Walls (pictured) has built a long and established track record by buying unloved investment trusts on wide discounts to their NAV, in the hope that a pick-up in both sentiment and share price performance will deliver strong returns. This approach has worked well over the long-run: according to FE Analytics, his £9m fund is the fourth-best performing portfolio in the IMA Flexible Investment sector over 10 years.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The manager says that over the last year it has become increasingly difficult to find value opportunities as discounts across the board have narrowed substantially.
Thankfully, the manager says there is still one option available. Although it is very contrarian and generally regarded as high risk compared with its peers, for investors who want the "double whammy" effect of an uptick in performance and a narrowing discount, Walls highlights the Marwyn Value Investors trust.
"We bought this on a discount of 30 per cent, so it fits into my theme of discounted value," Walls said.
The manager says he has begun buying shares in the Marwyn Value Investors trust because of its long-term track record and that he expects the discount to come in from here.
"The Marwyn trust has a very strong track record. They take a private equity-type strategy which has been very successful, so buying it on a 30 per cent discount looks to be a real value opportunity."
"This is a very specialist trust and isn’t the sort of thing investors would generally look at. However, it is special situations investments like this that I think can potentially add value," he added.
As Walls points out, the £113m Cayman Island-domiciled trust has delivered strong returns since its launch in October 2006.
Our data shows it has made 181.48 per cent over five years.
The fund does not have a benchmark and sits in the IT Global Smaller Companies sector, which with only two constituents can hardly be used an effective means of comparison. Merely by point of reference therefore, the Numis Smaller Companies ex IT index and the FTSE Small Cap index have returned 135.65 per cent and 99.8 per cent over that time, respectively.
Performance of trust vs indices over 5yrs
Source: FE Analytics
In spite of its strong longer-term track record, Marwyn Value Investors has underperformed against both the FTSE and Numis indices over the last 12 months, though has still managed returns in excess of 30 per cent.
Walls is confident in his outlook for the Marwyn trust, though he says it does carry with it some risks that make it unsuitable for some investors.
"It is a very concentrated portfolio," Walls explained. "Its largest holding is Entertainment One, which makes up more than 65 per cent of its assets. However, my colleague Fraser Mackersie, who runs the Unicorn Free Spirit fund, has it in his portfolio and I took comfort in the fact that he was happy with it."
"I appreciate that for a lot of people, this isn’t the sort of trust they would buy on their own because of the high stock-specific risk. However, it makes up around 3 to 4 per cent of my fund, so that risk isn’t a huge problem," he added.
Entertainment One is a media stock listed on the FTSE 250 index. The company is best known for producing the children’s programme Peppa Pig and for distributing the highly popular teen film series, Twilight.
The managers at Marwyn are not alone in favouring the stock. Our data shows there are eight open-ended funds in the IMA universe that count Entertainment One as a top-10 holding.
Those include Mark Slater’s MFM Slater Recovery and Growth funds, Leigh Himsworth’s City Financial UK Selected Opportunities fund and Philip Rodrigs’ Investec UK Smaller Companies fund. All three of these individuals are FE Alpha Managers.
For those interested in buying the Marywn Value Investors trust directly, it is now trading on a 26.4 per cent discount. It has gearing of 18 per cent and has a total expense ratio (TER) of 2.88 per cent, making it one of the more expensive closed-ended funds out there.
Alternatively, Walls’ Unicorn Mastertrust has an ongoing charges figure (OCF) of 1.6 per cent and requires a minimum investment of £2,500.
Walls says it will be possible for bargain hunters to find better opportunities in the future, but for the time being he remains concerned that there is so little value available – even for those willing to take their chances with higher-risk areas of the market.
"RDR has clearly had a part to play, along with the fact that investors have wanted to up their equity exposure, particularly in areas where you can get income," Walls explained.
"I know I will probably have to be a little more flexible when it comes to discounts and premiums, but I’m confident there will be value opportunities over time after or during market corrections."
"That said, I think if anything, the value argument is even less so now than it was a few months ago."
"The average discount in the sector is 5 per cent and even in areas like UK smaller companies, which are traditionally very discounted because of issues primarily surrounding liquidity, trusts have seen their discounts narrow."
"I appreciate that people are waking up to the fact that small caps are doing quite well, but I was astonished to read the front page of the FT Money section recently which explained that smaller companies actually do quite well over a long time. Isn’t that obvious?"
"I am always concerned that when it is in the press, it is in the price. That is notwithstanding that I do think small caps deliver superior returns over the long-run, but it all depends on the price you pay," he added.
