When we first upgraded PM Capital Global Opportunities Fund (PGF) in January 2016, we noted the fund’s high exposure to financials. At nearly half the portfolio, the fund believed that rising interest rates and credit growth would benefit its holdings of American, British and European financials, which were also much reasonably priced than Australian banks such as Commonwealth Bank or Westpac.
As a result of its concentrated portfolio and emphasis on long-term capital growth rather than dividends, we also noted that PM Capital recommends that investors have a minimum timeframe of seven years.
This is easier said than done, of course, and investors were tested by the Brexit surprise, which knocked down the prices of financials as investors figured interest rates would now been even lower for even longer. As banks tend to benefit from rising interest rates, this impacted PGF’s performance in the short term.
However, the market’s overreaction to Brexit soon reversed. Moreover, even before Donald Trump’s election victory, global interest rates were rising from historically low levels. More recently, led by the Federal Reserve, the world’s central banks have signalled that the era of historically easy monetary policy including quantitative easing is at an end.
If this is the case and interest rates do in fact keep rising, then not only should PGF’s banking holdings record increased earnings and dividends but interest rates over the next decade will look a lot different to the last five years.
As such, PGF is concentrating on finding businesses that can grow their earnings without needing low interest rates to do so.
As well as its bank holdings benefitting from rising interest rates, PGF’s Macau gaming stocks have benefitted from the cyclical recovery in gross gaming revenue in the former Portuguese colony. PGF’s holdings in alternative asset managers such as Fortress Investment Group – which was recently taken over by Japanese-based Softbank Group – and KKR have risen as investors have started to notice their higher yields and growth potential from rising funds under management.
Downgrading to Hold
With the stock market being an anticipatory system, these successes explains the increase in both PGF’s net tangible assets (NTA) per share and its share price from the depths to which they plunged post-Brexit.
With PGF’s discount to post-tax NTA narrowing to 5%, we’re downgrading to Hold. However, we're also increasing our recommended maximum portfolio weighting to 10% (from 5%).
As we’ve noted before, we prefer to purchase listed investment companies (LICs) at a substantial discount to their post-tax NTA per share to compensate for the fees charged by their managers. These fees mean investors’ returns will be lower than those of the LIC’s portfolio. (For more on analysing LICs, please see An Introduction to Listed Investment Companies.)
We may be prepared to relax this a little where we particularly like an LIC’s management and think they should outperform over time.
Note also that this is what we’d generally need to see clear value in an LIC – compared to making direct investments yourself – and therefore to make it an outright Buy. If you don’t want to pick your own investments then you will have to bear some costs, so it would make sense to only discount an LIC’s NTA by enough to overcome any extra costs above what a low-cost index tracker might charge.
With both PGF’s post-tax NTA per share increasing and its discount to NTA narrowing since we upgraded it to Buy, this is an example of the profits that can come from buying discounted assets at a discount.
Note: We’re not going to put a price guide on the stock as its underlying value changes every day with the market.