Spotlight - October 2020
What’s the future of the office? Will UK equities ever regain their shine? And how will Nick be celebrating the 25th anniversary of VCTs?
It’s now almost half a year since the UK went into lockdown. What felt at first like a temporary solution to an unprecedented emergency has become the basis of a new way of living and working, for those of us still lucky enough to be living and working.
The optimism of August and early September, with Rishi Sunak’s eat-out-to-help-out scheme followed by the reopening of schools and some offices, has been replaced by the grim realisation that we can expect months more of restrictions, local lockdowns and things generally not returning to normal.
One moment that seemed to encapsulate this was the announcement that the distributors of the next Bond film had decided it was no time to release No Time to Die, swiftly followed by the sad news that Cineworld is powering down all its screens in the UK and the US.
As investors, we need to try and work out what all this means for the asset classes into which we put our money. Commercial property is one area that has very obviously been affected. While REITs have remained open for trading, unlike many of their open-ended counterparts, they face the same big questions about their underlying assets. This month’s Spotlight brings you the views of several of our property managers on the future of the office, what’s going to happen to unused space, and how their tenants are coping.
It’s well worth noting that Jason Baggaley, one of the managers quoted in that article, will be speaking at an online seminar run by Aberdeen Standard on Thursday 29 October. Jason is an engaging and interesting speaker on UK commercial property who really tells it how it is, so if you’re interested in this asset class (and why the closed-ended structure is a good way to access it) I’d strongly encourage you to register – details in our event listing below.
Turning from property to UK equities, many have been surprised over recent weeks by the trio of mooted new offerings from Sanford DeLand, Schroders and Tellworth. Although we hear that the last of these hasn't got off the ground, it is still extraordinary that an apparently unloved asset class is generating such intense interest – especially given the double-digit discounts in the UK All Companies and UK Smaller Companies sectors. Ian Cowie looks at the prospects for Brexit Britain in his latest column for Spotlight.
As we come to terms with the likelihood that Covid-19 will not be all over by Christmas, it might be good to have something to celebrate. We could even do it with a patriotic bottle of Chapel Down sparkling wine, offering some much needed backing to the British economy.
That brings me neatly on to VCTs, which are celebrating their silver anniversary this year. VCTs have grown up fast, from a twinkle in the eye of Ken Clarke back in 1995 to an industry that manages £4.7 billion today, supports hundreds of fledgling UK businesses, and has helped to create (at a very conservative estimate) some 27,000 jobs. Spotlight has got the full story from VCT managers about where VCTs have come from and where they’re going next.
One asset class whose popularity appears undimmed by any uncertainty that Brexit and Covid-19 can throw at it is Renewable Energy Infrastructure. Trading at a robust premium of 17.1% – more than any other AIC sector – yet offering an attractive 5.2% yield, the sector’s pronounced UK tilt certainly doesn’t seem to be bothering investors. Faith Glasgow, in her debut article for Spotlight, examines the appeal of the sector, which seeks to generate attractive financial returns from assets helping us towards a lower-carbon future.
I hope you are finding life tolerable in these strange times. I can’t promise you tickets to the next Bond film or even a bottle of Chapel Down, but if there is any other way the AIC can help you, please do get in touch.
Nick Britton, Head of Intermediary Communications, AIC
Upcoming online events
Thursday 29 October 2020 | Closed-ended structures for property investments
Aberdeen Standard invites you and your colleagues to join them for an introduction to the world of investment trusts, with a particular focus on property. Jason Baggaley, Deputy Head of Real Estate Value Add Funds, will highlight the key features of investment trusts, including Real Estate Investment Trusts (REITs). He will also explore how closed-ended property funds could provide an interesting option for your clients’ portfolios. The online event will be held from 3pm to 4pm and you can register here.
