It now seems that the turbulence of the last few weeks hasn’t resulted in the IPO pipeline for investment trusts closing down. The Smithson fund has broken all records and raised over £800m, surpassing Patient Capital to be the biggest new fundraise ever. I have to say I seem to be the only person who was hugely underwhelmed by this new fund whose timing I think is a bit suspect – I’m not sure small and mid-caps are where I’d want to be this late in the cycle. But congrats are nevertheless due – this is a classic example of how to get retail investors excited by a fund proposition.
The much better news in my world is that the Cuba fund I mentioned over the summer in my Financial Times column has managed to get away, although it hasn’t raised quite as much as I suspect its backers had hoped for.
According to Numis “Ceiba Investments has raised gross proceeds of £30m as part of its listing on the Specialist Fund Segment of the London SE. The shares are due to list on 22 October under the ticker “CBA”, and the fund will have an initial market cap of £137.7m based on the issue price of 100p”.
Apparently, Ceiba had originally been seeking to raise up to £100m at a price of 119p per but “the issue price was subsequently reduced by 16% to 100p after the company announced that it had received “significant expressions of interest” at a lower price.”
In truth it can’t have been easy trying to raise money for a proper frontiers fund so I’m not surprised that the price had to come down – I also thought that a target raise of between £30m and £50m was probably about the tops.
Still, the fund is now on its way to the LSE and I think that’s great news. As I observed in my FT piece I think this is potentially a great lowly correlated equity play on a nascent market. The fund has strong asset backing and is generating a decent dividend yield. The track record of the managers is also impressive – since 2001 NAV has grown from $101m to $175m (adjusted for new capital raised) and distributed c.$80m in dividends (c.4.5% per year) while over the past five years the annualised shareholder return has been 15.2% in Dollar terms and 19.5% in Sterling terms. This definitely makes it into my Frontier portfolio alongside TriStar Resources and Caledonia Mining.
Trouble in Catastrophe Land
The Numis report I name-checked higher up in this blog also observed that catastrophe reinsurance specialist Catco has released numbers during the recent wind season which suggests some big losses are on the way. According to Numis’ report from the management, the gory details are as follows:
“the manager suggests that there is potentially a “single digit impact” to NAV from Hurricane Michael and a “low single digit” impact from Typhoon Jebi based on early industry information. The impact will be assessed in the October NAV. The attritional loss reserve (0.15% per month, 1.35% per month) is expected to cover all loss events other than the potential losses from Hurricane Michael and Typhoon Jebi.
Hurricane Michael: made landfall in Florida on 10 October and due to the recent nature of the event there remains considerable uncertainty over the private industry loss impact. Initial industry loss estimates by modelling companies suggest a range of $2-$10bn. Based on industry losses below $10bn, the manager expects a single digit impact to NAV. The impact will be assessed further prior to setting the October NAV.
Typhoon Jebi: made landfall in Japan on 4 September and recent industry loss estimates have been increasing for this event. Based on early information, the manager expects a low single digit impact to NAV. The manager is monitoring the event and will determine if a specific loss reserve is required prior to setting the October NAV.”
One last bit of (bad) news. It also seems that numbers relating to losses for LAST years hurricanes are also still coming in. According to Numis, the “latest PCS estimates for Harvey and Irma have continued to increase, which is unusual given that it has been over 12 months since the hurricanes.” Clearly, those losses for Harvey only apply to the earlier ordinary shares but they are also bound to impact sentiment for the more recent C issue. These are currently trading at $1.015 which represents an 11% discount to the September NAV.
Stepping back from these numbers two worrying thoughts come to mind. The first is that losses from wind seem to be on increasing progressively over time. Every year now seems to bring some catastrophic event which has single- or double-digit impacts on returns. What was once exceptional is now ordinary and the definition of catastrophe has to change. Obviously, the reinsurance market will say that premiums will have to keep increasing but presumably, we’ll sooner or later reach a tipping point at which the cost of all these once extraordinary events becomes too much for the individual clients. In simple language, they won’t be able to afford insurance even if the reinsurers keep hiking rates. Managed withdrawal from marginal coastal areas seems to be the only solution.
The other worrying thought is the time it is taking for these losses to be tabbed up. This is injecting a huge amount of uncertainty into financial models which in effect results in a discount to NAV i.e investors don’t really ever know the full cost of the damage so err on the side of the cautious. That also has a knock on effect I presume on pricing as it will force up premiums because investors will demand that this discount is allowed for in their pricing models. Which of course makes the insurance ever more unaffordable.
I’m still a happy holder of the C shares in Catco but I am growing more and more nervous. CatCo is doing a better job on reporting its numbers but it needs to be working harder explaining why the underlying financial models might be in jeopardy.