UK Edition
This column isn’t normally in the business of tipping investment trusts whose shares trade at a premium to the value of their assets. As its name suggests, it is on the hunt for investment trust bargains – listed funds whose shares are, for one reason or another, trading too cheaply.
That leads us to seek out discounts – the bigger the better, provided that the investment case stacks up and a credible path to narrowing it can be discerned. Size isn’t everything, however. Investment trust shares on double-digit discounts are enticing, but sometimes it’s the more fully priced opportunities that prove to be the better bets.
HgCapital is a case in point. When we first tipped shares in the private equity trust two years ago they were on a 5.7pc discount. That’s better than nothing, but not much to write home about, particularly as shares in rival trusts routinely traded at discounts four times as large.
Yet since March 2019, when we labelled HgCapital a “buy”, its shares have beaten the returns of all our other private equity trust tips, which may have seemed more obvious bargain contenders, by a comfortable margin. A return, including dividends, of 116pc is spectacular and more than double that managed by ICG Enterprise, now on a 13.3pc discount, and Pantheon International, whose shares trade 18.4pc below the value of its assets.
Oakley Capital, tipped a month after HgCapital, comes closest: it has returned 97pc over the same period. Its shares trade on a 20.9pc discount.
Most of HgCapital’s exceptional return has come from the strong performance of its investments, focused on its area of specialism: software companies that provide services such as payroll and accounting to other businesses, usually in return for a subscription.
A smaller portion has come from the lifting of its shares from their discount to a premium as investors’ enthusiasm has grown. A substantial premium at that: as recently as last week the shares were trading at more than 20pc above the trust’s net asset value.
That changed on Monday when HgCapital reported half-year results and a new quarterly NAV of 373.4p per share at the end of June, up by 11pc from 336.3p at the end of March. Yesterday’s 396.5p closing price puts the shares on a 6.2pc premium, which, while appreciable, is not as eye‑watering.
Those results featured further justification for HgCapital’s premium, the product of the trust’s stellar long-term record. Since the end of 1994, the year the current management firm was appointed to run it, the shares have returned more than 6,000pc. That beats even Scottish Mortgage, Britain’s largest investment trust, which has gained 4,700pc over the same period.
Reassuringly, HgCapital has continued to sell its stakes in businesses for more than they had been valued by the trust. Allocate, a workforce management software firm, was sold in June for £51m, 48pc higher than its value on HgCapital’s books at the end of December.
However, revaluations of the trust’s stakes, rather than sales, are responsible for the bulk of the rise in its NAV, which gained 21pc in the first half of this year. Its companies are now valued at an average of 25 times their profits, a record high for the trust. That may raise some concerns its companies are becoming too pricey, although as analysts at Numis, a broker, point out, “expensive relative value has not affected returns in recent years”.
Hg, for its part, acknowledged in its half-year results that valuations of software businesses “seem high”. But it compares them with 10-year US Treasury bonds, which, if valued in the same way as shares, are effectively trading on 80 times their “earnings”, with plenty of willing buyers.
Dave Ferguson, a fund manager at Activus Wealth, has been an investor in HgCapital for the past three years and says its record is worth paying for, both in terms of the premium on its shares and the valuation of its businesses.
“It buys businesses that are really defensive, with strong organic growth, providing mission-critical software, and it has been doing it for more than 25 years,” he says. “There’s a fantastic depth of experience and they are highly focused.” Questor agrees and advises readers to hold on to the shares, notwithstanding their valuation.
Questor says: hold
Ticker: HGT
Share price: 396.5p
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