Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Miton Global Opportunities. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Miton Global Opportunities (MIGO) offers exposure to a diversified pool of closed-ended investment companies, often operating in highly specialised areas, trading on substantial discounts to their intrinsic value, where the manager believes there is a catalyst for a re-rating.
Aiming to deliver cash (SONIA 3 month) plus 2%, the trust is relatively unconstrained in asset allocation.
As a result, the trust holds an array of idiosyncratic and diversified holdings in a variety of geographies, asset classes and sectors. The manager is focused on identifying ‘special situations’ and/or deep value opportunities in investment trusts where market conditions for the share price are likely to change in the foreseeable future.
With an extensive background in investment trust investing, the lead manager, Nick Greenwood, believes we are likely seeing structural changes to the investment trust universe, which is opening up opportunities for his approach. Recent headlines around liquidity struggles in open-ended vehicles, coupled with a global search for alternative sources of yield, have created new investment strategies not previously securitised.
With these markets being relatively immature, investor behaviour can be expected to be strongly reactive in relation to perceived correlations to other markets or short-term newsflow. This tendency offers further opportunities to the team’s strategy according to Nick, where identifying discounts likely to see near-term reversionary pressure can provide substantial portfolio uplift.
Not only do the trusts selected usually trade on a discount to their notional net asset value (NAV), but these NAVs themselves are often conservatively assessed, or the business is operating under challenging market conditions, giving rise to double discount opportunities.
The trust has lagged equity markets in the recent rally, but this should not be a surprise given that outperforming equity markets is not the target for the strategy and given the characteristics of the market rally (growth and quality have outperformed rather than value). Although falling markets will prove a headwind to absolute returns, the embedded discounts typically help to mitigate downside participation, and offer new buying opportunities to the managers.
The closed-ended structure allows Nick to take positions in less liquid areas of the investment trust universe which investors might otherwise find it difficult to access, and which frequently offer additional return potential due to this illiquidity. This approach does, however, have risks attached to it: in six cases the trust holds over 5% of the voting rights attached to shares in the company (accounting for over 13% of gross assets). Were the managers to change their thesis and seek to exit these positions, they could find doing so a challenge. However, it should be noted that these companies operate in different areas, and they are highly unlikely to need to be simultaneously realised.
Performance has been strong over the longer term, though the trust has lagged equity markets and peers in recent months. However, MIGO tends to have lower correlation to equity markets than its peers, and is focused on returns in excess of cash, so benchmarking against equities does not provide an appropriate comparison.
|Substantial embedded value via discounts in the underlying holdings||The trust is a significant shareholder in some of the underlying holdings, and could face difficulty selling these|
|Attractive opportunities diversified across different themes||Defies easy categorisation, for investors operating an asset allocation model themselves|
|Relatively low correlation to equity markets which can be reasonably expected to fall further in the future|
Miton Global Opportunities (MIGO) is a trust of trusts specialising in deep value opportunities and special situations. The management team, led by Nick Greenwood, seeks to identify pricing inefficiencies within the investment trust market, and thematic drivers for discount convergence to the share price. In practice, this often means buying trusts on deep discounts where there is a catalyst for a significant narrowing of the discount and/or a cyclical or structural change in operating environment.
MIGO has been operating since 2004, though the move to focusing more on discount and value opportunities is a development that largely occurred after the 2008-09 crisis. Nick has been managing MIGO for its entire existence, using his extensive experience and knowledge of the investment trust universe to identify opportunities in a wide range of eclectic and often esoteric investment strategies, which an average investor may find difficult to research or access. He is supported by Charlotte Cuthbertson, a dedicated analyst for the trust (and the open-ended equivalent fund), who has worked in the Miton investment trusts team since October 2017.
The fixed capital structure of the trust allows the managers to take high conviction positions; while there are over 50 holdings there is a sizeable tail of small positions, and over 75% of the portfolio is held in the top 20 positions. These ‘tail’ holdings may be small for a variety of reasons; some themes are regarded as best spread across a variety of trusts for broad exposure (such as UK small caps at present), while others may be small residual holdings that are in the latter stages of wind-up. The managers prefer to initiate holdings with small positions, and build these further as they develop conviction; certain very small holdings may be considered exploratory as they determine whether to pursue the opportunity or not.
This does, however, occasionally see them take sizeable portions of shares in issuance, and they are a major shareholder in a number of companies. Whilst this allows them greater opportunities to engage with the boards of these holdings, it can potentially make exiting these positions more challenging.
Thematic elements are incorporated in the portfolio, examining catalysts for a valuation re-rating or improved operating environment, and soft limits are applied to portfolio exposure to these themes. The trust has significant geographic and asset class diversification through the exposure incurred by the underlying manager, as well as thematic diversification.
