The broker Numis has recently released its investment trust recommendations for the year. These include a number of specialist mandates that are worth a closer look.
A good example is Bill Ackman’s £12bn listed hedge fund, Pershing Square Holdings (LON: PSH). It owns a concentrated portfolio of US equities with a hedging overlay strategy that aims to protect against black swan and other global macro risks.
PSH has built up an amazing track record with a five-year annualised return of 28%, yet the shares trade at a persistent discount and are currently available 28% below NAV. Numis believe that the fund offers value at this level, although there is no obvious catalyst for the shares to re-rate.
Another trust operating in the same sector is the £1.6bn BH Macro (LON: BHMG), which has a strong long-term record as a diversifier. Recently however it has really struggled and slipped to a 12% discount, although the Board has rather belatedly started to buy back some of the shares.
The problem is the 28% stake owned by Investec/Rathbones that has turned a strong supporter into an ongoing seller. Numis believe that it may require a corporate action solution to reduce this position that is seen as an overhang by the market.
One fund that appears to offer exceptional value is the £538m Riverstone Energy (LON: RSE), which invests in the global energy sector. Its shares are trading at a 36% discount to NAV, 44% of which is currently held in cash.
RSE is exploring the most efficient way to return capital to shareholders and if they were to succeed it would mean that the remaining assets are valued at an implied discount of 62%. The problem is that this could be a complicated process due to the onerous management contract and could incur substantial costs.
A more mainstream alternative is AVI Global (LON: AGT) that mainly invests in undervalued funds and holding companies. Its underlying portfolio trades on a wider than normal weighted average discount of 33%, while its own shares are available 10% below NAV, which represents an attractive double discount.
Numis says that AGT offers discounted exposure to cheap investment trusts such as Pershing Square and Third Point, as well as basket of listed private equity funds. The portfolio also includes European holding companies such as EXOR and Aker, as well as the alternative asset managers, KKR and Brookfield AM.
Investors who are primarily looking for yield may be interested in the £800m TwentyFour Income (LON: TFIF), which invests in floating rate asset-backed securities. The shares are yielding ten percent and Numis consider it an attractive option as they think that interest rates will remain at meaningful levels for some time.
TFIF distributes all of its income each financial year, as measured to the end of March. The broker says that the purchase yield in the current reporting period is 11.4%, which gives the scope for the double digit yield to increase even further.
Another option they highlight is Fair Oaks Income (LON: FAIR) that operates in the structured debt sector and yields 14%. Numis says that the high cash flows compensate for the likely increase in defaults as economic conditions deteriorate.
Before investing in any of these specialist funds it is important to understand that all of the wide discounts and high yields exist for a reason. These are complex vehicles that are subject to material uncertainties and it is only where market participants have misjudged them that the return will more than compensate for the risk.