Here are three funds that are in prime positions for profits in the coming month, writes Andrew McHattie of the Investment Trust Newsletter.
The Biotech Growth Trust (London: BIOG) has been amongst the worst fallers of the past fortnight, belying its position in what is meant to be a reasonably defensive sector.
The problem for the shares is that they have a high beta. They had performed very strongly before this sudden downward lurch, rising from a low of 155p in March to a peak of 197p in the third week of July.
All of that gain has disappeared now. Back down to 159p, the shares have suffered from the aggressive positioning of the trust, invested in smaller companies, mainly in America, and with some gearing (although only 3%) to boot.
The trust has lost more than 20% of its asset value over the month, although even after this loss it still outranks the other trusts in the sector in terms of its performance over the last year.
This trust is clearly a high-risk play, but it has a lot of fans, and could bounce back very strongly in a more supportive market environment. It could fall further, of course, but we think this is a reasonable recovery play if you feel so inclined.
BlackRock Frontiers Investment Trust (London: BRFI)
Sam Vecht, the manager of this fund, is very good at communicating with shareholders and the investment community.
This week he held a conference call, and explained that while frontier markets have fallen, the extent of the decline has been “nothing like” that of the front-line developed markets. Sam says “it is our view that they will continue to outperform," citing the lack of hot-money flows and the cheap valuations.
There is of course general market risk, plus specific political risk and issues with corporate governance, but Sam is optimistic for the medium term. He is very glad to be managing a closed-end fund where there is no need for forced sales at the wrong price. He says “we can invest rather than gamble on this long-term story.”
Sam pointed out that many of the smaller local markets have held up very well, and that where the trust has lost money over recent sessions, it has often been in holdings with listings on more major markets. He says “these frontier markets are showing their relatively defensive qualities.”
He adds that he has done extremely little trading, having faith in the trust’s holdings—which, if anything, he might be adding to at lower levels. “So far, our markets are not seeing any of the strain we’re seeing in the developed or the major emerging markets,” Sam concludes.
That said, he is starting to find some new opportunities, and has increased both his short positions on stocks he considers overvalued (though these are still less than 10% of assets), and some of his long positions as well.
In contrast to the unflustered management of this trust, the market has of course been marking down nearly all trusts, and these shares have not been exempt. From 93p a month ago, the shares are down to 77.9p, a fall of more than 16% over the month. They are also (just) trading on a discount now, as we hoped they might at some stage.
The last announced net asset value was 78.2p. That might widen out by a couple of pence, but we think the current price is probably too good to ignore—we are upgrading the shares to a buy.
NB Distressed Debt Investment Fund (London: NBDD)
Not many trust managers can be happy with the financial turmoil, but one exc eption may be this $450 million trust, launched in June 2010 with the objective to provide investors with attractive risk-adjusted returns through long-biased, opportunistic stressed, distressed, and special situation credit-related investments, while seeking to limit downside risk.
We have a general understanding of what that means, but no specialist knowledge at all of that sector, so manager reports are an essential way of staying in touch. The managers say they are pleased with the distressed market environment and the portfolio’s performance to date.
As of June 30, approximately 84% of the assets were invested in distressed assets, and the trust is in further negotiations to purchase assets that would deploy around 10% of additional capital.
This means the trust will effectively be fully invested, as in the future the managers expect to maintain between 5% and 10% of the portfolio in cash and cash equivalents as a reserve for investments in existing portfolio companies and new opportunities.
The trust has 47 investments, much in line with its expectations at the outset, but the managers say they have been able to buy in at lower-than-expected prices, with an average price of approximately 55% of face value against the expected level of 60%. The outlook is positive.
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