Nick Greenwood
Trust manager MIGO Opportunities Trust plc
The value of an investment can go down as well as up which means that you could get back less than you originally invested when you come to sell your investment.
This update should not be taken as advice. If you are unsure about any of the content please contact your financial adviser. Please remember that the value of stock market investments will fluctuate and investors may not get back the original amount invested. To assist, where appropriate, a glossary explaining some of the terms used has been provided at the end of this update.
Moving swiftly on from 2022
2022 proved to be a memorable year, rather than a hugely productive one for investors. In the early part of the year our defensive investment stance allowed us to dodge several market bullets. More recently our focus on unloved investment situations has left us watching the proverbial investment paint dry, for now.
The biggest headwind faced by the trust was a dramatic widening in the investment trust discounts. Just to recap, investment trust shares can trade below the value of their investments. This is known as a discount, they can also trade above the value of their assets. This is known as a premium.
According to the Association of Investment Trusts (AIC) the average discount across investment trusts reached 14.3% in November 2022 having started the year at less than 1%. This means that the average trust share price underperformed its own portfolio of investments by some margin, a clear challenge for a trust of investment trusts such as MIGO Opportunities. Please do remember that past performance is not a reliable indicator of future returns.
The cheap money taps get turned off
Other challenges during a testing 2022 included central banks starting to withdraw liquidity from the financial system by increasing interest rates, a process which undermines support for asset prices, such as bonds and company shares (equities). In addition, just as Europe was starting to emerge from the most severe pandemic in a century, came the largest, most disruptive war at the heart of Europe since World War II.
In the UK we saw the dramatic fallout from the neoliberal ‘Trussonomics’ episodes. On their own, each of these episodes would have been sufficient to stop markets in their tracks. Alarm at the Truss government’s polices triggered a spike in gilt yields. Rising gilt yields suggested a lack of willingness among investors to own the debt, as buyers demanded a lower price to buy them. This led to several higher yielding investment trusts that invest heavily in alternative asset classes seeing their share prices fall sharply.
A mini budget and a not so mini sell-off
It became clear that many of these investment trusts had originally been bought purely in response to a lack of investment options in a low yield environment, rather than for their fundamentals. With gilts becoming more attractive in terms of yield, there was an increase in investors selling other assets, with many investment trust holdings caught up in this momentum. We identified opportunities where trusts had been harshly treated. Frustratingly the market proved difficult to place trades in, even more so than in the early days of the pandemic.
New names on the team sheet
We persevered and as a result, we added three new names in the MIGO Opportunities Trust portfolio: Aquila European Renewables, EJF Investments and Grit Real Estate. They invest in renewables in Greece and Scandinavia, regulatory and structural change in the financial services and pan African property respectively. These vehicles are good examples of the increasing array of asset classes which are offered by the closed end investment sector.
A closed-end investment fund issues a fixed number of shares through a single initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold but no new shares will be created and no new money will flow into the fund.
Holding story #1: Georgia Capital
Amongst the year’s ‘biggest winners’ in our view was Georgia Capital which invests in the eponymous eastern European country. Sentiment remains dire mainly due to Georgia’s border with Russia and memories of the war between the two countries in 2008. In any event demand for single country eastern European funds has been non-existent in recent years. In our opinion, the local economy is booming and has reached a sweet spot moving on from basic industries. The establishment of a middle class is boosting growth.
Furthermore, the arrival of Russian professionals, notably IT specialists, has given the economy a further shot in the arm. Georgia Capital confirmed the conservative nature of its valuation process when it sold Tbilisi’s water supplier for cash at a useful premium to book value. Book value can also be thought of as the net asset value of a company, this is defined as 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.
Holding story #2: Vietnam
Conversely our main detractor in terms of MIGO’s performance has been Vietnam. This comes as a surprise given the country is a beneficiary of the Chinese covid lockdown and its trade war with the United States. Given Vietnam enjoyed strong GDP growth during the last quarter investors might expect its stock market to reflect this by appreciating and growing in value strongly. This was not the case.
The Ho Chi Minh stock market faces two challenges, one external and one internal. International investors are ploughing substantial capital into projects in Vietnam. The local authorities are keen that these investors do not lose money through local currency weakness against a very strong US Dollar. This has led them to be unexpectedly aggressive in raising interest rates which has caused locals to retreat from investing in local company shares.
The other challenge comes from excesses in the property market where developers have issued bonds inappropriately to retail investors. Arrests have been made and there have been fears that losses on these bonds will systemically undermine the banking system. This seems unlikely from our viewpoint; however Vietnamese equities are notoriously volatile given that the stock market is dominated by retail investors who often trade, rather than take a long-term view of investing. We believe that our overarching economic view on Vietnam remains intact.
The curse of investing in interesting times
Looking forward we remain cautious. Investors have enjoyed ‘free’ money for over a decade while interest rates have been at historic lows. Low interest rates and rounds of government backed economic stimulus in the shape of quantitative easing, have supported a widespread rise in asset prices during that period.
This largesse has now come to an end and the process may move into reverse suggesting mainstream equity markets may drift, without cheap money to stoke the growth engine. As investors, the tides may be moving against us, although the authorities will be limited in respect of how fast liquidity can be drained from the financial system given the fragility of markets. A key lesson from Trussonomics was that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once.
We remain positive and believe that there will be many opportunities for us in overlooked corners of the closed end world.
