219: Weekly Investment Trusts Podcast - with Andrew Jones (13 Jul 2024)

Hello and welcome to the latest MoneyMakers Weekly Investment Trust podcast. I'm Jonathan Davis, the editor of the Investment Trust Handbook and your host for this weekly review of all the latest news and developments affecting the Investment Trust sector. My thanks to JP Morgan Asset Management for agreeing to sponsor the podcast, which as a result will now remain free for the foreseeable future. MoneyMakers is an independent research and publishing venture with a mission to explain and inform, but I must remind you that for regulatory reasons, nothing you hear from any speaker today should be regarded as constituting individual investment advice. As the Labour Party celebrated its first full week in government, there was some cheering news in the economic data with the UK returning to positive if anemic growth according to the latest GDP figures and evidence of inflation falling, particularly in the United States, which has prompted the markets to return to expectations that the first interest rate cut across the Atlantic will come in September. Although the chairman, Jay Powell, insisted that the Federal Reserve still wants to see clearer evidence of a sustained fall in the rate of inflation before it takes that step. The stable government with a large majority that we have elected in this country is in stark contrast to the turbulent politics now playing out in France and elsewhere across Europe, which may well have something to do with the fact that the pound has continued to strengthen against the euro and is nudging towards 130 against the dollar. In the US, of course, questions about Joe Biden's fitness to serve another term continue unabated in the media at least. On the podcast this week, I shall be talking to Andrew Jones, the highly regarded CEO of London Metric, the listed property company which in the last year has completed the opportunistic acquisitions of not one but two listed UK commercial property investment trusts in the shape of CT Property and the much larger LXI REIT, a deal that completed in March. What is the rationale behind these two deals which will create a company with 6 billion pounds of assets, making it the third largest REIT in the UK? And what does it tell us about the state of the commercial property investment trust sector that London Metric can pick up these two trusts so easily using its more highly rated shares? I think you'll find this an interesting and thought-provoking discussion. It was a quiet week for news in the investment trust sector, meanwhile, but perhaps an insignificant one in terms of price movements with the average discount coming in to around 13%, its lowest level for some time. Gilts rose pretty much across the board this week. That's consistent with lower interest rate expectations, of course. And there was a sharp fall in the share prices of some of the big mega-cap tech stocks on Thursday following the latest inflation figures. Because that heightened speculation that the domination of the mega-cap big tech stocks may finally be coming to an end leading to a rotation towards other styles and sectors that have been dwarfed while the mega-cap stocks have been powering ahead. So, for example, biotech specialist trusts including International Biotechnology and Biotech Growth were among the biggest gainers this week in share price terms in the investment trust sector along with UK small cap specialists such as Aberforth, Aberdeen UK Smaller Companies, and BlackRock Throgmorton. While some of the infrastructure trusts such as INPP and BBGI, which are often regarded as bond proxies, were also notable gainers on hopes that interest rate cuts may indeed be on the way. Among the losers, Vietnamese and Indian specialist trusts featured quite prominently. Overall, however, gainers outnumbered losers by around 4 to 1. And the investment trust index finished up a little over 1.5%, which was ahead of both the FTSE All-Share and the S&P 500. Both of those two up around 0.8%. Nasdaq trailed in behind them. While copper and oil both declined massively on the week, gold was up breaching the $2,400 mark again, which it has breached once before this year. It was a sparse week for results in the investment trust sector, however, with just three trusts reporting full-year figures for the period to the end of March, albeit with very different outcomes. While 24 income, the fixed income specialist, reported an NAV total return of an impressive 18% there was a disappointing decline of 12% NAV total return at Miton UK MicroCap, which is well behind its benchmark. Elsewhere in the news, Chrysalis, the early growth capital trust, reported an NAV gain following confirmation that the UK microchip making company Graphcore, once held up as a potential rival to Nvidia, has been sold to SoftBank of Japan. Albeit at a price that is 75% lower than its peak valuation just 2 years ago. So, while there's an NAV gain, this particular investment has not made any money for Chrysalis. We've already marked down its value more recently. Other trusts that have a stake in Graphcore include Schiehallion, Edinburgh Worldwide, and Schroder British Opportunities. Also in the news, Odyssean Investment Trust, the UK small-cap specialist, which is one of the few trusts to be still trading at a premium, announced it's doing a small placing that will close next week to raise a few billion pounds. This one being open to retail investors. For subscribers to the Money Makers Circle, our trust profile this week features Target Healthcare, the care home provider. And they'll also find their portfolio performance reports from two of our regular contributors, reporting how well they've done in the first half of this year. It's been a decent one, it's fair to say. And a column by Edward Chancellor, the financial historian, about stock market bubbles. Plus all our usual other features, including the biggest share price, NAV, and discount movements this week and year-to-date. Finally, if you will indulge me in a piece of shameless self-promotion, and if you are one of those lucky people who've been sent a nomination form for the AIC's annual investment trust media awards, I wonder if you'd be willing to put forward the podcast as a nominee in the broadcast category or indeed any other of the content that we produce, Investment Trust Handbook and the Money Makers Circle newsletter. We've been going for 4 and a half years with the podcast and I guess my view is that it's a good time perhaps to seek some recognition for the sterling efforts that my colleagues Ben and Stuart have put into keeping you all, I hope, up to date and entertained about the goings-on in the investment trust world. I had a good opportunity this week to speak to Andrew Jones, who is the CEO of London Metric, a well-known REIT that is actually not classified as an investment trust but has been very active in the investment trust sector by means of acquiring through merger two investment trusts in the last couple of years. The first of that was a CT Property Trust and the second much bigger deal was the merger with LXI REIT, which only closed, I think, in March this year. So, that has created a very large real estate investment trust business. It's got assets of around 6 billion and I think it's the third largest in the UK. So, it's been a very active period for you, Andrew, and you have taken advantage, shall we say, of the way that the investment trust sector has evolved over the last couple of years in the face of rising interest rates. You moved in quickly to make these two acquisitions. Tell us how they came about, whether it was something you were looking for or whether you were approached by others and so on. How did it all come about that you managed to make these two deals in a relatively short period of time?

