Manchester & London Investment Trust (MNL) aims to generate capital appreciation and a reasonable level of income. Managed by Mark Sheppard (who also controls M&M Investment Ltd, which owns over 50% of MNL’s shares) and Richard Morgan, the investment policy has seen a seismic shift since 2015.
The investment process has become increasingly defined by a thesis the managers term ‘Long the Future’ (detailed under Portfolio). In essence, the managers’ conviction is that technological development is reaching a tipping point and that future economies will ultimately see machines exercising more economic power than labour. Therefore, MNL focusses on technology companies, using a highly concentrated approach. Over 90% of the portfolio is in the top 10 positions (as of 30/04/2020). The managers use derivatives (options, contracts for difference) to adjust the net equity exposure, ordinarily holding between an 80% and 120% net long position in equities and adjusting exposure tactically.
Options are also written to manage stock-specific risk. These helped MNL to mitigate some of the significant market downside seen in Q1 2020 (as discussed under Performance). Share price and operational momentum are closely monitored, and share-price momentum is used to inform decisions around deployment of derivatives.
An unusual additional feature of the trust is that every year shareholders with more than 2,500 shares (worth c. £15k as of 19/05/2020) are entered into a prize draw for centre-court seats at Wimbledon.
We think the trust’s broad thematic framework has a compelling logic, particularly in the current environment. However, whether this materialises into the investment outcomes anticipated is an important question. Although the managers have commented that the development of AI in particular is likely to pose structural questions for economies across the globe, historically the ultimate winners of the shifts in society-shifting technologies have not tended to be existing market leaders. Furthermore, whether these technologies are imminent remains debatable; we note that Facebook’s head of AI recently commented that “we are nowhere near matching human intelligence”.
Currently many of MNL’s holdings have strong momentum behind them. We agree with the managers in their assessments of the main risks to MNL (see Portfolio), but perhaps disagree with the managers’ sanguine outlook on the likely ultimate impact should the anti-trust risk in particular materialise.
The use of options as a tool for portfolio risk management is an interesting differentiator, but in our view the process is well founded and the deployment thus far appears to have been effective. It is reassuring to see the very real geopolitical risks to Western shareholders in Chinese share positions acknowledged, as these are not often considered in the wider market. The shareholder structure and low trading volume mean discount volatility may well remain elevated, but the desire to continue to grow through share issuance could ultimately help address this somewhat.
|Use of options in portfolio management has been effective||Dominant shareholder means discount is likely to remain volatile|
|Highly concentrated portfolio in leading growth opportunities||Gearing can exacerbate the downside (as well as amplify the upside)|
|Active monitoring of big-picture risks to main holdings||Single-stock risk is high|