run had taken the share price to well over £32 by the start of April, but it’s now back at £27. At the interim stage last September the company said it had assets of £51.53 per share. Assuming no change since then, that’s a 47.6% discount to book. The shares tend to trade at a big discount, mind, but they did climb to a premium in the last property boom.
Electra Private Equity
Private equity trusts were hit hard in the downturn, as some private equity companies collapsed or were heavily diluted by the sheer weight of their debt. Electra Private Equity has come through fairly well, and recovered from a sell-off that took its discount to NAV to over 60% in 2009. As I write the discount is estimated at 31%, according to Trustnet, and it was recently even bigger1. Private equity should trade at a discount due to the uncertainty about valuations, but a smaller discount of 15% to 20% is feasible in better times. Electra says it’s cautiously picking up good deals, including the assets of deleveraging banks. You’ll definitely want to dig into its reports; the very recent presentation to analysts [PDF] is a good start. Note that while Electra itself doesn’t have much debt, most of its portfolio companies do.
I have written about Caledonia before. Ten months on, the discount has widened from 20% to over 30% according to Trustnet. If the share price was to rise to the current NAV, an investor would see a nearly-45% gain. If it rose because the NAV was rising too, the gain would be even greater. Unfortunately, according to its latest annual results Caledonia’s NAV declined 7% in the past financial year on a total return basis, compared to a 1.4% rise in its benchmark. I still have money in Caledonia, but so far the market has been right. With even blue blood RIT Capital Partners recently flirting with a discount again, less illustrious Caledonia is probably one to tuck away and forget about for five years.
Gresham House Investment Trust
I said above that there’s not usually a timetable with an asset play, but that’s not quite the case with Gresham House. Its managers have decided they can’t make its brand of property investing work in shareholders’ favour in the current climate, so rather refreshingly they’ve decided to liquidate the portfolio and return all cash to shareholders. Recent full-year results put basic net assets at 427p per share, compared to a mid-price of £2.82 as I write. There’s a horribly wide spread, which could see you pay £2.95. On that basis there’s a 30% discount to NAV, or a gain of 44.5% in maybe one to three years. Management will still be drawing expenses, however, which could reduce the NAV; set against that a recent disposal went above book value.
Ticker: HAN / HANA
This is a similar deal to Caledonia – a big and old family-founded investment trust that is trading on a steep discount despite a very good long term record. Hansa was at least beating its benchmark over the latest six month period it officially reported to investors, though admittedly that takes us all the way back to September 2011. Its portfolio is more straightforward than Caledonia’s, except that roughly 40% is in one listed company, Ocean Wilsons (Ticker: OCN), a Brazilian tug operator that has its own emerging market portfolio. According to Trustnet, Hansa’s non-voting shares are on a 25% discount.
Jellybook Limited is a cash shell that raised money last year to buy into a social network company. It has yet to make its investment, and as of 31 December 2011 it was sitting on £10.5 million in cash, against a market cap of £7.45 million as I write. That means there’s a near-30% discount on cash here – and cash is cash. Of course the manager plans to pump the money into a currently unknown company that I think is unlikely to be bought cheap, though with Facebook shares declining perhaps the shine has come off the sector. In any event, in the dotcom days (when the manager was also active) a shell like this might have traded at a premium. Despite the discount on cash it’s probably the highest risk of all these shares, as we have no idea where the money will go.
Another very high risk share, this backer of wind turbine projects is suffering from multiple simultaneous reasons for its discount: It’s a little understood VCT, it’s horribly illiquid, a couple of its investments have been written down to near-zero, management has changed – oh, and the wind didn’t blow so much in the UK in the past couple of years, making potential investors lairy of the historical data. Other less cultured blogs would use a colourful term for multiple adults enjoying sexual relations at once to describe this confluence of negative influences, but I’ll just call it the group hug from hell. The bottom line is that the shares are trading at a 37% discount to a marked-down NAV. The potential catalyst for change is that new management says it’s cleaned the stables, and now hopes to deliver a dividend of 3.5p a year for the next three years, rising to 4p to 6p within five years. A disastrous foray into non-wind energy means its original investors will probably never see the 6p to 8p annual payout first targeted, and the high TER means there’s little chance of NAV growth, but a nimble nibble might secure a long-term tax-free income of around 10%. Ventus 1 shares once traded (ludicrously) at a premium to NAV, but I’d personally only invest from here in the hope of perpetual junk bond-like income.
Note: As I write I own shares in Caledonia Investments and Ventus 2, and may or may not buy or sell shares in all these companies. I take no responsibility for any decisions you make as a result of this post – read my disclaimer and do your own research. Remember most people will do better investing passively.
- Note that Trustnet uses an estimated NAV figure. For greater confidence when buying into a discounted trust, you need to wait until the company issues an up-to-date NAV, and then time your purchase accordingly. [↩]