After several years or poor performance Henderson Value Trust has new managers and a new name and is currently sitting of a huge double discount. I met one of the managers to find out how they plan to turn it around.
Henderson won the mandate earlier this year and assumed control on (Ahem) April fool’s day. It’s down to joint managers Ian Barrass & Paul Craig, with the support of assistant manager Charles Parton to turn around the pretty dire performance of the fund.
The trust has an unusual mix of investments in hedge funds, private equity and esoteric funds that makes it that wee bit more difficult to promote and to describe to potential investors.
Henderson are persisting with the existing investment mandate after existing shareholders, consulted by the Board made it clear they liked the investment remit because it added something different to their portfolio, they just want it to be better managed.
Background: So what is Henderson Value Trust & and where did it go wrong?
Henderson Value Trust (LON:HVTRR), let’s call it HVTR for short, invests in multi-asset esoteric investments worldwide. It invests on a largely though not exclusively fund-of-funds basis (simply a fund that invests in other funds), in multi-strategy portfolios of hedge funds, private equity, specialist investment funds and the occasional direct investment. Broadly it invests in investments that ordinary investors might not have access to or fully understand.
It was established as SVM Global fund by the then nascent Scottish Value Management in 1991 and the story of this fund is that until the financial crisis it performed reasonably well, and in some years very well. It was only really at the onset of crash that the performance fell, in fact nosedived and the fund found itself stuck with a portfolio of illiquid investments whose value was dropping exponentially.
Over 5 years whilst the benchmark went up 50% the fund went down 40%. Ouch!
The poor performance culminated in the lead manager resigning late last year and the board deciding to put the investment mandate out to tender.
Thirty three applications were received to take over the mandate with Henderson winning after what they describe as a gruelling process.
This is an aspect of investment trusts structure that receives less recognition from investors than it deserves. An investment trust board exists to represent the interests of shareholders. This sets them apart from open ended funds (Unit Trusts & OEIC’s). If this were an open ended fund it is likely that the same investment house would likely still be in place, and as a shareholder the only riposte you would have would be sell your holding in the fund at a ruddy great loss.
SVM Global also had issues around the accounting process and valuation which resulted in a write down to the NAV (net asset value) in September last year of around 13%. Unfortunately for investors this wasn’t the last write down they experienced as we will see further on.
Management
Perhaps with the exception of tracker funds management of a trust is of course always very important. Because HVTR has such a wide investment remit in listed and unlisted funds it comes with two joint managers supported by an assistant manager.
Ian Barrass is head of Private Equity at Henderson and has 29 years of investment and finance experience. Ian comes with experience in secured loans and infrastructure and is experienced in conducting due diligence (deep financial and other analysis before making an investment).
Ian has been particularly successful in realising substantial value for shareholders in Henderson Private Equity investment trust which was recently wound up. He realised over three times the market value of the trust from when he took it over, which was admittedly from a low point.
Paul Craig, his co-manager, is a Director of Hendersons multi-asset team and comes with 24 years of investment experience.
Henderson describes him as a specialist in listed fund investment, experienced asset allocator and investor in alternative asset classes with international experience.
Perhaps of more importance to investors Paul’s funds are top quartile performers and Trustnet, a financial data company who rank fund manager performances rank him as an outperformer among his peer group. He has beaten the average of his peers in 7/10 years.
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Historic underperformance
One has to ask the question of why this fund hasn’t recovered with the market at least to some degree. The chart below demonstrates why this isn’t so.
The chart illustrates that the total cost of investment for both sections below was around £27m, which was 15% of the portfolio, and the current value is £3.4m.
Ian Barrass told me “I don’t see this recovering; a lot of the situations are in liquidation and getting value back is going to be difficult. So this is £27m of investment where you basically lost £23-24m of capital”.
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Initial changes
One fact the managers wouldn’t disagree with is that the investment mix as it is within HVTR is not what they would have chosen if they were starting again today. There is too much in mining and in Russia, which has contributed a little to the performance.
Whilst Barrass confirmed that there will be changes to the portfolio, quite a few, it won’t be rushed, and they’ll be done in a way that preserves value best. They believe value is best achieved by employing an evolutionary rather than a revolutionary process so that it is managed gradually and thoughtfully.
Since taking over Ian Barrass & Paul Craig have completed a review of the trust and its investments. After completing their own analysis they asked Ernst & Young to review the half year results which were calculated by the previous manager SVM, but were announced by the new incumbents and covered the 6 month period up until the day before they took over.
Ian clarified that this wasn’t an audit but E&Y paid more attention to the numbers than usual and E&Y agreed with the Henderson team’s numbers.
Barrass also emphasised that in evaluating the portfolio they haven’t kitchen-sinked as some have expected. This is where managers, often when new write down the value of a portfolio to less than it’s worth in order to guide it up again and claim the glory.
