There are few property companies that have delivered asset value growth over the last three years. Those that have been almost exclusively exposed to emerging markets and have been rewarded for this excellent outperformance with a substantial share price falls. Developed market property, long perceived as being safer, have experienced substantial asset value falls and share price outperformance. This is quite perverse. However, this does present opportunities for investors that can take advantage of these anomalies. We have built up a position in South African Property Opportunities alongside a number of like minded investors at discounts in excess of 60%.

Shareholders have forced change on the fund over the last year with the original directors being removed, the managers changed and a strategic review implemented. The result of this review was announced last month and provides further clarity for the future of the fund. The portfolio has been divided into two with part to be realised in an orderly fashion over the next two years and the remainder being retained for further additional development prior to disposal over the next three years.

These sales will allow for a phased return of capital to investors. The method of return - share buy backs, cash distributions or tenders - have yet to be decided. Assuming it takes the full three years to complete and only realising the current asset value, this would generate a 30% per annum return using the current share price. To date, there has been a modest discount narrowing which should accelerate.

Originally published in August 2010

This month we are highlighting a fund which is in a way an each way bet. If the fund outperforms, shareholders will benefit from that outperformance together with an improvement in discount rating as investors buy into a successful fund. If the trust underperforms, while the asset value will be adversely impacted, shareholders may force some form of restructuring. This is a form of natural selection with the strong surviving at the expense of the weak and is common within the investment trust sector. There is a well defined cycle with strong fundraising being followed by restructurings and capital being returned to investors. The secret is generally to avoid the first and concentrate on the second. Currently, we appear to be firmly in the second with limited fundraising and substantial restructurings.

Its performance has not been sufficiently good to guarantee survival and has led to a number of activist shareholders taking holdings. With approximately a quarter of shares now in activist hands, the pressure is increasing and the discount has contracted from a near 30% discount down to mid teens. More still to come.

Originally published in July 2010

This month we are highlighting a fund in the fast growing cleantech / green technology area. Low Carbon Accelerator is one of only a handful of closed ended investment companies that specialise in this area and the only one that is wholly invested in private companies. The fund was launched in 2006, raised further money this time last year and now has a mature portfolio with ten investments. It is unlikely that there will be any further new investment made with cash resources being earmarked for follow-on funding of existing investments. In common with a number of private equity funds, it is priced on a wide 50% discount. Having suffered in 2008, the fund has seen asset value progression over the last three quarters. However, like a number of smaller investment funds, the share price has not reacted to the positive net asset value growth and the discount remains wide.

The fund’s portfolio, which is invested roughly half in the UK and half in USA, is concentrated in low carbon products and services in the following sectors: buildings (sustainable building materials, heating, lighting, clean air and water technologies for industrial, commercial and/or residential use); fuels (bio-fuels, low carbon fuels, catalysts and additives); energy efficiency (reductions in energy inputs at source, improved conversion and reductions at point of use); and energy generation (sustainable and clean energy, micro and distributed generation).

We believe that there will be a number of liquidity events within the portfolio over the next year which should be asset enhancing and discount narrowing.

Originally published in June 2010

This month, we are highlighting a fund which has been subject to material investor pro-activity over recent months. We intimated in recent factsheets that there are number of funds within the portfolio that offer the opportunity to make us as shareholders money with limited exposure to equity indices. Ceres Agriculture Fund is a good example of this, not only due to its investment remit but also for its discount narrowing potential.

The fund was launched at the height of the 2007 new issue bubble. This ‘alternative’ fund was targeted towards agriculture principally soft commodities; a hot area at the time. The asset value performance since launch has been poor and unsurprisingly the share price fell consistently for most of 2008 with the discount hitting in excess of 30%. This was in the face of claims by management that the underlying assets were extremely liquid – indeed they boasted that the entire portfolio could be liquidated within a single day. Investors took fright, there were few buyers and we were able to buy a position at an attractive level.

We were encouraged by the fund dynamics and in particular a requirement for an annual tender that was built into the listing documents. Almost three quarter of shareholders tendered their holdings at the most recent tender, which was completed last month. This, in conjunction with a further tender / liquidation requisition made by ourselves and other pro-active shareholder, has resulted in a board recommended liquidation vote. This should allow us to realise the investment at a level very close to asset value.

Originally published in May 2010

Investing, particularly in emerging markets, tends to fall into two camps – passive (index oriented) or active. Generally, index orientated funds track an index and over the longer term tend to underperform while active funds give the opportunity of substantial outperformance.

