Apax Global Alpha invests in a range of private equity funds raised and advised by Apax Partners. To avoid the problem of uninvested cash dragging on returns, the trust invests surplus liquidity in a portfolio of derived investments – debt and equity stakes in businesses that Apax Partners knows well. Apax focuses on four sectors – technology, services, healthcare and consumer – all of which are underpinned by long-term secular growth. In the world of private equity, Apax is a growth investor looking for good solid businesses available at attractive valuations that it can build into great companies. The key to its success is in nurturing these. An operational excellence practice within Apax supports the management of these companies. Apax Global Alpha had a good 2020, its focus on growth and quality made its portfolio resilient in the face of the pandemic.However, against the backdrop of the rally in value-style investing, its discount has opened up again. We think that this is at odds with its conservatively valued NAV – in 2020, the average valuation uplift when it exited an investment was around 40%.
BlackRock Throgmorton is one of the most successful UK smaller companies investment trusts and, as such, an ideal way to play the resurgence of international interest in the UK stockmarket. The performance of UK companies and smaller companies in particular has lagged world indices on uncertainty about Brexit. This was compounded by the perceived vulnerability of the UK economy to Covid-19. A Brexit deal and the success of the vaccine rollout in the UK has rekindled interest and investors are waking up to the value opportunity presented by the UK market. BlackRock Throgmorton benefits from an ability to back companies its manager Daniel Whitestone (pictured) likes and short companies that he feels face long-term, insurmountable challenges. The manager seeks to benefit from the profound change underway in many industries as disruptive new technology opens up new markets and calls time on those businesses that fail to adapt. The pandemic accelerated the pace of change in many industries. BlackRock Throgmorton’s manager says that he is as excited about the prospects for its portfolio as he has ever been.
Herald Investment Trust is a global smaller companies trust with a long and impressive track record of investing in technology and media businesses. It is a survivor, having weathered the tech boom and bust and the Global Financial Crisis. It can boast just one fund manager since its launch in 1994, Katie Potts (pictured). She is justly proud of the value that Herald has created for its shareholders over that time. While having a diversified global portfolio, Herald is also unique in the strength of its support for British technology companies – UK companies make up about half its portfolio. It is often a cornerstone investor in these businesses and a first port of call when they seek the finance that they need to expand. Small-cap and large-cap technology stocks do not always move in tandem, but last year investors started to recognise the value within Herald’s portfolio and, over the past year, it has produced returns well-ahead of peers such as Edinburgh Worldwide and Smithson. However, Herald’s shares are still trading on a double-digit discount to its net asset value while those competing funds trade on premiums.
At first glance, Jupiter Emerging and Frontier Income has had a difficult couple of years – giving up much of its outperformance of its benchmark since launch in May 2017 and shrinking last month after offering investors an exit at a price close to NAV. However, we see considerable latent value within its portfolio. There are good reasons to back emerging and frontier markets for the long term, and manager Ross Teverson's (pictured) focus on stocks experiencing positive change has worked well in the past. Money flooded out of most emerging and frontier markets last year, driving down valuations. Investors favoured the perceived safety of the Chinese market, which dominates emerging market indices. The Jupiter fund has a material underweight exposure to the Chinese market and this was a major factor in its underperformance. Investors also tended to punish markets that were hard hit by Covid-19, some of which featured in the trust’s portfolio.The pandemic drove down companies’ earnings as well as valuations. However, as vaccination programmes are rolled out around the world, there is hope of recovery. Rising earnings and improved sentiment could have a dramatic effect on share prices. The trust pays a decent yield while you wait.
Polar Capital Financials Trust was out of favour with investors for some time and was hit hard by Covid-19 as investors fretted about the potential for a surge in bad debts hitting bank stocks. The situation has improved dramatically, however. The trust is expanding as investors flock to take advantage of renewed enthusiasm for the sector. The trust’s global remit gives it the freedom to invest in much higher quality businesses than are available to a UK investor. Crucially, the managers, John Yakas (pictured), Nick Brind and George Barrow, think the re-rating of the sector has much further to run. Bank stocks were depressed as falling interest rates hit margins. Last year’s slashing of rates and huge injection of stimulus marked the nadir of the sector’s fortunes. Now, as investors talk about the prospect of rate rises to tackle inflationary pressures, the outlook is much rosier. We note, however, that the trust’s share price is only back to pre-pandemic levels. At that time, the managers were telling us that banks were materially undervalued. In essence, they went from cheap to ridiculously cheap and are back to being cheap again.
Apax Global Alpha, BlackRock, Herald Investment Trust, Jupiter and Polar Capital all feature.
As we find ourselves in the second half of 2021, the QuotedData research team put together their top investment company picks for the rest of the year.