Performance and valuation
The targeted dividend yield in respect of the current year of 6.0% on the 100p issue price, if achieved, would put APQ on a prospective 5.7% dividend yield based on the current 103p share price. Management has indicated that the company is currently comfortably on track to meet the target, with dividends well covered by its estimate of economic income. Economic income is a forward-looking measure with income expectations based on current bond and equity yields as well as more complex measures such as the notional yield embedded within FX forward contracts and hedges. APQ indicates that equity positions account for c 2.3p of dividend funding, credit positions 2.1p, and currency exposure 1.7p, with the remainder, including sufficient income to cover admin expenses, coming from the strategic and government bond portfolios. The equity contribution is high relative to the current 22.6% (of book value) equity exposure and benefits from a number of high yielding positions as well as income from option writing.
The most recent NAV per share of 97.82p (cum-dividend) as at the end of June 2017 puts the company on a P/NAV of 1.07x.
At this stage in the company’s development, we believe that investors are likely to draw comparison with emerging markets in general and the emerging markets fund sector, focusing on book value performance and yield. Using Morningstar data for a grouping of more than 20 EM closed-end funds in the global categories of EM equity and EM fixed income, the average price discount to NAV is c 9.0% with an average yield of 1.4%. However, we note that APQ’s strategy positions it quite differently to both the index and the EM fund sector; in particular we would note:
■
APQ’s focus on targeting an attractive and growing income stream from investment in emerging market businesses with no consideration given to emerging markets indices.
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APQ’s unconstrained investment flexibility across asset classes, long and short, with only prudential limits on gearing. In particular we note APQ’s ability to undertake direct lending.
■
APQ’s intention to make direct investments, potentially consolidating these into the group financial statements.
For these reasons, we would caution against judging APQ’s success by comparison with any particular EM index or the EM fund sector, particularly over shorter time periods.
Going forward, as APQ’s plans to selectively acquire management control in emerging markets focused companies begin to take shape, there is likely to be increasing focus on a broader range of operating metrics and particularly the potential for these investments to enhance group cash generation. Over time, as APQ’s track record builds it will become possible for investors to assess the success of the corporate strategy in terms of delivering good levels of (emerging market) growth in book value, while mitigating the traditional emerging markets volatility, and delivering an attractive and progressive stream of dividend income.
For now, in Exhibit 8 we show the monthly NAV (total return) performance from inception up to and including June 2017. The monthly returns are stated after adding back dividends paid.
Exhibit 8: Monthly change in APQ NAV per share (adding back dividends)
|
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
Ytd |
2016 |
|
|
|
|
|
|
|
|
1.46% |
-0.43% |
-1.22% |
-0.59% |
-0.80% |
2017 |
-1.25% |
0.24% |
-0.48% |
-2.12% |
3.15% |
1.17% |
|
|
|
|
|
|
0.63% |
Source: APQ, Edison Investment Research
In part reflecting the cautious approach taken by management, we estimate that 2017 year to date NAV total return performance is 0.63% (-1.48% in Q1 and +2.14% in H2). By way of comparison, in Exhibit 9 we show the H117 performance calculated in sterling for a range of global equity indices and iShares EM bond ETFs.
Exhibit 9: Comparator bond and equity performance in 6 months to 30 June 2017
iShares Emerging Markets Corporate Bond ETF |
-2.66% |
iShares US$ Emerging Markets Bond ETF |
-1.53% |
iShares Local Currency Emerging Markets Bond ETF |
3.16% |
MSCI EM Index (total return) |
12.82% |
MSCI World Index (total return) |
5.61% |
FTSE All Share Index (total return) |
5.50% |
iShares Emerging Markets Corporate Bond ETF |
iShares US$ Emerging Markets Bond ETF |
iShares Local Currency Emerging Markets Bond ETF |
MSCI EM Index (total return) |
MSCI World Index (total return) |
FTSE All Share Index (total return) |
-2.66% |
-1.53% |
3.16% |
12.82% |
5.61% |
5.50% |
Source: Bloomberg. All Sterling equivalents
APQ has provided a breakdown of its performance by asset class, as shown in Exhibit 10, which shows a broad spread across the whole range of assets. The FX contribution was positive in Q2 but remains negative year to date. In Q1, the implied negative FX contribution reflects the weakness of emerging markets currencies in respect of exposures embedded within underlying assets exposures as well as well as well as stand-alone currency forward positions.
Exhibit 10: H117 APQ sources of performance by asset class
|
Q217 |
H117 |
Credit |
14% |
54.0% |
Equity |
40% |
23.0% |
FX |
18% |
-35.0% |
Rates |
28% |
58.0% |
Total |
100% |
100% |
To provide more context to the longer-term track record of the APQ management team, we show the historical (monthly) performance for the old APQ Alexandria Fund in Exhibit 11. Similar to APQ, the fund invested in a broad range of stocks, bonds, foreign exchange, commodities, and derivatives across Asia, Latin America, Eastern Europe, the Middle East, Africa, and the developed markets.
Exhibit 11: Historical performance of APQ Alexandria Fund
|
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
Ytd |
2013 |
|
|
|
|
-1.53% |
-0.52% |
-0.59% |
-2.06% |
2.54% |
0.83% |
-0.64% |
-0.06% |
-2.08% |
2014 |
-2.99% |
0.56% |
1.13% |
0.84% |
2.58% |
0.91% |
0.84% |
-0.32% |
-1.24% |
2.19% |
-1.81% |
-6.36% |
-3.95% |
2015 |
-0.74% |
1.09% |
-0.88% |
3.44% |
-1.24% |
-1.40% |
-2.67% |
-4.21% |
-6.76% |
8.66% |
-2.00% |
-2.93% |
-9.99% |
2016 |
-5.00% |
4.64% |
18.04% |
9.94% |
-7.00% |
3.24% |
6.63% |
|
|
|
|
|
32.07% |
APQ Alexandria outperformed the MSCI EM Index (total return) in two of the four years (2013 and 2016) and underperformed in two (in 2014 and slightly in 2015), but outperformed the MSCI EM Index overall with a cumulative total return of 11.8% compared with 8.4%.
Although less directly comparable with the strategy targeted by APQ, performance data relating to GLG funds previously managed by the APQ management team are also available on the company’s website and are contained within its ‘’2017 Outlook’’ document (page 31), which can be found at http://apqglobal.com/outlook-2017/.