Compelling opportunities for the contrarian

Transcription

Investment Companies
UK Investment Companies Research
27 August 2015
Alan Brierley | Canaccord Genuity Limited (UK) | [email protected] | 44.20.7523 8091
Ben Newell | Canaccord Genuity Limited (UK) | [email protected] | 44.20.7523 8084
FTSE Investment Companies index since 2009
nadir (total return, base = 100)
275
250
225
200
175
150
125
100
Source:Morningstar
Weighted average Investment Companies ex
alternative investments sector discount (%)
-3
-4
-5
-6
-7
-8
-9
-10
-11
-12
Source:Morningstar
Contrarian value
BlackRock World Mining (HOLD)
British Empire (BUY)
Murray International (BUY)
Templeton Emerging (BUY)
Defensive/portfolio diversifiers
BH Global (BUY)/BH Macro (BUY)
Ruffer Investment Company (BUY)
Sub-sector quality on a discount
Listed Private Equity (OVERWEIGHT)
Notwithstanding recent weakness, global financial markets have made meaningful
progress since 2009. Generally speaking, investors who have adopted a buy-the-dip,
growth-orientated momentum-based strategy have been rewarded with strong gains.
However, the headline performance numbers mask a massive polarisation in returns, at
the style, geographic and sector level.
Growth continues to lead value with the MSCI AC World Growth index having outperformed
its value counterpart by 3% p.a. since the start of 2007 (and 9% in the past year). US
equity returns have been particularly noteworthy with the S&P Composite beating the
MSCI World ex US by 55% since October 2009. Emerging markets have struggled with
the latest sell-off taking the index back to summer 2009 levels. At the sector level, the
fortunes of the NASDAQ Biotech index (+469%) contrast starkly with that of the
Euromoney Global Mining index, which has lost 72% of its value since April 2011.
While many investment companies have fully participated in the recovery, some have
had a shocking time and so have now become contrarian calls. This report includes
BlackRock World Mining, British Empire, Murray International and Templeton Emerging.
While the principle of contrarian investing is simple and potential gains substantial, the
execution is much more difficult. Do these stocks offer once-in-a-generation
opportunities or are they value traps, and what are the possible catalysts for change?
Having become increasingly dependent on a narrow range of stocks, markets have lost
momentum since the end of QE3 last October. In recent weeks, concerns over a hard
landing for the Chinese economy and stockmarket, fears of a currency war and the
prospect of an end of the zero interest rate policy in the US have ignited a sell-off and
brought back painful memories. Only time will tell whether this is the beginning of
something more sinister or another buy-the-dip opportunity, but we do fear that the
ongoing commodities rout, with the Bloomberg Commodity Index now back at 1999
levels, may be the canary in the coalmine.
We also feature BH Global/BH Macro, Ruffer and Listed Private Equity; we believe they
have strategic value as portfolio diversifiers and would expect them to perform well in
these more challenging conditions.
Where do we go from here? The key theme of our 2015 handbook was Now the hard
work begins. We expressed concerns about the gap between valuations and
fundamentals, increasing signs of fatigue from many markets/sectors, the increasing
dependence on US equities (which have been propelled by a re-rating of rather anaemic
earnings growth which themselves have been boosted by significant levels of buybacks)
and historically narrow discount levels in the closed-end sector.
Little seems to have changed and we continue to favour a defensive stance with a focus
on capital preservation; our model portfolio is on page 19. We would take advantage of
elevated ratings of some distinctly average investment companies and reduce exposure
to higher beta more illiquid assets. While the ongoing sell-off may represent another buythe-dip opportunity, and we note that even US equities are now well into correction
territory, we do wonder what happens when (not if) we next have a crisis - with interest
rates so low and debt levels so high, just what tools will the authorities be able to deploy?
This research note is produced by Canaccord Genuity Limited which is authorized and regulated by the Financial Conduct Authority (FCA).
This is non-independent research and a marketing communication under the FCA Conduct of Business rules.
Please see the Important Disclosures section in the appendix of this note which are an integral part of it or visit Canaccord Genuity’s Online Disclosure
Database http://www.canaccordgenuity.com/ecmpgn/disclosures.pdf for more information.
