Numis Securities has removed three investment companies from its list of recommendations covering ‘alternative’ assets in property, infrastructure, and debt.
The appetite for alternatives remains strong as investors look for growth away from mainstream equities in uncertain stock markets, and hunt for reliable income in a low interest rate world. London-listed funds in these areas make up nearly half of the investment company universe following a boom in recent years, and currently have a market capitalisation of £80.6 billion.
However, the broker noted that the pace of fund-raising had slowed, with £5.1 billion raised last year, down 43% from the £9 billion raised in 2017, while numerous flotations and initial public offers (IPOs) were pulled in 2018.
Numis analyst Ewan Lovett-Turner said fundraising conditions ‘remained tough’ this year with just one flotation in the first quarter, although it had been a big one as Baillie Gifford’s pre-IPO Schiehallion Fund (MNTN) raised £364 million from institutional investors.
With its recommendations Numis aims to identify investment companies it believes will deliver attractive returns, either through a narrowing of any discount - which is the gap between a share price and an investment companies’ net asset value (NAV) - or through strong performance in the underlying portfolio.
It divides its picks between long-term ‘core’ holdings and shorter-term ‘trading’ opportunities.
Hedge funds bounce back
According to Lovett-Turner the ‘majority’ of alternative share prices rose in the first three months of the year, ‘reflecting the improvement in risk appetite’ after the big market falls at the end of 2018.
Private equity investment trusts made the strongest recovery thanks to positive NAV announcements offsetting the impact weak equity markets at the back end of 2018 had on valuations.
Lovett-Turner said the ‘laggards’ included aircraft leasing funds which reflected ‘fears over the residual value of A380s’, which Airbus have taken the decision to stop manufacturing.
Although there were no new additions to Numis’ list, strong share price gains saw three investment companies dropped.
Change of direction
Greencoat UK Wind (UKW) saw its share price rally 13% in the first quarter, moving to a 14% premium above NAV.
Lovett-Turner said the boost ‘partly reflects the NAV uplift from the extension of the assumed asset life for the whole of the portfolio from 25 years to 30 years’.
The success of the shares may also be partly due to an oversubscribed fundraise by rival Renewables Infrastructure Group (TRIG), which raised £302 million in an oversubscribed offer earlier this year, and proved just how popular renewables are.
TRIG did knock Greencoat off the top spot in terms of size, with the former growing to £1.8 billion, versus the latter’s £1.7 billion, but analysts are assuming Greencoat will come back to market.
‘We hold management [of Greencoat] in high regard, but believe that a future capital raise may provide a more attractive entry point, and so we would look to take profits,’ said Lovett-Turner.
Short but sweet
Blackstone/GSO Loan Financing (BGLF) didn’t make it onto the recommendation list for very long. Lovett-Turner added the trust, which invests in senior debt and collateralised loans, to the portfolio in January 2019 but is removing it just three months later after a rise in the share price as US credit market sentiment improved.
‘Sentiment towards the senior loan and collateralised loan market has improved, and the shares have risen 13.5% in sterling,’ he said.
‘As such, we are removing it from our list and continue to favour Fair Oaks Income (FAIR) as our long-term holding for exposure to collateralised loans.’
Property pushed out
Regional Reit (RGL) has seen its discount narrow in the first three months of the year to 9%, down from the mid-teens when it was added to the recommend list.
The real estate investment trust, which has a portfolio of offices and light industrial units located in regional centres around the UK, was added last year on its low valuation and high yield of 7.8%.
‘We continue to back the management team to deliver on their active asset management plans, but believe that better value is available elsewhere in the sector,’ said Lovett-Turner.
Better value could be found in Reits trading on bigger discounts, including Schroder Real Estate (SREI) at 18%, F&C Commercial Property (FCPT) at 15%, and F&C UK Real Estate (FCRE) on a discount of 13%.