Wanted: dead not alive [Members]

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• 

  Mogul

  1 Delta Hedge January 31, 2025, 9:47 am

  Great article. Thanks for putting in the hard yards on the research and for the as always edutaining write up.

  To broaden just a little bit more away from US exposure I recently scatter gunned a grand each into what I’d planned to be 30 REITs (including a couple of trackers) and a dozen or so Infra ITs. With the platform blocking access to buying some, it came to 20 odd & 10 of each respectively. RESI was in there.

  It wasn’t entirely indiscriminate buying (albeit at a tiny scale) as tried avoiding pure commercial property (with WFH concerns, but still did end up with a couple of Warehouse REITs).

  All the care home, sheltered, retiree and social housing ones looked dirt cheap.

  And although I must confess it wasn’t a deciding consideration, the fact they do something socially useful is a nice to know.

  Personally I’ll be bit sad if RESI or any others wind up. With no building by Housing Associations there needs to be an alternative to rapacious home builder led development.

  As an investment the social housing and care home ones have traded down – but so have the infra ITs (look at bellwether HICL recently).

  But I sense a bottoming out. The FTSE has been in a silent rally. Small caps will eventually shine. Some rate cuts are probably coming but maybe it takes longer for less. And those discounts should shrink and NAV start to rise. That’s the hope, anyway.

  We need more ITs not less. I’d like to see one for special situations which are not covered by passive flows like, for example, (seemingly) crazy cheap, low debt load and profitable bulk cargo carriers and leasers like CMRE, DAC and GSL at 2.4-4 x PEs (potentially massive operating leverage either up/down, which Trust discount/premium mechanisms could utilise).
• 2 The Investor January 31, 2025, 2:24 pm

  @Delta Hedge — Cheers for the nice words.

  Re: ReSi it’s when not if it’s wound-down — there’d need to be some kind of major market disruption I think for the sales process to be halted now. It’s been approved by shareholders and there have been major internal moves.

  I see (happily!) that the niche-ness of the Moguls membership means prices haven’t budged on this post. Kind of hope that won’t always be the case (for obvious reasons as it’ll mean we’ve many more members) but it’s nice not to have to worry about price disruption until then. 🙂
• 

  Mogul

  3 AoI January 31, 2025, 11:35 pm

  Thanks for the interesting post and insights, the investment thesis makes a lot of sense. I for one would enthusiastically cast my vote in favour of more such pieces. I couldn’t agree more on your sentiment regarding trusts both in terms of the ongoing tactical opportunities but also the fact listed closed end funds are the perfect structure for certain niche / illiquid assets and the loss of them is a step back in terms of the accessibility of markets for retail investors.

  On the niche-ness of Mogul’s membership – I did wonder about the ability of Moguls articles to move prices when LTI’s discount appeared to narrow after your December piece!

  On a semi related note to wind downs – HVPE this week doubling their distribution pool for buybacks to 30% of redemptions and imposing a 2026 continuation vote on themselves in response to their own activist was interesting. They estimated in the RNS that would result in $235m available for buybacks in 2025 which fully deployed would be a ~10% buyback yield, discount currently ~38%. Not quite a wind down (yet) but returning a 1/3 of portfolio realisations in the context of such a discount looks pretty interesting if one believed in the veracity of the NAV, historic realisations appear to support it.

  Your comment on whether the bigger infrastructure trusts will survive is one I have been wrestling with. On the face of it the core infra funds like INPP, BBGI & HICL with yields in the 7 to 8% range seem potentially interesting defensive income plays (appreciate they are not a homogenous group). If one believed their assurances that their current portfolios could support progressive dividends for 20+ years without further investment and you have inflation linkage it’s a very decent real-ish yield on a defensive asset class albeit the spread of the dividend yields over 20yr real gilt yields has actually narrowed since the negative real rate era. On a valuation basis they look unambiguously very cheap though relative to private markets, secondary transactions in infra LPs have been averaging ~5% NAV discounts whereas the listed trusts are trading on -20% to -30% and they’re using comparable discount rates. The question I don’t really know the answer to and would be fascinated if anyone has any insight is to what extent is it a problem that they can’t raise equity, Historically they just bought assets on revolving credit and then issued equity. Logically one would assume given they are of sufficient scale they can simply recycle capital within the portfolio but I’m not clear how this plays out in reality and to what extent they are now stuck in their existing portfolios.
• 

  Mogul

  4 Delta Hedge February 1, 2025, 9:29 pm

  @AoI #3: many thanks for the heads-up on Harborvest. Own some in GIA (as no dividends, so no need to worry about the now derisory £500 pa dividend allowance outside a tax shelter). My only listed PE exposure presently. Love it’s huge diversification. Frankly baffled though how the very wide discount just persists and persists (got in at ~40% discount to NAV nearly two and a half years ago now, and there’s been no real progress since, despite some false dawns). Fear that PE sector may be in a ‘last cycle but one’ scenario (i.e. tech now, PE before, and next will be something different again). The mood music in terms of delayed exits etc is not looking good. It would be wonderful though if Harborvest could finally close the gap to NAV.

  Infra is very tasty IMO. HICL sporting 7.3% div on a 28% discount with (IIRC) a 0.7 to 0.8 inflation correlation should make it a core holding for moderate risk funds. I can’t understand why it isn’t catching more of a bid TBH.

