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James Carthew: El Oro teaches Martin Currie how to roll over

9 July 2019

Few will mourn the passing of El Oro but the liquidation of this obscure investment company has an important lesson that Martin Currie Asia Unconstrained missed when it decided to call it a day.

Last week we said goodbye to one of the more eclectic members of the investment companies family. El Oro (ELX) has been put into liquidation and its assets divvied up between a rollover option and a cash option.

El Oro had a long and interesting history, having been greatly expanded under the leadership of Major Michael Woodbine Parish. Essentially it was a family investment company with Major Parish and his heirs holding substantial stakes in the business.

It was also famous for its colourful chairman’s statements, which covered a broad range of topics, not necessarily directly related to the company, including England’s sporting successes and failures, a strong antipathy towards HS2 (which I share) and calls for a resurgent coal UK industry (which I definitely do not agree with).

For a long time, the portfolio had a significant bias towards natural resources stocks. This weighed on the performance of the company and in 2016, after discussions with shareholders, it was decided that the company would wind up following the 2018 AGM.

In the event a proposal was made that shareholders be offered the choice of cash or shares in one of the three portfolios (Managed Income, Managed Growth and Managed Cash) that make up JPMorgan Elect.

I think that shareholders in an investment company that is winding up should always be offered the choice of a rollover into another investment company where possible.

I was disappointed that the board of Martin Currie Asia Unconstrained (MCP) did not go down this route when it announced last month that the trust would be liquidated, opting instead for a rollover for investors into the manager’s equivalent open-ended fund.

The reasoning was that because shareholders voted for the trust to continue last summer they must want to remain exposed to Martin Currie’s Asia Long-Term Unconstrained strategy. The claim seemed at odds with the trust’s persistent discount, which indicated the opposite.

What frustrates me is that investors that do want to remain invested in a closed-end fund must now crystallise any capital gain and choose from a raft of other Asian trusts that are trading at premiums or at asset value, including Fidelity Asian Values (FAS), Henderson Far East Income (HFEL), Pacific Assets (PAC), Pacific Horizon (PHI), Schroder Asia Total Return (ATR) and Schroder Oriental Income (SOI).

I cannot fathom why the board didn’t consider a merger or a rollover with one of these. As an aside, two Asian trusts that are still trading at a discount but are rising rapidly up the performance league tables are Edinburgh Dragon (EFM ) and its stablemate Aberdeen New Dawn (ADB).

To return to El Oro and JPMorgan Elect, it was notable that well over half of El Oro’s shareholders opted for the trust option with the vast majority of those heading for the Managed Income (JPEI) pool. I have always liked the structure of this trust, which allows investors to switch, quarterly, between the three pools without crystallising a capital gain.

The Managed Income pool is run by John Baker and Katen Patel. The influx of El Oro cash will increase it to about £100 million. It has beaten the FTSE All-Share index over 10 years but not over the last three and yields 4.1%. The portfolio is fairly bog standard and large company dominated with some exposure to bonds through another JP Morgan fund. To be honest this wouldn’t be my first choice in the UK equity income sector.

The Managed Growth (JPE) pool is the largest with assets of around £260 million. Managed by Katy Thorneycroft and benchmarked against a 50:50 blend of the All-Share and World ex UK indices, Managed Growth is a fund of funds with a strong bias to trusts and open-ended funds managed by JP Morgan which account for about 70% of the portfolio.

Thorneycroft aims to add value through her asset allocation decisions as well as capturing discount movements, where possible. This pool has beaten its benchmark over most time periods after fees.

I understand why some investors dislike funds of funds with their double layering of fees - the management fee is 0.3% on JP Morgan funds and 0.6% on third-party funds - but this is a highly diversified trust and one that can be easily flexed as macroeconomic circumstances change.

The attraction of the Managed Cash (JPEC) pool is really just as a place to hide in uncertain markets, especially given the low rates of return available on this asset class. It is a very efficient way of doing this, however, with an annual ongoing charge of just 0.02%.

El Oro shareholders have swapped an investment in one of the more unpredictable funds in the sector for one that sits at the conservative end. Reporting season might be less interesting but they may sleep easier at night.

James Carthew is a director at Marten & Co, operator of the QuotedData website. The views expressed in this article are his and do not constitute investment advice.

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