Peter Spiller warns BH Macro could lose continuation vote

The Capital Gearing fund manager blasts the hedge fund's approach to its share price discount as an ‘egregious’ example of ‘token’ share buybacks making no impact.

Capital Gearing (CGT ) fund manager Peter Spiller has warned Brevan Howard hedge fund BH Macro (BHMG ) it risks losing a continuation vote next year if the board does not do more to tackle the £1.3bn investment company’s double-digit discount.

Spiller, the City’s longest-serving fund manager and an active, engaged investor in closed-end funds, said the approach of BH Macro’s board to its lagging share price was an ‘egregious’ example of ‘token’ share buybacks making no impact.

Following a bumper £315m share issue in February last year, performance of the previously strong performing multi-strategy fund slumped, knocking demand just after a flood of its paper hit the market. 

Spiller said the fund’s underlying net asset value (NAV) had fallen 4.5% in the 14-month period, but investors who bought the new shares had suffered an additional 20% loss as the stock tumbled from a 2% premium above NAV to an 18% discount below it.

This was partly a response to fears that wealth managers Rathbones and Investec would hold more than 30% of BH Macro following their merger and would be forced sellers to avoid triggering a bid.

Nevertheless, Spiller said the board, chaired by Richard Horlick, had failed in its duty to buy back the shares with ‘sufficient vigour’ to avoid this painful derating, purchasing just under 3% starting in December.

BH Macro invests exclusively in the Brevan Howard Master Fund. To raise money for share buybacks, it has to sell stock in the Master Fund. While a 2% fee is payable if more than 5% of these are sold in a calendar year – a feature Spiller said was ‘indefensible’ – it would still have been worthwhile if it had stopped the discount widening, he said in his latest quarterly update.

Although BH Macro has seen the gap between its sterling share price and NAV narrow to just under 12%, the average one-year discount is 9.5% and that of its dollar share class (BHMU) nearly 9%. If this continues for the rest of the year it will exceed an 8% threshold and a closure vote will be held in 2025.

‘Directors must decisively confront the discount or risk failing the continuation vote next year,’ Spiller said, disclosing that he added the ‘generally well-managed’ fund to his £1bn trust in March. 

Discounts are voluntary

Widening his attack, Spiller claimed two-thirds of the investment company sector, or 248 listed funds, were no longer fit for purpose as they were too small, with a market value of under £600m meaning they had insufficient liquidity to attract big investors.

He blamed this on a lack of research and the concentration of wealth managers, while the regulatory backdrop on charges disclosure was the most hostile Spiller, 75, had seen in his 50-year career, he told Citywire.

Declaring share discounts were essentially ‘voluntary’ and a ‘threat’ to retail investors as they limit the appeal and growth of trusts, Spiller (pictured) called for boards to do more to ensure their shares traded close to NAV.

He urged other investment companies to follow Capital Gearing’s example and grow by operating a zero-discount model. This sees funds like CGT buy shares when they trade below NAV and issue more when they stand on a premium to assset value. 

Those with less liquid assets should offer investors regular opportunities to sell some of their shares at narrow discounts, he said.

Being such a well-known exponent of discount controls, it was embarassing last October when a legal delay in reclassifying its share premium account meant it had to suspend buybacks. The shares fell 5% below par but returned to a 2% discount when the problem was resolved in February. 

Topping up trusts

Spiller and his investment team, which includes co-chief investment officer Chris Clothier, chief executive Alastair Laing, Hassan Raza and Emma Moriarty, topped up several trusts in the first quarter when they stood on very wide discounts on offer.

They added to the Rothschild family-backed RIT Capital Partners (RCP ), given its commitment to reducing private assets and disciplined capital allocation policy, with the trust now making up 0.7% of assets.

They added to rival wealth preserver Ruffer Investment Company (RICA ) as its discount widened – forcing the board to launch its inaugural buyback programme – and praised its defensive portfolio, with almost two-thirds in cash or short-dated bonds and 10% in yen.

Just over £15m was added to infrastructure funds, including Foresight Solar (FSFL ), which has a discontinuation vote in June. Morningstar data shows they also topped up core infrastructure fund International Public Partnerships (INPP ), Bluefield Solar Income (BSIF ) and 3i Infrastructure (3IN ).

They increased exposure to UK index-linked government bonds to 23% as high employment levels and underinvestment limits growth without inflation, they believe, while yields were also attractive.

A 17% weighting to Treasury inflation-protected securities (TIPS) provides shelter from a downturn in the US economy, given their longer duration and dollar exposure, as interest rates and inflation look likely to remain higher for longer.

The weighting to corporate credit was cut by 3% to 11% – and duration shortened to 1.9 years – as record inflows compressed spreads.

Linker for Spiller’s 100th

Aged 75, Spiller remains active and still cycles to his City office everyday from West London, saying he would keep working until it was ‘no longer fun’. He added that he was pleased with the last 14 years of succession planning, which has seen the growth of 12-strong firm owned by its employees as a partnership.

While 2023’s annual results were the worst under his tenure, with NAV falling 3.6% to make it only the second time the trust has suffered a negative return, Spiller emphasised it did best during the worst years for the global economy. Over 10 years the shares have gained 55.4%, lesss than the 77.6% of the FTSE All-Share but less volatile.

Reflecting his long-term mindset, Spiller recently bought an index-linked bond maturing in 2048 to pay for his 100th birthday party.

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