“Is life always this hard, or just when you’re a kid?” “Always like this” (Leon: The Professional) In the post-financial crisis world, value investors have found themselves facing a period of structural underperformance relative to growth investors which has been unusual relative to history. In fact, this is the longest period of underperformance since at least the 1920s. This raises the question; what, if anything, could cause this to change?
Companies: GVP ASL BEE MIGO TMPL
The spice of life is variety. [It’s also a curry house in Glasgow, now sadly defunct.] Achieving variety by diversifying your assets has been an innate part of human risk management from time immemorial. Why else did the English Plantagenet kings maintain their claim to the French throne for so long? All investors, however, not just medieval royal families, have to consider how best to diversify the risks to which their wealth is exposed – whether they’re managing their own money or doing it professionally. For regulatory as well as theoretical and philosophical reasons, most UK investors actively seek portfolio diversification. Increasingly, as the advice industry becomes ever more regulated, advisers are making use of multi-asset, multi-manager products as a one-stop shop, especially as the asset management industry has become increasingly attuned to the opportunities and benefits of scale they can offer. Yet at this particular point in time, in an economic and financial environment unlike any we have experienced in the modern era, how exactly to achieve meaningful diversification is an increasingly difficult question. American economist Harry Markowitz is generally credited with developing and popularising the modern approach to diversification, as part of his doctoral thesis in 1952. Markowitz’s 60/40 equity/bond portfolio quickly became a staple of retail investor portfolios, and for many years equity and bond portfolios built around this basic concept have been highly successful for investors. Over the last thirty years in particular, the risk parity model, pioneered by investor and philanthropist Ray Dalio and his Bridgewater All Weather hedge fund, has achieved enormous success. The targeted aim of this model is a more equal split of realised risk/volatility between asset classes, and it is built on a more sophisticated version of the staple equity/bond approach. The success of this diversified approach in providing superior returns while also dampening volatility can be seen from the historic returns. The graph below shows returns from a 60/40 portfolio in the US since 2003, rebased monthly. Returns are shown on a log scale to reduce recency bias.
Companies: BMPG RICA MIGO HAST SONG
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 (as represented by the SONIA 3 month benchmark) 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.
Companies: Miton Global Opportunities
Miton Global Opportunities aims to deliver returns in excess of sterling three-month SONIA +2% by investing in other investment trusts that the managers believe are trading on discounts which are wider than they should be. The trust, which sits in the AIC’s Flexible Investment sector, has little in common with its stablemates in this sector, and has few comparable peers as a trust of investment trusts because of its unique focus on cash-plus returns. It is highly focused, with 87% of its assets held in the top ten holdings, and the investment process is very much a ‘qual’ affair - driven by manager Nick Greenwood’s expertise built on near 40 years’ experience in the sector. Since December 2017 Nick has been supported by Charlotte Cuthbertson, who is a dedicated analyst resource for the trust. The pair use few quant screens or filters, barring a system that allows them to monitor investment trust NAVs in ‘real time’ – estimating the real NAV of a trust by looking at its underlying holdings and working out their value, rather than waiting for end-of-day NAV updates from the trust itself, or indicative NAVs that largely reflect the movements of the major index constituents in a trust’s given market. The trust is focused wholly on capital growth and has outperformed the average trust in the AIC Flexible sector by a broad margin over five years, delivering 62.5% in NAV total return terms versus 36% for the sector. Since launch in 2004, it has delivered annualised NAV total returns of 7.5%. Performance comes in fits and starts, however, with very strong years (2015 and 2017 being examples) coming between leaner years, an example here being 2018. This is characteristic of the nature of the strategy. The managers are picking up trusts on wide discounts because, for varied reasons, the market does not recognise the opportunity they represent. Regardless of the managers’ skill, there isn’t much they can do to make the market see what they do – so it’s something of a waiting game. The trust was stuck on a significant discount of its own until recently, but after a major overhaul by the board – which introduced a number of new strategies to deal with it – the discount has reacted and the trust has been trading on an intermittent premium over the last twelve months.
Today, we introduce our investment trust ratings. According to the quantitative screens we have selected in an attempt to highlight the best performers in the closed-ended universe, the trusts discussed here have been the best in their classes over the last five years. We have selected trusts using two different sets of criteria, aiming to identify the top performers for capital growth and for achieving a high and growing income. There are many rating systems for open-ended funds, but no quantitative-based system for investment trusts that is available to the average investor. While we cannot identify trusts which will perform well in the future – past outperformance is no guide to future out-performance – we hope these ratings will highlight the outstanding performers in the closed-ended universe and those managers who have best used the advantages of investment trusts to generate alpha. We are trying to reward consistent and long-term outperformance, and so we have decided to look over a five-year period. All data is as of the end of December 2018, sourced from Morningstar and JPMorgan Cazenove. We have looked at NAV total return performance and discount value has not been considered: the aim is to identify those trusts which have performed the best rather than highlight bargains.
