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Financial Times - Activists open door to trust opportunities

by : David Stevenson 

A couple of weeks ago, I worried out loud that the spate of shareholder activism towards investment trusts and their boards might have a detrimental effect on investor choice.

These attacks – which involve shareholders trying for force managements to change their approach or return cash – are motivated by share prices that stand at wide discounts to the value of the trusts’ assets. Some investment trust share prices now reflect just 30 per cent of their net asset value (NAV).

As a result, activist attacks continue on an almost-weekly basis. One of the latest victims is a fund that invests in Kazakh equities, called Tau Capital. Concerns over corporate governance, commodity prices and a weighty investment in private equity have pushed its discount out to 25 per cent.

Now, you might think these activist assaults would be having the desired effect, as managers try to narrow those discounts to keep shareholders happy. Sadly, a scan down the latest statistics from analysts at Numis reveals the exact opposite: discounts are still widening across the whole listed fund sector, with more funds now trading at the higher end of their 52-week levels.

According to Numis, out of the 488 funds in their universe, more than 19 trade at a discount of more than 70 per cent to NAV, another 70-odd trade at a discount of more than 40 per cent, and 168 trade at a discount of more than 20 per cent. By contrast, just 81 investment trust shares trade at a premium to NAV.

On paper, this is bad news, but as I scan down the list, I can’t help but see potential opportunities.

Aurora Russia tops my list, with a stated discount to NAV of 63 per cent, although it is probably closer to 40 or 50 per cent in reality. I own shares in this specialist Russian private equity fund and, to date, it’s been a terrible investment. However, I think there’s a good chance that the next 18 months could prove to be more positive, assuming that Vladimir Putin, Russia’s president, doesn’t turn the clock back completely to 1937. An activist board has been installed at Aurora, dedicated to selling off the three core businesses: a Russian DIY chain (think B&Q in Cyrillic), a Russian money transfer company (its version of Western Union); and a Russian document storage business (similar to Iron Mountain). All are trading solidly – so I hope B&Q, Western Union and Iron Mountain might one day make them a sensible offer.

Next on my list is legal fund Juridica Investments which is trading at just 46 per cent of NAV. This fund invests in legal claims and was very much the pioneer in this fast-growing niche sector. I haven’t looked in detail at this fund yet but legal claims do seem to be a new asset class with potential, for those willing to be very patient.

Adventurous types should also take a closer look at private equity fund Origo Partners, at a 46 per cent discount, and Macau Property, at a 43 per cent discount. Both have very specific strategies for making investors money and a decent record – but seem to be unloved by a market no longer so keen on all things Chinese.

Analysts also seem to have regained their enthusiasm for private equity funds in the UK, with Jon Moulton’s Better Capital much the most favoured play. But cheapo contrarian types might be better off looking at Dunedin Enterprise at 38 per cent discount; Pantheon International, at 34 per cent; JZ Capital, at 28 per cent; and HG Capital, at 15 per cent.

For me, HG is the standout company in that list and I already own shares in it. It has a good reputation in the UK and European mid-cap buyout market. JZ has a great record in the US, and Pantheon International is starting to look like a very cheap way to buy into an internationally diversified portfolio of underlying primary funds. Dunedin seems to be one of the most unpopular funds in this sector, but a flood of profit realisations in recent weeks suggests it is doing some things right.

Over in the resources sector, the aforementioned Tau Capital looks interesting for its central Asian focus, as does Baker Steel, which invests in global special situations in the mining sector and trades at an 18 per cent discount. Meanwhile, the shareholder battle at Diamond Circle – a small fund that buys investment-grade diamonds and trades at a discount of 32 per cent – looks like it might be approaching a conclusion, with a Lebanese investor buying up a large chunk of the fund. But if its stays on the market, it could be worth a second look.

Obviously there’s one very big caveat to all these discount-driven “opportunities” – discounts can and do get even wider if markets ignore the valuations of complex asset classes!