While a top-down macroeconomic viewpoint is incorporated into the trust, portfolio construction is primarily a function of bottom-up idea conviction, tempered with consideration of the balance of themes within the portfolio. The team is cognisant of ensuring the portfolio is suitably diversified across different themes. Along with diversification considerations, position sizing also accounts for the perceived relative opportunity offered by individual holdings.
The trust’s tendency to mitigate downside participation is a natural outcome of the focus on discounts within the portfolio strategy. Nonetheless, risk assessments are an ongoing part of portfolio management, with scenario analysis and thematic contributions to risk being internally monitored, highlighted and discussed on an ongoing basis.
FX exposure is not typically hedged, though the managers do have the internal infrastructure to do so should they have an especially strong view on currency risk, or if they note when looking through the portfolio that they have high exposure to a particular currency.
The decision post 2008/09 to increasingly focus on discount opportunities, and the ongoing gradual move towards an increased weighting to alternatives, is attributable in part to some broader trends observed in the investment trust sector.
Cass Business School research has highlighted that around 84% of the outperformance of closed-ended pooled investments over their open-ended counterparts is attributable to the structure of the vehicle. Studies such as this have increasingly prompted the retail financial press to recognise and promote these advantages; and it is likely that the recent liquidity travails of some open-ended funds that have suffered outflows will accelerate this trend. The mass shuttering of open-ended property funds in 2016 is also likely to remain prevalent in the minds of many self-directed investors.
These self-directed investors are becoming increasingly important buyers in the investment trust sector, taking over from more traditional private client stockbroking firms. Industry consolidation within the wealth management sector has resulted in traditional buyers operating at too great a scale to access many smaller market cap opportunities, which adds to pricing inefficiencies and value opportunities for participants such as this trust.
As investors realise the benefits of fixed capital pools in less liquid asset classes, the managers anticipate a structural trend for alternative asset classes to be increasingly used by investment trusts, and this is likely to be reflected in the composition of the trust itself going forward. Issuance in alternative asset classes has consistently outstripped equities within the investment trust universe, although the outlier box-office launch of the Smithson Trust in 2018 affected the figures for that year.
Although the team expects to reflect this increased industry move towards alternatives in their portfolio going forward, these alternatives will continue to trade as listed companies; so short-term equity market volatility is likely to be observed in these positions for the immediate future. However, the managers expect that going forward the market will become more sophisticated at accurately valuing these products, and their correlation to wider equity markets will fall. For the present, knee-jerk association to immaterial market developments – alongside the attendant volatility – give the trust trading opportunities.
Current portfolio & positioning
The portfolio is currently diversified across a variety of asset classes and geographies, as can be seen in the chart below:
However, this chart does not fully capture different allocations within these asset classes.
Equity exposure encompasses themes playing on country-specific exposure (UK, Japan, India and Vietnam) and specific sectors (UK small cap, uranium miners, utilities). Property exposure is not generalist, but focused on opportunities in Vietnam, Macau, the UK and Berlin. Mining exposure, in addition to the uranium exposure noted above, encompasses a variety of strategies including mining royalties, equities and physical assets.
As of 24/09/2019, company assets are at around £75.9m, spread across 53 holdings, although as noted above some of these are de minimis. The top 10 holdings account for around 53% of the portfolio, with the fixed capital pool allowing the team to build high conviction positions in relatively illiquid companies.
The weighted geometric average discount across the top 12 holdings is 18.8%, as of 31/07/2019.
top ten holdings as at 31/07/2019
|Alpha Real Trust||6.8|
|Phoenix Spree Deutschland Ltd||6.6|
|Dunedin Enterprise Investment Trust||6.3|
|Baker Steel Resources Trust||5.8|
|India Capital Growth Fund||5.2|
|Artemis Alpha Trust||5.1|
|Real Estate Investors plc||5.0|
|Henderson Opportunities Trust||4.3|
|VinaCapital Vietnam Opportunity Fund||4.2|
|Macau Property Opportunities Fund||4.0|
Alpha Real Trust, the largest position as at this date, is emblematic of the team’s value approach. With a market capitalisation of £120m, the trust is too small and illiquid for many institutional investors, and trades on a significant discount. On current reported NAV figures, this stands at around -13%, but Nick believes the real discount may in fact be significantly greater than this, noting that the managers attach very conservative valuations to the properties in their portfolios. An example of this was Alpha’s disposal of a Frankfurt data centre for €44m in late 2018; the property had been recorded in the trust’s NAV assessment at a value of €22m. Despite the significant boost to NAV from this disposal, the share price reaction was muted, and it was only when subsequent broker notes highlighted the issue that there was a positive share price reaction.
