MIGO Opportunities 25 September 2019

Miton Global Opportunities (MIGO) offers exposure to a diversified pool of closed-ended investment companies, often operating in highly specialised areas, trading on substantial discounts to their intrinsic value, where the manager believes there is a catalyst for a re-rating.

Aiming to deliver cash (SONIA 3 month) plus 2%, the trust is relatively unconstrained in asset allocation.

As a result, the trust holds an array of idiosyncratic and diversified holdings in a variety of geographies, asset classes and sectors. The manager is focused on identifying ‘special situations’ and/or deep value opportunities in investment trusts where market conditions for the share price are likely to change in the foreseeable future.

With an extensive background in investment trust investing, the lead manager, Nick Greenwood, believes we are likely seeing structural changes to the investment trust universe, which is opening up opportunities for his approach. Recent headlines around liquidity struggles in open-ended vehicles, coupled with a global search for alternative sources of yield, have created new investment strategies not previously securitised.

With these markets being relatively immature, investor behaviour can be expected to be strongly reactive in relation to perceived correlations to other markets or short-term newsflow. This tendency offers further opportunities to the team’s strategy according to Nick, where identifying discounts likely to see near-term reversionary pressure can provide substantial portfolio uplift.

Not only do the trusts selected usually trade on a discount to their notional net asset value (NAV), but these NAVs themselves are often conservatively assessed, or the business is operating under challenging market conditions, giving rise to double discount opportunities.

The trust has lagged equity markets in the recent rally, but this should not be a surprise given that outperforming equity markets is not the target for the strategy and given the characteristics of the market rally (growth and quality have outperformed rather than value). Although falling markets will prove a headwind to absolute returns, the embedded discounts typically help to mitigate downside participation, and offer new buying opportunities to the managers.

The closed-ended structure allows Nick to take positions in less liquid areas of the investment trust universe which investors might otherwise find it difficult to access, and which frequently offer additional return potential due to this illiquidity. This approach does, however, have risks attached to it: in six cases the trust holds over 5% of the voting rights attached to shares in the company (accounting for over 13% of gross assets). Were the managers to change their thesis and seek to exit these positions, they could find doing so a challenge. However, it should be noted that these companies operate in different areas, and they are highly unlikely to need to be simultaneously realised.

Performance has been strong over the longer term, though the trust has lagged equity markets and peers in recent months. However, MIGO tends to have lower correlation to equity markets than its peers, and is focused on returns in excess of cash, so benchmarking against equities does not provide an appropriate comparison.