Seeking out companies that are unloved or ignored by mainstream investors is the key to discovering pricing inefficiencies and outperforming markets. These stocks are not priced inefficiently because of inferior quality; they are typically beset by problems specific to the company that are unlikely to endure over the long term.
The broad theme playing on people’s minds is uncertainty over the future growth of the world economy and hence the likely direction of future profits. This has resulted in heightened volatility and is another reason why solid companies may be available at attractive prices.
Profiting from private equity
Oakley Capital Investments (LSE: OCI) is a closed-end fund investing in and making co-investments alongside the private funds run by private-equity firm Oakley Capital. In August 2019 it was admitted to the Specialist Fund Segment (SFS) of the London Stock Exchange, an improvement over its previous Aim (junior market) listing, where corporate governance protections are weaker.
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OCI experienced growth in net asset value (NAV) of 25% in 2019. In conjunction with a narrowing of its discount from 38% to 23% as investors woke up to Oakley’s improved corporate governance and increasingly strong record, this resulted in a 57% share price total return. Oakley boasts an attractive portfolio of fast-growing stocks and a unique approach of focusing on complex deals. It can draw on a network of entrepreneurs to find investment opportunities. Throw in a wide discount to NAV and it remains a compelling investment.
A bet on Brazil
Cosan Ltd (NYSE: CZZ) is a family-backed holding company. CZZ owns stakes in two Brazilian listed holding companies, Cosan SA and Cosan Logistica, and the perceived complexity has deterred investors. However, within this structure lie high-quality assets, exposed to rail logistics, fuel retail and gas distribution. Our investment is predicated on both the attractive nature of the assets and the potential simplification of the group structure.
In 2019 NAV grew by 106%. Coupled with a narrowing discount as management took initial steps to simplify the structure, this resulted in a share-price return of 160%. The discount to NAV currently stands at 32%, which, coupled with confidence in the underlying assets and management’s proactive approach to value enhancement, creates the prospect of further attractive returns.
Value in Italian loans
We initiated our investment in Eurocastle (Amsterdam: ECT), a closed-end fund, in the first half of 2019. Eurocastle’s assets consisted largely of a portfolio of Italian non-performing loans (NPLs) and a stake in Italian-listed NPL servicer doValue. Having accumulated an 18% stake in ECT at a 20% discount to NAV, we worked with the board to implement a restructuring that led to the sale of the NPL portfolio and the distribution of the cash proceeds along with the doValue shares. We continue to see scope for further upside from the doValue shares, which we now own directly, with earnings growth set to accelerate from its recently-announced acquisition of FPS, the NPL servicing platform owned by Greece’s Eurobank.
Joe Bauernfreund is chief executive officer and chief investment officer of Asset Value Investors. He is the manager of AVI Global Trust and AVI Japan Opportunity Trust.
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