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Catching Up: Schiehallion, Tetragon, Mobius, and Hipgnosis

Since I started this blog I’ve reviewed about a dozen investment trusts that I don’t own. Let’s catch up with a few of them to see whether they now look worthy of a nibble.

Schiehallion (MNTN)

Baillie Gifford launched The Schiehallion Fund in March 2019 raising an impressive $477m. Its brief is to invest in unlisted companies that have “transformational growth potential and have the potential to become publicly traded”.

Be warned, though, it’s not deemed suitable for the great unwashed like you and me. It’s “a complex vehicle and is therefore inappropriate for the public”.

A number of Baillie Gifford’s other funds, like Scottish Mortgage and Edinburgh Worldwide, have a proportion of their portfolios in unlisted companies but Schiehallion will, eventually, be stuffed full of them.

Steady as she goes

Schiehallion reckons it will probably take a couple of years to invest two-thirds of the cash it raised at its IPO. That’s pretty slow compared to most trust launches but a useful indicator of the longer timescales investors need to adopt here.

By the end of September, some six months in, it had 10 unlisted investments accounting for 20.4% of its net asset value. That probably means it’s more or less on schedule with its earlier prediction. You’d expect a bunch of deals to start with followed by a slower pace thereafter.

Many of these 10 companies are ones Baillie Gifford has already invested in, such as SpaceX, Carbon, TransferWise, Tempus, Indigo Agriculture, Affirm Holdings, and HeartFlow. But it’s also invested in three new businesses, namely Away, ByteDance and FlixMobility.

To date, Schiehallion has invested about $10m in each company. Most of the holdings are equity-based although Indigo Agriculture is a fixed-interest position.

The US dominates with seven positions. There is one position apiece in the UK (Transferwise), Germany (FlixMobility), and China (ByteDance).

The company said it had looked at 150 private financing rounds in its first few months and was encouraged by the level of opportunities it was seeing. Nevertheless, the WeWork debacle and the lukewarm welcome for the recent Peloton IPO may be giving some investors in this space pause for thought.

I don’t think that’s bad news for Schiehallion, though. It’s playing the long game here and would no doubt welcome less frothy valuations given it’s yet to deploy the majority of its cash.

A premium to ponder

It wasn’t a great surprise to see this fund leap to a large premium as soon as it started trading.

The shares jumped to $1.125 on their first day and then climbed further to $1.175 over the next few weeks. They have remained unchanged at $1.175 since 8th May, well ahead of its latest $1.01 net asset value.

But when you look how often the shares have traded — after the initial post-IPO flurry, just twice in July and once in September according to the London Stock Exchange website — then maybe that flatlining of the share price is less of a surprise.

The bid-offer spread is quoted at $1.15 to $1.20 but I suspect buying in bulk on the open market is pretty much impossible.

Schiehallion has said that it might issue more shares, but with so much cash left to invest, I doubt it will be in much of a hurry.

Tetragon Financial Group (TFG)

Tetragon is a weird mix, mostly invested in a range of asset management firms, hedge funds, property, and debt. It has assets of $2.25bn, net cash of $200m but trades at a massive discount of 47.5%.

This high discount isn’t a temporary anomaly either. It’s been 30-50% for nearly all of the last decade.

The complex structure of Tetragon puts a lot of investors off I suspect. And it’s a high-cost fund (1.5% plus a 25% performance fee) with massive corporate governance concerns due to the non-voting nature of its listed shares.

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The big discount magnifies the underlying income its investments produce, resulting in a meaty dividend yield of 5.9%.

Big deal!

Co-founder Reade Griffith, who owns some 12m shares in Tetragon (worth some £120m), has recently been awarded the following 5-year package:

  • $9.5m in cash in July 2019;
  • $3.75m in cash in July 2020;
  • 0.3m non-voting shares in July 2021;
  • 2.1m non-voting shares in June 2024; and
  • between zero and an additional 3.15m non-voting shares – with the number of shares based on agreed-upon investment performance criteria – vesting in years 5, 6 and 7.

It would be nice to see some detail on what the “agreed-upon” criteria are. Some £10m in cash and up to £55m in shares (at their current value) is a hefty compensation deal.

I must admit that I am curious to see how well Tetragon copes with the next major financial crisis, given its focus on absolute returns. My suspicion is the net asset value might hold up ok but that the share price will still get whacked.

There’s a lot to like about this fund. But there’s a lot to dislike, too.

Mobius Investment Trust (MMIT)

Mobius Investment Trust was one of many launches that sneaked in before markets went south in the last quarter of 2018. It was looking to raise £200m but had to settle for £100m.