To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but
provides the greatest profit – Sir John Templeton
Value vs. Growth
MSCI AC World Value vs. MSCI AC World Growth (relative total returns,
base = 100)
100
MSCI AC World Value & MSCI AC World Growth (absolute total returns,
base = 100)
Source: Thomson Financial DataStream
MSCI World Value
Jun-15
Dec-14
Jun-14
Jun-13
Dec-13
Jun-12
Dec-12
Dec-11
Jun-11
Jun-10
Dec-10
Dec-09
Jun-09
Jun-15
Dec-14
Jun-14
Jun-13
Dec-13
Jun-12
Dec-12
Jun-11
Dec-11
Jun-10
Dec-10
Dec-09
Jun-09
Jun-08
Dec-08
Dec-07
Jun-07
Dec-06
75
Jun-08
80
Dec-08
85
Jun-07
90
Dec-07
95
Dec-06
180
160
140
120
100
80
60
40
MSCI World Growth
Rest of World vs. US
MSCI World ex US vs. S&P Composite (relative total returns, base =
100)
100
95
90
85
80
75
70
65
60
55
MSCI World ex US & S&P Composite (absolute total returns, base =
100)
250
225
200
175
150
125
100
75
MSCI World ex US
27 August 2015 | www.canaccordgenuity.com
S&P Composite
2
Emerging Markets vs. Developed Markets
MSCI Emerging Markets vs. MSCI World (relative total returns, base =
100)
MSCI Emerging Markets & MSCI World (absolute total returns, base =
100)
100
180
90
160
80
140
120
70
100
60
80
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
50
MSCI Emerging Markets
MSCI World
Global Mining vs MSCI AC World
Euromoney Global Mining vs. MSCI AC World (relative total returns,
base = 100)
Euromoney Global Mining & MSCI AC World (absolute total returns,
base = 100)
160
100
90
80
70
60
50
40
30
20
140
120
100
80
60
40
Jun-15
Dec-14
Mar-15
Jun-14
Sep-14
Dec-13
Mar-14
Jun-13
Sep-13
Dec-12
Mar-13
Jun-12
Sep-12
Dec-11
Mar-12
Jun-11
Sep-11
Dec-10
Mar-11
20
Euromoney Global Mining
MSCI AC World
3
BH Global – BUY / BH Macro – BUY
BH Global
Company statistics
Price
Discount
Dividend yield
Market capitalisation
Ongoing charge (£ class,
excluding performance fee)
1300p/US$12.85
4.7%/4.7%
0%/0%
£349m/eq£40m
2%
Source: Morningstar
Board
Director
(appointed to Board)
Sir Michael Bunbury,
Chairman (2013)
John Hallam (2008)
Graham Harrison (2010)
Talmai Morgan (2008)
Nicholas Moss (2008)
Fee
(£,000)
Investment
(£,000)
150
52
36
31
31
36
41
20
41
11
Source: Morningstar
Company statistics
Price
2065¼p/US$19.56/€19.90
Discount
5.3%/6.2%/5.4%
Dividend yield
0%/0%/0%
£745m/eq£233m/
eq£69m
Ongoing charge (£ class, excluding
2.55%
performance fee)
Source: Morningstar
Board
Ian Plenderleith,
Chairman (2007)
David Barton (2015)
Huw Evans (2010)
Christopher Legge (2007)
Colin Maltby (2015)
Claire Whittet (2014)
BH Macro has been a long-term constituent of our model portfolio and historically we
have had a marginal preference for this fund. However, we are impressed by recent
changes at BH Global and the strong re-rating would suggest this enthusiasm is
shared by the market. Undoubtedly the relatively subdued returns from both
companies in recent years have focused investor’s minds on the fee arrangements
and we welcomed the removal of BH Global’s 50 bps over-riding fee. Since the
changes, the NAV and shareholder total returns are 2.9% and 8.9% respectively,
comparing favourably against a FTSE All Share total return of -5%.
Both companies offer strategic and tactical value and these qualities are compounded
by attractive discounts. We believe these ratings are a function of the subdued returns
during the liquidity driven markets of recent years rather than prospective returns. The
Boards have demonstrated they will take decisive action to address supply/demand
imbalances and prevent discounts widening and control discount volatility, through
regular buybacks, capital returns and even class closures.
Brevan Howard seeks to generate consistent long-term appreciation, employing a
combination of global macro and relative value trading strategies in the fixed income
and FX markets. The traders will look to construct positively skewed, limited downside
return profiles under different event scenarios. The managers believe that extracting
economic value is fundamentally a function of effective risk management; the risk
management team consists of 29 investment professionals. There is a focus on
capital preservation with risk defined as the loss of capital not just volatility of returns.
BH Macro
Director
Key role in improving portfolio diversification
A fundamental question now is whether and for how long the authorities can continue
to create an environment that favours risk assets and keep volatility at artificially low
levels. Although we have no idea how long this phase may last, when it ends, it is
unlikely to end well. This will be a fertile environment for Brevan Howard and very
challenging for risk assets that have performed so well in recent years. Looking forward,
we expect Brevan Howard to deliver superior long-term risk-adjusted returns and so
believe that both companies have a key role in improving portfolio diversification.
Fee
(£,000)
Investment
(£,000)
167
0
0
37.5
37.5
34
34
0
15
0
25
0
Source: Morningstar
BH Macro was launched in March 2007 and is a direct feeder into the flagship Brevan
Howard Master Fund.
BH Global launched in May 2008 and following a policy change in September 2014, now
invests all of its assets in the Brevan Howard Multi-Strategy Master Fund. This currently
allocates to four underlying funds and a Direct Investment Portfolio (an opportunistic
allocation to individual senior traders). The current split is BH Master (43%), Direct
Investment Portfolio (30%), BH Asia Master (12%), DW Catalyst (11%) and BH
Systematic Trading (9%). The manager expects to allocate a material portion of assets
to the Direct Investment Portfolio and this is a key differentiator relative to BH Macro.
In addition, the fee structure of BH Global has been simplified. A management fee of 2%
is charged at the company level along with a 20% performance fee on the net NAV
performance above a high water mark. A 50 bps over-riding fee that had previously been
charged has been discontinued. For BH Macro, the management and performance fees
are 2% and 20% respectively but there is also an operational services fee of 50 bps.
Since inception, the Master Fund has delivered an annualised return of 9.78%,
volatility of 5.3%, with Sharpe and Information ratios of 1.52 and 1.8 respectively. In
addition, correlation with equity markets has been very low and actually negative
during market dislocations. However, QE has proved to be a strong headwind. Returns
have been somewhat anaemic since the authorities moved to “do-whatever-it-takes
mode” back in 2011 and have been materially impacted by a challenging period
between June 2013 and May 2014, when the NAV fell by 8.5%.
