The fund offering uncorrelated returns with downside protection

5 mins. to read
The fund offering uncorrelated returns with downside protection

There are not many funds that are capable of delivering decent returns regardless of the wider market, with one of the few exceptions being Crystal Amber (LON:CRS). The £230m investment trust has a very small retail following, although many people will have an exposure to it via the Woodford Equity Income fund as Neil Woodford’s investment management company is one of the largest holders with 16% of the shares.

The fund is managed by Richard Bernstein of Crystal Amber Asset Management who aims to provide shareholders with an attractive total return by investing in a concentrated portfolio of undervalued UK companies. These typically have a market value of between £100m and £1bn with most being towards the small and mid-cap end of the spectrum.

Bernstein is an activist investor that targets UK special situations where he thinks he can release value regardless of the direction of the wider market. He uses a screening process and his network of contacts to identify potential investments and will typically look for companies that will generate a return of 20% per annum over the holding period. This will normally be around four years.

The manager has a preference for cash or asset backed businesses and will look at the discount to net asset value (NAV), as well as any previous corporate activity and the presence of strategic shareholders to assess the likelihood of the company being bought out.

Wherever possible Bernstein attempts to create an activist angle so as to maximise shareholder value. Normally the reaction of the investee company management teams has been positive and he avoids businesses with serious problems or those with difficult people in charge.

A concentrated portfolio

As you would expect, it is a concentrated portfolio with just 17 holdings at the end of March. The largest of these represented a third of the NAV, with the top five accounting for three-quarters of the assets.

By far and away the biggest holding was Hurricane Energy, with Crystal Amber owning an 11.7% stake. The oil and gas company explores and develops offshore on the UK continental shelf with the main focus being on fractured hydrocarbon basins. Bernstein believes that the recent drilling results support his view that Hurricane has a significant resource base that could be in excess of one billion barrels of oil.

A further 13.7% of the fund is invested in Northgate, a light commercial vehicle rental company that operates in the UK and Spain. Its main business is flexible vehicle rentals that don’t tie the client into a long-term commitment, although it also sells some of the vehicles.

As you would expect, it is a concentrated portfolio with just 17 holdings at the end of March.

In December 2016 the company announced the appointment of a new CEO, Kevin Bradshaw, who had previously run Wyevale Garden Centres and the UK branch of Avis Europe. Bernstein is actively engaged with the management team to try to help it capitalise on its brand, market position and balance sheet strength, and believes that it is trading at a significant discount to the market.

The next largest holding is the residential property company Grainger that accounts for 13% of the fund’s assets. Grainger owns more than 3,600 regulated tenancy properties with a total value of £1.3bn. As these become vacant and are sold, it is thought that they will produce a reversionary surplus of £327m for the business.

At the end of last year Grainger’s shares were on a 17.1% discount to its NAV of 287p per share, which excluded the 78p per share reversionary surplus. Bernstein thinks that there is the potential to add significant value either by spinning off the regulated tenancy portfolio or from the sale of the business.

Strong uncorrelated returns

Crystal Amber has had an impressive 12 months with a NAV return of 54.9%, which makes it the best performing investment trust in the UK All Companies sector. This superb performance has enabled the discount to narrow to less than 1%.

Bernstein believes that the focus on special situations makes the fund less exposed to the wider market conditions. He also buys out‐of‐the‐money FTSE 100 put options to help protect shareholders against a significant general sell‐off.

He has had this policy in place since January 2012 and is prepared to allow for performance attrition of up to 4% per annum on hedging. During the 6 months to 31 December 2016, the net cost of these options was £5.4m, which was equivalent to 2.9% of the average net assets over the period.

Research by the investment trust team at Winterflood Securities shows that there is very little portfolio overlap between Crystal Amber and the other investment trusts in both the UK All Companies and UK Smaller Companies sectors. In most cases there are no common holdings whatsoever, with the biggest overlap being the 9% with the value orientated Aberforth Smaller Companies.

This suggests that the fund is a valuable diversifier, which is further reinforced by the strong excess returns relative to its various benchmarks. According to data compiled by Winterflood, over the five years to 27 April the fund’s NAV was up by 148% compared to the 59% achieved by the FTSE All-Share. It also comfortably beat the average sector performance.

Crystal Amber is mainly driven by the stock specific returns, especially when one or more of the investee companies are able to realise their hidden vale. This was the case both in 2012 and 2016, with the fund carrying on its successful record into 2017.

A unique fund

Over the last few years the fund’s shares have traded between a 10% discount and a 10% premium. The Board has the authority to buy back shares to control the discount volatility, although the recent strong performance means that they are currently trading close to par value.

There is a tiered management fee arrangement with a charge of 2% per annum of NAV or the market cap up to £73.5m, whichever is lower, and 1.5% above this. A performance fee of 20% will also apply although it is subject to a compounding hurdle rate of 10% per annum. This resulted in a pretty punchy ongoing charges figure of 2.17% for 2016.

It is interesting to note that 84% of the fund’s shares are owned by institutional investors such as Woodford and Invesco Perpetual.

It is interesting to note that 84% of the fund’s shares are owned by institutional investors such as Woodford and Invesco Perpetual, with the directors and management accounting for a further 4% and wealth managers 6%. Just 5% of the company is held by retail investors.

Neil Woodford bought his sizeable stake via a placing of shares in January 2015. He had previously invested in the fund when he was at Invesco Perpetual where he ran the firm’s Income and High Income funds. Crystal Amber used to offer a decent dividend yield, although this has now fallen to 2.1% following the strong capital gains. The fund’s policy is to pay a dividend of 5p per annum.

Crystal Amber is a unique, specialist fund that is capable of generating high and uncorrelated returns. This makes it a useful addition to a portfolio, especially if you think that the wider market is unlikely to put in a strong performance.

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