It’s an emerging and frontier markets fund with an activist twist, looking to unlock value by helping companies improve operationally or via their approach to environmental, social, or governance factors. Maybe it could give Tetragon some advice!

China, India, Brazil, and South Korea are its four main markets, accounting for 50% of its assets. It’s a concentrated portfolio with just 23 holdings and 10% in cash.

Mobius initially fell to a small discount but then enjoyed a premium from late January until the end of July. This allowed it to issue 5m new shares taking its share count to 105m.

A summer of discontent

Since then, the wheels seem to have come off a bit. The share price has fallen by some 15% and it’s currently trading at a 6% discount. Any investors who bought in at the IPO have lost just over 17%.

The damage seems to have been caused by heavy falls in a number of holdings. Mobius provides a fairly detailed quarterly management commentary, and the next one is due any day now, so that should shed some light on what’s been happening.

This was always going to be a pretty risky fund, given its choice of markets and the concentrated nature of its portfolio. But I think it’s too early to take a firm view as to whether this represents a good buying opportunity or the first sign that the approach just isn’t working.

I’m cooling on emerging markets as I get older. They seem to have long stretches where they seem to either massively underperform or outperform developed markets. But I don’t think I’m good at spotting turning points in situations like these and I could do with the volatility that comes with holding them through thick and thin.

Hipgnosis Songs Fund (SONG)

Yet another 2018 new launch!

I might seem obsessed with investment trust IPOs but I do find them interesting to look at. I like the learning process that comes from reviewing them and it allows me to check back later to see if they did what they promised to do at the outset.

While it’s pretty rare that I will actually invest in a trust IPO, I’ve added newbies like Smithson and Gresham House Energy Storage to my portfolio recently (the former when it launched and the other six months afterwards). But I don’t expect that habit to persist and my position sizes in both are still pretty small.

Hipgnosis Songs Fund offers investors to chance to profit from song royalties. I’m not aware of another fund that does this, and it’s certainly unique among UK investment trusts.

Juicy prospects?

As well as buying sought-after songs, it’s also trying to squeeze out as much juice as possible from them by actively promoting its titles using its in-house expertise. There’s a useful paid research note from Kepler that provides plenty of background detail on this.

At the end of August 2019, it had nearly 7,500 songs in its catalogue. But the revenue mix is a lot more concentrated than that large number suggests, with the top 10 accounting for 31% of 2018 income and 141 songs making up 80%.

Hipgnosis raised £202m when it launched, then £142m, £51m and £231m in subsequent placings.

Asset value complications

Its net asset value needs a little background explanation. Under accounting standard IFRS 15, the value of songs acquired after written off over time. However, Hipgnosis prefers what it calls an operative net asset value, where its portfolio is independently valued.

By 31 March 2019, a sizeable difference between the two measures had already opened up. The IFRS method put net asset value at 98.2p whereas the operative measure was 103.3p.

I guess how much revenue is generated as a percentage of net asset value will be a good indicator to watch in future years, although the rate of expansion right now makes that hard to get a handle on.

I’m still a little sceptical about the really long-term prospects for music revenues. The company says global revenues declined for 15 years from their peak of $29bn in 1999, due largely to piracy. Although growth resumed in 2014, that 1999 peak may not be surpassed in nominal terms until 2027.

While the current trends look favourable, this could turn out to be a very cyclical business.



Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.

Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!

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2 Replies to “Catching Up: Schiehallion, Tetragon, Mobius, and Hipgnosis”

  1. Hipgnosis is fascinating. Investors love a bit of access to more desirable industries (EMI and Terra Firma…) so the constant placements don’t surprise me.

    I think that a) it’s very hard to put a valuation on the songs and their revenues and b) to know the fiduciary strength of the management.

    I have been impressed by some of the names they’ve got on board, but again would have no idea whether they have been acquiring them at a good price or not.

    Schiehallion is another interesting one – I’m not sure who wants to hold that much cash. And these sorts of investments may be less appealing in a post-We-Work world. It is possible that Bytedance will do well given its current ubiquity with teenagers (though equally it could be a replaceable fad), but the fact that Baillie Gifford invested in Peloton gives me cause for concern – to me, that’s definitely on the delusional end of ‘hot products’.

  2. I find Hipgnosis really tough to gauge as well. I’d be fascinated to see what someone with real music industry knowledge makes of it.

    I don’t think Schiehallion’s high cash balance is much of an issue, though. They highlighted upfront that it would take a long time before all the funds were deployed and I’d rather they were more selective. Peloton wouldn’t be my first choice, but spread across a sufficiently diverse portfolio it wouldn’t concern me too much. I think with these higher-risk portfolios there are always going to be a few investments you don’t fancy.

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