Investment trusts have one key attraction over their open-ended counterparts, where the vast majority of fund flows go to: you can sometimes take advantage of low sentiment and buy them on heavy discounts.
Over the long term this can create a substantial addition to returns. Nick Greenwood – who has headed the Miton Global Opportunities trust since 1994 – aims to take full advantage of this in his trust of trusts portfolio.
In fact, Greenwood often goes further still, believing the best pricing inefficiencies happen in less well known trusts – where liquidity can be higher and marketing budgets much lower. In this article, he reveals five of current favourite “bargains” – both popular and off-the-radar.
First up is the Mercantile IT, which at £1.5bn is one of the largest UK-listed closed-ended funds. Manager Martin Hudson has been at the helm since 1994 but was joined by Anthony Lynch and Guy Anderson in 2009 and 2012 respectively.
The trust has beaten the FTSE All Share over one, three, five and 10-year periods. Over the past 20 years it has more than tripled the FTSE’s rise.
Performance of trust, sector and index over 20yrs
Source: FE Analytics
“The mandate comprises UK small and mid-caps, however, in practice performance does not to stray too far from that of the FTSE 250 index. The opportunity comes through upheaval within the share register with a major shareholder changing ownership, which has led to their stake being put on the block,” Greenwood said.
“This overhang has triggered a rapid widening of the discount from 8 per cent at the end of January to 18 per cent recently. Mercantile’s shares are unlikely to languish at this level for long and seems to offer far more value than an exchange traded fund [ETF] covering the same ground.”
The fund has its largest exposure to financials, domestically focused consumer names and industrials with smaller exposures to oil & gas and healthcare as well as 12.6 per cent in cash. Top holdings currently include Betfair, Domino’s Pizza and Bellway.
The trust has an ongoing charges figure (OCF) of 0.50 per cent, isn’t geared and has a current yield of 2.93 per cent.
This £123m trust is suffering from the same upheaval, says Greenwood. The five FE Crown-rated portfolio owns a 16.7 per cent stake in the asset management boutique Majedie and its largest positions include the firm’s top funds such as the Majedie Tortoise, Majedie UK Income and Majedie Global Equity funds, followed by large-cap UK equity stocks.
“This trust started life as a Malaysian rubber plantation only becoming an investment trust in 1985. The wrinkle here is that Majedie set up Majedie Asset Management [MAM] in 2002 and the stake in this manager is increasingly valuable and represents hidden value,” Greenwood said.
“MAM also manages Majedie’s assets, which is of interest as the bulk of MAM’s funds are closed to new investors. Therefore buying shares in the investment trust offers scarce capacity trading at a discount for anybody seeking an investment with MAM.”
Since Nick Rundle took over in 2009, the trust has returned 76.31 per cent, beating its average IT Global sector peer by 10 percentage points but failing to beat its FTSE World ex UK index.
Performance of trust, sector and index under Rundle
Source: FE Analytics
The trust is geared 23 per cent and is trading on a 4.5 per cent discount.
Next, Greenwood tips this new player to the UK stock market, having only listed on the London Stock Exchange in June 2015.
“It owns a Berlin-focused portfolio of residential property. The city’s property market is without parallel having been an urban wilderness when the wall came down in the early 90s. In the space of a single generation the city has reasserted itself as a major European capital. The recovery still has a long way to go,” he said.
“Phoenix Spree was launched in 2007 and has around 650 shareholders. These have been locked in and many are taking the opportunity to sell now that it is listed. The company is not well known, therefore the weight of sellers has overwhelmed what buying interest there is.”
Since the launch of this trust onto the London market it has returned broadly in line with the IT Property Direct Europe sector average, although it should be noted that this is made of the average performance of just seven funds.
Performance of trust and sector since June 2016
Source: FE Analytics
“The company is converting their apartments from rental into leasehold, at which point the properties can be sold at a significant premium over the value that they are carried at within the trust’s net asset value. Phoenix Spree has ambitions to turn itself into an established property investor and has recently recruited the former CEO of Deutsche Wohnen. The shares are pretty liquid,” Greenwood adds.
This Indian equity-focused investment trust was the best performer of any trust in whole Association of Investment Companies’ (AIC) universe back in 2014 with a whopping 70 per cent return. That year saw the election of Narendra Modi as prime minister and a flux of positive sentiment to Indian equity markets.
Last year, however, was a largely flat year for Indian stocks, with the MSCI India index down 0.69 per cent but this trust was still up 1.03 per cent.
Since the current manager David Cornell took over in January 2010, the trust has returned 39.94 per cent while the index is up 14.13 per cent.
Performance of trust and index since January 2010
Source: FE Analytics
Greenwood said: “The current management team arrived in 2010 and are the third incumbents in IGC’s relatively short but initially disastrous life.”
“They endured a tough time turning around the legacy portfolio but in recent years returns have been stronger than better known peers such as JPM India and New India. India Capital Growth is a classic example of when a trust discount reflects the track record of the vehicle rather than that of the current managers,” he added.
The trust, which is currently on discount of 17.3 per cent, was also hit by heightened investor concern of emerging markets equities. Greenwood argues this is unwarranted.
“India has a more developed equity culture than most other emerging markets. The benefits from the arrival of a market-friendly majority government focused on removing inefficiencies should feed through into earnings forecasts, a trend which will run for years rather than months.”
“Sentiment towards emerging markets is dire at present, however there seems to be little differentiation between markets. India’s dependence on imported oil leaves it better placed than most.”
“This is an ideal environment for traditional stock pickers such as the team at IGC. A particularly heavy issue of subscription shares has led to the market using the diluted NAV rather than the more appropriate undiluted version, which explains the wide discount.”
The trust has no gearing and an annual management charge of 1.5 per cent.
Last up is this more exotic property portfolio centred on ‘China’s Las Vegas’. While perhaps not for the faint-hearted, it is mostly owned by asset management firms such as Lazard, Invesco and Rathbones.
“It is a maturing portfolio of mainly residential property in the former Portuguese colony. Despite the clamp down on corruption in mainland China depressing profits, there are six new casinos due for completion by 2017,” Greenwood said
“These operations will require 40,000 extra employees whereas unemployment in Macau currently stands at around 2 per cent. Staff will have to be imported placing the local residential property market under severe pressure, Macau is already amongst the most densely populated places in the world,” he said.
“This is a classic arbitrage between perception and reality as this trust’s discount reflects dire sentiment towards anything to do with Macau. In fact the outlooks for casino operators and property investors are rather different.”
Despite featuring in the James Bond hit Skyfall, 2014 was a torrid year for Macau casinos due to a clampdown on corruption in China. Things have not much improved but Greenwood says the property sector is more stable and heavily discounted in this trust. Its discount is a whopping 42.5 per cent.
“Given that proceeds of disposals are being handed back to shareholders, the discount provides a buffer against any further declines in NAV. The local market will be underpinned by the opening of the road bridge to Hong Kong in 2017 which will leave many of the trust’s assets within 40 minutes’ drive of HK’s airport.”
“The new Cotai strip will enable the colony to develop a Las Vegas style business model focused on conventions and entertainment rather than being purely a gambling den. MPO will have to find a new market for its ‘One Central’ asset which is exposed to the declining junket market.”
The trust has 69 per cent gearing and an unusually large OCF of 3.28 per cent.