VCTs: the first quarter-century
We assess the outlook for the VCT industry after 25 years of supporting UK businesses
Last month marked 25 years since the launch of the first VCT. From humble beginnings in 1995 the sector has grown to back winners from Zoopla to Secret Escapes and cutting-edge UK businesses such as Femtech provider Elvie, video games developer Frontier Developments and internet-of-things business Simulity.
To celebrate the 25th anniversary of VCTs the AIC has spoken to VCT managers about their best-performing investments, the many companies they’ve backed and the future of the sector.
Source: AIC as at 31 December for 1995 - 2019, as at 31 August for 2020
Annabel Brodie-Smith, Communications Director of the Association of the AIC, said: “VCTs have come a long way in 25 years. Today they back companies in sectors which would have been difficult to imagine in 1995 such as gene therapies and cloud computing. However, this is really a continuation of what VCTs have always done: provided vital finance to the UK’s most dynamic young businesses.
“VCTs offer a powerful way of bridging the finance gap for budding companies, something that’s more important than ever as the economy faces the challenges of the pandemic. Through supporting innovative businesses, VCTs provide important social and economic benefits. Since their inception, VCTs have generated over £1.4 billion of exports and created more than 27,000 jobs.”
Patrick Reeve, Chairman of Albion Capital, Manager of the Albion VCTs, said: “We’ve been managing VCTs for 25 years, so pretty well from the beginning – and it’s been a lot of fun. At the start, Ken Clarke spoke of funding ‘small, growing, technologically-advanced and innovative companies’. Well, in the early years there was a huge range of strategies, only a few of which could really be described as ‘tech’ – but that’s changed as successive governments have, very sensibly, made the industry sharpen their focus on to technology and risk.
“We launched our first technology-focused VCT in late 2000, just as the dot-com boom was collapsing, so we luckily missed the worst of that particular crash. Twenty years on, Albion VCTs have invested over £600m in 195 companies: areas as diverse as medical imaging, cyber security, alternative energy sources, gene therapies, AI and quantum computing. These businesses are changing the way we live, the way business operates, and safety and security across all areas of our lives.”
Jo Oliver, Fund Manager of Octopus Titan VCT, said: “Octopus Titan VCT has backed 128 companies but ZPG (formerly Zoopla Property Group) is our best-performing investment. We first invested in 2009. Overall, Octopus Titan VCT invested a total of £3 million over several rounds of funding. Zoopla listed on the London Stock Exchange in 2014 and became the first UK start-up to reach a billion-pound valuation after having started out with VCT funding. The holding was completely exited in February 2017. The sale price of the last remaining shares represented a multiple of more than 33 times the price paid originally.”
Bevan Duncan, Investment Manager of the Baronsmead VCTs, said: “Since launch 25 years ago, the Baronsmead VCTs have raised more than half a billion pounds to back ambitious, high performing management teams in nearly 300 UK companies. Our most successful investments include Glide, which provides fibre broadband to under-served areas of the market, such as multi-tenant buildings and business parks. We sold our stake in May 2020 for a multiple of 6.3 times our original investment. Two years ago, we sold our investment in Symphony Ventures, a leading robotic process innovation and intelligent automation business. We invested £3.5m and sold our stake at a 2.4 times multiple just over a year later. Another good example is Scriptswitch, a software company supporting GPs with prescription information, originally developed by a small team at Warwick University. We exited our stake for 4.8 times our original investment.”
James Livingston, Partner of Foresight Group, Manager of the Foresight VCTs, said: “Our VCTs have supported 205 companies and in terms of internal rate of return Simulity was a particular highlight, an internet-of-things tech business we invested in and then sold to ARM within nine months for three times our money. In terms of value growth, working with App DNA, an application migration start-up, and selling it to Citrix for almost $100m generating a 32-times return was pretty exciting.”
