Sabre-rattling hedge funds spark fear into the companies in which they build stakes. Just ask GlaxoSmithKline or FirstGroup. But the persistent discount attached to Third Point Investors against its net asset value (NAV) made the UK investment trust, managed by US investor Dan Loeb, a target for criticism this year.
In what was a taste of its own medicine, shareholder Asset Value Investors, which has built a 10.1 per cent stake in the trust, last month wrote to the board, urging it to call a shareholder meeting to vote on proposals to help close the discount.
The plan was rejected by Third Point, which said it would inappropriately infringe on the board’s ability and obligation to manage the company, and it would have no legal effect under the company’s rules.
The UK-listed investment trust invests directly into Third Point’s largest hedge fund, which primarily takes long and short positions in global equities as well as in sovereign and corporate credit, and has an allocation to private equity.
Guernsey-based Third Point deserves some dues, posting progressively improved share price returns over the past three years. The varied asset allocation of the master fund it invests into means direct comparisons with broader indices are trickier. But it has outperformed the MSCI World and S&P 500 over a one, two and three-year basis. Over the past 12 months the shares have delivered a return of 78 per cent, more than twice that of those two indices.
It’s not like shareholder agitation has not borne fruit because the gap between the share price and NAV has narrowed since the start of the year. Shares in the trust might trade at a 14 per cent discount against an estimated NAV of $30.39 at the end of July, but before this year the discount typically stood at 20 per cent or more.
Addressing the shares’ discount has been top of the priority list. In April it announced a five-point plan that included buying back shares to work towards a long-term discount of no more than 7.5 per cent against NAV, and an exchange mechanism that would allow investors to exchange shares in the trust for an interest in the master fund up to $50 million, a move aimed at attracting larger institutional investors to the share register. Target exposure to private equity and venture capital will also be lifted to up to 20 per cent of NAV.
While Loeb might be synonymous with agitation, it’s a strategy that can deliver lumpy returns. This year the activism-constructivism strategy has delivered a negative gross return of 0.2 per cent, and that’s before management fees and expenses are deducted. But since 2011 getting in boards’ ears has generated an annualised return of just over 20 per cent, ahead of the S&P 500.
Elsewhere, there have been better outcomes this year, as the fundamental and event strategy generated a 15.8 per cent boost to the trust’s profits. That involves anything from targeting companies it reckons are quality growth compounders to those that could benefit from an event such as a spin-off or merger.
Winners for the trust since the start of the year were its investment in cybersecurity group SentinelOne, Intuit, the software provider, and Danaher, the US technology and science group. Indeed, enterprise technology was the sector in which it had the second largest exposure after financials at the end of July.
The trust’s current share price discount could be an opportunity, particularly if the impressive trajectory of NAV gains continues. And at a time when active asset managers are under attack from cheaper passive strategies, closet index tracking isn’t an accusation that could be levelled at Third Point.
ADVICE Hold
WHY Good track record of NAV gains is promising for further rerating in the shares
Lok’n Store
Self-storage is probably up there as one of the dullest corners of the property market. But amid the upheaval caused by Covid, boredom has been a virtue to investors in UK real estate groups.
Take Aim-traded Lok’n Store, which develops and lets self-storage units. Since lockdown first hit in March last year the shares have made a 128 per cent return. That’s an outperformance of the Aim All-Share index, which itself has been turbocharged in recent months by a flock to recovery plays.
It’s a response to bullish updates from the Hampshire-based company and its much larger peers, which has culminated in Lok reporting a jump of over a fifth in self-storage revenue over the year to the end of July.
Peel Hunt, the broker, increased its forecast for revenue growth this year from 15 per cent to 21 per cent and raised its NAV forecast by 5 per cent to 632p a share, to reflect increased occupancy.
The good fortune of the sector over the past 18 months is an oddity as these companies typically do well in times of economic expansion. But the upheaval caused by Covid, whether that be businesses clearing office space or restaurants storing furniture, has pushed up occupancy levels.
Then there’s the housing market frenzy, which has benefited take-up of Lok’s units, as it typically gains 70 per cent of its business from household customers. Some of the heat seems likely to come out of the demand-side here.
Where will future earnings growth come from? Lok prices according to occupancy of its units and the level of local competition. Occupancy as a percentage of lettable area rose from 69.6 per cent last year to 85.8 per cent by the end of June. Pricing has started to creep up but more is expected and it should trickle down to the bottom line.
There’s also store expansion plans. A pipeline of 13 sites would increase the portfolio to 50 and boost lettable space by 38 per cent. Costs of operating stores are largely fixed and incurred on opening, meaning potentially greater earnings growth.
The shares trade at a 23 per cent premium to Peel Hunt’s forecast net asset value at the end of July, which leaves good growth prospects looking priced in for now.
ADVICE Hold
WHY Valuation reflects price rises and store openings, which should feed through to solid profit growth
