Ian Cowie: holding on for more after trebling money in under a year

It’s an ill wind that blows no good and fears of war have helped to treble the price of one investment trust I bought less than a year ago. Britain’s prime minister, Keir Starmer, caught the anxiety of our times at last weekend’s Munich Security Conference when he told European leaders: “In a few days it’s the four-year anniversary of the start of the conflict in Ukraine.

“We want a just and lasting peace, but that will not extinguish the Russian threat that’s going to affect every single person in this country, so we need to step up. That means on defence spending, we need to go faster.”

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Switching UK taxpayers’ pounds from welfare to warfare will not be easy now that nearly one million young people in Britain have gone straight from school to the dole. Official figures show 946,000 people aged between 16 and 24 are not in education, employment, or training (NEET), representing 12.7% or one in eight people among this age group.

However, countries closer to the front line are already spending heavily, boosting defence stocks and funds holding them - such as Seraphim Space Investment Trust Ord (LSE:SSIT). For example, Germany has already committed hundreds of billions of euros and emphasised the need to prepare for the next war - not the last one - with new technology, such as satellites or “eyes in the skies”.

More than three-quarters of Seraphim’s net asset value (NAV) is invested in defence-related space technology and two-thirds of the total is based in Europe, including the UK. So, this fund is a double beneficiary of soaring defence spending across the Continent, coupled with the realisation that we can no longer rely on America to protect us from Russia.

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That’s why I paid 53p last March for shares that traded at 155p on Wednesday. Seraphim’s biggest underlying asset, a Finnish satellite-maker called ICEYE, played a major part in that exhilarating ascent when it announced it had signed a €1.7 billion (£1.5 billion) contract with Rheinmetall AG (XETRA:RHM), Germany’s largest arms manufacturer, to supply intelligence to that country’s armed forces.

ICEYE’s satellites specialise in synthetic aperture radar (SAR), which gives precise location information - accurate to within 50 centimetres - and can see day or night, through clouds and even vegetation.

This week, SSIT updated the market with news that its four largest holdings - the others being ALL.SPACE, D-Orbit and HawkEye 360 - increased their NAV by an average of 36% during the quarter to December. It added that they enjoyed a combined fair value uplift of £69 million, equivalent to a 24% increase across SSIT’s whole portfolio’s NAV of £284 million.

That suggests the 23% published premium - or percentage by which the shares are priced above their NAV - is historic rather than an accurate assessment of this fund’s current trading position. However, unlisted assets - or smaller and start-up companies not yet traded on any recognised exchange - are always difficult to value.

Another worry is that yearly ongoing charges of 1.77% look steep but might be justified by the additional costs of investing in such a specialised sector. Wary observers also warn that what goes up like a rocket can come down like a stick.

Against all that, James Bruegger, SSIT’s co-fund manager, was upbeat this week and suggested there might be more to come. He said: “The substantial valuation uplifts across all four of our largest holdings reflect the benefits these companies are now starting to reap as a result of consolidating their leadership positions in their respective categories.

“Given the strong momentum in these four companies and indeed the overall portfolio, we anticipate there being further positive news and commensurate increases in valuations over forthcoming quarters.”

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Similarly, Mark Boggett, chief investment officer, predicted “a wave of defence procurement opportunities in the years ahead” and added: “The value of SSIT has certainly not peaked, on the contrary, the portfolio is well-positioned to benefit from this major tailwind.

“Given the strong momentum, we expect further positive news and corresponding increases in valuations in the upcoming quarters.”

With just a few months to go before this fund is due to celebrate its fifth anniversary, having been launched in July 2021, we won’t have to wait long to find out if Boggett and Bruegger’s optimism is justified. Paradoxically, one potential headwind for these shares is that peace might break out and kill the defence boom.

SSIT is a high-risk fund which has demonstrated its potential to deliver high rewards but remains totally unsuitable for anyone who is going to lose sleep if it falls back to earth with a bump. Even so, its stellar performance over the last year has made this investment trust the fourth-most-valuable holding among more than 50 assets in my forever fund, and I intend to hang on for more.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Seraphim Space Investment Trust (SSIT) as part of a globally diversified portfolio of investment trusts and other shares.