Private Investors would do well to have a look at the opportunities thrown up within the investment trust sector. Not that many years ago, the sector was the preserve of the traditional stockbroker investing on behalf of their clients. In recent years, those firms have largely been acquired by the vast wealth management chains.
These merged organisations now have assets under management that are so substantial that it is difficult for them to use smaller and medium sized trusts. They simply would not be able to buy enough shares to move the needle within their portfolios.
This has led to a whole raft of these listed funds falling below the radar. Investment trusts are structured in the same way as industrial companies in that their shares are bought and sold on the open stockmarket. Therefore, the price you pay or receive is purely decided by the balance of supply and demand at that moment. Many trusts have become overlooked and unloved, so the market in their shares has often become extraordinarily inefficient.
Therefore, the market price can dramatically vary from the true value of the underlying portfolio. A current example within Miton Global Opportunities plc’s portfolio is private equity specialist EPE Special Opportunities, where the official valuation at the end of March was 448p, yet its shares traded that day at 295p. We have spent the last few years building Miton Global Opportunities plc’s portfolio of exciting opportunities that have been ignored by mainstream investors. For a couple of years, their focus was on a narrow range of very large growth stocks.
This meant that the unloved and overlooked stayed that way. Effective vaccines against Covid are now a reality and this development triggered a broadening of markets. We are now witnessing an influx of investors seeking hidden value amongst trusts. This suggests that it will not be long before the potential of Miton Global Opportunities plc’s portfolio is unlocked.
We look for investment trusts where we are not only confident about the outlook for the portfolio but also where we believe there is a special situation that offers further upside. When we capture a rising asset value and a narrowing discount, this represents a powerful combination. Recent successes include Polar Capital Financial Trust and City Natural Resources.
Polar Capital Financials does what it says on the tin. It specialises in a narrow range of sectors, principally banking, insurance and payment systems. In the aftermath of the Covid crisis there was very little demand for those sectors. Given the poor sentiment, it came as little surprise that the trust’s shares traded at a much wider discount than they have historically.
The market perceived that there were two significant headwinds facing the banking industry. Firstly, it had started to believe that the yield curve would remain flat indefinitely. A flat yield – where there is little difference in yields from the shortest-term bonds to the longest-term – is bad news as borrowing short term and lending long is core to a bank’s profitability – normally the curve steepens the further out in time.
Furthermore, banks made substantial provisions in the expectation that Covid shutdowns would mean that a significant number of customers would not be able to service their debts. Monetary and fiscal stimulus have been thrown at the financial system on a heroic scale, on a par with WW2. This has been a factor behind longer term interest rates increasing and also the buoyant economy has meant that far fewer bank customers have found themselves in difficulty and therefore a significant proportion of the provisions would no longer be needed. The market’s fears were never realised and financials have proved to be a post vaccine rally winner. Despite the positive newsflow, Polar Capital Financial’s discount traded at its widest in late August. Today the shares are trading at a premium having risen nearly 60% since the August low to 14 May 2021, benefitting from the powerful combination of a rising nav and narrowing discount.
Another specialist fund which has come back into favour is CQS Natural Resources, which has bounced 277% from Covid lows on 23 March 2020 to 18 May 2021 on a total return basis. The shares trade close to par to their value at the moment but it has frequently been possible to pick up stock at discounts comfortably wider than 20% in recent years. The trust specialises in small mining companies which were hard hit during the Covid sell off. The sector has bounced sharply with the global economy. Given how long it takes to develop a mine and the lack of capital expenditure in recent years, a number of stocks will benefit from commodity shortages. The “electrification” of our world means that this will be particularly true for metals such as copper, tin and silver.
Being a closed-ended fund itself, we believe that Miton Global Opportunities plc is well positioned to exploit pricing anomalies in this sector. It is protected from daily inflows and outflows, which allows greater conviction. We know that we will not be forced to sell holdings cheaply on a bad day in order to finance a redemption. Therefore, larger positions can be taken with the knowledge that the shares will be held until it is the right time to sell.
The largest holdings in Miton Global Opportunities plc’s portfolio trade at an average discount of a little over 20%. In other words, we are buying these assets at 80% of their latest open market valuation. Our strategy is to focus on situations where we believe the catalyst exists to trigger a narrowing of the discount. There is no point in owning trusts simply because they trade on a wide discount.
We have the luxury of spending our days researching the whole spectrum of investment trusts. Our underlying trusts include everything from shipping leases to residential property in Berlin. Searching for these investment trusts can also be somewhat of a time bandit for the self-directed investor, however Miton Global Opportunities plc provides a one-stop shop access to an area of the market where assets are trading at far below their intrinsic worth.
Source: Morningstar, as at 31.03.2021.
The performance information presented in this document relates to the past. Past performance is not a reliable indicator of future returns.
Assistant Fund Manager
Miton Global Opportunities plc
Notes to Editors:
This article has been prepared in response to a request from UK Investor Magazine to be used by the journalist.
Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.
All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.
A free, English language copy of the trust’s full Prospectus, the Key Information Document and Pre-investment Disclosure Document are available on the Premier Miton website, or you can request copies by calling us on 01483 306090.
Financial Promotion issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.