Overdue a reappraisal?

Hansa Investment Company 20 November 2020 Update
Download PDF

Hansa Investment Company

Overdue a reappraisal?

Investment trusts
Global multi-asset

20 November 2020

Price Ord.

180.0p

Price A-share

178.5p

Market cap

£215.4m

AUM

£336.2m

NAV*

278.7p

A-share discount to NAV

35.4%

Ordinary share discount to NAV

36.0%

*Including income. At 17 November 2020.

Yield (A-shares)

1.8%

Shares in issue

120.0m

Code Ord/A-share

HAN/HANA

Primary exchange

LSE

AIC sector

Flexible Investment

52-week high/low*

197.5p

128.5p

296.4p

224.6p

*A-shares. **Including income.

Gearing

Net cash at 31 October 2020

1.7%

Fund objective

Hansa Investment Company was created in 2019 through the redomiciliation of Hansa Trust from the UK to Bermuda. It aims to achieve medium- to long-term growth through a diversified, multi-strategy approach, combining a strategic stake in OWHL with a portfolio of global equities and predominantly third-party managed funds, giving access to primarily non-UK equities, along with more thematic and diversifying funds. Hansa IC does not have a benchmark.

Bull points

Lead manager Alec Letchfield’s fund selections (c 75% of the portfolio) have performed well.

Flexible silo structure is supportive of future gains and can offer downside protection.

Significant rerating potential given wide discount.

Bear points

No clear catalyst for Brazil to return to favour, albeit the market may be at a cyclical low point.

Given the persistence of wide discounts on both Hansa IC and OWHL, and value remaining unloved, timing of a rerating is uncertain.

Fund NAV has lagged global stock markets over one and three years.

Analysts

Sarah Godfrey

+44 (0)20 3681 2519

Mel Jenner

+44 (0)20 3077 5720

Hansa Investment Company is a research client of Edison Investment Research Limited

Investors looking at Hansa Investment Company (Hansa IC; HAN/HANA) may have been perplexed in the past as to why its strongly performing multi-asset fund portfolio sits alongside a large strategic holding in a Brazilian maritime services company, Wilson Sons (WSON) and a value-oriented selection of direct equities. In this short update, we seek to address this question and argue that Hansa IC’s deep ‘double discount’ (c 45%) to net asset value and near-2% dividend yield could mean long-term investors can effectively afford to wait for an exit from or reappraisal of the WSON holding, and/or a rerating of the equity portfolio.

Fund selections performing well over one and three years to end-October

Source: Refinitiv, Edison Investment Research. Total returns in sterling.

Why consider Hansa IC now?

Manager Alec Letchfield’s overhaul of the portfolio since 2014’s strategic review has largely worked well, with strong performance coming from the regional and thematic funds silos and the diversifying exposure performing as it should, limiting downside in volatile market conditions and adding to incremental returns. The Ocean Wilsons Investments (OWIL) part of the strategic stake in Ocean Wilsons Holdings (OWHL) has significant overlap with these fund selections. However, the portfolio of direct equities, chosen by Rob Royle with a value tilt, has underperformed and OWHL’s holding in WSON has suffered a perfect storm of low oil prices, falling global trade and a declining Brazilian real. With some of these headwinds abating as the world begins to look beyond COVID-19, Hansa IC therefore offers recovery potential as well as access to structural growth themes such as tech and healthcare. This may be more than fully reflected in the fund’s current c 35% discount to NAV.

The analyst’s view

Discussion over the WSON holding has dominated the discourse around Hansa IC, but is arguably less relevant given it is now only c 10% of the fund.

Letchfield deserves credit for his fund selections, which have allowed investors to access global growth themes such as technology and healthcare while retaining a degree of downside protection via the ‘diversifying’ silo.

While the value-oriented direct equity portfolio has detracted from recent returns, it acts as a foil to the more growth-focused fund selections and could be beneficial if there is a change in market leadership from growth to value.

Hansa IC: What’s the story?

Hansa Investment Company (previously Hansa Trust until its redomiciliation to Bermuda in 2019) has long offered a differentiated investment proposition to investors, with a family office approach to preserving and growing capital. It has been transformed since the arrival of lead manager Alec Letchfield, a multi-asset specialist, from HSBC in 2013. What was once effectively a UK equity fund with a large (c 40% of NAV) strategic stake in holding company OWHL – which owns a portfolio of funds (OWIL) alongside 58% of WSON – is now a diversified, multi-asset portfolio of funds (c 75% of NAV including OWIL) and global equities (c 13% of NAV), with WSON accounting for just 9.6% of assets at end-October 2020 (a little over half of the 18.4% holding in OWHL). Letchfield has organised the fund portfolio (excluding OWIL) into core regional funds (43.2% of NAV at 31 October), thematic funds (11.0% of NAV), and ‘diversifying’ funds (12.4% of NAV), a category that includes credit and hedge funds and aims to offer downside protection in volatile markets. As shown in the chart on page 1, these three ‘silos’ produced creditable performance in the three years to end-October (+25.1%, +65.5% and +8.7% respectively for core, thematic and diversifying funds), including over the difficult past 12 months, in which period the core regional funds returned 12.4% and the thematic funds 34.1%, while the diversifying funds were up 0.7%. (The drag from OWHL/WSON has reduced the fund’s total NAV returns to -1.2% and 2.8% over 12 months and three years respectively to 31 October 2020.) This compares with total returns of 5.5% and 22.6% from global equities (as measured by the MSCI AC World index) over one and three years. However, the market seems to have overlooked the positive developments since 2014, with the fund’s discount to NAV widening from c 20% to nearer 40% over the period.

