After a poor start to life, Menhaden seems to be rapidly on the path to recovery. Having had a new management team at the helm since April 2016, the team are now making good ground towards recovering the previous underperformance.
The team’s philosophy is very much valuation led, and they aim to identify durable companies with strong pricing power and very high barriers to entry. The portfolio is highly concentrated, and the team aim to remain invested for the long term. One of the overarching multi-decade themes that the managers recognise as being an important influence on future returns is that energy and resources need to be used more efficiently, and so most of the companies in the portfolio benefit from this theme in one way or another.
Using the advantages of the closed-ended structure, the managers invest in private as well as public markets. Over the past few months, it is the private investments that have been contributing strongly to returns. As it stands now, the trust’s two largest investments (together representing nearly 30% of NAV) are expected to complete transactions which will see nearly 25% of NAV converted into cash.
Elsewhere the public equities portfolio continues to evolve, reflecting the low turnover approach. The team has cut the Airbus holding in half, and recycled capital into a new position in Charter Communications, a business they believe is a classic Menhaden stock with high barriers to entry and a dominant market position at an attractive price.
Having lagged whilst the portfolio was being repositioned, the trust has slowly been catching up with world equity markets and the average global investment trust. It is worth noting that this is despite around half of the overseas currency exposure being hedged back into sterling. More recently, over September Menhaden’s NAV increased by 6.8% driven by the value increase of ADO Group, the trust’s second largest holding, whilst the MSCI was +0.9%. The shares trade on a discount of 20%.
It is possible that many investors are labouring under the misconception that Menhaden is a “green” fund, aiming to save the world rather than deliver good investment returns. However, whilst there are echoes of “green”, the management team aim to invest with high conviction into businesses that they view as good value and having dominant market positions with high barriers to entry.
The performance since the portfolio was repositioned in 2017 gives grounds for optimism, and that the more clearly thought out investment rationale is now bearing fruit. The very strong performance year to date, latterly driven by private investments, continues to provide evidence that Menhaden has indeed turned a corner.
In our view the main catalyst to help the discount narrow is the approaching completion of the current transactions for the trust’s two largest investments (together representing nearly 30% of NAV). Should they complete, Menhaden will be left with a more liquid and less concentrated portfolio overall. This could be an important consideration for the 20% discount. Listed private equity trusts currently trade on wide high ‘teen or low-twenties discounts, but Menhaden has a very different liquidity profile – and especially so following these transactions.
We continue to argue that the current discount of 20% is an interesting play for those who are willing to wait (but are happy with the potential volatility that the concentrated portfolio could deliver).
|20% discount reflects historic mishaps, rather than the portfolio as it will be when the upcoming private transactions complete||Concentrated portfolio means any stock picking mistakes will hurt NAV|
|Strong recent performance relative to world equities and global trusts||"Friends and family" share register means 2020 continuation is unlikely to act as a catalyst for discount narrowing on its own|
|Differentiated high conviction portfolio, with clear investment rationale behind it||OCF of 2.1% is relatively high|