In recent years the investment trust world has become a home for alternative asset classes such as infrastructure and more esoteric assets like song royalties. This has increased the range of opportunities on offer for MIGO Opportunities Trust (“MIGO”), given our focus on finding investments that we believe are incorrectly priced. We believe that the relative infrequency with which alternative assets trusts update and publish their net asset values extends this opportunity further.

Increasing exposure to private equity

One alternative asset class to which MIGO has considerable exposure is private equity. In selecting which trusts to invest in, there are several key factors that we consider. Firstly, the managers’ investment skills. Secondly, we prefer trusts that are directly invested in the underlying companies, rather than in other private equity 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. Whilst acknowledging that private equity firms use debt to enhance returns to investors, 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 improving governance. The trust used to have a number of historical corporate governance issues, in particular a habit of issuing stock at a discount, but in the past few years, it has resolved these. However, its shares remain on a wide discount, as it would seem that perception has not caught up with recent events. 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. We would expect the resulting excellent performance of the NAV could also attract investors to the trust.

Dunedin Enterprise

Dunedin Enterprise is an interesting opportunity as it is in liquidation. The trust has had a chequered history during the process of realising 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 have matured and are ready to be sold.

Schroder Public Private Trust

We had looked at this under its previous management but were uncomfortable with Woodford’s valuation techniques and investment process. We were not initially tempted to buy into its new manager 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. The sale 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 has given them the cash to make new investments and further fund existing ones. However, despite this, in combination with Schroders putting more stringent internal controls in place, many investors remain wary.

Opportunities created by structural selling

As managers we like opportunities created by structural selling. In the world of private equity, one factor that may give rise to this has to do with underlying charges. There has been downward 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 equities, 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, and those which are more akin to running costs.

In many cases, this has resulted in the publication of very high costs in the KIDs and other regulatory documents that investment trusts are required to produce. The 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 IFAs 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 are expensively run trusts, they have been selling their holdings.

Private equity is a sector that has been particularly hurt by these regulations. Because of structural selling, many sit on wide discounts – in some cases approaching 30% by our estimates – yet many of the trusts within it have been generating excellent returns. It has therefore become a significant part of MIGO’s portfolio and is an area where we continue to find interesting opportunities to explore.