4
BH Macro
NAV vs. FTSE All Share (absolute and relative total returns, base = 100)
240
Premium/Discount (cum-fair NAV, %)
6
280
255
210
3
230
180
205
150
0
180
155
120
130
90
105
60
Mar-07
-3
-6
80
Mar-09
Mar-11
NAV (LH scale)
Mar-13
Mar-15
FTSE All Share (LH scale)
-9
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
NAV vs FTSE All Share (RH scale)
Source: Morningstar
Source: Morningstar
BH Global
NAV, price & FTSE All Share (absolute total returns, base = 100)
115
Premium/Discount (cum-fair NAV, %)
0
110
-3
105
-6
100
-9
95
-12
90
-15
Aug-10
BHGG - NAV
BHGG - Price
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
FTSE All Share
Source: Morningstar
Source: Morningstar
BH Macro vs. BH Global – NAV & shareholder total return (base = 100)
124
145
140
120
135
116
130
112
120
125
115
108
110
104
105
100
95
100
NAV total return (LH scale)
Shareholder total return (RH scale)
Source: Morningstar
5
BlackRock World Mining
Company statistics
Price
Discount
Equity portfolio (as % of NAV)
Dividend yield
Ongoing charge
206p
12.4%
116%
10.1%
£369m
1.4%
Source: Morningstar
Board
Director
Fee
(£,000)
Investment
(£,000)
Anthony Lea
(Chairman, 2005)
Ian Barby (2003)
Colin Buchan (2001)
David Cheyne (2012)
Ian Cockerill (2013)
Russell Edey (2014)
Judith Mosely (2014)
45
25
30
37.5
30
30
30
30
52
60
49
58
14
15
Source: Morningstar
HOLD
The canary in the coal mine?
When Ben Bernanke gave notice of his intention to launch QE2 in August 2010, risk
assets appeared to be the prime beneficiaries. We expected BlackRock World Mining
to perform well in this environment and indeed for the rest of that year, the price
jumped 52%. Sadly, it has all been downhill since then. Since its peak in December
2010, the Euromoney Global Mining £ total return is -68% while the BlackRock World
Mining NAV total return has lagged this benchmark by 23% since April 2012.
These are indeed challenging times for BlackRock World Mining while sentiment towards
the asset class is so poor, and it is difficult to identify a catalyst for any turnaround in
the short-term. However, maybe these are the classic BUY signals for the contrarian
investor. Subdued global growth and the slowdown of the Chinese economy represent
obvious headwinds, but, with the share price now back to 2005 levels and 75% off its
April 2011 highs, we wonder to what extent are these already discounted?
The current yield, based on the total dividend paid last year of 21p is now 10.1%. The
Board recently advised that based on current estimates proving correct, it is prepared
to use revenue reserves to maintain the current dividend level in 2015. Future use of
reserves will depend on its confidence in returning to a fully covered position in the
near term.
The 2014 dividend was covered and although H1 2015 EPS fell 6.1%, the interim
dividend was also covered; income from investments was 16% below H1 2014 but this
was partially offset by a 57% rise in option premiums, begging questions about
sustainability. We draw investors’ attention to these issues when looking at the apparent
attractiveness of the headline yield. While commodity prices remain at these depressed
levels we are likely to see a greater focus on underlying income streams and an
increased scrutiny of the progressive dividend policies of some of the key holdings.
The Bloomberg Commodity index is now back at 1999 levels. To be candid, we
struggle to reconcile the collapse in the commodity sector with a global economy that
is supposed to be recovering. This remains an undoubted concern. We added BRWM
to our model portfolio in March 2009, but downgraded from a long-standing Buy
recommendation to HOLD last October.
For the investor who is prepared to take a long-term view, then the shares have their
attractions. The higher beta characteristics bode well when we arrive at the other side
of the valley, while BRWM remains the only commodity-focused closed-end fund with
good marketability.
6
Premium/Discount (cum-fair NAV)
NAV vs. Euromoney Global Mining/FTSE All Share (total returns,
base = 100)
110
250
100
200
2
-2
-6
90
150
80
100
-10
-14
-18
70
Aug-05
50
Aug-07
Aug-09
Aug-11
vs. Euromoney Global Mining (LH scale)
Aug-13
-22
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
vs. FTSE All Share (RH scale)
Source: Morningstar
Source: Morningstar
Top 10 investments @ 31 July 2015
Geographic exposure - Sector
% of NAV
BHP Billiton
Global - Diversified
16.7
Rio Tinto
12.9
Global - Copper
8.9
Glencore
6.5
Lundin Mining
5.7
Norilsk Nickel
Russia – Diversified
5.1
Peru - Copper
4.4
Mexico – Silver & Diamonds
3.4
Australia – Industrial Minerals
3.4
First Quantum Minerals
Cerro Verde
Fresnillo
Iluka Resources
Hudbay Minerals
Canada – Diversified
3.3
70.3
Source: Company Reports
Sector breakdown (% of total assets)
Base Metals
22.1%
Geographic breakdown (% of total assets)
Gold
12.5%
LatAm
15.4%
Silver &
Diamonds
10.4%
Diversified
43.6%
Source: Morningstar
Net current
liabilities
-0.8%
Other Africa
7.4%
Canada
6.7%
Industrial
Minerals
4.8%
Other
5.2%
Australasia
8.5%
Emerging
Europe
4.8%
Global
52.6%
South Africa
2.6%
Net current
China
liabilities Indonesia
2.2%
-0.8%
0.6%
Energy
Minerals
2.2%
Source: Morningstar
7
British Empire
Company statistics
Price
Discount
Dividend yield
Ongoing charge
456.2p
13.1%
101%
2.3%
£625m
0.9%
Source: Morningstar
Board
Director
Strone Macpherson
(Chairman, 2002)
Steven Bates (2006)
Susan Noble (2012)
Nigel Rich (2012)
Andrew Robson (2008)
Fee
(£,000)
Investment
(£,000)
35
182
25.3
23
23
27
91
41
68
20
Source: Morningstar
BUY
Patience beginning to wear thin
The manager looks to identify valuation anomalies where the price does not reflect
intrinsic value. Stock selection seeks to identify high quality global holding companies,
asset backed companies and funds where there are a number of potential catalysts
for the discount to narrow. Strong balance sheets and cash-flows are an important
part of the investment selection process. The manager will actively engage with
holdings to improve corporate governance and unlock shareholder value, although the
track record of realising value in recent years has not matched the experience with
investment trust holdings at the end of the 1990’s/early 2000’s.