What were the attractions of that particular trust to you in terms of assets?

So that was the first part of the cherry and then you turned your sight to LXI REIT. I'm sure you know the principles of that company very very well for over many years. How did that one come about? That was a meeting of minds was it or was it opportunistic as well?

I guess the question really is about these two deals that you've done, the fact that the investment trust sector, the commercial property trust along with many others had de-rated, was that a factor in creating the opportunity for you? You wouldn't have been able to do that without that?

Right. So, you're able to use your superior rating of your shares to complete these deals, yeah.

Right. Well, LXI was not particularly small, though, was it? I mean, it was a couple of billion in assets and so on. But, I'm just wondering whether you think there is an issue around the investment trust commercial property sector. You've made some comments, for example, that you think that self-managed companies on the whole are better than externally managed property companies. There's been this issue around cost disclosure, obviously, which may be a factor for some investors in these things. But, justify that view to me. Why is self-managed better than externally managed?

Right. And there is a perhaps a bias towards asset accumulation rather than optimizing the use of capital.

Okay. So, you've completed these deals and well, we've seen quite a lot of activity in the commercial property sector, particularly the investment trust listed sector. So, what do you got to do to justify making this deal work and actually produce extra returns over and above what you would have made by not doing the deals?

So, perhaps it would be worth restating, you know, for the benefit of our listeners exactly what the objective of your company is. You say it's to generate income and then to compound that income and let it grow over a period of time. So, do you have a kind of target rate of return? Is that a realistic concept to ask you?

Just to repeat for those who don't know what triple net means that your leases with your lessees, they are responsible for the operating costs, for the insurance, maintenance, taxes, and so on. And you just provide the property essentially and take the net rent.

So, it's simpler and saves you a lot of head count and so on.