Stuart Veale, Managing Partner of Beringea, Manager of the ProVen VCTs, and Chair of the Venture Capital Trust Association, said: “We have backed 120 companies and in terms of enterprise value at exit, Watchfinder is our top performer. Watchfinder, the platform for pre-owned luxury watches, grew during ProVen’s investment to become the UK’s fourth largest watch retailer – its growth and innovative use of technology motivated Richemont, the Swiss luxury group, to acquire the business in 2018. Mergermarket is another standout performer. Having been acquired by the Financial Times Group in 2006, Mergermarket has grown to become a cornerstone of the financial data and media industries – it has since been valued at £1bn, making it ProVen’s first ‘unicorn’.”
Trevor Hope, Partner of Mobeus Equity Partners, Manager of the Mobeus Income & Growth VCTs, said: “Since the day we started, we have played a successful role in the stories of 48 UK SMEs that have been realised. We’re very proud that by backing these driven and determined UK businesses over our 20-year history, those realisations have made a net £220 million of cash profits for Mobeus VCT shareholders and that, in more than half the cases, we more than doubled our initial investment.”
Dr Paul Jourdan, Fund Manager of Amati AIM VCT, said: “We made a series of investments between 2012 and 2015 which have proven to be truly scalable growth companies, each in their own way playing a role in the deployment of digital technology to transform the way that different industries work. Our strategy of running the winners makes us long-term investors in these businesses. Each has made us returns of between 15 and 20 times our original investment, taking account of the profits we have taken along the way. These companies now feature amongst our top ten positions in the VCT. Frontier Developments is one of the UK's leading video games developers and Keywords Studios is a service provider to the video games industry. GB Group provides online identity verification services and AB Dynamics is provider of crash testing and transmission testing services to the automotive industry.”
Now versus then
Kostas Manolis, Partner and Head of Unquoted Investments at Downing, Manager of the Downing VCTs, said: “It's safe to say that the VCT market looks very different today compared to 25 years ago, with one of the biggest developments being the rule changes away from management buy-outs and asset-backed companies towards earlier-stage investments. This renewed emphasis on early-stage companies has sparked some really exciting opportunities for us across a number of sectors, including cutting edge 'deep tech' and healthcare companies.”
Jo Oliver, Fund Manager of Octopus Titan VCT, said: “The start-up ecosystem in the UK was in its infancy 25 years ago and now it’s one of the best places in the world to start and scale a business. The transformation over that time really is extraordinary and VCTs have played a crucial role in helping drive that change by helping to fill the funding gap that once existed. Just ten years ago, you probably wouldn’t have imagined that big American tech companies like Amazon, Google, Microsoft and Twitter would have acquired a VCT-backed business. Yet we’ve now sold businesses to all four, which I think is testament to how far we’ve come.
“Success breeds more success as all that experience of how to grow and scale businesses has compounded over time, especially now we have so many serial entrepreneurs. That means the quality of teams we are now able to invest in is better than it’s ever been. We’re also starting to see some positive signs in terms of increased diversity among the founders receiving funding from VCTs. There is clearly a long way still to go, and part of that is also about increasing the diversity of the investment teams themselves. It’s proven that more diverse investment teams achieve better returns, so there is plenty of incentive.”
James Livingston, Partner of Foresight Group, Manager of the Foresight VCTs, said: “I think investment sizes have grown quite significantly as funds have grown and consolidated. When VCTs were starting in the late 90s something called the internet was just getting established in consumer and investor consciousness. There have been some ups and downs along the way, but the internet has only gotten more important – from delivery of software to almost any consumer good imaginable. Female founded companies were a rarity ten or twenty years ago. Whilst the start-up and early stage ecosystem is a long way from parity it’s certainly improving.”
Patrick Reeve, Chairman of Albion Capital, Manager of the Albion VCTs, said: “Early on in Albion VCT’s history we invested in Active Hotels which went on to become Booking.com, now recognised as one of the most successful European software start-ups. More recent highlights include Grapeshot, an early-stage advertising technology business which within just four years was acquired by Oracle, while PSE, a spin out from Imperial College specialising in modelling for complex industrial processes, was recently acquired by Siemens. These three exits were all at ten times original cost. Current stars in our portfolio include Quantexa, a big data AI analytics business which has just been listed at No.14 in the Sunday Times Tech Track 100.”
