Trading at $0.69, Babcock & Brown Structured Finance Fund (BB) is currently 34.9% down from its initial public offering (IPO) price and $0.10 below its net asset value (NAV).

After a swift glance at the various Investment Trusts listed on the Singapore Exchange, investors will be hard pressed to find another investment vehicle that has fallen below its IPO price and NAV by so much an extent.Is BB in the red? No, by all accounts the fund is doing well, announcing record dividends and acceptable earnings.The recent global financial turmoil is certainly responsible for the slide in BB’s share price, but why to such a large degree?

UNKNOWN BUSINESS WORRIES INVESTORS
Incorporated in Bermuda, BB is a mutual fund company that invests in assets in three sectors, namely Operating Lease Assets, Loan Portfolio and Securitisation Assets as well as Alternative Assets.Backed by the Babcock & Brown Group which manages A$71.7b of assets as at December 2007, BB certainly is well-versed in the arena of international finance. One of the main draws of its portfolio is the diversification into various industries unlike REITs, which concentrate on a few countries or sectors.Yet its diversification has proven to be its undoing in the eyes of investors. While it is easy to attach a value to a shopping mall, how does one value “Heaven is a Place on Earth”, a music copyright asset or aircraft that are leased out?

SECURITISATION IS AN UGLYWORD
The main culprit behind the recent financial turmoil, securitisation is a technique developed by financial wizards of Wall Street that managed to earn billions of dollars in fee income for investment banks.Under the process of securitisation, a special purpose vehicle will acquire a pool of assets through issuance of securities that are backed by the assets themselves. According to the financial wizards, even if there are bad apples in the barrel, investors are relatively well-protected from risk by the diversified portfolio. Problems popped up, however, when investors couldn’t spot the bad apples and put a value to the securitised assets, practically making such assets untenable.The bad news is that BB happens to have sizable investments in such assets but the good news is that none of them have gone into default and most are rated B and above.

ATTRACTIVE YIELD, SIZABLE CASH & EARNINGS
In FY07, BB delivered total dividends of $0.107 or 15.5% in annual yield. Assuming a constant dividend policy, investors purchasing BB could easily recoup their principal in 6.5 years, a bargain when compared with supposedly high-yielding REITs and dividend counters.The securitised property investments that BB have on its portfolio may worry investors, but these assets only occupy about 19% of total assets. In the worst case scenario of a complete write-down, BB’s NAV will only be slightly lower than the current trading price.Further, cash and cash equivalents had almost doubled to $127.6m giving BB a free hand in scooping up opportunities or simply buffeting its portfolio from further turmoil.Coupled with its respectable earnings of $68.7m, BB appears to be oversold.