Barrass also pointed out that one of the reasons they won the mandate was for their fair value process and also HVTR are not paid a performance fee so there’s no in-built incentive there.
Another major change they’ve made is their fist investment in to a Korean Preference share fund called Weiss Korean Opportunity Fund Limited. This is an investment trust ran by a team they know well and have worked with in previous funds. It invests in preference shares of large Korean companies such as Samsung, Hyundai etc and does so because there is a disconnect in the Korean market at present whereby the preference shares are being valued much more cheaply than the ordinary share. HVTR invested £2.6 million.
Portfolio Analysis
HVTR currently has 59 investments in the portfolio which Barrass & Paul Craig have reviewed looking at the underlying liquidity, diversification and underlying investment quality.
In this process they recategorised the investments slightly differently from the way SVM did it. Barrass explained “we did a look through analysis of what’s in the portfolio, what’s actually in the funds and we formed an initial assessment to decide what we’re going to do”.
And what they did was they reduced SVM’s 6 categories to 5. The chart below brakes down the portfolio and illustrated that 56% is in listed vehicles and in the unlisted side 31% had redemption periods (notice periods before being allowed to exit), which Barrass said they found were surprisingly low at around 1 week (mainly the hedge fund portfolio and some OEIC’s).
Barrass said “also, a number of the portfolios are already in run-off mode. It’s a relatively liquid portfolio, people looking from the outside don’t necessarily appreciate this. It does though need to be in a closed-end fund”.
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HVTR’s underlying holdings can reasonably be perceived to be fairly risky investments and Barrass doesn’t expect this to change. He said “I don’t think the risk profile will be changing radically. What I would say is that going forward I’d like to avoid the situation where you get no liquidity if you want to sell. So we’d probably look at that a bit more critically. Also we have said we’d like to introduce a wee bit more yield to the fund, perhaps from infrastructure or from some of the finance funds. The current yield is 0.8%, I think if we could introduce a bit more yield it would be well received”.
The slide below takes a closer look at the portfolio by Sector & by its geographical location.
The sector appears to be quite diversified but there are a couple areas to too much concentration which goes back to my earlier point about changes that still need to be made. Basic resources and oil and gas is 17% combined. This concentration has hurt the fund performance in the last few months and will be sold down when an opportune moment presents.
Looking at the fund by geography there is a little too much concentration to Russia and too little to Asia and Emerging markets outwith Russia. There is little in the US too compared to its size.
The portfolio of holdings includes investments the new managers are happy to hold such as Acheron Portfolio Corporation, which buys insurance policies from Americans usually with cronic illnesses who want to access the value of their insurance policies before they die.
They also like Zouk Solar Opportunities Fund too which they think has great prospects.
Investment Process & Opportunities
With the investment remit of the trust set as a Global specialist fund-of- funds manager, Barrass & Craig have what they believe to be a clear strategy to take the trust forward. Barrass explained “we’re looking for funds that our investors would not normally invest in themselves because they’re a bit small or they don’t understand them. So we’re providing a subcontracted service in the specialist and alternative fund sector here”.
The number of holdings is likely to shrink with the managers considering 50 as a more appropriate level as opposed to the present total of 58 holdings, which includes a direct holding in an oil explorer.
The managers are part of the multi-asset management team at Henderson that runs £5.5 billion. Ian Barrass sits with Paul Craig and his team about 3 days a week, the other two days he’s with the PE team. Barras explained “What do we get from that, we get a flow of ideas of what our multi asset team are going in to, a macro perspective on what investment ideas are emerging there, geographies, types of asset classes and we can feed of that to make sure we’re in the right areas when we make our investments.
Active portfolio management that doesn’t mean activist, we’re not activist in nature, what it means is if we make a mistake we do something about it. We’ve gotta know why we go in to an investment and what we hope to get out of it”.
HVTR has strict Risk management procedures in place from Henderson’s internal team who analyse the trusts investments including the underlying holdings of the funds it invests in to make sure amongst other things that there isn’t too much portfolio concentration in one company held through several funds.
Historic performance is HVTR’s starting point in finding a good manager. Barrass continued “also getting to know them, stability of personnel, especially in PE is very important. Consistent performance, culture, clarity of thinking , they must have a clear investment process that they stick to; and also trust, you’ve gotta trust the people you’re investing in.
We’ve gotta figure out what will happen to our investments when the market goes down, are we gonna be left in trouble?”
HVTR has a target annual rate of return of 10%, a little high but this is what they’re looking to achieve.
Barrass explained “now, we’re not saying that every investment we make is gonna return 10% per annum, but it’s an indication of the kind of guideline we set. We ask ourselves before we make an investment, what do we think the investment can make for us over the next few years, not in 5 years but what do we hope to make from it in the next few years. And it’s got to be a decent understandable return and this might sound very basic but it is in fact a very important discipline.