Jo Oliver, Fund Manager of Octopus Titan VCT, said: “If you were to ask the average person on the street, I think Secret Escapes is probably the best-known company in our current portfolio. It’s a free-to-join members-only travel website, which offers luxury hotel stays and holidays at up to 60% discounts by selling hotel rooms that would otherwise lie empty. While it has clearly had a challenging time over the last few months, it has bounced back incredibly well, and has benefited massively from the trend for staycations, with a huge increase in bookings for holidays in the UK.”
Trevor Hope, Partner of Mobeus Equity Partners, Manager of the Mobeus Income & Growth VCTs, said: “One of the most exciting and gratifying aspects of VCT investing is the chance to spot the potential in small but disruptive companies, as we did when we backed DiGiCo in 2007 and ATG in 2008, and to provide flexible and patient support over the longer term. DiGiCo provides audio mixing solutions for live sound, broadcast and theatre and Mobeus realised its investment in 2014. The sale returned more than £25m in cash over the life of the investment to Mobeus-advised VCTs. This return equates to a five-and-a-half times multiple of Mobeus’s original investment, a cash internal rate of return of 45%. As DiGiCo’s first investor, we were extremely proud when the business (now Audiotonix) reached a reported €1bn valuation in its latest sale at the end of 2019.”
James Livingston, Partner of Foresight Group, Manager of the Foresight VCTs, said: “In our portfolio right now we have investments ranging from a therapeutic drug which uses your own blood to repair diabetic foot ulcers, to another that makes a vaginal egg temperature sensor used to monitor fertility, to one that uses artificial intelligence and undersea robots to speed leak detection for undersea pipelines. As well as lots of more typical software, healthcare, distribution, consumer and manufacturing companies.”
Jo Oliver, Fund Manager of Octopus Titan VCT, said: “For decades, healthcare products were designed with little attention paid to the physiological needs of women. ‘Femtech’ has emerged to change that, and Elvie’s co-founder, Tania Boler, is at the forefront of the trend. Elvie launched the world’s first silent, wearable, fit-in-your-bra breast pump, in late 2018. The first batch sold out within minutes, a phenomenon that has repeated itself several times on both sides of the Atlantic. This follows the success of the company’s first product, Elvie Trainer, an award-winning device which helps women train their pelvic floor more successfully, which has a number of health benefits. The market for health wearables is a multi-billion-pound opportunity, and we believe Elvie could be on course to be a go-to brand for 50% of the population.”
The next ten years
Stuart Veale, Managing Partner of Beringea, Manager of the ProVen VCTs, and Chair of the Venture Capital Trust Association, said: “As we emerge from the pandemic, the VCT industry has the experience, network and funding to drive forward the economic recovery, backing innovative companies to deliver substantial growth throughout the UK. This will undoubtedly be led by pioneering technologies shaping the future of healthcare, manufacturing, and financial services, such as cyber security, artificial intelligence and robotics. VCTs will also provide vital support to the government as it seeks to address the structural inequalities in the British economy, through supporting the levelling-up agenda as well as backing entrepreneurs from under-represented communities.”
Patrick Reeve, Chairman of Albion Capital, Manager of the Albion VCTs, said: “So where will the sector go from here? Well, the key strength of VCTs is that they are evergreen, so don’t have a fixed timetable for exit and can therefore take a very long-term view. They can be patient – and they can back true, longer-term value, which in turn tends to last and be resilient simply because it does some social good. This combination of cutting-edge technology and helping to find areas that can lead to longer-term socially positive results, seems to me where the VCT sector is heading.”