In recent years, value investors have faced material headwinds as central bankers in
the developed world have successfully engineered a powerful rally in risk assets and
kept interest rates and asset volatility at exceptionally low levels. Since the end of
2006, the MSCI World Value index has lagged the MSCI World Growth index by an
annualised 3%.
Not surprisingly, British Empire has struggled against this backdrop and matters have
been compounded by material underweight US (where the manager has struggled to
find value), overweight Europe, relatively high levels of liquidity and some poor
individual stock selections (in gold miners and energy).
For investors, poor NAV total returns have been accompanied by a de-rating which
now sees the shares trade on one of the widest discounts in the global sector. Since
June 2012, the company has bought 25m shares (or 16% of shares in issue) to
address a supply/demand imbalance; these shares are currently held in treasury. In
the absence of a turnaround in sentiment, we would expect the company to continue
to employ an active buyback programme.
We note that these are anxious times for British Empire; since the beginning of 2013,
the shareholder total return has lagged the peer group by a sobering 25% and this has
materially impacted sentiment towards the company. Back in April 2012, we said that
patience was the hardest part of value investing and three years later, little seems to
have changed. The portfolio remains relatively cheap (currently trading at a 25%
discount) while the look-through discount represents a significant margin of safety.
Meanwhile the focus on quality businesses with strong balance sheets and cash-flows
should underpin defensive characteristics. Identifying a catalyst for a change in
fortunes is challenging but we wonder whether a move to higher interest rates will
lead to a more supportive environment.
NAV/Shareholder total returns vs. AIC Global peer group (base = 100)
Discount vs. peer group (cum-fair NAV)
110
0
105
-2
100
-4
95
-6
90
-8
85
-10
80
-12
75
-14
70
65
Aug-05
-16
Aug-10
Aug-07
Aug-09
NAV total returns
Aug-11
Aug-13
Aug-15
Aug-12
British Empire
Shareholder total returns
Source: Morningstar
Aug-11
Aug-13
Aug-14
Aug-15
Morningstar Global Growth
Source: Morningstar
8
Sector
%
Investor AB
Investment Holding Company
6.5
Sofina
4.5
NB Private Equity
Investment Company
4.3
HarbourVest Global Private Equity
Investment Company
4.1
Jardine Matheson
4.0
Investment AB Kinnevik-B SHS
3.5
Aker ASA
3.3
Symphony International
Investment Company
3.2
Wendel
Investment Company
3.2
Mitsui Fudosan Co
Real Estate Company
3.1
Sub-total
39.7
Sector breakdown (% of invested assets)
Risk region breakdown (% of net assets)
European
Holding
Companies
31.5%
North
American
Holding
Companies
3.8%
Asian Holding
Companies
9.0%
Closed-End
Funds
37.5%
Resources &
Mining
1.5%
Conglomerate
3.9%
Source: Morningstar
Property
12.8%
Americas
24%
Pacific ex
Japan
9.7%
UK
13.3%
Japan
8.8%
Liquidity
-0.8%
Continental
Europe
39.2%
Emerging
Markets
5.8%
Source: Morningstar
9
Listed Private Equity
Overweight
Something’s missing…
In our Listed Private Equity sector review of April 2009, we highlighted the potential
for some exceptional returns and what we regarded as “a classic opportunity for the
contrarian investor”. In that time the weighted average shareholder total return of
229% compares to a FTSE All Share total return of 106%, translating into 8.5%
annualised outperformance. The key driver of these superior returns has been a rerating from extremely distressed discount levels. Somewhat counter-intuitively, for an
industry that looks to generate 3 to 5% excess returns over quoted equities, NAV
progression has been relatively subdued. Since the start of 2010, the weighted
average annualised NAV total return is 9.3%, ahead of the FTSE All Share total return
CAGR of 8% but behind the MSCI World CAGR of 10.3%.
We are intrigued but not unduly concerned by this solid but dull relative performance.
We believe it is due to a number of factors. Firstly, since the authorities began flooding
markets until last summer, quoted equities have been led higher by a number of
higher beta, “lower quality” stocks. Between November 2011 and July 2014, a basket
of 50 S&P 500 companies with weak balance sheets (measured by Altman Z-scores)
put together by Goldman Sachs outperformed a basket of companies with stronger
balance sheets by 42%. We would expect the LPE sector to struggle in this type of
environment, although notably there are signs that this is now beginning to reverse. In
addition, NAV’s have historically tended to lag in buoyant quoted markets.
