By Nick Greenwood, Fund Manager – MIGO Opportunities plc
A major headwind for the MIGO Opportunities Trust (MIGO) portfolio in recent months has been the rapid widening in investment trust discounts. Numis recently published their widest average discount figure for the sector since the Global Financial Crisis at 17.2%. The figure is much wider for trusts with alternative mandates where there has been a vast issuance of shares in recent years leaving the market oversupplied with unwanted shares. Well known trusts such Hipgnosis Songs, Taylor Maritime and Tritax Eurobox trade on extreme discounts. The sharp rise in interest rates has triggered a rapid move out of these trusts causing some former favourites to see their share prices fall sharply. Ten-year gilt yields touched 4.5% in the immediate aftermath of September’s “mini budget” having started last year at around 1%. Whilst UK government securities have recovered their poise, they still offer 3.5%. Given investors can now generate income from these conventional sources they no longer need to take enhanced risks. Consequently, it has made sense to switch out of, say, an infrastructure trust yielding 5% into gilts. It became clear that many of these trusts had originally been bought purely in response to yield starvation rather than for their fundamentals. In response to the evaporation of the yield premium there appears to have been a universal selling of investment trusts with many babies thrown out with the bath water.
Investment trust shares are purely decided by the balance of supply and demand in the market and the current oversupply has left perfectly decent portfolios trading well below their fundamental values. This is because there is a lack of demand for the structure that owns them rather than the assets themselves. Inevitably the market will exploit this arbitrage by takeover bids. An early example has been Blackstone’s 168p bid for Industrials Reit one of our core positions which owned mixed light industrial estates. Its shares languished on a wide discount closing at 118p the day before the offer was made.
We expect the headwind to turn into a tailwind for MIGO.
Risks
Alternative investments typically behave differently to traditional investments such as bonds and equities. They can include a range of assets such as specialist lending, private equity, hedge funds and gold. Adding alternative investments to a portfolio can help to make it more diverse but can also make it more volatile.
Nick Greenwood
Fund Manager – MIGO Opportunities plc
ENDS
Notes to Editors:
This information is intended for journalists and media professionals only. It should not be relied upon by retail clients or investment professionals. The views provided are those of the author at the time of writing and do not constitute advice. These views are subject to change and do not necessarily reflect the views of Premier Miton Investors. The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.
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