The managers of the Alpha trust themselves own around half the shares, and as such have their interests very much aligned with shareholders. Excess capital is often used to buy in shares for cancellation, and Nick anticipates greater convergence of the discount to NAV over the coming 12-24 months.
Property is an area where the team has identified value opportunities at the present time. Investor alarm at a proposed freeze on rents in Berlin added to the opportunity in Phoenix Spree Deutschland, a significant holding in the portfolio, and the managers used a sell-off in mid-2019 to top up their exposure. This proposed rent freeze, by the far-left Die Linke party, is generally thought to be unconstitutional and a federal, rather than state, matter (as it pertains to contract law). With Berlin rental rates already relatively low even compared to other German cities, approval at the federal level seems unlikely to be forthcoming. Berlin itself remains the main hub of start-up companies in Germany, and demand remains robust.
German property is generally valued on a lifetime cash flow basis, which is not a factor generally appreciated by the wider UK market and causes valuation errors when assessing the assets. Were Phoenix to sell some of its assets into leasehold they could reasonably expect an uplift of at least 25% to the recorded value of the assets. Nick believes that the reported discount to NAV of over 30% is an accurate reflection of the underlying assets and is engaging with the trust’s management to consider undertaking buybacks for cancellation to help realise some of this value.
While both of these trusts operate in similar areas, they are primarily high conviction positions held on their individual merits. However, strategies more focused on gaining exposure to broad sectoral themes (with less focus on catalysts at an individual level) are also incorporated in the portfolio. Recently the team has added significant exposure across an array of trusts investing in UK micro-cap companies. Nick says that at present there is something of a perfect storm in this space, with three factors depressing share prices.
Firstly, he notes, there is widespread trepidation from institutional shareholders awaiting greater clarity on the UK political situation; institutional investment surveys regularly show that allocations to the UK are significantly underweight relative to their history. Secondly, industry consolidation in the wealth management sector has, as noted above, resulted in many small funds being perceived as offering insufficient capacity to cope with much greater pooled asset levels. This in turn gives greater scale to certain investment vehicles at the expense of smaller competitors, which accordingly obliges them for liquidity reasons to focus on larger companies where they can adequately trade their large equity stakes.
This has helped give rise to the third factor, which is widespread concern over liquidity in the small-cap space following the circumstances surrounding the Woodford Equity Income fund. The confluence of these factors has left UK small and micro-cap focused trusts trading at sizeable discounts to NAVs that are, in any event, themselves trading on depressed valuations. Accordingly, Nick has added exposure to this sector. The team has chosen to do this through a variety of trusts to reduce stock-specific risk when what they are seeking is broad exposure to the theme.
Investor aversion to the UK micro-cap market comes despite the fact that there is not likely to be a substantial change in operating environment for many of these domestically-focused companies.
A further attempt to take advantage of such short-termism within the market is the trust’s holding in Baker Steel Resources Trust. This trust will, after completion of the mine (anticipated in 2022), be entitled to a percentage of the physical output of what will be the world’s second-largest silver mine. Yet this factor is entirely unaccounted for by the wider market. Greater capital investment discipline in the mining sector over recent years is also increasingly resulting in better supply management of many commodities, and this trust is well placed to benefit from any uplift, as is the Geiger Counter Trust.
The latter invests in uranium mining companies, a highly niche sector. The uranium industry has been affected by negative newsflow, but demand growth for new generators is fairly transparent and predictable, and supply discipline is being enforced by the sector’s two largest players. With spot uranium trading around $35 per pound, major players are in some instances finding it more profitable to buy the end product on the open market to fulfil contracts where they receive c. $55 for fulfilment, and to shutter select mines with higher production costs. The anticipated outweighing of demand relative to supply could provide a new, positive cycle for uranium spot prices and the mining sector by extension.
Several positions within the portfolio are held with the expectation that they will enter wind-up, and that the realisation and distribution of assets will offer uplift to the market value. Several of these investment theses came to fruition in 2017, with much of the cash being retained through 2018 due to lack of opportunity and a need to potentially fund share realisations. However, a holding in Macau Property Opportunities, where the team originally anticipated a wind-up scenario in the near future, is now unlikely to be wound up in the next six months, as the underlying market faces problems relating to concerns over trade war escalation between the US and China.
Gearing is applied tactically, with short-term borrowing facilities of up to £9m available. Currently there is no gearing in place, however, with the trust holding around 8% of the portfolio in cash, as a result of numerous takeovers and wind-ups within the portfolio. This cash is likely to be redeployed as opportunities present themselves.