Altering perceptions on a ‘complicated’ structure

It seems likely that Hansa IC suffers from a perception of being structurally ‘complicated’. On one level this is understandable: it is a listed company with two classes of share (HAN/HANA) that owns 26% of another listed company (OWHL, whose ticker on the London Stock Exchange is OCN), which in turn owns 58% of Brazil-listed WSON. Both Hansa’s own shares and those of OWHL trade at significant discount to the value of their underlying assets (respectively 35–36% and c 45%), to the extent that the look-through discount is c 46%. However, we would argue that it is possible to take an alternative view by focusing on the elements that are not complicated and looking at the wide discount as an opportunity rather than a threat. As mentioned above, including the funds in the OWIL portfolio, around 75% of Hansa IC’s total assets are invested in third-party funds, the majority of which are open ended and therefore trade at NAV. In the main, these are successful funds run by specialist managers, giving access to some of the most popular current investment themes, such as US equities, global technology stocks and innovative healthcare names. If these themes should go off the boil then Letchfield, who has managed funds of funds for many years, could rotate the portfolio with relative ease given the underlying funds are largely liquid and tradable. Then a little over 13% of the fund is invested directly in a portfolio of global equities selected by Letchfield’s colleague at Hansa Capital Partners, Rob Royle. The 19 equity holdings include well-known names such as Alphabet (parent of Google), Samsung Electronics and the Warren Buffett vehicle Berkshire Hathaway. However, Royle’s value tilt has meant some of the names in the portfolio have underperformed in the growth-driven market recovery this year, while others, such as TripAdvisor and Irish drinks firm C&C, have suffered as a direct result of coronavirus-driven lockdowns. It is worth noting that the extent to which value has underperformed growth has been at historically stretched levels this year, and it would be reasonable to expect this to reverse at some point in the future. This is particularly so given recent positive news on COVID-19 vaccine candidates, which has led to swift gains in travel and leisure-related names as the market begins to believe in an eventual return to ‘normal’ ways of living.

If WSON is the ‘elephant in the room’, it is a much smaller elephant than it used to be, making up only 9.6% of Hansa IC’s NAV at 31 October 2020. Letchfield points out that the only reason OWHL was ever such a large part of the portfolio was because of WSON’s strong historical performance. Clearly performance has not been strong over recent years, but despite the headwinds WSON has faced from the pandemic-induced decline in global trade, a collapsing oil price and a slump in the Brazilian currency (its shares were down 9.0% in local currency terms from 1 January to 31 October 2020, but fell 35.5% in sterling terms), it has actually performed well in recent months, up c 49% in BRL terms from the low point in March to the end of September, and rising another c 3% since then (as at 18 November). Indeed, Letchfield points out that WSON came out strongly from the global financial crisis and could do so again as the world recovers from the COVID-19 shock. The company has already reinstated its H220 dividend. Brazil’s stock market has tended to be highly cyclical, given its large exposure to natural resources and a shifting political backdrop, but with much of the recent global fiscal stimulus focused on supporting infrastructure investment, there is significant scope for recovery from what could prove a cyclical low point. Both the currency and the main Brazilian stock market index have already strengthened markedly since the positive vaccine news in early November.

Conclusion: Time for a reassessment?

Even if the WSON stake were completely disregarded, we argue that Hansa IC’s discount would still look unreasonably wide for a diversified portfolio of quality global equities and funds (including the OWIL portfolio), chosen with an eye towards capital preservation. To put this in numerical terms, excluding the 9.6% of Hansa IC’s NAV accounted for by WSON at 31 October 2020 would reduce the cum-income NAV per share from 262.7p to 237.5p, with the 169.0p closing price of the A-shares at that date equating to a 28.8% discount to the ex-WSON NAV. This compares with an 8.3% average discount for Hansa IC’s chosen peer group (excluding the three UK-focused funds and Henderson Alternative Strategies, which is winding down) at the same date, within a range of a 1.3% premium to a 23.2% discount to NAV. While there can be no guarantee that Hansa IC’s discount will narrow in the near future (given the long-term level and the 12-month average of 36.3%), the c 20pp differential versus the peer group average means it would be easy to argue that either or both of WSON (9.6% of NAV) and OWIL (8.8% of NAV) are effectively ‘in for free’. Furthermore, with OWHL also standing on a c 46% discount to NAV, the valuation anomaly appears even greater. This may give investors some comfort that underlying value in the portfolio could be realised, particularly given the much-improved outlook for WSON and emerging signs of a move away from the ‘growth at any price’ mindset that has dominated global equity markets in recent years. We will publish a full review note in the coming weeks.

General disclaimer and copyright

This report has been commissioned by Hansa Investment Company and prepared and issued by Edison, in consideration of a fee payable by Hansa Investment Company. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Hansa Investment Company and prepared and issued by Edison, in consideration of a fee payable by Hansa Investment Company. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues