Walls, who manages the five crown rated Unicorn Mastertrust fund, has told FE Trustnet on a number of occasions that value in the closed-ended universe is much harder to come by than it has been in the past because discounts have tightened across the board. However, the manager – whose fund has been a top quartile performer in the IMA Flexible Investment sector over one, three, five and 10 years – says investors can find decent discount opportunities if they are prepared to do their homework and says that the £52m Midas Income & Growth Trust, which offers a 4.1 per cent yield, is a good example.
“It falls into the category of a global equity income fund,” Walls said. “It isn’t a particularly large fund and until about three years ago, the performance hadn’t been that great.”
“However, since they have a have adopted a new dividend policy, it has performed pretty well. For instance, its NAV performance has been than the likes of Murray International and British Assets.”
“The discount has always been quite wide – because of its size – and despite its 4.1 per cent yield, it is trading on an 8 per cent discount. The average trust in the sector, on the other hand, is trading on a 3.1 per cent premium.”
The Midas Income & Growth Trust has been managed By Alan Borrows since August 2005.
According to FE Analytics, the closed-ended fund has considerably underperformed against the IT Global Equity Income sector over that time with returns of 39.46 per cent.
Performance of trust vs sector since Aug 2005
Source: FE Analytics
However, as Walls highlighted, the trust’s relative performance has picked up recently. It outperformed the sector in 2012, 2013 and is up against the sector so far this year.
Over two years, the trust has returned 37.39 per cent and has beaten the sector by close to 10 percentage points.
Performance of trust vs sector over 2yrs
Source: FE Analytics
Alan Borrow says that the major reason for the trust’s pick up in performance has been due to change in its dividend policy.
“Just over two years ago, we had quite a high income mandate which had become a real constraint. However, since we have reduced the dividend target it has given us a much more rounded return.”
“We still have a good income stream, as shown by our 4 per cent yield, but we can now deliver a better capital return.”
One of the major reasons why Walls is optimistic about Midas Income & Growth Trust, however, is due to its big position in AJ Bell, the investment platform and stockbroker.
It is an unlisted company and Walls thinks it is in a very good position to benefit from the recent budgetary changes.
“Its largest holding, which makes up 3.8 per cent of the trust, is AJ Bell. This is an exciting company, particularly in light of last week’s budget. It is now a fully-fledged investment platform and we saw how Hargreaves Lansdown has performed over the last week.”
“Its margins won’t be as high of course but it is an unlisted holding and there is reason to suggest that its valuation is quite conservative.”
Monica Tepes, investment trust analyst at Cantor Fitzgerald, also says that the trust should get a boost from its holding in AJ Bell, noting that the fund is one of only three shareholders in the private company.
Borrows says that AJ Bell has been part of his portfolio for quite some time, but he is every excited about the businesses’ prospect after the recent Budget.
“It’s a real win-win situation for AJ Bell with the added flexibility of pensions and the increased allowance for ISAs,” Borrows said.
“We built a position around seven years ago and we were the first external shareholder in the company. It was quite unusual thing for us to do given it was unlisted, but it was a local company and we had a good working relationship with Andrew Bell.”
“We own around 8 per cent of the business, which is quite a large chunk, and out trust is one of the only ways for other investors to gain access to it for other investors to gain access to it.”
As it is unquoted, Borrows admits that valuing AJ Bell is a difficult task. However, using their own analysis and with the help of a third party broker, Borrows say that the Manchester based platform is trading at around 13 times earnings and is paying him a 4.4 per cent dividend yield.
He says that profits were down last year; however he is expecting good growth this year because of the changes to ISAs and pensions.
Walls also believes that will be the case, but he says that Borrows’ closed-ended fund will continue to outperform without being overly dependent on the future of AJ Bell.
“Regardless of what happens with AJ Bell, Midas Income & Growth has scope to outperform and is throwing off a decent yield. It’s a trust that is offering a hidden bit of value,” Walls added.
There were a number of winners and losers on the back of last week’s budget. For instance, the relaxation of pensions caused shares in annuity providers such as L&G, Resolution and Phoenix Group.
On the other hand, the likes of Hargreaves Lansdown bounced as a result of the changes pensions and ISAs.
Performance of stocks over 1 month
Source: FE Analytics
Midas Income & Growth Trust is a multi-asset portfolio. It holds direct equities, but also has positions in collective investment vehicles such as Lindsell Train Japanese Equity, Somerset Emerging Markets Dividend Growth, Royal London Sterling Extra High Yield and the Blackrock World Mining IT.
The closed-ended fund has gearing of 9 per cent and has ongoing charges of 1.49 per cent.