For several years, the managers have been focused on building value in the
underlying portfolios and we believe there is now considerable latent value here in an
environment where valuations are high and M&A activity at record levels. As the
portfolios continue to mature we would expect to see further healthy realisations.
Meanwhile conservative valuations will likely see further meaningful uplifts on carrying
value while also representing important defensive characteristics.
The traditional equity long-only investment companies now trade on historically narrow
discounts, with the weighted average discount now 4.6%. Meanwhile, the re-rating of
the listed private equity sector has lost momentum in the past couple of years with the
weighted average discount of 18.5%, a long way below the average 10% premium it
reached prior to the financial crisis. We like this margin of safety, while recent
developments at Electra highlight the risks of a relaxed approach to addressing
discounts; there is certainly no room for complacency.
Given the experiences during the last crisis, it is only natural to question the defensive
qualities of the Listed Private Equity sector, particularly if we have now entered a
period of choppier waters. However, we do believe there are a number of material
differences between 2008 and now. Much work has been done on strengthening
balance sheets at the investment company level, with many companies having net
cash and medium-term debt facilities in place in case of need, while the maturity
profile of the underlying portfolios is increasingly attractive. Critically, the Boards now
have firepower to provide some liquidity and prevent relatively modest selling
pressure causing so much damage, as was the case during the crisis.
We take comfort from the margin of safety represented by the current discounts and
conservative valuations of the portfolios. As demonstrated by the performance table
below, given the divergence between the best and worst performers, stock selection is
critical. Our current preferred plays are F&C Private Equity, Graphite Enterprise,
HarbourVest Global Private Equity, NB Private Equity, Pantheon, Standard Life
European Private Equity and SVG Capital.
10
Morningstar Listed Private Equity ex 3i sector - NAV/TSR vs. FTSE All
Share/MSCI World (base = 100)
Premium/Discount (%)
20
130
10
120
0
-10
110
-20
-30
100
-40
-50
90
-60
80
Aug-10
Aug-11
Aug-12
NAV vs FTSE All Share
Aug-13
NAV vs MSCI World
Aug-14
Aug-15
-70
TSR vs FTSE All Share
Source: Morningstar
Source: Morningstar
NAV total returns to 21 August 2015 (sterling adjusted, base = 100)
1 year
Rank
3 years
Rank
5 years
Rank
10 years
Rank
3i
113.2
6
162.4
1
145.6
12
165.1
8
Aberdeen Private Equity
110.3
11
123.2
10
149.1
11
Better Capital PCC 2009
112.3
9
112.8
15
141.8
14
92.0
20
102.0
19
Candover Investments
71.4
21
80.4
21
57.1
20
47.8
12
Electra
124.4
1
152.0
3
193.3
2
356.9
1
F&C Private Equity
109.2
12
122.4
11
152.1
10
244.4
3
Graphite Enterprise
102.0
15
124.1
9
154.5
8
216.3
5
HarbourVest Global Priv Equity
112.9
7
144.4
4
179.2
3
HgCapital Trust
112.4
8
125.2
7
157.1
7
284.4
2
JPMorgan Private Equity
119.5
3
114.7
14
98.6
18
142.9
9
JZ Capital Partners
120.5
2
124.3
8
166.6
5
131.6
10
234.2
4
LMS Capital
NB Private Equity
Oakley Capital Investments
96.4
18
103.0
18
109.2
17
118.9
4
144.2
5
167.7
4
99.0
17
108.7
16
129.5
15
Pantheon International
112.2
10
130.0
6
160.7
6
Princess Private Equity
105.0
14
107.9
17
124.4
16
Private Equity Investor
95.2
19
88.9
20
97.6
19
176.3
7
Standard Life Euro Private Eq
105.1
13
120.8
13
153.2
9
213.5
6
SVG Capital
117.6
5
154.4
2
260.0
1
101.9
11
99.6
16
122.2
12
145.0
13
Morningstar Listed Private Equity ex 3i
110.9
126.8
158.1
194.9
MSCI World
102.9
138.8
170.5
205.8
FTSE All-Share Index
97.2
123.9
150.7
181.2
MSCI Europe
98.6
135.4
140.3
167.3
Source: Morningstar
11
Shareholder total returns to 21 August 2015 (sterling adjusted, base = 100)
1 year
Rank
3 years
Rank
5 years
Rank
10 years
Rank
3i
130.9
2
254.5
1
219.5
7
140.9
8
Aberdeen Private Equity
111.5
8
141.6
12
149.9
14
105.0
13
77.7
19
104.0
18
77.4
20
61.5
21
Candover Investments
45.5
21
66.9
20
43.0
20
18.8
12
Electra
123.3
3
190.9
3
254.8
2
332.6
1
F&C Private Equity
108.7
10
161.8
7
213.2
8
249.6
3
Graphite Enterprise
100.1
14
159.6
8
227.4
5
219.0
4
HarbourVest Global Priv Equity
121.0
4
191.0
2
253.0
3
HgCapital Trust
110.7
9
127.7
15
159.6
13
254.7
2
JPMorgan Private Equity
138.1
1
149.5
9
88.1
19
108.5
10
JZ Capital Partners
106.7
12
143.6
11
186.9
10
100.8
11
83.3
19
110.9
17
168.2
12
118.1
5
182.7
4
224.1
6
94.7
18
121.5
16
136.9
16
111.8
7
174.0
5
240.6
4
192.7
5
Princess Private Equity
115.1
6
139.6
13
196.0
9
Private Equity Investor
98.7
16
102.5
18
148.3
15
145.6
7
LMS Capital
NB Private Equity
Oakley Capital Investments
Standard Life Euro Private Equity
SVG Capital
99.4
15
147.7
10
185.8
11
176.4
6
108.6
11
164.9
