Two other deep value alternative investments, beyond listed equity

Friday, 16th August 2019 07:30 - by David Harbage

In yesterday’s blog, a number of alternatives to stock market quoted company shares were discussed – from inflation-linked bonds to warehouse property, absolute return-focused funds to commodity trusts. In response to reader requests, two more deep discount (by reference to the market or share price seemingly undervaluing as the asset worth) investment trusts are aired in this addendum article.

Oakley Capital investment trust endeavours to provide long term capital appreciation via its investment in private equity portfolios of high growth and mid-market size assets and other similar opportunities. The portfolios focus on Europe and in industry sector terms are biased towards technology, media, telecommunications, consumer and education. Despite a conservative approach to managing its assets (in particular maintaining a healthy, circa 18% cash balance), over the past five years the assets have grown at a compound rate of 17% per annum. Net asset value growth, including income, has been 16% over the past year, 47% over 3 years and 172% over 10 years. The £450 market capitalised trust is an Alternative Investment Market (AIM) listed company that plans to move to the LSE’s main market later this year; it offers an income yield of 2%.

The nature of such managers of unquoted equity and debt is to astutely acquire, actively work with the investee company management and potentially then sell its stake (via market listing, trade sale or other disposal. Last month’s trading update, covering the first half of 2019, was encouraging – featuring a 13% rise in net asset value in the period (+23% over the past year), with NAV estimated to be between 315p-318p per share. Total return to shareholders was considerably higher as the (share price to NAV) discount narrowed from 46% to 29%. The prospect of further tightening in the discount, in response to continuing news flow surrounding the Fund’s constituent investments (for instance Inspired was partially sold in May at an 81% premium to 31.12.2018 book value), and NAV progression suggests further progress irrespective of wider market conditions.

Another investment trust which features a much higher discount to NAV than typically applies is UIL, a closed-end investment company which (like Oakley) has a concentrated portfolio of investments. Seeking to maximise shareholder value, the manager searches for undervalued assets in different sectors and markets and currently 91% of the portfolio is invested in just ten holdings. As at 30 June 2019, 21.8% of the portfolio was invested in Somers, a financial services holding company (which includes a stake in PCF Bank), 16.3% in the infrastructure & utilities investment trust Utilico Emerging Markets, with 12.7% in Australian listed Zeta Resources and 12.3% in gold miner Resolute Mining. A geographical split of assets shows: Australia 20.6%, Bermuda 15.4%, Gold Mining 15%, UK 11.8%, Europe 10.9%, Asia 7.4%, Latin America 6.5%, North America 6.1%, Middle East & Africa 5.1%, New Zealand 1.2%.  

The capital structure is unusual, featuring £174m of debt, via four tranches of zero dividend preference (ZDP) shares repayable in 2020-2026, and including bank debt of £50m. Shareholders’ funds (equity) amount to £326m – putting financial gearing at 65.8%. Essentially, the fate of the ordinary shares is dependent on the portfolio of investments performing well and paying down the debt (which in itself is likely to be rolled forward). The NAV as at 30 June 2019 was estimated to be 369.8p, putting the shares on a current discount of 47%. Managed by Charles Jillings, the fund is measured against the FTSE All-Share index and both share price and NAV total return has been impressive: +18.8% share price, +29.5% NAV, +0.6% All Share over 1 year to June 2019 (+73.6%, +65.7%, +29.5% respectively over 3 years, +443.0%, +637.6%, +245.3% since launch in 2003 respectively).

As always, investments mentioned in this blog are not recommendations, readers should carry out their own investigation and research as the assets mentioned may not be suitable.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.