Menhaden (MHN) invests in businesses that benefit from the efficient use of energy and resources. The managers see this as a long-lasting secular growth theme, which enables their companies to outperform.
With its closed-end structure, MHN can afford to be highly concentrated (only 14 holdings), and invests in both private and public markets. The team aim to identify companies which have the opposite characteristics of ‘commoditised businesses’, exhibiting strong pricing power and high barriers to entry. They invest for the long term and have high conviction: the top ten holdings account for 92.9% of NAV (as at 31 May 2020).
An important development is that many of the private investments have now been sold, as we discuss in the Portfolio section. Having received sales proceeds at the end of 2019, MHN had around 15% cash in January 2020, and this was invested in listed equities during March and April. As a result the trust has been able to bounce back, and is now only marginally behind world equity markets YTD; despite having low USD exposure as a result of currency hedging.
Performance has been strong against comparators in the past three years, with NAV total returns of 28.5% to 31/05/2020, versus the MSCI ACWI return of 20.5% and the average global investment trust return of 17.8%. MHN’s YTD NAV has proved relatively defensive, as we illustrate in the Performance section.
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 has narrowed to c. 24% currently.
MHN is a highly differentiated and actively managed trust which seems aligned with a long-term secular growth theme. The portfolio is highly concentrated, which means that at times the NAV is volatile. However MHN’s underlying portfolio has evolved rapidly over the last six months, with only c. 20% of the portfolio now in unlisted investments – compared to around 50% at the beginning of the year.
We believe an attractive feature of the trust is that the managers aim to focus squarely on fundamentals. Their willingness to take a long-term view, and back their convictions, is illustrated by their approach to the recent equity market sell-off. The team followed a structured approach, investing c. 2% of NAV per week from cash holdings as markets declined; largely adding to their highest conviction positions and enabling the trust to bounce back. In our view this recovery gives grounds for optimism and is a further sign that the trust’s clearly thought out investment rationale is now bearing fruit.
MHN’s performance has been strong on a relative basis over the past three years, including excellent performances during 2018 and 2019. The more recent experience serves as a warning, however, that MHN’s discount is volatile, which presents both risks and potential opportunities. We continue to believe that on a discount of c. 24% (to the 31/05/2020 NAV) MHN is interesting, both for the value opportunity but also given the evolving track record of the management team.
|24% discount unwarrented given 80% of portfolio is now in listed equities||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|