A moment of truth
REIT portfolio managers on the future of the office and how their tenants are coping
With the government now advising workers to work from home where they can, the pandemic continues to ask big questions about the future of commercial property. What does the future of the office look like? What could happen to unused office space and how are tenants coping?
There are also big questions about the future of open-ended property funds. On Wednesday 30 September, new FCA regulations came into force requiring these funds to suspend if there is material uncertainty over 20% of the fund’s value. However, the regulator has already begun consulting on new proposals requiring notice periods of 90 or 180 days for investor withdrawals.
The AIC has gathered views from investment company managers in the Property – UK Commercial sector about the future of commercial property and the funds that invest in the asset class.
Annabel Brodie-Smith, Communications Director of the AIC, said: “Whilst some of us had begun a tentative return to the office over the summer, recent announcements from the government suggest a fuller return is going to be much further down the line. There’s been a lot of discussion about the new normal, but it remains to be seen what the longer-term impact will be on the office, its location and its purpose.
“While these questions are undecided, it’s important that investors who want to invest in commercial property can do so within a suitable fund structure with reliable redemption rights. Proposals for 90 or 180-day notice periods for open-ended property funds are a step in the right direction, but we would question whether they go far enough. In Germany, the notice period is a year. The basis on which an investor can leave the fund should not change, regardless of the level of redemptions.”
The future of the office
Richard Shepherd-Cross, Manager of Custodian REIT, said: “Betting against central London has not worked for anyone over the last 20 years, so by hook or by crook I suspect it will survive as an office location. That said, the days of the five-day-a-week commute into a central London office are perhaps behind us. Remote working, whether from home, suburban or regional offices is likely to be a feature for the future. I would back regional offices in towns and cities where people want to live, rather than choosing where to live because of the train timetable, and they can benefit from a short commute to a satellite office. Locations that support a high-quality built environment and access to open space are often the cathedral or university cities such as Cambridge, Oxford, Bristol, Guildford, York or Norwich. Offices will still be in demand for professional and service sectors, where collaborative teamworking and business meetings are required. Headquarters offices to promote corporate culture, brand awareness, staff training and board-level strategy will also remain in demand. Accessible city centre locations are likely to be the preferred location for these functions.”
Jason Baggaley, Fund Manager of Standard Life Investments Property Income Trust, said: “There is likely to be an increase in the supply of available office space – with poorer quality offices becoming much harder to let, and suffering the biggest rental and capital value decline. It is too early to say what the extent of that will be, but our expectations are that central London and the West End in particular will be hardest hit, as long and expensive commutes will increase the desire to work from home. Generally we expect city and town centres to remain more popular than out-of-town offices, and that car-based commuting will only be a short-term solution.”
The future of open-ended property funds
Calum Bruce, Manager of Ediston Property, said: “The FCA’s recommendations are a step towards addressing the fact illiquid assets simply do not belong in open-ended funds. The lengthy redemption notice periods proposed by the FCA will effectively kill the viability of open-ended property funds for investors and turn attention to property investment trusts, which have long been superior vehicles for liquidity, performance and income. Fundamentally, the open-ended structure is not suitable for holding illiquid assets such as property.”
Richard Shepherd-Cross, Manager of Custodian REIT, said: “Open-ended funds have yet again proved themselves to be unsuitable structures to invest in real estate, particularly for retail investors. The funds are promoted on the basis of liquidity and investment in real estate. In truth they do not offer liquidity when it is really needed and they invest so little in real estate, often holding 25% or more in cash, that they cannot offer what is best about real estate investment, which is a high income return. I think that retail investors will be wise to this and will liquidate their holdings when the funds re-open. Should those same investors re-invest in closed-ended funds they will enjoy a low entry price in the current market, the prospect of significantly higher dividends than they have been used to and liquidity when they want it. Furthermore, over the long term they will see outperformance relative to the open-ended funds they left. I think the writing is on the wall and this will be re-enforced by the FCA’s recommendations which will make it very hard for retail investors to invest or for their wealth managers to advise investment.”