Right. Simple can be good. Let me ask you then, in terms of There's two things going on here. We obviously have the issues in the investment trust sector, the listed investment trust sector, but there's also a property cycle going on at the same time, which is not unrelated, I think. But, tell us where you think we are in the property sector, if you'd be so good, and what would be the sort of trigger to improve things if they have been deteriorating or to make them worse if they aren't.

Yeah. So, you need lower interest rates effectively lower funding costs. Yeah.

Yeah, well we saw that heavily discounted rights issue from Regional REIT would be a classic example I suppose.

Right. So if take logistics for example, that's had a very positive trend of tailwind behind it for quite some time now. Everybody wants to get into it. So you can still acquire things at prices that allow you to make decent returns or sufficient returns anyway.

And there are some other sectors you mentioned in your recent presentation and results which I thought was interesting but ones that you're not interested in. Perhaps you could explain why. So you mentioned student housing, built to rent, and data centers as being examples of sectors that don't fit your model. Do you have a view though about whether they're attractive sectors or not?

Right, so it just doesn't fit your particular model as you say.

When liquidity returns as in a healthy way, we'll find it easier to sell assets, but harder to buy.

So, where does that aspect of your management style come from? That's sort of more entrepreneurial approach than some you would think. To some people it would think it all carries more risk, but you're confident in what your judgments are. So, where does that come from? Why are you doing things that others can't do?

Yeah. I guess what I would have to say is that obviously been a very difficult period for the commercial property sector. I looked at your share price and so on and I think over 5 years the total return is still only around 2% or something like that. So if the share price is back to where it was sort of 5 years ago. But over 10 years you've done much better, 7% in a low interest rate environment that's very good. And obviously a lot of your competitors have done much less well than that. So is it a case where if things go well, you will be able to get back up to some kind of strong positive real return? And commercial property is a real asset so you would expect it to deliver something in excess of what gilts are yielding anyway, producing it.

And in terms of your shareholder register, do you have ambitions to change that in any way? Are you interested in attracting more pension fund money or more direct investors, private investors? What's your sort of feeling about that?

You're now 6 billion in assets as you've said. Are there some kind of limits on how big this company could become?

And if I can ask you then also just about government. We've had a general election. Obviously, we've got a new Labour government. What is it that the government, any government, but this one in particular could do that would help your business in any particular way? What would be the number one thing you'd like to see?

All right. Would you ever consider doing things overseas, outside the UK?

Very good. Right, thank you. Was there anything I didn't cover here that you wanted to talk about?

Yeah. But are there any sort of sectors in particular you've got your eye on which perhaps you wouldn't want to tell me anyway, but

Yeah. It's strange, isn't it? I mean, there are lots of them, many of them sort of side by side, yeah.

Yeah, the center of Oxford is very interesting. There's a new shopping center, but there's also a lot of empty shops around the place and most of those that are open are Costa Coffee or something.

You don't have to make money back the same way you lost it.

Yeah. But eventually, of course, you're going to have too much of a good thing, aren't you? And then you'll get over supply and then you'll get over capacity and so on and then you're back into a new cycle where you've got to find the next person.

Indeed.

Yeah, and I've been lucky. I met him once and I went twice actually. I went to Omaha.

Did you? Fantastic, yeah. And it's all presented in this very homely way.

I mean, I was listening to a podcast that a friend sent me and it was an interview with Terry Smith, which I also found quite enlightening. He speaks very sensibly.

I like him. His real estate approach is not million miles away from those, you know, it is buying well and if you buy the best assets, what do we say? We say when you buy quality time creates wealth. When you buy secondary time can destroy it.

So, that was Andrew Jones who's the CEO of London Metric which has been hoovering up some assets in the UK listed investment trust space and doing so so far with considerable success. Thank you for listening. The Money Makers Weekly Investment Trust podcast is independently produced and edited and is listed on all leading podcast channels. You can also sign up at the website money-makers.co to be notified every time a new podcast is available. Please note these podcasts are provided for educational purposes only and nothing you have heard from any of the speakers should be regarded as constituting investment advice. If you want more news, analysis, interviews and other investment trust content, don't forget to look at the Money Makers Circle available now for a modest subscription at the website.