EOS Russia is an active unconstrained fund launched in mid 2007 in order to capitalise on investment opportunities arising as a result of the process of deregulation, restructuring and privatisation of the Russian electricity industry. Readers will recall Margaret Thatcher sanctioned a similar process in the early nineties, creating substantial returns for investors. The main goals are to increase the efficiency of the existing energy companies and create an attractive climate for private investments – very Western aims.

The Fund’s starting portfolio consisted of a single investment Unified Energy Systems which was broken up in mid 2008 into 26 separate companies. Subsequently, the portfolio has evolved to a more attractive mix with the eight largest investments now accounting for three quarters of the portfolio and heavily weighted towards distribution and generation.

The reform process has come a long way in the last two years and is now on par with the Nordic countries and ahead of the average European Union country. Russia has an ever increasing energy need and the process will meet its future need for electricity. Substantial value has already been identified and the fund’s asset value has more than doubled in the last year. Perversely it trades on a wide discount currently 25% which will narrow on the run up to its end date which is in 2012.

Originally published in April 2010

Although this month we are focussing on JP Morgan Russian Securities, it is worthwhile tying this in to a broader comment on Russia itself. The fund is the longest running trust specialising in Russia and has been a core position since the Fund’s start. The returns have been very volatile but it has been the best performing fund over ten years. However, it was one of the worst in 2008 when the Russian market fell by 75% subsequently more than doubling in 2009. Throughout most of the last couple of years, the discount has been very consistent around 10%.

The fund is similar to a number of emerging market specialist funds with an aim of outperforming the main benchmark indices – in Russia this is the MSCI Russian Equities Index. However, it is different by having sector weightings demonstrably different from both its benchmark index and competitor funds. It maintains a materially underweight relative position in both energy and utility companies with overweight positions in consumer focused businesses and telecom companies. This has allowed for a reduction in volatility.

On Russia generally, rather than being intimidated by the scale of the recent rebound, it is worth noting that the 2009 rally started from valuation levels similar to crisis lows seen in 1997/8 and recent rises have merely restored valuations closer to fair value. Looking forward, Russia remains dependent upon the oil price, global liquidity and global growth. However, with valuations not challenging, 2010 should be another positive year for both Russia and the fund.

Originally published in March 2010

Although this month we are focussing on JP Morgan Russian Securities, it is worthwhile tying this in to a broader comment on Russia itself. The fund is the longest running trust specialising in Russia and has been a core position since the Fund’s start. The returns have been very volatile but it has been the best performing fund over ten years. However, it was one of the worst in 2008 when the Russian market fell by 75% subsequently more than doubling in 2009. Throughout most of the last couple of years, the discount has been very consistent around 10%.

The fund is similar to a number of emerging market specialist funds with an aim of outperforming the main benchmark indices – in Russia this is the MSCI Russian Equities Index. However, it is different by having sector weightings demonstrably different from both its benchmark index and competitor funds. It maintains a materially underweight relative position in both energy and utility companies with overweight positions in consumer focused businesses and telecom companies. This has allowed for a reduction in volatility.

On Russia generally, rather than being intimidated by the scale of the recent rebound, it is worth noting that the 2009 rally started from valuation levels similar to crisis lows seen in 1997/8 and recent rises have merely restored valuations closer to fair value. Looking forward, Russia remains dependent upon the oil price, global liquidity and global growth. However, with valuations not challenging, 2010 should be another positive year for both Russia and the fund.

Originally published in February 2010

This month we are concentrating on a fund that with assets in excess of £1bn is the largest specialist investment trust in the sector and was one of the Fund’s first investments. At the time of the initial investment, the fund was unloved and the sector out of favour. Since then, the sector has regained favour and to a degree the rating has improved, however with the discount in the mid teens, there is further scope for discount narrowing and share price appreciation.

The fund’s policy is to invest in mining and mineral companies globally. The majority of the return is through capital appreciation although the fund does pay a dividend equivalent to approximately 1% per annum. The fund retains the option of also investing up to 10% in physical metals. The fund tends to concentrate on the larger capitalised companies. Although many investments are listed in mature markets, their activities are in regions such as South America, South East Asia and South Africa and across a number of commodities including gold.

We have been positive on the resource sector for a number of years and see no reason to change this view at present. Commodity prices have rallied strongly in 2009 as the financial distress in the sector has eased. One would expect this to lead to an increase in supply, however there has been a shutdown of existing capacity and new supply has been scaled back. Even a modest increase in demand should provide ongoing support to commodity prices.

Originally published in January 2010