Jason Baggaley, Fund Manager of Standard Life Investments Property Income Trust, said: “A huge amount of time has been spent with individual tenants discussing their needs. Some tenants, mainly the larger corporates, have refused to engage, or simply refused to pay rent even whilst they have traded. The vast majority of our tenants have engaged in constructive discussion. With our smallest tenants we have suggested a write-off of rent for a period – they need to be helped to have a future business, and during lockdown the safety and well-being of them and their families was the main priority. For our larger tenants we have agreed a range of solutions, based around their business needs. It has been heartening to have had so many positive conversations and to have been able to help those who have needed it the most.”
Calum Bruce, Manager of Ediston Property, said: “We are doing what we can to keep on top of events and will provide support, reassurance and appropriate assistance to those tenants struggling as a result of lockdown where necessary. We have agreed rent deferment and repayment plans with tenants who have demonstrated genuine hardship. To date, no outright rent-free period has been granted unless we have received some benefit, like a lease extension, in return. Unfortunately, several well capitalised businesses which can afford to pay their rent are taking advantage of the pandemic and are choosing not to pay any rent. A landlord’s ability to pursue these arrears is fettered because of the government-imposed moratorium on the use of the usual arrears recovery methods, which has recently been extended and will be in place until at least the end of 2020.”
Richard Shepherd-Cross, Manager of Custodian REIT, said: “In common with most landlords, we have supported tenants with rent deferrals, rent-free periods as part of lease renegotiations and in isolated cases have considered rent concessions. While government legislation has handed control in rent recovery negotiations to tenants, without any support being offered to landlords, it should be noted that collectively the commercial landlords of Great Britain, many of whom are individual savers and pensioners, investing via REITs and funds, have offered huge economic support to GB plc. Investors have foregone dividends, endured illiquidity as material uncertainty forced open-ended funds to close while at the same time suffering CVAs and administrations, which in turn have diminished asset values. Let us hope that the tenants of Great Britain return the favour and revert to paying rent as soon as they are able.”
Will unused office space be converted?
Jason Baggaley, Fund Manager of Standard Life Investments Property Income Trust, said: “Over the last five years we have seen a great deal of conversion of old offices into hotels and residential units. That is likely to continue, although the demand profile for residential will evolve as people prepare to work from their home more of the time – and we are unlikely to see significant hotel demand for a while.”
Richard Shepherd-Cross, Manager of Custodian REIT, said: “The process of converting unused office space into residential space or student accommodation has been underway for some time. Permitted development accelerated this activity and created the opportunity for rental growth in regional office markets. Secondary office space that neither fits with current environmental standards nor provides a COVID-safe working environment will quickly fall into vacancy and disuse. Happily, in most towns and cities, the pricing dynamics of residential or student property will support conversion and I would expect this trend to continue. Even if we see a reduction in demand for office space, the conversion of the secondary office space will help to keep supply and demand sufficiently in balance to support office rental levels.”
The future of retail
Calum Bruce, Manager of Ediston Property, said: “It is our belief convenience-led retail warehouse assets, which constitute 61.6% of our portfolio, will prove to be more resilient than other parts of the retail market. Retail warehouse assets have proved to be more resilient than both high streets and shopping centres during the COVID-19 pandemic. During lockdown several out-of-town retailers were able to stay open for trade as they were classed as providing ‘essential services’ by the government. As lockdown restrictions were lifted, but social distancing continued, the attributes of out-of-town retail parks appealed to customers, as evidenced by higher footfall numbers. Their accessibility, ample car parking provision, and the space they provide for queuing (avoiding contact with other shoppers) plus the fact that they are open-air, make them the ideal location for shopping in the post-lockdown world.”