  IT mergers and self initiated wind ups present some short term opportunities but it’s quite sad that a 150+ year old sector is dying before our eyes. I’m surprised it’s taken this little to bring it to its knees (bearing in mind what we’ve seen since the 1860s).

  The biggest opportunities in this type of area globally though seems to be in the chronically under loved and even less covered Japanese micro and nano caps. Here’s an example from my inbox today:

  https://open.substack.com/pub/altaycap/p/unlocking-value-dirt-cheap-japanese

  The catch is that you basically need a Japanese brokerage account and the TSE has a minimum lot size of 100 shares regardless of what that means in cost.
• 

  Mogul

  5 Gareth Ghost February 2, 2025, 6:04 pm

  I’d like to add my vote in favour of more articles similar to these. Very interesting, thanks.
• 

  Mogul

  6 Delta Hedge February 3, 2025, 9:41 am

  Apologies here, but I have to ask this obvious question re: “guessing ReSi will be wound-up in 2025”:

  Mr Market will likely guess similarly and presumably also assess likely realisation proceeds at around 72p.

  And whilst the rental income disappears as the assets are sold, in the meantime it’s banked whether it actually gets paid out as a dividend or not, and the yield, as you note, is appreciably over 7% presently, thereby mostly counteracting any time value of money discount (re: the 10% p.a. discount suggested in the piece).

  I don’t want to sound like a EMH zealot here clutching his collected works of Fama and French, but why don’t the shares trade up closer to the realisation valuation now in expectation?

  Today RESI can be had for 54 pence. That’s a really big gap to 72 pence, at least on a realisation realistically expected within a year.

  Is it that the trust is just too small (even at £100 mn cap) and just too illiquid for institutional arbitrageurs to come out and buy in force?
• 7 The Investor February 3, 2025, 10:02 am

  @DH — It seems we often have this discussion when it comes to these discounted trusts. 🙂 But if you go back through history it’s very often the case that these windups deliver market-beating returns. (Not always, obviously).

  If you want to be EMH about it then recall that expected equity returns have a large range over a 12-month period, to the upside and the downside. It is very reasonable to assume here that the maximum upside is much more capped than for the market as a whole, although perhaps not the expected upside. (Standard deviations around both etc).

  Then we have execution risk. The sales process could be bungled. The NAV could be over-stated. There could be issues transferring / renegotiating the debt that means a buyer demands a steeper discount to NAV.

  Perhaps the biggest risk is delay. As I noted with my examples, in the case of ASLI if you assume the process will take two years instead of one then the share price is probably around fair value already.

  Bungling, delays, market dislocations and economic dislocations all can and do happen to impair what you get returned from a wind-down.

  We could also add management that acts more in its own interests (to prolong higher fees or hit some other internal incentives) though I don’t see that with these examples here.

  Finally as you note we have the small cap / illiquidity issue. Perhaps this impairs ‘smart money’ getting into the share in a timely fashion, though I doubt it. Probably more likely is the market is somewhat discounting the fact that if any of those risks materialise in a critical fashion then you could be stuck in a small cap that’ll cost you dearly to get out of (via moving the market price, spreads, other illiquidity issues).

  There’s (almost) never a free lunch, which was why I included the various risks in my write-up. 🙂
• 8 The Investor February 3, 2025, 10:32 am

  p.s. Just to slightly modify the direction of my comment above, to be clear I am not necessarily looking for massively market-beating returns from wind-ups so much as ‘surer’ / risk-adjusted returns.

  But ‘surer’ doesn’t mean sure! 🙂
• 9 The Investor February 3, 2025, 10:33 am

  @Gareth Ghost — Cheers!
• 

  Mogul

  10 Delta Hedge February 3, 2025, 10:59 am

  Thanks @TI. I think these might be worth a bigger punt than the measly £1k (0.1% across everything) I’ve got in RESI presently (paid 61p), but I’ll keep it to no more than 0.5% overall. Regret minimisation framework. When it comes to active, I’d characterise my own approach as ‘cowardly’ 🙂 Relieved that this doesn’t look to be a Tetragon Financial Group ($TFG.AS) situation where it sits on an enormous unresolved discount largely because the managers and the shareholders are at a permanent loggerhead.
• 

  Mogul

  11 Delta Hedge February 5, 2025, 7:52 am

  RESI covered by Simon Thompson in this week’s IC and the previous week here:

  https://www.investorschronicle.co.uk/content/f55c85f3-6cb1-5929-89c9-b275da35ada2
• 12 The Investor March 5, 2025, 1:24 pm

  @all — As always I cannot and do not undertake to deliver ongoing coverage of the shares I discuss in Moguls (beyond my resources and my remit! 🙂 ) but just a note today on the 6.8% decline for ASLI.

  This reflects the shares going ex-dividend on a 4p return of capital, not any operational problems at the REIT.

  We should expect more of this over the months ahead. In fact it’s what holders want to see — a dwindling share price reflecting a steady return of capital (via ‘B’ capital shares in this case) as ASLI disposes of assets and returns money to shareholders.

  If you’re looking at this in 12 months time and the price is 10p or whatnot, hopefully that is why! 🙂

  My return as a holder of ASLI will comprise this return of capital and any ongoing value in the residual stock/share.