The average discount to net asset value (NAV) in the investment trust sector has fallen from 10% at the end of June to 6.8%, but there is still no shortage of trusts trading on far higher discounts. Some of these will prove to be bargains, producing compound returns through the combination of strong underlying performance and narrowing discounts. Others will prove to be lame ducks, justifying the high discount. It takes experience, deep knowledge and a great deal of due diligence to sift the gems from the dross, and even then mistakes are inevitable.
It’s tempting to buy a selection of high-discount trusts in the expectation that the bargains will counterbalance the lame ducks. But most investors will be wary of having too many holdings and prefer to focus on mainstream trusts rather than the specialist, esoteric or problematic trusts trading on large discounts.
Fortunately, there is an answer: Miton Global Opportunities Trust (LSE: MIGO), the £85m trust managed by Nick Greenwood and Charlotte Cuthbertson. “We seek to buy trusts at significant discounts to their intrinsic value – 17 of our 33 positions were recently trading at a discount of over 30% and some were trading at over 40%,” says Cuthbertson. The average discount is 25%, says Greenwood. “It used to be just basket cases that traded on high discounts but many quality trusts now do so.
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The trusts MIGO invests in cover not just listed equities but also private equity, debt, commodities and property. A rigorous process screens out those in unattractive areas of the market with too much debt or doubtful asset valuations, and looks for a catalyst for change. This creates a shortlist from which investments are chosen. “We look for the underlying portfolio to be performing well so that the NAV will increase,” says Cuthbertson. “We are trying to buy £1 of assets for as little as 70p.” Holdings are sold when the discount falls to modest levels, or when the trust is wound up or taken over.
Keeping up with trends
The enormous range offered by the sector means that MIGO’s portfolio is well diversified, with 20 different sub-sectors. MIGO seeks to switch between specialist areas as they move in and out of favour. For example, trusts invested in shipping were recently sold as the world moved out of lockdown, trade increased, shipping rates rocketed and the trusts’ shares re-rated. More recently, MIGO has been buying biotech trusts, which have fallen out of favour, says Cuthbertson.
“Uranium has also become one of our largest themes as the new nuclear reactors being built increase demand. The price of uranium has been too low following the Fukushima accident.” The largest holding at 5.8% of the total is the Vietnam Opportunity Fund, trading on a 20% discount. Its managers point to the divergence between a strong economy (annualised growth of 7.7% in the second quarter) and a weak stockmarket, down 17% in the first seven months. Private-equity trusts in the top ten holdings include Dunedin Enterprise, which is being wound up, and Oakley Capital.
Other holdings include Phoenix Spree Deutschland, which owns residential rental properties in Berlin that are being sold at large premiums to valuation, and Georgia Capital, which invests in this prosperous region of the Caucasus at the crossroads of Asia, Europe and the Middle East.
Given the obvious popular appeal of its strategy and the exceptional value in its portfolio, it is surprising that MIGO is not a much larger trust. Shares trade at a discount of just 2.5% to NAV so it shouldn’t be long before it can expand through share issuance, improving liquidity and reducing already-reasonable costs. The trust’s alreadyrespectable record (22% investment return in three years) looks set to accelerate.
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