Richard Shepherd-Cross, Manager of Custodian REIT, said: “Town centre retail is oversupplied and rents are reacting accordingly. Too many retailers are misusing CVAs to drive down rents and circumvent their contractual obligations, which is in part made possible by the oversupply of shops. If we look beyond the pandemic, retail town centres are likely to be smaller but with a wider range of local operators, previously pushed out by the national multiple chains, and a strong mix of retail and leisure.”
Jason Baggaley, Fund Manager of Standard Life Investments Property Income Trust, said: “Nearly all landlords have found rent collection difficult given the economic headwinds. Over 85% of rent owed to us has been paid. The majority of those tenants who are in arrears have agreed a schedule to repay the rent from Q2 and Q3 in the future, mostly in 2021, and several have agreed terms to extend their lease commitments in return for a write-off of some rent. In most cases where rent arrears exist, we anticipate recovery by way of an agreed repayment schedule for deferred rent, or a write-off in return for extended lease terms.”
Investing to beat climate change
Faith Glasgow explores the appeal of the Renewable Energy Infrastructure sector
Unprecedented forest fires in Siberia, California, Australia. Tornados, devastating floods, record-breaking summer temperatures, shrinking ice caps. There is plentiful evidence that the earth’s climate is changing rapidly as a result of human activity, with catastrophic consequences for society and the natural world.
As concern over the future of the planet has become a mainstream movement over the past two or three years, interest in broader ‘sustainability’ and ESG (environmental, social, governance)-focused funds has mushroomed. But the options for investors keen to invest part of their portfolio specifically to mitigate the effects of climate change are relatively limited.
This is where the AIC’s Renewable Energy Infrastructure sector comes into its own. The 13 investment trusts housed in this sector focus their attention on infrastructure projects designed to reduce carbon emissions, primarily through solar or wind power generation, energy storage or improved energy efficiency.
As Peter Walls, manager of the Unicorn Mastertrust fund of investment trusts, observes: “If you’re really worried about the climate, this is pretty much the only [collective] investment option available to you.”
Although most people think of investment trusts and companies as investing in listed equities, there has been massive growth in those focused on alternative assets, including not only renewable energy infrastructure but also the likes of property, debt, private equity and aircraft leasing. Over the six years to August 2019, AIC figures show that alternative trusts more than doubled in value from £35 billion to £80 billion, and they accounted for 70% of total new share issuance in 2019. In the renewable energy sector, the number of trusts has doubled over the past three years alone.
The big advantage of these trusts for particularly hard-to-sell assets such as renewable energy infrastructure is their closed-ended structure, which means that a fixed number of shares are issued and traded on the stock market. When demand falls, the trust’s share price drops and the discount to net asset value (NAV) widens; but, in contrast to open-ended funds, the manager does not have to keep cash available or sell assets if investors rush to get their money out.
David Gorman, head of research at Castlefield Investment Partners, adds: “Shares are traded on the stock market just like regular stocks, so they are very liquid investments and they enable investors to access a broad range of assets in a cost-effective way. For people interested in investing sustainably, trusts can invest for the long term in a portfolio of wind farms, an anaerobic digestion plant or maybe even social housing, all things which an individual would not be able to invest in directly.”
However, the appeal of renewable energy investment trusts extends well beyond anxious environmentalists. With reliable dividend-paying assets highly prized in these days of rock-bottom interest rates, income investors have homed in on the generous yields on offer. These currently average 5.2% and in many cases are linked to inflation (with any capital growth as a bonus).
As a consequence, all the companies in the sector are currently trading on hefty premiums to NAV, averaging 17.5%. That's a bigger premium than any other AIC sector.
Walls suggests that current premium levels mean “it may be worth waiting for the secondary share issues that happen from time to time”. It’s important to note also that these trusts are specialist investments and should only form a small part of any balanced portfolio - particularly as their performance will be influenced by external factors such as the wider price of fuel globally and the UK government’s policy on supporting renewable energy generation through subsidies and other initiatives.
