Over the past year or so I’ve become increasingly obsessed with investing via exchange-traded funds. I love the fact that you can use them to get diversified exposure to whole sectors or even markets, and that you can buy and sell them in real-time just like individual shares.
And of course I love the fact that they are cheap – buying an ETF will usually cost you less than a quarter of the price of an actively managed unit trust in the same sector. But, however tempting it is to spend all one’s time swooning over the opportunities offered by ETFs, they can’t yet do everything. They can’t get you into timber, for example, or Africa, or the Indian property market.
Specialist investments: growing demand for quirky vehicles
For this kind of thing you need the specialist investment trust market. Here, you will find all sorts of quirky vehicles listed both on AIM and on our main market, be they investment trusts or just investment companies (which, for the purposes of most investors, are much the same thing).
Take timber. I’ve written about investing in forestry here before and remarked that it is tough to get exposure through the stock market. Not any more. In the past year, two investment companies – Cambium and the Phau-nos Timber Fund – have listed in London with the specific aim of buying timber and forestry.
Then look at German property. Two years ago, had you wanted to get a piece of the market you’d have had to head off to Berlin with a briefcase full of euros. Today all you have to do is buy shares in one of two AIM-listed investment companies – Speymill and Puma Brandenburg – that are busily buying up flats in Berlin.
If you want to go slightly mad and place your bets on the tiny Egyptian stock market, there is the Egypt Trust (up 250% over the past three years) and if you want exposure to Africa, you can buy shares in Lonrho, a pan-African investment company.
With professional investors (at whom most of these funds and companies are aimed) demanding increasingly focused and specialised investment vehicles, more of these kinds of funds are being launched every week. It used to be that you’d see two new ones every year, said Nick Greenwood, chief investment officer of Iimia Fund Management. Now you see two most weeks.
Specialist investments: how to choose where to invest
But with so many coming to the market, how do you go about choosing which ones to invest in? The first thing to note, said Greenwood – who is something of an expert on specialist trusts – is that you shouldn’t buy them when they list. These funds are often investing in very illiquid markets (timber and Berlin property being classic examples), which means that it takes them time to invest the money they raised before listing.
For 12 to 18 months, therefore, their net asset value (the value of their underlying assets) may not change at all. Given the very short attention span of modern markets, they drift off the radar and their share prices sink accordingly. Much better to watch them list and then to wait until they start announcing deals before buying.
With this in mind, Greenwood likes the Alpha Tiger Property Trust, which invests in India. Its shares listed last November at £1, but then drifted down to 88p-89p. However, the firm is now out securing deals – and saying so – and the shares are heading up again. They are trading at about 95p.
Also of interest for those who like India is the India Capital Growth Fund. This launched in December 2005 but, as it invests only in small and medium-sized companies, it was slow to find a home for all of its cash. The market lost interest, and now, despite the fact that it is both fully invested and doing well, it remains overlooked.
Shares in the trust trade at an 8% discount to the value of its assets. Sentiment will catch up with reality at some point but, until it does, this represents a rare bargain in today’s markets.
Greenwood thinks CQS RFF(Rig Finance Fund), which is managed by alterative investment management group CQS, looks like another good deal. CQS RFF invests in the financing of the construction of rigs and refurbishment of old ones. Iimia expects returns of about 13% a year.
Specialist investments: perhaps the biggest bargain of them all
Finally I want to point to RAB Special Situations (RSS), a listed company that invests solely in RAB’s Special Situations hedge fund. The latter has made a killing in the past few years with companies its managers think will do well out of Chinese growth. This has meant lots of small metals and mining firms but also several alternative energy firms and more recently Ethiopian eucalyptus forests (this definitely qualifies as quirky).
If you believe in the commodity super-cycle (that we are still only at the beginning of a great bull market) this is a fabulous fund to have access to. Yet right now shares in RAB Special Situations are trading at a 13% discount to their net asset value. This might be the biggest bargain of them all.
Disclosure: I hold shares in Puma Brandenburg and Lonrho and intend to buy some in RSS.
First published in The Sunday Times 3/6/07