6
298.9
1
130.6
9
97.7
17
131.6
14
127.2
17
Morningstar Listed Private Equity ex 3i
107.0
142.9
191.9
133.4
MSCI World
102.9
138.8
170.5
205.8
FTSE All-Share Index
97.2
123.9
150.7
181.2
MSCI Europe
98.6
135.4
140.3
167.3
Source: Morningstar
12
Murray International
Company statistics
Price
Premium
Equity/Fixed income portfolio
(as % of NAV)
Dividend yield
Ongoing charge (excl
performance fee)
812.5p
1.2%
101%/15%
5.7%
£1,042m
0.73%
Source: Morningstar
Board
Director
Fee
(£,000)
Dr Kevin Carter
(Chairman, 2009)
Lady Balfour of
Burleigh CBE (2003)
James Best (2005)
Marcia Campbell (2012)
Peter Dunscombe (2011)
David Hardie (2014)
Investment
(£,000)
42
203
23
11
23
28
23
23
427
47
31
34
Source: Morningstar
BUY
“Don’t get emotional about stock, it clouds your judgement”
For many years after assuming managerial responsibility in 2004, Bruce Stout put
together an exceptional performance record that transformed the fortunes of Murray
International. Strong NAV gains were accompanied by a healthy re-rating and the
Board addressed a material supply/demand imbalance by issuing new shares and in
the process raised over £360m. Strong stock selection combined with a prophetic
reading of the macro-economic environment were key drivers.
However, the recent history has been sobering. Since April 2013 the NAV total return
has lagged the benchmark by 26% and a painful de-rating has compounded matters.
A disciplined value conscious process continues to emphasise solid growth businesses
with strong balance sheets and proven management teams focused on shareholder
interests, but with hindsight, this has proved too defensive in recent times. The portfolio
has been significantly underweight US/overweight Emerging Markets, while the strength
of sterling has been a further drag (90% of the portfolio is invested internationally).
The manager continues to be troubled by the macro backdrop, particularly debt levels,
while noting that “stretched and illogical valuations usually always lead to capital
destruction regardless of prevailing short-term justifications”. Meanwhile, with regard
to sterling he believes that given economic and political fundamentals, such strength
is unlikely to last.
Given current sentiment and supply/demand dynamics, we see further downward
pressure on the discount in the short-term. After trading on a material premium for
many years, recent weeks have seen selling pressure intensify. Accordingly, while it
may have seemed inconceivable a short time ago, the Board may soon have to take
action to prevent this de-rating gaining momentum. We look for Boards to take tangible
action to protect investors from excessive premium/discounts and also rating volatility.
Back in 2013 we warned over the sustainability of the premium and moved from a BUY
to Tactical SELL recommendation. However, we then blotted our copy book by returning
to a BUY in 2014. Although this has proved premature we retain our confidence in the
manager and have a great deal of sympathy with his views. We like the focus on
capital preservation, and would highlight that the dividend yield is now 5.7% while the
revenue account and reserves are strong. We strongly believe that at some point the
market will once again come to value these characteristics.
NAV/Shareholder total returns vs. Composite index: 40% FTSE World
UK/60% FTSE World ex UK (base = 100)
190
13
180
11
170
9
160
7
150
5
140
3
130
1
120
110
-1
100
-3
90
Aug-05
Aug-07
Aug-09
NAV total return
Aug-11
Aug-13
Aug-15
-5
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Shareholder total return
Source: Morningstar
Source: Morningstar
13
Sector
%
British American Tobacco
4.9
ASUR
4.9
Taiwan Semiconductor
3.6
Unilever Indonesia
3.6
Taiwan Mobile
3.2
Philip Morris
3.1
Nordea
2.9
Roche
2.7
SingTel
2.6
Zurich Insurance
2.6
Sub-total
34.1
Geographic breakdown (% of portfolio)
UK
13.8%
North America
15.4%
LatAm &
Emerging
Markets
27.4%
Japan
2.1%
Cash
0.9%
Europe ex UK
18.5%
Asia Pacific ex
Japan
21.9%
Source: Company data
14
Ruffer Investment Company
Company statistics
Price
Premium
Dividend yield
Ongoing charge
218.6p
4.6%
44%
1.6%
£338m
1.18%
Source: Morningstar
Board
Director
Fee
(£,000)
Ashe Windham,
Chairman (2009)
John Baldwin (2011)
Wayne Bulpitt (2004)
Jeanette Etherden (2004)
Peter Luthy (2004)
Christopher Spencer (2004)
Investment
(£,000)
35
175
25
25
25
25
25
0
44
80
262
31
Source: Morningstar
BUY
The powers of compounding absolute returns
Ruffer focuses on the preservation of capital and seeks to generate consistent,
sustainable and absolute returns; the principle objective of the company is to achieve
a positive total annual return, after all expenses, of at least twice the Bank of England
base rate. Since launch in July 2004, the annualised NAV total return is 8.8%, around
100 basis points ahead of the FTSE All Share CAGR of 7.8% and notably this has been
achieved with 40% lower volatility.
