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Ken Baksh – Portfolio diversification..6% annual yield and 6% discount to assets for European property investment trust idea!
Schroder European Real Estate Investment Trust-ISIN- Gb00By7R8K77
Launched in December 2015, the Schroder European Real Estate Investment Trust targets growth regions in Continental Europe and aims to provide a regular and attractive level of income together with the potential for long term income and capital growth.
With a certain degree of uncertainty surrounding the UK commercial property market (slowing economic growth, BREXIT) increasing number of investors are looking to continental Europe for their real estate exposure, and the SERE would seem to tick many boxes.
Ideal for an investor seeking above average income, with predominant exposure to European economies, and exhibiting low correlation with a number of other asset classes
Following a recent meeting with management members, I update my initial note as below,
Results released on December 06,2017, show Net Asset Value increasing 13% over the last full year (September Year End) to Euro 1.33, and dividend pay-out moving towards the company target of 5.5% on issue price. At current price of 111.5p, the stock trades on a discount to NAV of approximately 6% with a prospective annual yield of 5.9% payable in Euros or sterling.
- Eurozone economic data continues to remain positive, growing faster than the UK over recent quarters and this relative outperformance is expected to continue. Private business surveys point to further growth and property and investment activity remains robust. A recent sample of German companies, for instance, showed rents rising between 4% and 6% over the last twelve months.
- SERE invests in cities/regions characterised by large liquid real estate markets such as Amsterdam, Berlin, Hamburg, Munich and Paris where local GDP is outperforming the national averages.
- The Trust is managed by Jeff O Dwyer, an experienced real estate investment manager, who is supported by nearly 100 property specialists located in key European hubs. The team see over Euro 2 billion of introductions each month, with the near-term pipeline comprising over Euros 115 million yielding between 5.8% and 7.5%.
- The process/risk control involves holding the bulk of the portfolio in stable income producing developments (approx. 70%) while adding a greater capital return component to the other 30% via refurbishments, change of use, lease extensions etc. A large portion of the rents are index linked.
- The purchase of a data/mixed user investment in Apeldoorn in February this year, on a very attractive 10% income yield leaves the fund fully invested.
- Geographical weighting is currently Germany (30%), France (50%), Holland and Spain (20%) by value.
- The top five properties were in Paris, Seville, Berlin and Biarritz.
- Portfolio is almost 100% occupied with a 6.8 years average lease time and net property income yield of 6%
- Loans of approx. Euros 73 million (compared with assets of approx. Euros 233 million), are usually employed on a loan to individual property asset basis, and in aggregate enjoy a maturity of about 6.6 years and interest rate of 1.3%
SERE targets a fully covered Euro yield of 5.5%(7.5 Eurocents on a Euro equivalent issue price of Euro1.37). Dividends are declared in Euros, and paid quarterly, with UK shareholders being given the option of sterling or Euro pay-outs. Lease structures vary across Europe, but most typically have some form of inflation linkage, providing support for the target dividend.
Current discount to NAV (Euros 1.347-December 31st, 2017)) represents a good level to be obtaining exposure to mainstream European property.
- The portfolio seeks to enhance property returns with a relatively modest level of gearing currently 25% LTV, (35% target LTV). The blended all in debt cost is 1.3% with an average maturity of around 6.5 years.
- Closed end fund structure with daily liquidity via a listing on the main market of the London Stock Exchange.
Sources (LSE,company management and Numis Securities)
By Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh – When is a trust not a trust?
When is a trust not a trust?
Many of my regular readers will know of my preference for investment trusts (closed end funds) over OEIC’s (unit trusts, to those of a certain era!). I come clean on the fact that my formative City years in the late 70’s and most of the 80’s were spent with one predominantly investment trust institution!
However, that bias aside, and, even though the abolition of trail commission has levelled the playing field somewhat between open and closed end funds, there are still many other current reasons why I think investors should always include analysis of investment trusts, certain ETF’s and unit trusts before making their final choice of pooled investment vehicle. There can be nothing worse than correctly identifying the asset class, but then picking the “inappropriate” vehicle within that class!
Numis have recently conducted their annual analysis showing that equity focussed investment trusts have outperformed open ended funds, whether in NAV total return terms (thus eliminating the effect of fluctuating discounts), or price total return terms (i.e. in the investor pocket) in at least 75% of the cases over the last five and ten years. In fact, over the last ten years, in price total return terms, investment trusts have outperformed unit trusts in 15 out of 16 sectors…. The one exception being Japanese small companies. I reproduce their statistics below (Appendix 1) …thanks to Morningstar and Numis Securities Research!
Performance is clearly a major positive issue. There are however seven or eight other reasons why investors should consider investment trusts as part of their due diligence process when considering pooled investment vehicles.
- Investment trusts allow managers to take a longer-term view; they do not have to sell assets when investors sell their units, unlike unit trusts. Investment trusts are well suited for assets that are hard to sell quickly, like property and infrastructure. As a recent example, property investment trusts very substantially outperformed property unit trusts after the Brexit vote. In fact, some of the unit trusts placed time restrictions or financial penalties on selling investors, and still hold excessive amounts of cash, which dilute any recovery in the underlying asset.
- Unit trusts distribute their income on an annual basis, while investment trust managers can accrue revenue reserves for a rainy day! Despite the widespread dividend cuts around 2008-2009, many investment trusts were still able to maintain their records of paying out and growing dividends. There are two or three investment trusts that have actually racked up about 50 years of consecutive dividend increases, spanning at least the four major market “crashes” since my time in the City!