Performance is very much focused on absolute levels of return, as opposed to relative, with the trust benchmarked against cash, represented by SONIA 3 month plus 2%. However, it should be noted that the trust has outperformed its open-ended peers over the past five years, delivering NAV returns of 53% against a sector average of 48%. A narrowing of the discount over this period has further boosted returns to shareholders, with a share price return of 70%. [We have compared MIGO to the IA Flexible Investment sector average, as opposed to the Morningstar Investment Trust Flexible sector average, because it contains a far greater number of strategies, thus average figures are less skewed in the short term by aberrant results. The Morningstar IT sector is also affected by zero-dividend preference shares and other anomalies.]
MIGO VS IA SECTOR
This outperformance does not appear to have been a result of greater participation in broad risk rallies. The chart below shows the R2 of the Miton trust (in red) to the MSCI World index. It highlights a consistently lower R2 to global equity indices than the broader IA Flexible Investment sector (in blue), reflected in the disparity in their median readings on this metric.
This analysis suggests that the trust is less correlated to the equity market than its peers, and therefore more successful in offering diversification. As the trust increasingly moves to take advantage of increased opportunities in the alternatives sector going forward, and as this sector matures and itself likely diverges from general risk asset performance, the trust’s correlation to wider equity markets may be reasonably expected to fall.
R2 OF MIGO AND IA FLEXIBLE INVEStment sector to msci world
In line with this, one-year returns have lagged the sector largely as a result of a lack of participation in the substantial equity rally seen in 2019 to date. However, downside participation in Q4 2018, when risk markets faced severe headwinds, was constrained.
one year performance
Some idiosyncrasy to returns can be seen from discrete calendar year performance; in particular, the consecutive years of outperformance in 2016 and 2017, at a time when equity-style indices and the effects of duration had substantial rotations, highlights the potential for stock-specific factors to help drive performance. Value-style indices outperformed growth and quality indices in 2016, yet trailed them both significantly in 2017. Nonetheless, MIGO managed to outperform over both calendar years.
While performance has lagged in 2019 year-to-date, this is unsurprising in a strongly rising market driven by liquidity, where outperformance has generally been concentrated in larger stocks and not in recognising valuation anomalies.
discrete Calendar year Performance
While dividend streams are generated internally, this product is targeting capital growth. Dividends generated from underlying holdings are used to pay management fees, with any shortfall paid out of capital; in the last two reporting years, dividends generated have been sufficient to cover all management costs. The excess has been used to reduce the deficit in revenue reserves. However the board may, at its discretion, in future decide to distribute capital from the trust as dividends.
Nick Greenwood has over 40 years' experience in the investment trust sector and was a founder member of the Christows stockbroking operation in 1991. He joined Miton following the merger with Exeter Fund Managers in November 2007. He has managed Miton Global Opportunities for 14 years and also runs the OEIC equivalent – Miton Worldwide Opportunities.
Charlotte Cuthbertson works as a dedicated analyst for the trust, having joined Miton in 2015 and worked on the investment trust team since 2017. Further idea generation is often stimulated by conversations the team has with Miton colleagues and external brokers.
Presently the trust trades on a discount of -2.3%. The discount has substantially narrowed in recent years, having traded consistently over 10% prior to 2017. However, the appointment of Numis as the trust’s stockbroker has improved liquidity, and since 2015 the trust has been marketed by Frostrow.
For much of its existence the trust was subject to a continuation vote every three years; however, shareholders voted to replace this with a realisation option every three years. Having offered a realisation opportunity in 2018 (where this was exercised in respect of 1.55% of the shares in issue), the next opportunity for investors will now be in 2021.
Allied with the realisation opportunity now offered to investors, and increased retail ownership, these factors have helped to narrow the discount, and while there remains some volatility in the metric, it has consistently traded within a narrower range in recent years.
Nick notes that investment platforms have become an increasingly important source of liquidity and trading volume, with around 44% of their shares now held on platforms. The shareholder register indicates a reasonable degree of depth and diversification across the shareholder base.
The board authorised, and the trust undertook, the issuance of 800,000 new shares over the previous financial year while the trust was trading at a premium. Up to 14.99% of the company’s ordinary share capital can be repurchased, though this will be reviewed at the AGM in September 2019.
The OCF on the trust is 1.4%, with management fees of 0.65%. Management fees are taken from income; this was easily covered over the previous financial year by existing income streams. The size of the trust (with net assets of £75.9m as of 24/09/2019) means that the OCF is amongst the highest in the sector, and compares to an AIC Flexible Investment sector average of 0.97%. The Key Information Document Reduction in Yield (RIY) figure is 2.41%, compared to a sector average of 3.38%, although we caution that methodologies vary.
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