Fund Research

Tetragon Financial Group

Last update 06 November 2019

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Tetragon Financial Group. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Investment objective

To generate distributable income and capital appreciation, aiming to provide stable returns to investors across various credit, equity, interest rate, inflation and real estate cycles.

As at:

01/11/19

Group/Investment

Tetragon Financial

Ticker

TFG

Management Company

Tetragon Financial Management

Manager Name

Reade Griffith; Paddy Dear;

Association of Investment Companies (AIC) Sector

Flexible Investment

12 Mo Yield

5.8%

Dividend Distribution Frequency

Quarterly

Latest Market Capitalisation

£879,279,456

Latest Net Gearing (Cum Fair)

-7%

Latest Ongoing Charge Ex Perf Fee

1.87%

Turnover Ratio

0.0%

Shares Outstanding

91,452,174

(Discount)/ Premium (Cum Fair)

-47.2%

Daily Closing Price

961.5p

Source: Morningstar

Tetragon Financial Group Limited (Tetragon) invests in a broad range of alternative assets. It aims to generate returns on equity of between 10-15% per year across cycles, and seeks to distribute a proportion of these returns through a dividend. The company has net assets of $2.27bn, and is traded on the Specialist Fund Segment of the LSE (primary listing on Euronext Amsterdam) with both a US dollar and an unhedged sterling share class.

Tetragon invests in a diversified set of alternative assets, including bank loans, real estate, credit, convertible bonds and infrastructure. As at 30 September 2019 around 62% was invested in those asset types, while 31% was invested, private equity style, in the equity of investment management companies who manage the funds through which Tetragon obtains its exposure. The balance (7%) was held in cash.

In the Portfolio section we provide more detail on the underlying assets themselves. Tetragon aims to identify and invest in a range of uncorrelated alternative asset classes, using managers who can achieve the trust’s total return objectives. However, in also owning stakes in alternative asset management companies, Tetragon aims to leverage the depth and breadth of their investment platform, to grow assets and ultimately achieve strong returns from these investments too. The uplift in valuation from two of their holdings in investment management companies during the first half of 2019 reinforces this approach.

The company’s objective (capital appreciation and distributable income) has been achieved so far. Tetragon’s NAV performance has been strong both in absolute terms and relative to equity and alternative funds. Putting this in the context of the broad investment trust universe, over five years the fund has generated a similar quantum of returns to Scottish Mortgage, but with the same volatility as RIT Capital.

Importantly, Tetragon has exhibited NAV correlation to equity markets at a fraction of the level of those two trusts; over five years Tetragon has exhibited a correlation of just 0.16 against the MSCI ACWI. In terms of capital preservation, the maximum drawdown over five years is significantly lower than Scottish Mortgage or RIT Capital, at -8.5%. Not surprisingly, Tetragon’s alpha and Sharpe ratio statistics are better than the other two trusts, which in our view are both very good performers in their own right.

Selected nav risk / return metrics (five years)


Premium / (Discount) to NAV

Return
(pa)

Std Dev
(pa)

Correlation (vs MSCI ACWI)

Max Drawdown

Alpha
(pa)

Sharpe Ratio
(pa)

Scottish Mortgage

-1.7

17.7

22.1

0.66

-22.5

4.37

0.85

Tetragon

-47.2

15.3

14.4

0.16

-8.5

9.05

1.66

RIT Capital

9.4

8.6

14.2

0.55

-11.6

-2.08

0.34

Source: Morningstar, as at 31 October 2019

Find out why we believe Tetragon is unfairly treated by the market, despite generating an 11.2% NAV total return per annum since IPO...
William Heathcoat Amory

Disclaimer

This report has been issued by Kepler Partners LLP.  The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.

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