A family-run investment trust to buy and lock away

Menhaden Resource Efficiency made a slow start, but progress is encouraging. Buy before the discount closes, says Max King.

Investment trusts controlled by a wealthy family have an intuitive appeal. The family will have a long history of investment success, excellent business connections and an ambition for strong returns in the good times combined with an emphasis on preserving value in difficult markets. Management that doesn’t perform will be swiftly changed and the outside investor has the comfort of knowing that if it goes wrong, his/her losses will be dwarfed by the family’s.

Against that, business and investment acumen is not hereditary – “clogs to clogs in three generations”, as the saying goes. Families can be complacent, over-confident and reluctant to change. RIT Capital has been an excellent performer but others have had long periods in the doldrums.

A slow start

Hence when Ben Goldsmith launched Menhaden Resource Efficiency (LSE: MHN) in 2015, investor enthusiasm was muted and it raised just £80m. Investors worried about Goldsmith’s limited experience and that a focus on environmentalism would be at the expense of returns.

After a poor start in which the share price dropped over 40%, Goldsmith brought in Luciano Suana as co-manager and specified “resource efficiency” rather than environmentalism as the focus of investment. Saving the planet had to make good business sense to be investable. Returns have since compounded at 11% and the net asset value (NAV) per share has risen to 142p, but the share price languishes at a 29% discount, just above the £1 issue price. Investors, it seems, remain sceptical.

With a market value below £100m, the trust is too small for the mainstream wealth management companies, while many of Goldsmith’s original friends and family backers have got bored and sold out. The trust pays a negligible dividend which does not endear it to private investors. Worst of all, in the eyes of some, the portfolio is concentrated, with the top three investments accounting for more than 50% at 31 March and the top ten for over 90%.

There are no borrowings to push up returns and private equity investments account for only 12%. Goldsmith’s connections give MHN access to some of the best private equity investors in the world and this has helped returns in the last five years. But at present “private equity investors have too much money so are paying up for deals and seeking to justify the price with massive leverage”. Menhaden hopes to invest more in private equity but is prepared to be patient.

Natural monopolies

The listed equities are divided between infrastructure and “monopolistic technology”. The former includes Canadian Pacific Railway and Canadian National Railway; Vinci, the French toll road, airports and construction group; John Laing; and X-Elio, a leading Spanish solar-energy equipment supplier. On the tech side, Alphabet alone accounts for nearly 30% of the portfolio. “It’s a natural monopoly and a growth business trading on 16-17 times earnings,” says Suana, “with optionality in artificial intelligence (which will revolutionise education), self-drive vehicles, quantum computing and 6% of SpaceX thrown in for free”.

Another 12% of the portfolio is in Microsoft. “It’s another monopoly which prices by bundling so Microsoft Teams is, in effect, thrown in for free. The cloud business is super-exciting, removing the constraint of capacity, storage and the need for downloaded software programs.” The trust is currently building up a 5% holding in Amazon, also for its cloud business.

Suana’s scepticism about Neflix has been vindicated, raising confidence in the decision to focus on a few big tech holdings. In time, more private equity, a broader spread of holdings and a material dividend are likely, but the discount will then be a lot lower. One to buy now and lock away.

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