Boy, the constant flow of new funds is turning into a veritable tsunami before the summer recess!
The excellent investment trust research team at Numis reports two new funds today alone.
The first is a curious potential gem of a fund called ScotGems which has just raised £50m, well below its target. This investment trust will build “a concentrated portfolio of 20–30 global small cap companies, with a bias towards Asia Pacific (ex Japan) and Emerging markets. The fund is managed by Stewart Investors who utilise a bottom-up approach with a focus on well managed companies with strong financials and long-term growth prospects, purchased at reasonable valuations. …The fund will start trading on 26 June under the ticker “SGEM”. The lead manager will be Ashish Swarup, assisted by Tom Allen.”
Numis reports that Stewart Investments split out from First State Stewart in 2015. It remains within the First State Investments group, but operates largely autonomously. Angus Tulloch is a non-independent Board member of the trust, having recently stepped down as joint managing partner of Stewart Investors, where he remains employed as a portfolio manager. The management fee will be 1% pa of net assets and the ongoing charges ratio will be capped at 1.5% by the manager.
This very small fund sounds a bit like an Asian version of Aurora — a fund where I’m non exec. Aurora is also a small fund but has grown over time because of its unique focus on contrarian investing. The ScotGems fund is also fairly unique and will run a very concentrated portfolio, which I like. It’s also benchmark indifferent, which is the right way to go for active managers. I’ll be looking more closely at this fund over the next few weeks either here at the Adventurous Investor or via my MoneyWeek column. Watch this space.
The OTHER new fund is back in the alternative income space, again.
It’s a US debt fund and it’s called PennantPark Income Trust — currently looking to raise £150 from mid market loans.
Again here’s the Numis quick take on the fund:
“ PennantPark Income Trust is looking to raise £150m (with the potential for up to £200m) to make loans to US private mid-market companies, with EBITDA of $10m-$50m. The fund will be listed on the Main Market of the London SE and is due to start trading on 14 July under the ticker” PINC”. The shares will be issued at 100p, with an initial NAV after launch costs of 98p. The minimum size for the issue to proceed is £75m….The fund is targeting a yield of 4.5% on the issue price in the first financial year to 30 June 2018, rising to 6.5% pa thereafter on a quarterly basis. ….The portfolio is expected to include 25–40 loan investments, with at least 80% in floating rate securities. The target portfolio is 45–70% First Lien Senior Secured (Libor+4–7%); 15–30% Unitranche debt (Libor+7–10%); 15–25% Second lien/subordinated debt (Libor+15–25%); and 0–5% Equity (18%+ target IRR). The fund may use gearing of up to 25% of net assets at the time of drawdown.”
Some key observations on my part about this proposed new fund.
In reality, it looks a lot like the UK’s first BDC. Business Development Companies have been popular in the US market as an alternative source of income. These BDCs are a tax efficient structure that allow hedge funds and asset managers to lend to mid-market businesses, usually via some form of securitised structure. The share price of BDCs tend to gyrate up and down in terms of discounts and premiums — for the past few years BDCs have been trading at big discounts.
The yield of 6.5% looks about right, and is probably fairly conservative. Equivalent funds such as Ranger — a London listed fund that operates in a similar bit of the market — have tended to feature higher yields. That sounds enticing until you discover that they may have lent money to riskier businesses. But 6.5% might also strike some investors as a bit low for the risks of lending to those private mid cap businesses in the US.
I’m also a little worried by the fund’s proposed hedging policy. The good news is that the fund won’t be hedging its capital value but will be hedging its annual sterling dividends.
I’m frankly a bit cagey about any hedging at all. It sounds great on paper but in my experience frequently goes horribly wrong — one common problem is after FX volatility, cash levels required to manage the hedge shoot up, hitting returns. This is a US focused fund and investor’s should be grown up enough to accept that it needs to be entirely unhedged.
I can’t say I know anything about the manager, PennantPark a US middle market credit investor with AuM of $2.0bn through two Nasdaq-listed business development companies (BDCs) and one private comingled draw-down fund. Its senior staff come from Apollo which is a major player in this space. I’ll report back on the manager in the next few weeks, once I’ve had a few conversations around the City!
On the plus side, I like the fact that the management fee is 1.0% pa of net assets (0.9% for assets over £500m), with no fee on initial cash proceeds until the portfolio is 90% invested. There’s also no performance fee. The board will also be fairly active in managing that potential discount — given the experience of many BDCs and Ranger, they might need to be !
According to Numis again the board will use buybacks and hold “tender offers on a quarterly basis at NAV less costs for up to 10% of the share capital (capped at 25% pa). There will be a continuation vote at the third AGM, and every three years thereafter.”
I have no idea whether this fund will get away. I’m not completely convinced there is demand for this but to be fair BDCs are popular in the US and if you’re going to run a portfolio of mid market loans you might as well do it in the deepest, broadest market on planet Earth — the US. My snap judgement is that if the annual dividend had been closer to 8%, I might be more interested !