SVM Global Fund - a Fund For All Seasons

The SVM Global Fund plc (ticker code: SVG-L) is an investment company which listed on the London Stock Exchange in 1991. The fund is managed by SVM Asset Management in Edinburgh, a fund management company owned and run by the well-known fund manager, Colin McLean. At Stg267p a share and with 57 million shares in issue, the company (fund) is some Stg£150 million in size. It operates as a 'Fund of funds' which means that it invests in other quoted and unquoted funds across various asset classes and geographic regions.

Hence, the SVM Global Fund plc represents an actively managed global balanced fund and sits neatly alongside the previously covered RIT Capital Partners plc. Both funds should be considered core holdings in any investment portfolio.

At this point in time, SVM Global Fund plc has several attractions from a private investor's viewpoint;

• It offers global diversification and active management across an array of asset classes including equities, property, private equity, natural resources, hedge funds and other lesser known asset categories. The fund is significantly underweight dollar assets.
   
• The fund currently offers good exposure to emerging markets and natural resources - two areas of global markets that look set to continue to outperform.  The fund had a 16% weighting in the Far East and a 23% weighting in emerging Europe. Approx 65% of the emerging Europe exposure is to Russia and the former CIS countries, all of which are benefiting from the commodities boom.
   
• As the chart above highlights, the fund has grown its net asset value by 72% in the 2000s after all costs and out-performed the global equity markets (as represented by the FT World Index) which delivered a return of 9% over the same eleven-year period.
   
• There appears to be significant hidden value in the fund's shares and if global equity markets have indeed resumed their uptrend, as I think is highly likely, then there is a high probability that the fund could deliver strong out-performance relative to global equity markets over the next 2-3 years;
  
  
  • At Stg267p, the company's own shares are currently trading at an historically high 16% discount to the latest reported net asset value of Stg318p.
     
  • In addition, many of the funds own fund holdings remain at steep discounts following the global credit crisis making the underlying discount much steeper in reality. According to SVM Aeet Management (who I have spoken with), the average discount on its fund holdings is 25%. Many of its quoted funds are still sitting on discounts of 40% offset by its holdings in open-ended (unquoted) funds which by their very nature trade at net asset value. Th ecombined discount is therefore nearer 37%.

As I said in my coverage of RIT Capital Partners back in March, I believe these type of actively managed balanced funds are far better balanced and better managed than the balanced unit-linked funds on offer from the insurance companies in Ireland. The Irish fund managers are generalists by nature whereas both SVM Global and RIT Capital Partners are managed by specialist fund managers.
 
A Global Remit
The fund's objective is to deliver long term growth providing shareholders with a diversified international multi-strategy portfolio and unique access to specialist funds. The company has holdings in circa 70 separate funds. Its own total expense ratio is 0.9%.

The tables opposite highlight (i) the geographic spread of the fund which has a strong presence in the Far East and the emerging European markets and (ii) the variety of asset classes covered from specialist fund operators to hedge funds, private equity funds, natural resource funds, property funds and special situation funds.

Long Term Out-performance but Near Term Under-Performance
A review of the fund's performance in the past reveals a number of relevant points;

• Over the 11-year period from September 1999, the fund has nicely out-performed with a return of 72% against a 9% return from the FT World Index
   
• From the onset of the global credit crisis, the fund has under-performed the global equity markets with a 3-year negative return to end September 2010 of -25% compared to only -6% for the FT World Index. The under-performance can be attributed to poor performances from its hedge fund and private equity fund holdings in particular in addition to the smaller size of many of its fund holdings where illiquidity following the global credit crisis has driven discounts on many of the fund's holdings to unusually high levels.

A 16% Discount to NAV
As the chart opposite highlights, the SVM Global Fund plc is currently trading at a 16% discount to the underlying net asset value which is at the higher end of its long term discount range.

At the height of markets in 2006, the fund traded at a modest premium perhaps reflecting the fund's strong out-performance leading up to the peak of markets in that year. The more recent under-performance no doubt explains the current more sizable discount. Quite simply, it is a contrary and positive signal, in my view.

The fund has attractive exposure to some strongly performing themes like natural resources and emerging markets and it is very possible that it will re-establish its track record of out-performance. The unusually large discount currently on offer is therefore highly attractive, in my view, especially as many of the fund's underlying holdings are also trading at similarly large discounts. As discounts on the underlying funds narrow, SVM Global's net asset value should grow at a faster pace than the world index. The discount on its own share price sould narrow also and the combination could lead  to strong outperformance of its shares over the next few years.

Note On Investment Company Discounts / Premiums
An unusual characteristic of investment companies is that the company share price is separate to the company's net asset value. Clearly, in the medium to long term, where the net asset value goes, the share price should follow to reflect the underlying value of the fund. But the investment company share price responds to supply and demand and in the short term this means that the share price can diverge quite materially from the net asset value i.e. if there is an excess of sellers of the shares the price may fall even if there is no change in the value of the company's investment portfolio. A share price that is trading below the net asset value is said to be trading at a discount. Similarly, a share price trading above te net asset value is said to be trading at a premium.

In my view, investment companies are far superior investment vehicles than unquoted funds such as the unit-linked funds in Ireland. In addition, while I am a fan of ETFs (exchange traded funds), it is hard to beat a well-managed investment company trading on an unusually large discount. A fuller note on investment companies (trusts) can be found in the subscribers' area - either click on the link provided or go the 'Investment Solutions' at the top left of the Home Page, click on the icon, scroll across to 'Investment Notes'. Alternatively, there is a version in PDF format via eBooks on the Home Page which can be bought with a credit card.

Subscribers interested in looking up the SVM Global Fund plc's website, where the history of the fund, new facts sheets and Annual & Interim Reports are available can click the link provided or go to www.svmonline.co.uk and look for 'Investment Trusts'.
 

GillenMarkets (www.gillenmarkets.com)