Bag a bargain in the investment-trust sector

A professional investor tells us where she’d put her money. This week: Charlotte Cuthbertson, assistant fund manager, Miton Global Opportunities.

Miton Global Opportunities seeks to exploit mispricings in the investment trust world. We look for good assets trading at a discount where we have identified a catalyst for the value to be realised. Over recent months we have seen value building as progress is being made at the net asset value (NAV) level but share prices have failed to keep up.

Digging for treasure

Baker Steel Resources Trust (LSE: BSRTis a small mining trust. The team seeks to identify promising deposits and fulfil planning requirements to establish rights to operate. Typically, they sell these to a multinational company, which will turn the prospect into a mine while Baker Steel retains equity or a royalty. The trust is at an interesting stage where several of its investments are on the cusp of big developments. With 43% exposure to precious metals it is benefiting from investors’ flight to safe haven assets. Given ongoing concern over the macroeconomic backdrop this trend looks set to continue. The trust has been one of our best performers over the past year but at a 24% discount there is still plenty of value to unlock.

Big opportunities in micro-caps

Micro-caps in the UK are facing a perfect storm. Structural headwinds over the past few years have prompted a de-rating. The City is consolidating into larger asset management companies so there are fewer funds small enough to buy companies at the bottom of the market-cap spectrum. When funds are large they are not inclined to acquire very small companies as these barely move the needle in terms of their overall portfolio. Micro-caps have also suffered from Brexit concerns as they are perceived to be more domestically focused than blue chips. To add insult to injury they have also been battered by the post-Woodford liquidity witch-hunt. Investors now fear illiquid stocks and have been selling smaller companies into an unwilling market.

But many investors will now be tempted to buy. After a period of poor performance many micro-cap trusts have drifted out to wide discounts and the stocks in their portfolio are trading at low multiples, creating a double discount. We have been buying River and Mercantile UK Micro Cap Trust (LSE: RMMC).

The Midlands are on the move

We also like Real Estate Investors (Aim: RLE), a trust specialising in property in the Midlands. Many property funds have been shunned thanks to Brexit jitters, while fears over the death of retail have also dominated the headlines. The story in the Midlands, however, is very different and the trust owns a diversified property portfolio. The fall in sterling has been a shot in the arm for the local economy, which specialises in high-end manufacturing for export. The Midlands is set to host the 2022 Commonwealth Games and there have been several high-profile institutions moving their headquarters to Birmingham, notably HMRC, HSBC and PwC, which should help boost the economy further. The trust suffers from its small size and trades at a discount but investors buying now will receive a yield of around 7% generated entirely from cashflow.