Over the last few years, I’ve been very happy to invest in the Samarang Asian Prosperity Fund, managed by Greg Fisher. I like its value-driven style, its substantial investments in lesser-known geographies in the East Asian region (Vietnam and Malaysia for instance), and its focus on consumer products business catering to the growing middle classes. The slight catch is that the fund – closed for new money the last time I looked – is also heavily invested in Japanese small-cap value stocks. That’s a fabulous opportunity set but it’s also a difficult focus and in truth, the fund has slightly underperformed in recent months. That doesn’t worry me and Greg has taken some active steps to address this issue.
Regardless of recent numbers, Greg is always worth listening to when he talks about those less popular national markets. He observes that the recent winners have been in North Asia, especially Taiwan and China. Both are geographies Greg tends to steer clear of, especially China. But Greg thinks the future might be very different.
“Over the next 5-‐‑10 years, however, in addition
to the relative undervaluation that still exists in Japan, one can
make a stronger case for ASEAN, especially markets such as
Indonesia and the Philippines, where the last 8 years has seen a
significant de-‐‑rating. I have recently found new ideas and begun
to make small investments in conglomerates, consumer
franchises, asset managers, amongst other businesses, with
direct exposure to these economies’ future growth.”
The charts below nicely summarise the valuation gap Greg alludes to.
Trading List Update
I’ve also got an end of year update on my alternative funds trading list.
This time around I have included any dividends paid during the holding period. Overall, my odd, eccentric little portfolio has provided a total return of 21.7% over the (approximately) six months its been operating. That compares to a price return of around 4% for the All Share and (by my estimate) around 6% including any dividends paid on that benchmark index. Overall, I’m quite pleased with these numbers so far, but it is a risky portfolio, and if volatility spikes again god alone knows what might happen to these less than perfectly liquid funds.
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Two quick updates on funds in my list.
The first is from Numis on a new acquisition by PRS REIT. Details below:
PRS REIT has acquired a full-let development of 123 new homes in Greater Manchester for £19.0m from BlackRock Real Assets. The development generates £1.16m pa in passing rent, and was independently valued by Savills prior to acquisition. The transaction marks the full commitment of PRS REIT’s funding resource of £900m (gross). The company’s portfolio now has 3,163 completed homes generating an estimated rental value (ERV) of c.£29.4m pa. c.2,000 further homes are under way at varying stages of development. Once completed the portfolio will contain c,5,200 homes with an ERV of c.£50.0m pa.
Numis Views: Shareholders will be pleased to see the fund acquiring an income generating portfolio as we believe that the company’s reliance on construction, and the impact of Covid-19 timing delays and resultant reduction in the dividend target, are a key reason why PRS has been the weakest performer of the residential REITs in 2020 year to date. The company has delivered a negative price total return of -12.4%, which compares with a positive return of 9.2% on average for the supported living/share ownership peer group as a whole. However, we continue to believe that the fundamentals of providing affordable family homes remain attractive over the long term and note there are currently very few ways to access this part of the market in listed form. Furthermore, the company’s strong relationships with housebuilders should in our view provide cost transparency and the delivery of a high quality product which will ultimately lead to an attractive investment portfolio and stable income streams.
The second update is from Matt Hose at Jefferies on Honeycomb – an acute observer of the listed lending funds. He’s switched Honeycomb IT to a hold from buy. His note his below. For the record I’m happy to continue holding but I have set a new target of 950p at which point I would be tempted to take profits.
Anyway, here’s Matt’s update…
“Re-rating: HONY has undergone a dramatic re-rating since the depths of the pandemic. Between March and August it traded at a discount in the high-twenties, but now trades at a 6% discount to our estimated 1,011p NAV. This has been driven by the portfolio proving largely resilient to effects of COVID, share buyback activity, and the recent announcement of FTSE All-Share Index inclusion. Although the extent of the discount earlier in the year will trigger a discontinuation resolution at the 2021 AGM, the special resolution is unlikely to be passed at the current rating. Moreover, further upside to the rating is clearly now more limited, especially given the potential for share issuance at a premium to NAV, with the fund due to receive a greater share of manager Pollen Street’s investment pipeline following its loss of the Pollen Street Secured Lending (PSSL, now ACI) mandate.
Straightforward proposition: Recent monthly updates have pointed to HONY becoming an increasingly simplified proposition. Direct consumer loans, the portfolio’s only true ‘first loss’ or ‘whole loan’ exposure, have fallen from 17% of the portfolio in March to currently 9%, with the remaining exposure expected to run-off over the next 12 months. Aside from a small amount of equity exposure (of c.3%), this would leave the portfolio focused on structurally secured loans, i.e. those with credit enhancement via the borrower’s equity. While the gross return on the portfolio, of currently around 10%, will reduce as a result, the leakage in the gross to net returns will also helpfully shrink. Senior facilities will typically be underwritten on the basis of no credit losses and so run-rate impairments should reduce, while the facilities do not require the use of a third-party servicer, and so servicing fees should also ebb. Together they represent about c.2% of return leakage. Against this, financing costs look to have modestly increased as part of the recent refinancing, particularly given the large size of the TopCo facility aimed at ensuring the fund has a liquidity buffer.
Reserving: HONY’s IFRS 9 reserving has been under the spotlight of late due to the reserve increases Waterfall Asset Management made following its appointment to PSSL/ACI. In the case of HONY, we feel the more likely scenario is reserve releases though. HONY’s reserving had already been increased in March, April and May in anticipation of whole loan borrowers coming off forbearance, resulting in total provisions of 11% against the gross whole loan balances as at 30/06/20, with approximately two-thirds of this sat against the consumer loans. As these (seasoned) loans run-off, or are sold, there is the potential for reserve releases, particularly given the high provision coverage levels of the loans where credit risk has increased significantly, or are already impaired (i.e. stage 2 and 3 loans).”