Page 29 - DIY Investor Magazine | Issue 37

‘SCOTTISH MORTGAGE HAS BEEN REPURCHASING ITS SHARES BUT NOT FAST ENOUGH TO MAKE A REAL DIFFERENCE TO ITS DISCOUNT’ However, it does have an illiquid asset problem in that almost 30% of the fund is invested in private equity (the figure at the end of January 2023 was 28.1%). That is an issue as shareholders have imposed a limit of 30% on the trust’s unlisted exposure, if it breaches that level, the trust cannot make any new unlisted investments. Scottish Mortgage has been repurchasing its shares but not fast DECISIVE ACTION enough to make a real difference to its discount. Its buybacks, which are generally funded from liquid assets, push it closer to We have recently seen a couple of funds decide to take action having 30% in unlisteds. to demonstrate the accuracy of their NAV valuations. On 2 March, Tritax Big Box REIT announced that it was selling three We have called for that limit to be raised to 50% and we would assets for a combined total of £125m. then like to see the trust step up its share buyback activity with the aim of achieving a meaningful narrowing of the discount. This was in line with the value that had been attributed to these assets at the end of December, and reflected a combined net Other big global funds already have policies in place to do just initial yield of 4.6%. The money raised is being used to reduce that. For example, the £2.9bn market cap Alliance Trust aims debt. to keep its discount not far off 5% in normal market conditions, Apr 2023 DIY Investor Magazine · That seems to be true in the private equity sector, for example. 29 However, there has been quite a bit of evidence to suggest otherwise. These funds are regularly selling businesses, and when they do, they tend to record big valuation uplifts, suggesting that if anything the NAVs are understated. There could be danger here for some of these funds. A few years ago, one of the flagship funds in the private equity sector and one of its best-performers was targeted by an asset stripper. The fund was dismembered, realising significant profits. It is not inconceivable that this could happen again. and it does a reasonable job of that. Today, it is trading on a discount of just 6.3%, having bought back over 16m shares since the start of 2022. DOUBTS ABOUT TRUE NAV FIGURES Some funds have seen their discounts widen as investors feel that their NAVs may be overstated. The chairman also indicated that some of the money would be recycled into other investment opportunities, but we think shareholders should be demanding that at least a portion of it should be used to fund share buy backs at this level (the current discount is about 31%). Triple Point Social Housing REIT, which is trading on a hefty 66.5% discount (down from a 6% premium at the start of 2021), is being more proactive. Its latest results statement said that “The board and the manager are focused on delivering value to shareholders, and are exploring making accretive share buybacks and the potential sale of a portfolio of the group’s properties”. We think that could make a real difference to its rating. James Carthew is Head of Investment companies, QuotedData