Menhaden has evolved over its relatively short life. It is possible that many investors are under the misconception that it is a “green” fund, aiming to save the world rather than deliver good investment returns. Having met with the management team, we believe the philosophy can be better described as using a “value” focus to identify durable companies, with strong pricing power and very high barriers to entry, aiming to remain invested for the very long term.
In taking a long-term view, the managers feel they need to consider a wide range of long-term factors and make various macro assumptions about the future. One of these assumptions is that environmental considerations - and more specifically resource efficiency - will become increasingly relevant for businesses of all types. Those that provide their products or services in the most resource efficient way will be more successful - both in terms of having lower costs / taxes, and their products will appeal more to an increasingly aware consumer.
Using this philosophy, Menhaden has a resulting portfolio which is highly concentrated, currently with only 19 positions. From a top down perspective, the team try to balance the portfolio across three “buckets” (public equities, private investments and “yield”), each expected to be around 30% of the portfolio over the medium to long term depending on the opportunities the team find. Otherwise, there are no restrictions to the shape of the portfolio; the team tend to look for opportunities within four broad sectors- being renewable energy, sustainable transportation, resource & energy efficiency and water & waste.
We discuss the rationale for various holdings in the portfolio section. However, the current largest holding (representing c 21% of NAV) is X-Elio, a private investment in a Spanish solar PV developer. It is currently held at a valuation 50% above the price that Menhaden bought the stake. The team at Menhaden were tight lipped on the potential for this investment, but we note that there has been some press coverage in Spain (link) on what El Pais speculates might be one of the (Spanish) deals of the year. According to the newspaper, KKR put its 75% stake up for sale in October 2018.
The trust, launched in 2015, had a difficult start in life which explains the current very wide discount. However, since the portfolio was repositioned (Q1 2017), performance has started to improve. Over the past year, Menhaden has outperformed the average of the global investment trust and open-ended peers, as well as the MSCI ACWI index.
We believe the investment philosophy behind Menhaden has shifted considerably since IPO, reflecting the fresh team and approach. As time goes on, there appear to be increasing signs that the shift is paying off, and performance has improved measurably over the past year on an absolute and relative basis.
Whilst one swallow doesn’t make a summer, we believe there are grounds for optimism that this improvement in performance can be sustained. Certainly, with such a highly concentrated portfolio, we might expect that the listed equity portfolio could be more volatile at times than the index and peers.
The recent improvement in performance, as well as the upcoming continuation vote in 2020, means the current discount of 27% puts the trust in an interesting position for those who are willing to wait (and are happy with the potential volatility that the concentrated portfolio could deliver).
|27% discount reflects historic mishaps, rather than the portfolio as it is
||Concentrated portfolio means any stock picking mistakes will hurt NAV
|Speculation surrounding possible realisation of largest holding
||Concentrated share register means the 2020 continuation vote might be hard to call
|Recent performance improved, with 2020 continuation vote as possible backstop
||OCF of 2.1% is relatively high