Feeling daring? Then venture into my three tips.
This week I have three ideas – some more opportunistic than others – drawn from the world of exchange-traded funds (ETFs) and investment trusts. One is a play on emerging markets, one is an adventurous punt on cybersecurity, and the last a good vehicle for seeking value.
1. Gamble on emerging markets
Let’s get stuck straight in with a fund I’ve covered before – Utilico Emerging Markets (LSE: UEM). This investment trust (which I own) invests in infrastructure-orientated businesses throughout the developing world.
Its track record suggests it has captured returns from emerging markets far more efficiently than more established names, such as the Templeton Emerging Markets trust. It also has a strong income focus, with a dividend yield of around 3.5%.
Emerging markets have been getting a thorough kicking – amid China’s challenges and fretting over rising US interest rates – but this squall will pass, as they all do. When that happens (maybe next year), the turnaround will be sharp. One interesting way to play it could be the subscription shares issued by Utilico a few weeks back. In effect, subscription shares are an upside warrant or option on an underlying ordinary share price.
At specific dates (usually annually, or every six months) you get the chance to convert your subscription shares into ordinary shares at a fixed price. These options are effectively a geared way of playing a bounce in the price. They don’t pay any dividends and they are a gamble on the price going up. So let’s see how they work so we can decide if the gamble is worth the risk.
Utilico’s managers have issued 42 million of these subscription shares (subs) to investors, giving them the option to transfer into ordinary shares at a price of 183p. This transfer can happen “on the last business day of each of February 2016, August 2016, February 2017, August 2017 and February 2018”. But you don’t have to be an existing shareholder to buy the subs. You can buy them for 11.5p (at the time of writing) under the ticker UEMS.
Here’s how it works. The ordinary shares currently trade at 158p. So if you buy a subscription share with the intention of converting into the ordinaries over the next few years, the share price needs to rise above 194.5p before you make a profit (11.5p to buy the subs, then 183p to subscribe for the ordinaries). That’s a big ask – it assumes a 20%-plus rise in the ordinary share price. But if sentiment shifts, I reckon we could see a big rebound, and it’s worth noting that the share price has been above 200p at times.
So let’s say the share price rises to 205p. At that point, the subs would be worth 22p a share (205p less 183p), near-doubling your initial 11.5p investment. Of course, the reverse could happen too – the ordinary shares could keep falling, leaving the subscription options to expire worthless. In short, you could lose 100% of your investment far more easily than if you bought the ordinary shares outright. My feeling is that we may not have seen the worst for emerging markets yet, so the subs could fall further – but I’d be a buyer at 7p.
2. A focused play on cybersecurity
Another idea for the adventurous is a new exchange-traded fund from ETF Securities that we mentioned here last week – the ISE CyberSecurity (LSE: ISPY) fund. The focus – obviously – is cybersecurity. More than half of the businesses the fund tracks are software outfits, such as Sophos and Trend Micro, but network equipment businesses such as Juniper and Cisco also make the list. Some investors find these theme funds a bit ‘faddish’, but they have their virtues, as long as you’re selective.
One problem with investing in many tech funds is that you end up with a portfolio dominated by Apple, Google and Microsoft. There may be nothing wrong with that, but it’s too broad for some. So I think there could be real mileage in being focused on cybersecurity specifically – the market is only going to get bigger – and investing in some smaller businesses.
3. Back a true contrarian
Finally, keep an eye on Aurora Investment Trust (LSE: ARR). This fund has seen better days. But now the directors seem to have decided to turn it into a vehicle for Phoenix Asset Management, run by Gary Channon. I’ve known Channon for some time. He’s one of the UK’s most interesting value fund managers. Private investors can’t get into his existing private fund as it’s only marketed at institutions and high-net-worth individuals – so the decision to use Aurora as a new listed vehicle is interesting. Channon is a hugely focused stockpicker who has made big, successful bets on a whole range of businesses – including Sports Direct at its nadir and the housebuilders after 2009.
Details are due out in the next few months so there’s not much more to say right now. And the shares aren’t very liquid – when I rang my own broker at Hargreaves Lansdown, they observed that there are no electronic market makers and so you’d have to leave open a “fill or kill” order. The restructuring will involve dealing with this issue – but if everything goes to plan, we could be about to get access to a very experienced, contrarian UK stockpicker who can give stars such as Nick Train and Andy Brough a real run for their money.