- Investment trusts are also subject to market discipline. If performance dips, the board of the investment trust can hold the manager to account and, in extreme cases, replace him. This has happened, and there have been more cases of investor activism e.g. Alliance Trust which have prompted personnel moves….and usually, improved investor return.
- A related issue is the possibility of outside corporate action. A one stop approach in acquiring a chunk of assets, sometimes at a large discount either to merge into another financial group or for other reasons may make sound commercial sense. For example, the British Coal Board Pension fund took over one of my old stable TR Industrial and General in 1988, and more recently, one of my recommendations in the specialist area of Japanese real estate,Japanese Residential Investment Company was taken over at a substantial premium (approx30%) late 2015 by one of the Blackstone Funds.
- Many, but not all, investment trusts use gearing, which can provide a boost to returns when markets rise and with current borrowing rates so relatively low compared with income returns from many stock market sectors. However, the opposite can be true….so an advantage or disadvantage! Extra homework and diligence required!
- Unit trusts tend to be priced just once a day so that investors do not have perfect visibility over the price they pay. This can be especially true when unstable market conditions are prevailing. Investment trusts tend to be traded live so investors have a better feel for what they are paying and can finesse their entry/exit points.
- The subject of a fluctuating DISCOUNT is of course, a two-way argument and can produce an element of complexity and unpredictability into investment trusts, especially for inexperienced investors. As with gearing, price performance and final cash return to the investor can be enhanced/weakened by inappropriate gearing relative to the overall market background. As a sweeping generality, out of favour markets, tend to be accompanied by wider discounts, and it is often in these periods, that longer term value investors can benefit. As an example, over the last five years, Europe and Japan have received new investor attention and this can be seen by the superior price performance over NAV performance in the table below (i.e. discount narrowing), while in the case of the defensive UK Equity Income sector, discounts have widened over the same period.
- Finally, the subject of relative pricing is as long as a piece of proverbial string with AMC’s, performance fees, initial charges, platform fees and dealing fees being thrown into the comparison pot, but in general, especially if the one off initial charge can be heavily discounted or eliminated, the differences have narrowed over recent years and unit trust are no longer significantly more expensive than investment trusts from a dealing perspective.
In summary, do not ignore investment trusts!
I can provide a service of stock selection or even construction of an entire investment trust portfolio if desired. Feel free to contact with your requirement.
Appendix 1
by Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information
Ken Baksh – Do you have enough…..commodities?
Black Rock Commodities Income Investment Trust –ISIN GB00B0N8MF98
Commodities have made a strong start in 2018, rising to a three-year high. The Bloomberg Commodity Spot index hits its highest level since 2014 last week after strong readings for manufacturing activity around the world and increased global demand forecasts. A weaker dollar and various supply constraints/worries such as Libya, Iran, North Sea pipeline affecting oil supply and Chinese shutdowns affecting various metals.
Resource companies themselves have cut spending on new projects and have generally stronger balance sheets and are returning more to shareholders.
One way of accessing this sector is through the Black Rock Commodities Income Investment Trust.
The object of this investment trust is to achieve an annual dividend target, (currently 4p), and over the long term, capital growth, by investing primarily in securities of companies operating in the mining and energy sector.
- The fund predominantly invests in large quoted equities, the split between oil and mining being approximately oil, majors plus exploration/production 38%, mining 46%, miscellaneous 16% as at end November 2017.
- Underlying major mining companies, have for the large part responded to the historic weaker trend in resource prices, maintaining balance sheet discipline and adjusting their cost bases.There have been some examples of spectacular self-help stories e.g. Glencore and Anglo American Mining.
- Recent mining conferences have highlighted the need for increased use of Lithium, Cobalt, Nickel and Copper relating to Electronic Vehicles.BRCI has been building exposure to these elements over the last couple of years. For example, Glencore is now one of the leading global suppliers of Cobalt, a vital component for rechargeable batteries.
- Rising economic growth projections, supply constraints and a changing OPEC stance have significantly helped the prospects of the major oil companies held. Royal Dutch, for instance, has announced much better than expected results and offers a dividend yield over of over 6%. Statoil and Total also confirmed the more favourable trend for oil majors.
- As at End November 2017, the Fund ‘s major holdings featured Royal Dutch (6.1%), First Quantum (9.3%), Rio Tinto (6.7%), BHP (6.6%), Glencore (5.0%), and Chevron (4. 5%).The top ten holdings represented nearly 52% of the total portfolio, a relatively concentrated stance.
- The global nature of these companies provides exposure to non-sterling currencies, especially the US dollar. This can benefit both capital and income when sterling is on a weaker trend.
- On a TECHNICAL NOTE, it should be noted that energy and material stocks represent about 25% of the FTSE100 index. If using this as a broad benchmark, the weighting in these sectors can materially affect the relative performance of UK active and passive funds.
- As well as targeting financially strong dividend paying equities the company also employs option writing strategies and an element of gearing, currently near 3%, to further improve the sources of income.
- On an annual yield, over 5%, (payable quarterly), this trust represents a high income longer term value play, but investors should be aware of the volatility of the underlying sector-maybe another reason to adopt a pooled approach. The trust currently trades at a current discount to net assets of near 6%, near the year’s low, compared with the premium on which it traded for most of the last five years (see graph below). The company operates a discount management procedure from time to time.
Sources:Trustnet,London Stock Exchange,Corporate Web Site,Numis.
by Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
Disclaimer
All stock recommendations and comments are the opinion of writer.
Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.
All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.
You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk
The author may have historic or prospective positions in securities mentioned in the report.
The material on this website are provided for information purpose only.
Please contact Ken, (kenbaksh@btopenworld.com) for further information