Opportunities for MIGO Opportunities Trust plc to make the most of the growth of alternative asset classes

Charlotte Cuthbertson

MIGO Opportunities Trust plc

Charlotte Cuthbertson, assistant fund manager for MIGO Opportunities Trust plc, looks at the opportunities that have arisen as the investment trust world has increasingly become a home for alternative asset classes.

 

In recent years the investment trust world has become a home for alternative asset classes such as infrastructure and even less well known assets like song royalties. By definition, alternative assets are types of non-traditional investments, in other words, an asset other than company shares (equities) or bonds. This has increased the range of opportunities on offer for MIGO Opportunities Trust plc (“MIGO”), as we look to find investments that we believe are incorrectly priced. The Net Asset Value (“NAV”) – which is the combined sum of the portfolio of investments that a trust holds – can be very different to the share price which an investor pays to acquire shares in that portfolio. A trust whose share price is below the value of its NAV is said to be trading at a discount. This is what we are looking for, to be able to pay a price below what the underlying portfolio is worth, for example paying 70p for £1 of assets.

In the case of an investment trust invested in equities, its investments are priced daily, enabling the trust to publish a daily NAV, and the investor to see the discount to NAV each day. A trust investing in alternative assets, however, may only review and update the value of its portfolio once a month, once a quarter or even only half yearly. This means that at any given point in time, the true value of its portfolio can be very different to the last time its net asset value was published. We can take advantage of this difference, and we will look to fund those opportunities where we can buy into those trusts where other investors are still focused on the previous NAV and may not appreciate that the underlying portfolio may have gone up in value.

Increasing exposure to private equity

One alternative asset class to which MIGO Opportunities Trust plc has considerable exposure is private equity. As the name suggests, these private equity trusts are invested in private companies rather than in quoted companies, which are traded on the stock market. In selecting which trusts to invest in, there are several key factors that we need to consider. Firstly, we need to feel confident that the managers of these trusts are good at making investments. Secondly, we prefer trusts that are directly invested in the underlying companies, rather than in other private equity funds (known as a fund of funds). We value the ability to assess each company in which a particular trust has invested, and to become familiar with the drivers and risks of each of its investments. Finally, one of the main criticisms often levelled at private equity trusts is the amount of debt they use. We understand that private equity firms use debt to attempt to enhance returns to investors, but we avoid trusts that we believe have too much debt.

Oakley Capital

Oakley Capital is one of our favoured private equity trusts. We are increasingly being asked by investors about Environmental, Social and Governance aspects of our investments. We focus on the governance aspect in particular and think that Oakley Capital is an example of where governance is improving. This trust used to have a number of historical corporate governance issues, issuing stock at a discount, but in the past few years it has resolved this issue in order to meet appropriate standards. Oakley Capital has a bias towards software, online platforms and subscription-based revenue models such as online education in its choice of investments, many of which have done extremely well.

Dunedin Enterprise

Dunedin Enterprise is an interesting opportunity as it is in liquidation. The trust has had a chequered history during the process of selling its assets, due to some failed investments and a persistently wide discount. More recently however, the portfolio has turned around and there are some very interesting businesses within it that are less likely to experience significant growth having matured and are ready to be sold.

Schroder Public Private Trust (Patient Capital)

Schroder Public Private Trust is the new name for the old Woodford Patient Capital. We had looked at this under its previous management but were uncomfortable with the manager’s valuation techniques and investment process. Once it had moved to its new managers, we were not initially tempted to buy as the trust had very high levels of debt, which goes against our investment process and also constrained the new managers’ ability to make further investments. Sales of one of the underlying holdings, Kymab, for a price well above its stated value has now transformed the trust. It has meant that the team were able to pay off the debt and this has given them the cash to make new investments and further fund existing ones. However, despite Schroders putting internal controls in place, paying off debt and making some new investments, many investors remain wary.

Opportunities created by structural selling

As managers we like opportunities created by structural selling. This is where other market participants are selling their holdings in an asset for non-investment related reasons. In the world of private equity, this may be to do with underlying charges. There has been pressure on fund management fees over the past few years as customers become increasingly focused on value for money. At the same time, the way these fees are measured has thrown up some anomalies. For trusts that invest in listed stocks, fee calculations are straightforward, but as mentioned at the outset, the sector has become a natural home for alternative asset classes. Investment trusts operating in these areas have a wide variety of business models, and it is often difficult to define which costs are part of a trust’s investment function – the investment management fee – and those which are more akin to running costs.

In many cases, this has resulted in the publication of very high costs in the regulatory documents that investment trusts are required to produce. Our trade organisation, the Association of Investment Companies (“AIC”) was so concerned that its paper on the subject, published in 2018, was entitled “Burn Before Reading”. Despite ongoing pressure from within the industry, investment trusts are still required to produce these documents, and wealth managers and Independent Financial Advisers are obliged to report the costs they contain to their clients without having the opportunity to explain the imperfections in the methodology that lies behind their calculation. As most do not want to appear to be investing their clients’ monies in what at face value appear to be expensively managed trusts, they have been selling their holdings.

Private equity is a sector that has been particularly hurt by these regulations. Some trusts have wide discounts, yet many of the trusts within this sector have been generating excellent returns. It has therefore become a significant part of MIGO Opportunities Trust’s portfolio, and is an area where we continue to find interesting opportunities to explore.

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Risks

All types of investment carry a degree of risk.  It is possible you could lose some, or all, of the money you invest. The level of risk varies depending on the type of investment.

Reference to any particular stock does not constitute a recommendation to buy or sell the stock

The performance information presented in this insight note relates to the past. Past performance is not a reliable indicator of future returns.

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.

Future forecasts are not reliable indicators of future returns.

Glossary

Alternative assets

These are types of non-traditional investments – in other words, something other than shares, bonds or property. The term can cover anything from commodities (such as gold) to infrastructure investments (for example, companies involved in financing, building or maintaining motorways or hospitals). Alternative assets can be useful to help with diversification, as some of these investments are not expected to perform in the same way as more traditional investments.

Asset classes

Different groups of investments such as company shares, bonds, commodities or commercial property.

Equities

Another name for shares (or stock) in a company.

Investment Trusts

Investment trusts are a type of collective investment where a group of investors pool their money to invest in a portfolio of assets. As public limited companies, they trade on a stock exchange so that investors can buy and sell from the market.

Net Asset Values (NAV)

The total of a company’s assets minus its liabilities. The net asset value per share is the total of a company’s assets minus its liabilities divided by the number of shares in issue.

Quoted company

A company whose shares are traded on a stock exchange.

Share price

The amount it would cost to buy one share in a company; it is not fixed but fluctuates for many reasons, including the success of the company and market conditions.

IMPORTANT INFORMATION:

The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the content contained within/suitability of the funds mentioned, please speak to a financial adviser.

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 fund does not constitute a recommendation to buy or sell the stock or fund. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

All data is sourced to Premier Miton unless otherwise stated.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

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.

006693/070622

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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