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Questor: another discounted trust that is selling off its assets – and getting good prices
Questor's investment trust tip of the year – Macau Property Opportunities, which has got off to a good start with a 3.3pc gain since Jan 4 – was chosen because it was being liquidated and we expected the prices it achieved for its assets to be well in excess of those reflected in the share price at the time, which was at a 30pc discount to the value of the assets.
Today’s pick is in a similar situation: JPEL Private Equity is in the process of winding itself up after a chequered past.
Previously known as JP Morgan Private Equity and before that as Bear Stearns Private Equity, its shares have yet to recover from the financial crisis. And, until recently, it had a complicated capital structure that included zero-dividend preference shares, said James Burns, who holds shares in the trust in his Smith & Williamson Multi Manager Global Investment fund.
Burns holds the trust on the basis that its managers should achieve good prices for the remaining assets, which means that shareholders can expect to receive back more for each share than the current share price. In other words, the current discount of 13.5pc will in effect be reduced or eliminated.
“If you want to wind up a portfolio of private equity investments, you couldn’t choose a better time,” he told Questor. “It is a ripe environment and the managers may even be able to sell some of the assets at a small premium to the current book valuation.”
There have already been three mandatory returns of capital to investors and more will follow as the trust builds up cash from asset sales.
It has about 40pc of its holdings in funds with the remainder held directly, and Burns said some of the latter could be disposed of by way of flotations.
There are, of course, risks that could upset the expectation of good proceeds from the trust’s asset sales.
First, the process could take up to two years, and the market could turn in that time. Second, while the top 20 holdings account for 77pc of the portfolio, “there is quite a long ‘tail’ of other assets”, said Burns.
“The fact that the fund’s net asset value has been creeping up suggests that the managers are doing a good job of selling the assets, but the discount may reflect some fear that the smaller holdings could be hard to sell,” he added. “If so, the trust might accept lower prices for some holdings in order to tidy things up in a reasonable time.”
He pointed out that about 60pc of the assets were denominated in dollars with a further 30pc in euros: “It’s hard to make a case for a stronger pound at the moment so this foreign currency exposure offers some protection to investors.” Shares in the trust itself are denominated in dollars.
The management fee is 1pc of gross assets plus a performance fee; the “ongoing charge” is 1.86pc. Questor sees this as reasonable given the complexity of the managers’ task.
Burns said availability of the stock in the market “comes and goes”. He managed to buy 280,000 shares over two days in January but private investors could struggle at times.
To stand the best chance of getting the stake you want at the price you want to pay, it is likely to be best to call a broker and be prepared to wait a day or two for your order to be met.
Questor says: buy
Ticker: JPEL
Share price at close: $1.45
Update: Real Estate Credit Investments
Burns also owns a stake in Real Estate Credit Investments, tipped here in October 2017, and told Questor that he expected to hold the fund for at least the next two years.
“The investment case is unchanged,” he said. Our original tip highlighted the trust’s ability to lend to opportunistic property buyers who scented bargains after the Brexit vote, and to make good low-risk returns thanks to the withdrawal of traditional lenders from this part of the market.
“As long as Britain avoids a severe recession, this trust should be OK,” Burns said. “I still expect an 8pc yield later this year if the share price stays the same.” The fee structure has also been improved.
Questor says: hold
Ticker: RECI
Share price at close: 166p
Investment trust news
Monks, tipped here in October 2016, has trimmed its cost. From May 1 the annual management fee will be 0.45pc on the first £750m of total assets, 0.33pc between £750m and £1.75bn and 0.3pc thereafter. This last tier is new. Current assets are £1.8bn.