International net-net(sorta) #3 Societe Francaise de Gestion et d'Investissement

Societe Francaise de Gestion et d'Investissement (SOFR:FP)

Trading at €1487.99 (4/5/11)

This is a bit different than most net-nets because Societe Francaise de Gestion et d'Investissement (Sofragi) isn't a business selling at a discount but is a closed end fund.  The business description of Sofragi notes that it holds a combinations of shares, warrants, options, and bonds of companies trading on the Euronext Paris.  In addition it can also own foreign shares and hold cash as well, this sounds awfully similar to a mutual fund to me.  

So what makes this a unique opportunity?  To start with Sofragi is owned by two majority holders, 55.44% by Aviva Vie, and 22.58% by Agrica which leaves 21.98% in the public float.  And considering there are only 100,000 shares total we're talking about a total of 21,980 shares available for purchase which isn't a lot.  Secondly the net asset value is ascertainable and liquid.  It would be simple for Sofragi to distribute the shares and cash in-kind to each Sofragi shareholder to realize actual asset value.

You might be wondering how do we know the fund still trades at a discount?  Sofragi is nice enough to post the valeur liquidative (NAV) on a fairly often basis.  As of this post the NAV is posted for 4/4/11 showing €1833.12 vs the trade price of €1487.99 a 18.8% discount.

Upside
The upside to this investment is technically unlimited, the fund could soar but a more realistic goal is the discount to NAV closes giving an investor a 23.3% gain at todays values.

Downside
The risk to this sort of arbitrage purchase is that the discount persists for some time before it closes and the value of the fund drops.  Some of this risk is reduced by the fact that the fund holds a conservative allocation, as of 12/31/2010 the fund held 54.51% shares, 41.05% cash, and 4.44% bonds.

Conclusion
Investing in a closed end fund at a discount to it's NAV is a fairly safe investment with a predictable outcome.  No fund trades at a discount forever, but will usually drift closer to NAV over time.  A factor that could be helping persist the discount is that Sofragi has a very low float, and two large majority shareholders.  As a value investor I make money betting on mean reversion, and an investment in Sofragi is just that.

Disclosure: I don't hold a position in any issue mentioned above although I might consider purchasing Sofragi in the future.

2 comments:

  1. I had a quick look at Sofragi and it does look really interesting currently. Marketpcap is around 110 mln., NAV around 168 mln. so a huge upside. Since I am quite new to the company, do you know what the reason is why the spread (shareprice / NAV) increased ?

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  2. I believe the spread is a supply and demand issue. There are no new shares being issued and it's hard to hedge the full portfolio, so there's a spread.

    Historically buying funds like this at a discount and holding until the gap closes has been a very reliable strategy. I don't see why it would be any different in Sofragi's case.

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