MIGO Opportunities Trust plc – 2023 Outlook: Trust Insight

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.

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Risks

The value of stock market investments will fluctuate, which will cause trust prices to fall as well as rise and you may not get back the original amount invested. The value of your investment might not keep up with any rise in the cost of living.

The information provided in this document is for information purposes only and is not intended to be a recommendation for investment purposes or investment advice. The information contained and opinions expressed in this document are based on our current understanding and are subject to change. Premier Miton is unable to provide investment, taxation, or financial planning advice.

Investments made in bonds, equities or other assets in less-developed countries generally carry higher risk than those made in developed countries.

The share price of companies (equities) can experience high levels of price fluctuation.

Higher inflation can lead to some investments falling in value, particularly those with a fixed level of interest, for example government bonds and corporate bonds. The value of an investment might not keep up with any rise in the cost of living

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.

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

For trusts investing globally, currency exchange rate fluctuations may have a positive or negative impact on the value of your investment.

Future forecasts are not reliable indicators of future returns.

Glossary

Alternative assets
Typically, investments other than the more traditional company shares or bonds which could include, for example, commodities (such as gold), infrastructure, private equity, real estate, and hedge funds. Alternative investments can be useful to help with diversification, as some of them are not expected to perform in the same way as more traditional investments.

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

Bond yield
This is calculated by taking the level of interest paid by the bond, divided by the price of the bond, expressed as a percentage. As the price rises, the yield falls and vice versa.

Closed-ended funds
A portfolio of pooled assets that raises a fixed amount of capital through an initial public offering (IPO) and then lists shares for trade on a stock exchange.

Government Bonds
A type of bond, issued by a government. They pay out a regular fixed amount of interest until the bond’s maturity date, when the issue value of the bond should also be repaid. In the UK they are called gilts and in the US they are referred to as treasuries.

Growth stocks/companies
Typically, those companies whose profits are less sensitive to economic activity and can grow profits and generate cash at a rate above the average growth for companies listed on the stock market and through different economic conditions; they usually operate in faster growing industries such as technology or healthcare.

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.

Liquidity
Refers to how easily an asset can be bought or sold in a financial market. When there is high liquidity, it will be easier to find a buyer (or seller) for that asset and vice versa.

Open ended fund
A diversified portfolio of pooled investor money that can issue an unlimited number of shares. These shares are priced daily based on their current net asset value (NAV).

Redemption
Mutual fund investors can request redemptions for all or part of their shares from their fund manager.

Trussonomics
Economic policies advocated by the former British Prime Minister Liz Truss. The policies are based upon the principle of reducing the overall tax burden, as part of a model intended to create a high-growth free market economy.

Volatility
A measure of the frequency and severity with which the price of an investment goes up and down.

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 of this document or the suitability of the trust mentioned speak to a Financial Adviser.

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 0333 456 4560.

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

Financial promotion issued by Premier Portfolio Managers Limited (registered in England no. 01235867), authorised and regulated by the Financial Conduct Authority, a member of the Premier Miton Investors marketing group and a subsidiary of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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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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Disclaimer

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.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

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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Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

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.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio 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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