Historically, fortunes have been inversely correlated with equity markets and as the
chart below demonstrates, the company is likely to struggle during liquidity fuelled
equity rallies. Since last summer, there has been a stealth-like recovery in the relative
NAV performance, and a re-rating has compounded these superior returns; the
shareholder total return is now 16% ahead of the FTSE All Share since last September.
Although the NAV has lagged equity markets in recent years, the shares have traded
on a premium and the company has increased shares in issue by 73%. The closedend structure and size give the manager greater flexibility than its £3bn open-ended
fund, and so we have a natural preference, but we would be mindful of acquiring shares
on overly excessive premium ratings. The company has an annual redemption facility,
for up to 25% of its shares, although this has only been used once in 2007.
For some time the managers have expressed concern about the rising tide of “easy”
money and the increasingly correlated nature of markets; the portfolio is defensively
positioned but the key focus is ensuring these defences are in the right place – “it is in
the reaction to the next crisis where the true risk lies”. With global debt, both on an
absolute level and also as a percentage of GDP now higher than 2007, reducing the
debt burden will be a significant challenge. The portfolio is currently positioned to
protect against both inflation and financial repression through index-linked bonds,
while the equity investments (with a material tilt towards Japan) will give exposure to
the possibility that we may be able to grow out of these debt problems. In addition, the
sterling exposure is now 79%, its highest level in several years.
In order to reduce the equity risk profile and improve diversification, we added Ruffer
to our model portfolio at the beginning of last year. Given the inverse correlation
characteristics, we believe it has an important role to play in improving portfolio
diversification while its defensive attributes leave it well placed if we have now
entered a more challenging phase.
15
NAV & FTSE All Share, Shareholder total return vs. FTSE All Share (total
return, base = 100)
240
180
220
160
200
180
140
10
8
6
4
160
120
140
120
100
80
60
Aug-05
0
80
-2
60
Aug-07
Aug-09
Aug-11
2
100
Aug-13
-4
-6
Jun-08
Ruffer Inv Co - NAV (LH scale)
FTSE All Share (LH scale)
Price total return vs. FTSE All Share (RH scale)
Source: Morningstar
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Source: Morningstar
Top 5 bond/equity investments @ 31 July 2015
%
1.875% Treasury index-linked 2022
6.2
5.9
4.6
US Treasury 0.625% TIPS 2043
4.0
US Treasury 1.125% TIPS 2021
3.9
T&D Holdings
2.5
Mizuho Financial
2.4
Mitsubishi UFJ Finance
2.3
Sumitomo Mitsui Financial Group
2.0
The Boeing Company
1.5
Asset allocation (% of NAV)
Gold and gold
equities
3%
Options
1%
Japan equities
19%
Currency allocation (% of NAV)
UK equities
8%
Cash
6%
North
American
equities
8%
Index-linked
gilts
9%
Asia ex
Japan 4%
Long-dated
index-linked
10%
Non-UK indexlinked
19%
Illiquid
strategies
9%
Sterling
79%
US dollar
8%
Yen
8%
Europe
equities
4%
Gold
3%
Other
2%
16
Templeton Emerging
Company statistics
Price
Discount
Dividend yield
Ongoing charge
387.7p
13.3%
94%
2.1%
£1,207m
1.2%
Source: Morningstar
Board
Director
Fee
(£,000)
Peter Smith (Chairman,
2004)
Christopher Brady (2007)
Hamish Buchan (2008)
Neil Collins (2006)
Peter Harrison (2007)
Beatrice Hollond (2014)
Gregory Johnson (2007)
Paul Manduca (2015)
Investment
(£,000)
60
39
35
35
35
47
35
0
35
0
58
27
17
0
0
0
Source: Morningstar
BUY
Desperately seeking value
For many years, TEMIT has been a core holding for investors looking for global
emerging markets exposure. However, the recent experience has been sobering.
While emerging markets have materially lagged developed markets (by 46%), TEMIT’s
value-orientation has been a drag on the relative performance (20% behind), and as
the chart below highlights, the discount has come under increasing pressure
(widening from 3% to 13%). The shareholder total return is now 53% behind the FTSE
All Share since the end of 2010. Ominously, matters have begun to accelerate to the
downside in recent months.
Last month, TEMIT announced that Carlos Hardenberg would replace Mark Mobius as
lead portfolio manager. Moving forward, Mark Mobius will remain Executive Chairman
of the Templeton Emerging Markets Group and a portfolio manager of TEMIT, while
critically a team of 53 portfolio managers represents a significant depth of resource.
While the recent history has been poor, we feel it pertinent to note that since TEMIT
was launched back in 1989 it has outperformed the MSCI Emerging Markets and
FTSE ALL Share indices by an annualised 3.6% and 3.7% respectively.
Since the beginning of the year, selling pressure has gathered momentum and the
Board has addressed this by purchasing 10.6m shares for cancellation. We would look
for the Board to continue to address this imbalance and expect buybacks to remain a
feature until we see a sustainable recovery in performance.
In a recent note we highlighted the management fee, which is 1.1% of shareholders’
funds, and argued that there was scope for a reduction in charges. We believe that
this fee remains generous and that it is a legacy of the superior longer-term record. In
what is an increasingly competitive environment we note that the ongoing charge is
more than four times the £4bn Vanguard Emerging Markets Fund.
