Thu, 16/01/2014 - 12:19
The board of directors of ALTIN has decided to link its capital reduction policy directly to share price performance.
When share price appreciation is satisfactory, the board considers that indiscriminate capital reductions are not in the best long-term interests of the majority of shareholders and of the company.
In the future and so long as the discount does not narrow significantly, capital will be returned to compensate investors when share price performance falls below a 10 per cent to 12 per cent target. Such capital reductions will be conducted exclusively through the repurchase of own shares.
The board will no longer propose capital distributions in the form of tax-free dividends out of the share premium account in future.
In 2013 NAV increased by 10.17 per cent, ahead of peers and industry benchmarks, as investment decisions taken over the last 18 months added close to three per cent to the 2013 performance. Despite a modest increase in leverage, ALTIN has maintained a relatively contained beta to equity markets, which should provide adequate downside protection in case of a correction in risk assets.
ALTIN's share price rose by 24.65 per cent, fuelled by a partial closing of the discount and, to a lesser extent, by the two capital reductions that were undertaken in 2013. Firstly, the company paid a four per cent dividend in the form of a tax-free return from the share premium account and secondly, in September, it bought back a further 10 per cent of its capital through an innovative put option strategy.
Despite these good returns and the measures put in place in 2013, the discount to net asset value remains at an unsatisfactory level (around 23 per cent at year-end). As a consequence, the board has convened to determine a coherent discount management strategy that genuinely serves the best interests of the company and all its long-term investors.
An analysis of NAV and share price evolution since the company's inception in 1996 shows that ALTIN's level of discount to NAV is cyclical and is essentially driven by performance and by general market appetite for alternative strategies. The board has reviewed the measures implemented in 2013 by ALTIN and by its peers and has concluded that capital reduction strategies have had only modest success in narrowing the discount to NAV. The board is concerned that an open-ended commitment to buying back capital will inevitably have a longer term detrimental impact on returns, by increasing the total expense ratio of the company and by reducing liquidity in the shares.
As repeatedly reducing capital is detrimental to their long-term interests and ultimately guts the company of its substance, the board has concluded that further capital reductions will be far more effective if used as a mechanism to compensate investors during periods of lower share price appreciation, rather than as an indiscriminate discount reduction instrument.
Based on the +6.4 per cent annualised return on its investment portfolio over its 17-year track record and until the discount narrows significantly, the board considers that ALTIN investors are entitled to a share price increase of 10 per cent to 12 per cent on an annualised basis, in all but the most adverse market environments. As a consequence, as long as the share price increase meets this explicit target, no capital reduction should be expected. On the other hand, should the share price fail to meet this share price return objective, the board intends to initiate further capital reductions via the issuance of put options or second line share buybacks. By boosting share price performance and transferring intrinsic value to shareholders, these capital reductions should prove to be effective compensatory measures, whilst avoiding to undermine the substance of the company, which as previously stated is detrimental to the interests of long-term investors.
The best way of closing the discount is to attract new long-term investors to the company. As a consequence, the investment manager has pledged in 2014 to renew and re-energise its investor relations programme focused, aside from the clear investment merits of the portfolio, on the board's clear commitment to return capital to shareholders in years of share price underperformance, whilst preserving the capital base in years when performance targets are met.
The board has also concluded that the capital provided by the shareholders (nominal value and share premium account), which can be distributed tax-free, constitute the most valuable part of the capital structure and that a continuation of dividend distributions out of tax-free reserves is not in the best long-term interests of investors, especially in light of the successful capital reduction that was conducted through the issuance of put options. Future capital reductions will therefore be conducted exclusively through the repurchase of own shares either via the issuance of put options or via second line buy backs. Consequently, in 2014 the company does not intend to distribute capital in the form of a tax-free dividend/repayment of nominal value.
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