The 1966 film How to Steal a Million features a scene in which Hugh Griffith, in the role of Parisian art forger Charles Bonnet, observes: “Millionaires must be all quite mad. Perhaps it’s something they put in the ink when they print the money.”
I’ve been reminded of both the movie and the line in the past two weeks. First, when the Bank of England announced that it was, in effect, printing more money – by extending its quantitative easing programme through the purchase of another £50bn-worth of government and corporate bonds. Second, when armed robbers effected the biggest-ever UK jewellery heist at Graff on New Bond Street – by posing as well-heeled customers, to steal £40m-worth of diamonds.
Two thoughts then occurred – one whimsical, one practical. Doesn’t inflation date 1960s movies quickly (a concept that Mike Myers exploited to comic effect in the Austin Powers spoofs)? And what is the quickest way to “steal” £40m legally (a thought all investors have probably entertained at one time or another)?
Musing on the latter question, I came up with a few ideas. Oversee a more-than doubling of Royal Bank of Scotland’s 2008 pre-tax loss of £40.6bn, thus qualifying for more than double Sir Fred Goodwin’s £16m pension fund. Or sign as a centre forward for Premiership spendaholics Manchester City and sit on the substitutes’ bench for 19 seasons, thus accumulating said lump sum at a rate of £170,000 a week. Or travel back in time one year and invest £91.4m in the New Star Hidden Value fund, thus ensuring you’re still looking for your lost £31.4m today. Or buy a lot of shares in the Thames River Hedge Plus investment trust and persuade the board to wind it up at close to net asset value (NAV), thus releasing £40m-worth of assets that aren’t reflected in the share price.
On the assumption that you lack the banker’s chutzpah, the footballer’s skill and the Einstein-Rosen bridge to implement the first three ideas, option four is the only one worth pursuing. Nick Sketch, senior investment director at Rensburg Sheppards, appears to have reached the same conclusion – albeit via a less circuitous argument.
In conversation earlier this week, he suggested that some investment trusts look like a steal – in that they allow investors to buy assets at “10-15 per cent the wrong price”. So, if you can grab them cheap and fence them expensive, it’s easy money.
It certainly seems easy. According to the analysts at Wins, investment trust share prices were up 18.4 per cent in the first seven months of the year – outperforming the 9.4 per cent rise in the FTSE All-Share index – and yet their discounts to NAV widened again. Excluding private equity, hedge funds and direct property funds, average discounts had hit 8.5 per cent by the end of July, compared with 7.5 per cent one month earlier. Add in those illiquid trusts, and the average is nearer 10 per cent. Part of the reason is that asset values have been recovering so sharply that investment trust share prices lag behind them. But the Wins analysts conclude: “We would expect share prices to eventually catch up... we suspect that there will be buying interest and that value opportunities will be shortlived.”
So where can you make a quick £40m? It’s not as simple as raiding the most heavily discounted trust, and demanding that it winds up or buys back shares. As Sketch points out, most of the investment trusts that look cheap today deserve to be, because they hold high-risk or unrealisable assets.
In fact, some discounts are as fake as Charles Bonnet’s copy of the Cellini Venus. Take commercial property trusts. If a further 15 per cent fall in property valuations is priced in, many of their share prices represent a premium over NAV. F&C Commercial Property trades at an 8 per cent premium even now, making its shares a reverse steal: worth £40m more than its assets, according to Wins.
However, among equity trusts, Sketch identifies some where real assets remain hidden. Law Debenture’s NAV conceals a trustee business valued at £0 on its balance sheet. MedicX’s NAV comprises property underwritten by NHS Trusts, suggesting it should be valued as an infrastructure fund rather than a commercial property investment.
He also chooses equity trusts where the quality of management suggests the discounts are more likely to narrow than widen: Jupiter Primadona, where a 16.4 per cent discount hides £7m of NAV; Gartmore European, where a 4.3 per cent discount hides £6m; and Schroder Japan Growth, where an 16.6 per cent discount hides £18m.
Of course, to make a million from any of these will require an even bigger investment in their shares. But as Audrey Hepburn says to Peter O’Toole in the film: “You don’t think I’d steal something that didn’t belong to me, do you?”
matthew.vincent@ft.com