We added TEMIT to our model portfolio back in March 2009 and although the
shareholder total return in the first 20 months was nearly 198%, the company has
since endured a perfect storm. Undoubtedly these are dark days and current
sentiment is reminiscent of that towards the end of the TMT bubble. However, it is
worth noting that between April 2000 and May 2003, the company outperformed the
MSCI Emerging Markets index by 45%. Only time will tell whether we have reached a
point where investors are despondently selling, but we believe there are dangers in
throwing the towel in now - we retain our BUY recommendation.
NAV vs. MSCI Emerging Markets (LH scale) & on an absolute basis (RH
scale) (total returns, base = 100)
135
325
130
275
125
120
225
115
Discount (cum-fair NAV)
-3
-5
-7
-9
175
110
-11
105
125
100
95
Aug-05
Aug-07
Aug-09
Aug-11
vs MSCI Emerging Markets (LH scale)
Source: Morningstar
Aug-13
75
Aug-15
-13
-15
Aug-10
Aug-11
Aug-12
Aug-13
Aug-14
Aug-15
NAV total return (RH scale)
Source: Morningstar
17
Brilliance China Automotive
Country - Sector
%
Hong Kong/China – Consumer Discretionary
8.2
Unilever
UK – Consumer Staples
4.4
Siam Commercial Bank
Thailand – Financials
4.3
MCB Bank
Pakistan – Financials
4.2
Dairy Farm
Hong Kong/China - Consumer Staples
4.1
Itau Unibanco ADR
Brazil - Financials
3.9
Astra International
Indonesia – Consumer Discretionary
3.8
Brazil – Financials
3.6
Kasikornbank
Thailand - Financials
3.3
PetroChina, H
Hong Kong/China – Energy
3.3
Banco Bradesco, ADR
Sub-total
43.1
Geographic breakdown (% of net assets)
South Africa
4.4%
Sector breakdown (% of net assets)
Cash
5.9%
Other
12.2%
Hong
Kong/China
26.3%
Pakistan
5.4%
India
5.8%
Indonesia
6.9%
Thailand
13.2%
South Korea
8.5%
Materials
6.7%
Cash
5.9%
Financials
27.3%
Consumer
staples
9.6%
Information
technology
10.9%
Energy
18.4%
Consumer
discretionary
16.7%
Brazil
11.4%
Industrials,
4.5%
18
Canaccord Genuity Investment Company model portfolio
Current constituents
BH Macro
Monks
BlueCrest All Blue
British Empire
Perpetual Income & Growth
Edinburgh Dragon
Polar Capital Technology
Edinburgh Investment Trust
RIT Capital
HICL Infrastructure
HarbourVest Global Private Equity
Standard Life European Private Equity
Impax Environmental
Templeton Emerging
The MedicX Fund
Worldwide Healthcare
Model portfolio (NAV and price), FTSE All Share and FTSE Investment Companies (total returns, base = 100)
250
225
200
175
150
125
100
75
50
Jun-15
Mar-15
Dec-14
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
FTSE ALL SHARE
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Model Portfolio - NAV
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Model Portfolio - Price
FTSE Investment Companies
Source: Thomson Financial DataStream, Morningstar
19
Appendix: Important Disclosures
The research provided in this report is based on our investment company analysis. Investment companies mentioned in our
reports are not formally "covered" or "rated" by Canaccord Genuity, and as such there is no assurance that additional research will
follow previously issued reports. The analysis contained in this research report is based on assumptions and predictions regarding
future price movements and overall market trends. There can be no assurance that such assumptions and predictions will
ultimately prove accurate or correct. Please note that the disclosures below relating to the distribution of stock ratings are relevant
for Canaccord Genuity's fundamental research only.
Analyst Certification:
The authoring analyst of Canaccord Genuity Limited whose name appears on the front page of this research hereby certifies that
(i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent
and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such
authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed by the authoring analyst in the research.
Distribution of Ratings:
Global Stock Ratings (as of 27 August 2015)
*Total includes stocks that are Under Review
Canaccord Investment Companies Ratings System
BUY: Over the next twelve months we expect the company to outperform its peer group and/or benchmark, in terms of
shareholder total return
HOLD: Over the next twelve months we expect the company to perform in line with its peer group and/or benchmark, in terms of
SELL: Over the next twelve months we expect the company to underperform its peer group and/or benchmark, in terms of
OVERWEIGHT: Over the next twelve months we expect the sector to outperform the peer group and/or benchmark
UNDERWEIGHT: Over the next twelve months we expect the sector to underperform the peer group and/or benchmark
None of the stocks covered in this research are under formal and regular coverage by the analyst nor are they formally rated in
accordance with the Canaccord Genuity Ratings System.
Ratings track
BH Global
BUY (26/03/2012)1
BH Macro
BUY (26/03/2012)1
BlackRock World Mining
BUY (31/01/2013); BUY (29/01/2014); HOLD (16/10/2014)
British Empire
BUY (26/03/2012)1
Murray International
BUY (26/03/2012)1 ; SELL (15/07/2013)1 ; BUY (29/01/2014)1
SELL (26/03/2012)1 ; BUY (31/01/2013)1
Templeton Emerging
BUY (26/03/2012)1
1. Date Canaccord Genuity Limited integrated with Stewart.
20
Canaccord Genuity Company –Specific Disclosures as of 27 August 2015
Canaccord Genuity or one or more of its affiliated companies is a market maker or liquidity provider in the securities of BH Global,
BH Macro, BlackRock World Mining, British Empire, Murray International, Ruffer Investment Company and Templeton Emerging or
in any related derivatives.
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21
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Compelling opportunities for the contrarian

Transcription

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