We also took away another line that SVM used a lot, ‘Deep Value’. It was a phrase they used quite a lot. That to me implies that you’re always looking for an extremely cheap stock. My view of value is different. I would buy something that is on a premium to NAV if I thought it had high growth potential. And I could see where a decent return would come from; 8-9% return is fine. I’m not looking at extreme situations when’re you’re taking a contrarian view of value on a deep value basis. So we’re not going to talk about deep value anymore we’re just talking about value”.
For an idea of where HVTR might be going and its opportunities, Barrass and Craig see opportunities in areas such as specialist finance which has been a very interesting area for the last few months. With banks not lending as they used to yields have gone up and terms strengthened for providers of finance and a number of specialist funds have appeared to take advantage of this.
Infrastructure, there is none of that there at present but exciting opportunities exist.
In PE (Private equity) there is too much concentration to the UK when exiting opportunities are presenting themselves worldwide.
So why invest now?
Barrass’ response to this question was “We think having gone through our review we’ve done everything we need to. We think the NAV is now investible. Also if you come in now you’re at the start of the process. It isn’t going to be a quick fix but you have experienced managers to take this forward. We’re clear on where we’re taking it though the details will develop over time and we have a very strict risk management procedure in place”.
To drum up interest Henderson are embarking on a marketing drive over the next 18 months. They also promise to continuously communicate and explain to the market and to shareholders what they’re doing which is important in a fund that is so esoteric, unusual and complex.
HVTR currently has around £14m in cash. That’s 10% of the portfolio which is there to invest when the moment is right.
And finally but importantly if they don’t succeed in turning the fund around shareholders can go in to the continuation vote and come out at NAV in around 18 months time. JP Morgan Cazenove the broker described this as an interesting two way bet, either they manage to improve the performance and upgrade the portfolio. Or if they can’t it might be wound up.
Charges & Discount
Perhaps because 33 applications were received to take over the management of HVTR the fee structure compares very favourably when compared to other specialist funds or indeed to the fee structures of some of the funds it invest in.
The annual management fee is 0.7%. There is no performance fee and, with the amount of restructuring the new managers have instigated which may prove costly and otherwise be a drag upon performance the management fee does not kick in till September. This should absorb some of the one off fees to pay for the restructuring.
HVTR’s analysis reveals that the trusts underlying investments trade on an average weighted discount of -26%. That is pretty huge though it is important to caution that how much of this can be realised remains to be seen, however, with HVTR itself sitting on a discount of 16%, that’s a fair old discount on a discount which hasn’t yet moved in accordance to the new investment management and process.
It has become fashionable for trusts to augment a discount control mechanism but HVTR hasn’t and will not do this. Barrass explained “our view is that with these sort of portfolios, a closed end vehicle is the correct way to run them but we don’t want to be in a situation where we want a very strict discount control mechanism because it means we might need to sell things at short notice to make good the discount. The more important point is there is a continuation vote for this fund in December 2014. We think the best way to improve the discount situation is to improve the performance and to illustrate that this portfolio can generate the returns”.
WhichInvestmentTrust.com View
Henderson Value Trust now has very capable managers with a good track record in managing similar investment mandates. However it needs to be recognised that a fund such as this is unlikely to be suitable for many investors because it is just too high risk.
Although unsuitable for some, a well managed fund investing in alternative asset classes offers investors not diversity of risk, because in trying times all risk assets perform poorly, but what it does help to avoid is the concentration of risk in the same underlying stock of fund type.
It has to be recognised that if the current managers were starting out again, HVTR’s portfolio of investments are not what they would have chosen in its entirety. Many of the holdings will be sold though it may need some patience to wait for the right levels of liquidity or price to prevail.
There continues to be some risk that the value of the portfolio could be written down from here but as the portfolio has been carefully reviewed carefully both by the manager & by Ernst & Young, and as there is such a strong incentive upon a new management to get all of the bad news out right away and we do not think this likely.
The trust is sitting on a discount to NAV of around 16%. In addition to this the underlying funds that the trust is vested in is on a nominal discount of 26%. I use the term nominal because we can’t be at all certain that the discount would ever be reduced to zero because the underlying implied value me be less than indicated.
A large discount upon a discount does in our view indicate however that there is likely to be value there.
Henderson Value Trust is never going to be the type of fund that is attractive to widows and orphans but with only 18 months to go till shareholders are given the opportunity to vote to wind the trust up there is plenty of incentive upon the management to turn things around. For the more adventurous investors amongst you we think this could be a very interesting little investment. If the fund doesn’t perform in the next 18 months it will be unlikely to survive and the management are in no doubt about this.
For adventurous investors, Henderson Value Trust joins our buy list.
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