How would you like to own shares in Nvidia, but at a 10% discount to its current trading price? Many would agree that such an offer is certainly attractive, but not feasible to obtain. However, such a unique value proposition is achievable through the use of offshore investment company holdings.
It is for good reason that offshore investment companies, which form the basis of Overberg Asset Management’s (OAM) global private share portfolios, are known as the City of London’s “best kept secret.” They have been around since Victorian times, yet few know about them apart from financial professionals and institutional investors, since they do not come with fee-based distribution incentives like unit trusts or other collective investment schemes.
Here we outline their top three distinctive benefits of offshore investment companies:
A closed-end structure:
Investment companies only issue a limited number of shares. This means the share price of the investment company may diverge from its net asset value (NAV), but this creates an added opportunity for investors as prize assets can often be bought at a discount to NAV and sold at a premium to NAV. The NAV discount cycle tends to move in tandem with business cycles. Discounts tend to widen ahead of bear markets as occurred in 2022 and most of 2023, when interest rates surged at the fastest pace since the 1970s. The discounts have since narrowed in line with falling inflation, declining interest rates, a recovering global economy and a burgeoning productivity boom driven by Artificial Intelligence.
The aggregate NAV discount of the 400 or so London Stock Exchange listed investment companies is currently 9%, compared with a peak of 17% in October 2022 but still far from its long-term average with considerable potential to narrow further. Before Covid struck the discount was just 1.3%. The outlook for investment companies is the most attractive that is has been for years.
Hedge funds and institutional investors are circling. They recognise the value. Hipgnosis Songs Fund, which earns its revenue from music royalties, was trading at an eye watering 50% discount to NAV before receiving an all-cash takeover offer from Blackstone at an 18% premium to the adjusted operative NAV. The share price increased accordingly, gaining by 92% over two months, adding to the returns of OAM’s global private share portfolios.
Scottish Mortgage, well known for its early-stage investments in Amazon and Tesla and more recently in Nvidia, has attracted the attentions of activist hedge fund manager Elliott Management, which built up a 5% stake in the company. The size of Elliott’s investment pressured Scottish Mortgage into narrowing its NAV discount. It announced a £1 billion share buyback programme, the largest ever used by an investment company.
Another hedge fund, Saba Capital, has built up sizeable positions in Baillie Gifford’s US Growth Trust, JPMorgan’s European Discovery Trust and BlackRock Smaller Companies Trust. The pressure to narrow NAV discounts resulted in record investment company share buybacks of £3.6 billion in 2023. When NAV discounts get too wide, they tend to self-correct in line with market cycles, but investors can also take comfort from Discount Control Mechanisms used by investment companies. As well as share buybacks, mergers, buyouts, and managed wind-downs, all serve to compress NAV discounts.
NB Global Floating Rate Income Fund for instance approved a managed wind-down in January 2023, which has significantly added to investment returns as the share was trading at a discount to NAV but capital distributions resulting from the sale of the company’s assets were made at NAV.
OAM’s private share portfolios have benefitted from holdings in Hipgnosis Songs Fund, Scottish Mortgage and NB Global Floating Rate Income Fund. The portfolios have also benefitted from the massive appreciation in Nvidia, which is the heaviest weighted share in Scottish Mortgage and Allianz Technology Trust. Both these investment companies are held in our private share portfolios and both trade at unusually wide NAV discounts of close to 10%, with significant opportunity to narrow.
Low-cost access to best of breed global investment teams:
Investment companies provide the ideal structure for gaining exposure to alternative asset classes such as private equity and absolute return strategies. Alternative asset classes which add so much value to portfolios in terms of diversification and performance are often illiquid and so the closed-end structure of an investment company is the ideal structure for holding them. They are ordinary shares and traded daily on the London Stock Exchange.
Gearing:
Investment companies tend to outperform rising markets due to the narrowing in NAV discounts, but also due to their ability to use borrowed money to boost returns. If the investment company earns more than the interest paid on the loan, the gearing will boost investment returns. This is one of the reasons that offshore investment companies tend to produce better returns than the market indices.
Since markets always tend to go up over the long-term, investment companies have a long-term history of outperforming. If you would like to participate in our unique global investment strategy, personally or via a trust or pension structure, please contact our experienced and dedicated management team for a free consultation and ensure your financial wellbeing. Since our establishment in 2001, OAM has developed a proven track record in global and domestic South African markets.
By Nick Downing, CEO, Chief Investment Officer, Director, Overberg All writers’ opinions are their own and do not constitute investment recommendations or financial advice. Speaking to a qualified wealth and investment professional is crucial before making financial decisions.
- ‘Overberg Asset Management (Pty) Ltd. is an authorised financial services provider: 783’ established in 2001.
