Menhaden (MHN) is a highly concentrated global equity fund categorised in the AIC’s Environmental sector. The management team took over nearly five years ago (April 2016), first transitioning the portfolio to suit the new investment philosophy, and then refining since – which has shown good results in terms of performance.
Portfolio of investments must fit two criteria, as we discuss in the Portfolio section. Firstly, they must have a dominant position in their market, with a very high competitive moat. The second is that companies need to deliver – or benefit from – the efficient use of energy and resources. As such, it fits a ‘sustainability’ definition in two ways.
With its closed-end structure, MHN can afford to be highly concentrated (only 17 holdings currently), with the top two holdings representing more than 20% of NAV each. With the trust holding both public (c. 80%) and private (c. 20%) investments, the team use the structure to its fullest extent.
Over the last three years, the team’s approach has led to strong performance relative to global equities as well as the Global investment trust peer group as we illustrate in the Performance section. NAV total returns over three years to 30/10/2020 (MHN announces NAVs only monthly) was 32.8%, compared to the MSCI ACWI return of 21.6% and the average global investment trust return of 19.3%.
MHN’s discount has historically been wide but, following the trust’s good performance in 2018 and 2019, it regained ground to trade in the high teens. The discount then widened dramatically during March, to c. 50%, but still remains wide at 27% relative to JPMorgan Cazenove’s estimated NAV.
MHN is a highly differentiated and actively managed trust which seems to fit the sustainability theme in more ways than one. The portfolio is highly concentrated, which means that at times the NAV can be volatile. However, MHN’s discount looks an aberration when one considers the overall proposition.
The underlying portfolio has evolved rapidly this year, with only c. 20% of the portfolio now in unlisted investments compared to around 50% at the beginning of the year. The team’s actions during the Q1 selloff show that they are focusing squarely on fundamentals. Their willingness to take a long-term view, and back their convictions, has meant that MHN is on track to turn in another year of good relative performance, on the back of strong results in 2018 and 2019.
Now that the trust has a tiered management fee, and we have seen organic growth such that it is now paying a lower fee on any future growth, another potential reason for the wide discount (i.e. a high OCF) is eroding. The discount widening dramatically earlier this year serves to highlight the risk of the illiquidity in the shares, but at the same time offers a potential opportunity. Certainly, if the trust continues its current trajectory of improved liquidity, a reducing OCF and strong relative performance, the chances must be rising of the discount narrowing on a sustained basis.
Wide 27% discount to estimated NAV seems entirely a result of historic factors
||Concentrated portfolio means any stock picking mistakes will hurt NAV
|Good performance track record continues to develop
||Illiquidity and highly concentrated portfolio mean discount volatility likely to persist
|Differentiated high conviction portfolio, with clear investment rationale behind it
||OCF of 2.0% is relatively high