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Questor: this diversified, conservative trust made 28pc last year. So why the perennial discount?

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Sir James Cayzer - Marina Imperi
Sir James Cayzer - Marina Imperi

The stubbornly high discount on Caledonia Investments continues to confound this column.

The £2bn trust, which holds a mix of quoted stocks, unquoted businesses and private equity funds, delivered an impressive net asset value return of 28pc over the year to the end of March. This compares with 13pc from global shares. These returns were driven largely by the trust’s unquoted stocks, which gained an impressive 55pc over the year.

Sales of stakes in Deep Sea Electronics, a maker of generator controllers, and BioAgilytix, which provides bioanalytical testing, generated proceeds of £347m, bringing cash up to 14pc of the portfolio. Caledonia can also boast the elite status as one of only four trusts to have grown its dividend for 54 consecutive years.

Yet in spite of these accolades, it trades on a 27pc discount – and hasn’t traded at a premium to its assets for more than a decade.

Philip Matthews holds the trust in his Wise Multi‑Asset Growth fund. He says the current discount looks illogical because it doesn’t take into account the trust’s healthy cash position and the nature of its quoted stocks portfolio, which is largely in large liquid shares such as Microsoft and Diageo.

“To trade your way out of those positions would be incredibly quick to do, but the market is putting a very high discount on that,” he says.

This leaves Caledonia looking very cheap. Matthews says investors who buy at today’s share price are effectively getting one of the sub‑portfolios (quoted stocks, unquoted businesses or private equity funds) free of charge.

Following a bumper year for NAV returns, and a strong 2021 too, something tells Questor that Caledonia may struggle to deliver gains of 25pc of 30pc again this year. Nevertheless, it still has potential to deliver healthy returns, particularly from its unquoted investments and private equity funds.

While there is no clear catalyst for the discount to narrow in the near term, Matthews advises investors to focus on Caledonia’s prospective returns in the meantime. “NAV growth has to be the primary reason to hold the trust,” he says. “Caledonia invests in a range of interesting areas that look attractive, where businesses are growing. We think there is scope for the NAV to rise.”

The final point to consider is the trust’s conservative approach, which reflects Caledonia’s origins as the repository of the wealth of the Cayzer shipping family.

They remain the biggest shareholder today, which is both a blessing and a curse: it allows the managers to take a long-term approach, but the trust’s concentrated shareholder register also goes some way towards explaining its persistent discount.

We believe the trust offers value at today’s share price. Keep buying.

Questor says: buy

Ticker: CLDN

Share price at close: £36.60

Update: TwentyFour Income Fund

TwentyFour Income Fund, tipped here in March 2018, has acquired the assets of another trust, UK Mortgages.

Both funds, managed by TwentyFour Asset Management, invested in European “asset-backed securities”, although the latter had focused on residential mortgage-backed bonds. These are bundles of mortgages packaged together to form a bond.

The transaction was priced at 83.32p per share in UK Mortgages, representing a 3.6pc premium to its December NAV. This reflects the expectation that the assets have been acquired at a discount to “fair value” because UK Mortgages valued its holdings using a different methodology.

What should investors make of this deal? Overall, there appear to be a number of positives. Perhaps the most obvious is that TwentyFour Income has acquired around £140m of high-yielding assets, which diversify the fund’s income stream.

These assets are not easy to buy in bulk on the open market and look attractive at a time when interest rates are rising because they pay “floating rates” that increase in line with interest rates.

For investors dissatisfied by the deal, a full exit will be offered at a discount of around 2pc in the third quarter of this year.

However, we would suggest holding on to TwentyFour Income on account of its forecast yield of 7pc after the merger and resilient income stream.

Questor says: hold

Ticker: TFIF

Share price at close: 110p

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