Liberum investment company analysts have picked their dozen favourite ‘alternative’ closed-end funds they think offer the best exposure to real estate, debt, private equity and the US and emerging markets this year
A difficult and volatile 2020 saw the funds portfolio of analysts Conor Finn and James Shields produce a total shareholder return of 7.8%. That beat the FTSE UK Private Investor Balanced index, a benchmark of a mix of asset classes, which rose 5.7%, but lagged the 10.1% return of the better-known FTSE 100 blue-chip equity index.
Once again in making their New Year selection the duo are aiming for a diverse bunch of listed funds that will deliver capital growth and good income, hoping to avoid the dividend cuts that plagued debt and real estate investment trusts last year.
They have made four changes and retained eight of last year’s recommendations. Among those dropped from the portfolio are Empiric Student Property (ESP ) and Amedeo Air Four Plus (AA4 ) which plunged 22% and 47% respectively as the coronavirus lockdowns saw students hand in the keys to their university rooms and wrought havoc in the airline leasing sector.
With the UK enduring its third lockdown, the analysts say Empiric faces ‘significant impact form Covid-19’, while the outlook for aviation is ‘bleak’, they say, with Amedeo’s dividends suspended as Thai Airways, the lessor of its planes, struggles to survive.
Also out are fund of funds HarbourVest Private Equity (HVPE ), up 6.9% last year, and Pollen Street Secured Lending (PSSL), the former debt fund now known as Alternative Credit Investments (ACI ), which accepted a £639m bid from Waterfall Asset Management in November, netting Liberum an 11.5% gain during the year.
In their place it has picked three trusts trading on wide discounts to net asset value, where they believe there is scope for a share price re-rating, and one private equity fund offering straightforward potential for growth.
PRS builds momentum
With its shares trading 17% below NAV, PRS (PRSR ) real estate investment trust (Reit), a provider of family rental homes, is the first of Liberum’s recovery plays. Slower-than-expected construction since launch nearly four years ago has depressed shareholder returns in the £381m company and left the quarterly dividends of the 5% yielder uncovered by earnings.
Returns are improving, however, as deployment progresses with PRS owning 3,163 completed units - 96% of which were occupied - at the end of last year, out of a target 5,200. With the potential for more development profits to come, the analysts think investor sentiment towards the stock will improve, although they note annual ongoing management charges at 1.8% are high.
Fair Oaks’ high dividend
Double-digit yields were what drew Liberum into Amedeo two years ago and cautious investors might want to bear in mind what happened to its shares last year before buying Fair Oaks Income (FAIR ) for its 14% yield. The £213m closed-end fund, a former Citywire award winner before last year’s pandemic crisis, is a corporate broking client of Liberum. Its leveraged investment in floating rate, senior secured corporate loans in the US and Europe is high risk and the company was forced to briefly suspend its dividends in the first quarter of last year.
Finn and Shields say the fund’s credit exposure is through several fund managers chosen by Fair Oaks and that loan defaults are comparatively low and are improving. ‘Following the dividend reinstatement in the second quarter, the shares offer a 14% dividend yield. The fund is managed by an experienced team with strong alignment of interests,’ they said. At 63 cents the US dollar denominated shares stand 5% above net asset value (NAV), a massive improvement on the 52% discount they fell to in the pandemic panic last March.
VPC’s strong dividend
The choice of VPC Specialty Lending (VSL) looks well timed. The analysts published their picks hours after the £228m US secured lender revealed it was poised to make a $19.5m turn on a stake in Bakkt Holdings, a digital assets trading platform that is expanding into cryptocurrencies.
The 7% spike in the shares this produced reduced VSL’s 14% discount to 9.5%, which the analysts believe deserves to narrow further and re-rate to a premium given the company’s high 10% dividend yield is fully covered by earnings. The company won a Citywire performance award in November for the strong underlying performance in the previous three years.
Finn and Shields say: ‘The company focuses on segments including small business lending, working capital products, consumer finance and real estate. The portfolio of loans benefits from a layer of protection through first loss equity positions and 93% of the loans also benefit from a guarantee from the portfolio company in addition to the loan collateral.’
A string of profitable exits from investments last year saw Apax Global Alpha (APAX ) grow net asset value by 16% and deliver a shareholder return of nearly 19% as the undervalued shares started to close the gap with its portfolio of hard-to-access Apax private equity funds. Over five years the Guernsey investment company has more than doubled shareholders’ money with a 109.8% return including dividends.
The Liberum analysts think there could be more to come given the shares still stand on a wide 12% discount. ‘The fund primarily invests in four key sectors: tech and telco, services, healthcare and consumer. The private equity portfolio is relatively mature and we expect realisation to support strong NAV growth over the next 12 months.’ An added attraction is a semi annual dividend that aims to distribute 5% of NAV a year.
Eight reasons for eight ‘holds’
Completing the 12-strong line-up, the eight investment companies the Liberum analysts are retaining from last year are:
- Corporate broking client Civitas Social Housing (CSH ) for ‘demonstrating the robust nature of its business model’.
- Tritax EuroBox (BBOX ) offers ‘structural rental growth’ in the prized area of logistics and ‘likelihood of yield compression’ driving capital gains.
- BioPharma Credit (BPCR ) the high interest rate lender to drugs companies enjoys ‘limited competition in its specialist market’.
- Real Estate Credit Investments (RECI ): another Liberum corporate client ‘capitalising on senior lending opportunities’.
- Hipgnosis Songs Fund (SONG ): strong NAV performance from growth in music royalties last year and quarterly dividends covered 1.5 times by earnings.
- Oakley Capital Investments (OCI ) is another corporate broking client. Like rival private equity fund Apax, Oakley also offers ‘significant NAV growth potential,’ says Liberum.
- Pershing Square (PSH ): ’The fund is managed by renowned investor Bill Ackman and has delivered a NAV total return of 169% over the last two years but continues to trade on a 19% discount to NAV.’
- VinaCapital Vietnam Opportunity Fund (VOF ): ‘VOF is the top performer in its peer group and our top pick to benefit from the continued growth of Vietnam’s economy.’
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