2 February, 2015 By Bill Jamieson
One of the greatest innovations in equity finance was the investment trust. Scots played a major role in its development more than a century ago in providing finance for companies in America. So it is pleasing to see United States value fund managers Gamco visit Scotland last week to introduce a new investment trust to Scottish financial institutions.
The new trust – the Gabelli Value Plus+ Trust, which lists on the London Stock Exchange on 17 February – has attracted much institutional attention in Scotland in view of its attractive features and Gamco’s investment track record. Gamco has a reputation as an activist manager – a description that can strike terror into the hearts of laggard stock market performers. It has set up the trust to invest mainly in US equities, with a bias towards small to mid-cap businesses. It has a target to raise up to £250 million.
What distinguishes Gabelli from the pack? It uses a methodology called private market value (PMV) – what the managers believe an informed industry buyer would be willing to pay to buy a company. The aim is to identify businesses whose shares trade on the stock market at a significant discount to this PMV estimate.
It traces the origins of this value-driven approach to the long-established Graham & Dodd value discipline. It has fine-tuned this approach to identify catalysts that might help to narrow or eliminate the difference between the company’s share value and the estimated PMV – typically corporate restructurings (de-mergers and asset sales), business improvements and mergers and acquisitions.
There is a long track record of out-performance. The managers claim that the PMV gap provides a margin of safety for investors and that the technique has generated an annualised return for the Gabelli Core All Cap Fund of 15.9 per cent since 1977, compared with the S&P 500’s 11.8 per cent return and the 11.9 per cent return on the US smaller company index, Russell 2000. It also believes the strategy has delivered fewer “down” years and lower losses when compared to the S&P 500.
So this looks to be a fairly rigorous and disciplined value investor approach. But what might make this investment timely? And what of management fees and charges that can often send an investment trust debut to an immediate discount?
Gabelli believes there is currently “a compelling opportunity for investment in US equities” through using its methodology. We are entering, it says, “a fifth wave” of accelerated merger activity. With record levels of cash on company balance sheets, many are seeking opportunities to be more productive and competitive through acquisition.
Last year saw a global total of $3.5 trillion (£2.3tn) of deal volume compared with $2.6tn in 2013. The managers believe this will continue through 2015 and beyond, driven by low interest rates and record levels of corporate cash. And alongside the high levels of spin-offs and buy-outs there are increasing levels of “dry powder” at buy-out funds that needs to be deployed. Again, this has the potential to spur corporate activity – and thus opportunities for this trust.
As for listing costs, Gamco will be absorbing these to ensure issue expenses will not exceed 1 per cent of gross proceeds, against the 2.5 per cent sector average. In addition, Gamco will invest 10 per cent of the total capital raised in the issue. The managers’ fee is also tied to market capitalisation and not assets.
On discount control, the board says the most direct ways to ensure that the trust’s shares do not yawn out blow net asset value are tender offers and share buy-back powers. These, it says, should help keep the discount consistently low. A sales note by Investec’s Finlay Bodman points out that Gamco manages 11 closed-end funds on the New York Stock Exchange and they trade on a much tighter average discount than the rest of the US closed- end fund universe.
As for stewardship, Scots are well represented. One of the investment trust’s new directors is Charles Irby, formerly chairman of Aberdeen Asset Management. Alex Hammond-Chambers is on the management board, having served as chairman of the Association of Investment Companies and once been a fund manager of British Assets Trust in Edinburgh. Gabelli Value Plus+ Trust’s chairman will be Andrew Bell of Witan Trust, who recently stepped down as AIC chairman.
For investors underweight in US equities and who favour a defensive, value-driven approach, this new trust should be of considerable interest. It has a good pedigree, with years of experience in the PMV technique, offers a low entry cost for investors and is overseen by well-regarded names in the investment trust sector here.
The deadline for applications is 11 February. Issue price is 100p, net proceeds of the issue are a minimum £247.5 million and net asset value per share at admission will be a minimum 99p. Investec has done an informative pre-IPO sales note and further details should be out shortly.