Each week, professional investors tell us where they’d put their money. This week: Ian Barrass, James de Bunsen, and Peter Webster of the Henderson Alternative Strategies Trust
Investors have enjoyed handsome stockmarket returns since the financial crisis. Since the end of February 2009 the FTSE All Share has returned 185.9%, at an annualised rate of 12.7%. We feel that the backdrop for equity markets is now becoming less favourable. Valuations have re-rated – the All Share now trades on a forward price/earnings ratio of 14.4 times, compared with 8.6 times in February 2009. Central banks are slowly removing monetary support. The Federal Reserve forecasts three more interest-rate rises in 2018 and has begun to shrink its balance sheet; the European Central bank is tapering asset purchases and the Bank of England recently raised rates for the first time since 2007. Tight labour markets suggest that a rise in inflation also shouldn’t be a surprise.
We believe that now is a good time for investors to diversify. Within private equity we like Riverstone Energy (LSE: RSE), a North America-focused fund launched in 2013, which invests in shale oil and gas companies. Since 2000 the investment team have managed nine private funds through a variety of oil-price environments. Their track record is impressive – they have a disciplined process and have repeatedly backed management teams that they have successfully supported in the past. Teams backed by Riverstone have the advantage of not having to rely heavily on debt financing, thereby improving their ability to survive sustained periods of low oil prices. The majority of the capital raised has been deployed during a period of low oil prices, following the oil-price fall in late 2014. As a result, the team has been able to buy assets at attractive valuations. The fund is now fully deployed and has executed its first exit, generating an attractive internal rate of return. It trades at a 20% discount to its net asset value (NAV) and we believe that further successful assets will both raise the NAV and help to narrow this discount.
Following the European Union referendum result, we have exited our UK property exposure and are searching for opportunities elsewhere in Europe. We have found some interesting ideas within German commercial property. Summit Germany (LSE: SMTG) invests in commercial property in Berlin and other major cities across Germany. Aside from robust German growth, we like the low borrowing rates available that create an attractive spread between the yield on German commercial property and financing costs. Summit has a strong record of adding value by boosting occupancy, extending leases, developing extra land and refurbishing assets.
One attraction of investing in closed-ended funds is the ability to take advantage when funds are trading at discounts to the value of the underlying portfolio (the NAV). Discounts have narrowed on average during 2017, but we still see interesting opportunities. One example is NB Distressed Debt Investment Fund Ltd – Extended Life Shares (LSE: NBDX). The fund trades at a 15% discount to NAV and is also now in realisation mode, which means that investors could benefit from buying shares and waiting for the company to sell its assets at levels near to current carrying values and return capital.