If you’d rather look for a broader-brush investment response to environmental concerns, the leading option of the three trusts in the Environmental sector is Impax Environmental Markets, which invests in companies active in the growing resource efficiency and environmental arena, from sustainable forestry to pollution control. It trades on a modest 2% premium and has seen a share price rise of 21% over the past year.
Is the tide turning for UK equities?
The time to buy is often when prospects look grimmest, reflects Ian Cowie
Doubts about how Brexit will work in practice after the transitional period ends in less than three months’ time have depressed many British share prices to the point where they look cheap. Unfortunately, ‘cheap’ is not always the same thing as ‘good value’ and it remains unclear which individual businesses will deliver income and gains to investors brave enough to buy today.
Fortunately, many UK investment companies’ shares are trading at double-digit discounts to their net asset value (NAV). Better still, they enable us to avoid the difficulty of trying to pick individual winners by diversifying our money over dozens of different businesses.
For example, the AIC UK All Companies and UK Smaller Companies sectors are both currently priced more than 11 per cent below their average constituent companies’ NAV, according to independent statisticians Morningstar. So buyers of these trusts obtain £1 of underlying assets for every 89p they invest.
That’s a good place to start because the first step toward making a profit is often - but not always - to buy low. Just how lowly-priced UK Plc is compared to overseas rivals can be seen in analysis by the German asset manager, Star Capital. This expresses share prices as a multiple of their corporate earnings - to calculate their price/earnings or P/E ratio - and refines that measure of value by placing it in the perspective of historic valuations, to give the cyclically-adjusted P/E or CAPE. Star Capital calculates that America’s CAPE ratio is currently 32; Japan’s is 19; France’s is 18; Germany’s is 17 and Britain’s is less than 13.
Put another way, the average CAPE ratio for developed markets around the world is 25 while emerging markets score 16. So Britain’s rating on this benchmark is about half the developed world’s average and even lower than emerging markets’ typical ratio. No wonder some senior fund managers are beginning to argue that politics rather than economics are depressing domestic valuations. For example, Mark Mobius, the founder of Mobius Investment (stock market ticker: MMIT) who has invested around the globe for three decades, said: “The UK is beginning to behave like an emerging market in terms of political uncertainty. The political situation has deteriorated, with more polarisation and less reliability in general.”
Similarly, Nick Train, who has managed Finsbury Growth & Income (FGIT) since the end of the last century, recently compared two of this companies’ underlying holdings. He observed: “It is hard to analyse the difference in share price performance between the two as being anything else than a punitive discount being placed by global investors on a company that is listed in London, rather than Hong Kong. Apparently global investors have an aversion to the UK stock market, but this is, in some cases, getting ridiculous.” Bear in mind that FGIT is the top-performer in the UK Equity Income sector over the last five and 10-year periods, when it generated total returns of 66 per cent and 252 per cent respectively. To put those numbers in perspective, Morningstar calculates that the average total returns from this sector over those periods were 3 per cent and 75 per cent.
Mobius and Train are not the only managers who have noticed how cheap British share prices look. A dynamic duo of new investment companies are aiming to capture the value in smaller companies trading in this country.
Keith Ashworth-Lord, founder of Sanford DeLand Asset Management, which aims to apply the principles of investment guru Warren Buffett, is launching the UK Buffettology Smaller Companies Investment Trust (BUFF).
Meanwhile, City giant Schroder Investment Management is launching the Schroder British Opportunities Trust.
When I asked Ashworth-Lord why anyone would buy a new UK investment trust when long-established rivals are trading at double-digit discounts to their NAV, he replied: “Price is what you pay, value is what you get.”
Whether Buffett’s words of wisdom prove right again remains to be seen. Here and now, it is encouraging to see several experienced fund managers, with impressive long-term outperformance, claiming that UK equities are unloved and undervalued. The best time to buy shares is often when we least feel like doing so, because that’s when investors’ confidence and share prices are likely to be low. Brexit Britain might yet prove to be a real bargain as part of a globally diversified portfolio.