Hansa Trust — Overdue a reappraisal?

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.

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.

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.