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Questor: this trust’s holdings have grown at an average of 40pc but its discount is 30pc
Questor investment trust bargain: Oakley Capital Investments has great access to promising private firms but a mistake it made two years ago is still hitting sentiment
Last month we tipped Hg Capital, a private equity trust admired by everyone in its field and described as “unique” by one analyst. Today we look at a listed fund with some similarities that is trading at a far wider discount than the one at which we recommended Hg.
That fund is Oakley Capital Investments and its current discount of just under 30pc compares with Hg Capital’s of only 5.7pc at the time of our tip (it has since moved to a small premium of 1.3pc).
Some of Oakley’s wide discount can be attributed, in a way with which regular readers will be familiar, to past mishaps that investors have still not forgiven, in this case the trust’s unwise decision to issue new shares at a discount in 2017.
There is no obvious reason to expect the discount to narrow now, but, if the trust’s underlying investments can maintain their strong performance, sooner or later a smaller discount should be its reward.
This long-term prospect should be seen as the icing on the cake to the trust’s principal appeal: its expertise in managing investments in private businesses and the network of relationships that give it access to the most promising deals.
“Its biggest asset is its Rolodex of contacts among successful entrepreneurs across Europe,” said Andrew Lister of Aberdeen Standard Investments, who holds Oakley in his Halifax Fund of Investment Trusts.
“Dealing with people who have built up businesses before is an approach that seems to work in private equity. It means less due diligence is required before deals can be struck as the individuals concerned are already known and trusted.”
He said Oakley’s “unique selling point” was its ability to invest in businesses at reasonable valuations when much of the market for private equity deals was already “fully valued”. This is partly down to its network of relationships and partly because it operates at the smaller end of the spectrum, where there is less competition among investors.
“It won’t be competing with the giant American private equity houses, which concentrate on larger deals,” said Lister. “It is buying companies that are a bit under the radar, where the entrepreneurs involved are sometimes choosing Oakley as an investor.”
The trust’s management company also runs unlisted private equity funds and it is these that Oakley Capital Investments puts its money into, along with some direct investments into those funds’ underlying businesses.
- Read Questor’s rules of investment before you follow our tips. See Questor's tips every day at twitter.com/DTquestor
It also lends to these firms on occasion and the interest earned goes some way to supporting the trust’s dividend; it currently yields 2.3pc. The trust does not invest in non-Oakley funds. Its portfolio consists of very fast-growing companies: on average they grew profits (on the “Ebitda” measure) by 39pc in 2018.
“This is similar to Hg’s level of growth and proves that you don’t have to buy individual stocks or a fund run by Baillie Gifford [the fund house renowned for its focus on growth] to get fast-growing companies,” Lister said. “Investors are gradually waking up to this.”
Such strong growth means that “I can rely on the net asset value rising and don’t have to worry too much about the discount”, he added. “The trust is not without risk, but it’s pretty interesting at a time when so many things look fully valued.” He also noted recent buying by Oakley executives.
Questor says: buy
Ticker: OCI
Share price at close: 197p
Investment trust news
Income seekers who like to use investment trusts have a new tool at their disposal: the Association of Investment Companies, the trusts’ trade body, has introduced an “income finder” on its website.
The key feature is a calendar that shows when each dividend is paid, which can help you smooth your income across the year. You simply generate an online portfolio to reflect your own holdings.
You do need to sign up to use the service, which is at theaic.co.uk/income-finder.
Funding Circle SME Income is to wind itself up, subject to shareholders’ approval at an extraordinary meeting to be held soon. We put it on Questor’s “watch list” in June 2017 but never tipped it.
- Questor archive: telegraph.co.uk/questor
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