Companies: IPU FAS ATR JEO FEV FGT THRG SEC PAC BRSC IAT HNE MIGO TRY JMG DIVI SLS BGS SDP JETI SOI BCI MRC TIGT EDIN JAI BEE SDV BRIG AAIF HFEL SCF SIGT BRFI IVPG CTY HINT JCH NAIT
Miton Global Opportunities aims to deliver returns in excess of sterling threemonth LIBOR +2% by investing in other investment trusts that fund manager Nick Greenwood, who has almost 40 years’ experience in the sector, believes are trading on discounts which are wider than they should be. The trust, which sits in the AIC’s Flexible Investment sector, has little in common with its stablemates in this sector, and has few comparable peers as a fund trust of investment trusts, particularly because of its unique focus on cash-plus returns. It is highly focused, with more than half of its assets held in the top ten holdings, and the investment process is very much driven by the expertise of the manager, although we understand that Miton is taking steps to put more resources behind the fund. Nick uses few quant screens or filters, barring a system that allows him to monitor investment trust NAVs in ‘real time’ – estimating the real NAV of a trust by looking at its underlying holdings and working out their value, rather than waiting for endof-day NAV updates from the trust itself, or indicative NAVs that largely reflect the movements of the major index constituents in a trust’s given market. The trust is focused wholly on capital growth and has outperformed the average trust in the AIC Flexible sector by a broad margin over five years. Since launch in 2004, it has delivered annualised NAV total returns of 7.8%. Performance comes in fits and starts, however, with very strong years coming between more modest bouts of performance – though the trajectory of returns has only been negative twice in the last ten years. The trust was stuck on a significant discount of its own until recently, but after a major overhaul by the board – which introduced a number of new strategies to deal with it – the discount has narrowed sharply. A much greater retail presence on the shareholder register means the discount going forward looks set to be more volatile than it has been in the past, but this is also a major opportunity for the trust itself in Nick’s view. He says the large volume of small trades going through platforms means opportunities arise far more frequently than they did in the past, and this, he believes, could prove to be a significant driver of returns going forward.
Edison Investment Research is terminating coverage on Miton Global Opportunities (MIGO). Please note you should no longer rely on any previous research or estimates for this company. All forecasts should now be considered redundant.
The star fund manager culture and its effect on open-ended fund industry has been the subject of debate for many years, frequently making headlines when a high profile manager leaves for pastures new. To try and address the problems associated with key man risk, many fund management groups have pushed the ‘team-based’ approach more in recent years in an effort to soften the blow if a lead manager does change fund management houses The idea being if a manager does depart, investors won’t feel the need to sell out of a fund because they know the team taking over will run it in a similar way. Given their structure of being closed-ended, investment trusts have traditionally been shielded by the effects of key-man risk. However a recent example of a high profile departure at River & Mercantile shows they are not immune. Rather than being swamped with outflows, the River & Mercantile UK Micro Cap Trust saw is share price fall 14.6% and its discount to net asset value (NAV) move from 16.2% premium to a 0.6% as investors hit the panic button after the announcement its lead manager, Philip Rodrigs, had left the group. For Nick Greenwood, manager of the Miton Global Opportunities trust, the large drops the trust has faced since Rodrigs’ departure, represent the risks that investment trusts with key managers can face when those managers leave. “If you have a key manager following, the price that the trusts trades at can be very different to its peers, meaning that if the manager leaves, the price can quickly fall either back into line or below the peer group,” he says. In its 2018 rebalancing of its model portfolio, Winterflood replaced the R&M UK Micro Cap Trust with the JP Morgan-managed Mercantile Investment Trust in the UK equities section of its portfolio for its mid and small cap exposure. Trading at a 9% discount at the time, it felt the Mercantile Investment Trust, which is managed by Guy Anderson, represented a better value opportunity (versus the premium the R&M UK Micro Cap was trading at the time). However after the events that unfolded since Rodrig’s departure, Simon Elliott, a research analyst at Winterflood Investment Trust, says the micro cap fund does offer value versus its nearest peers. He also believes there is a large opportunity in the micro cap segment of the UK market for a genuinely active manager to add considerable value through stock picking. “The fund’s assets of £102m are nearly only 10% below where the board has deemed it appropriate in the past to return capital at NAV,” he says. “It is feasible that the portfolio could generate sufficient growth within the next 12 months to warrant a third return of capital and we would expect this to act as a catalyst in narrowing the discount.” At the same time, while many in the past may have invested in the fund because of the previous manager, its new manager, George Ensor, knows the trust having been involved with its running since launch in December 2014. “As a key member of River and Mercantile’s equity team, Ensor has gained the respect of the team’s leadership and we were impressed with his knowledge of the stocks in the portfolio at a recent meeting,” says Elliott. “Whether this will translate into strong returns, both absolute and relative, will only be proven in time. “However he has a head start given his current knowledge of the portfolio and this is an important, high profile mandate for River and Mercantile, not least as its only listed collective to date.” Meanwhile Greenwood, who never held the fund, says things can work in the opposite way. Namely a badly performing trust can see its discount narrow if it gets taken over by new management. A most recent example of this would be the Aurora Investment Trust. Having been a serial underperformer in the IT UK All Companies sector, since Phoenix Asset Management took over the trust in January 2016 it has undergone a complete transformation under new manager Gary Channon. As such it has moved from a 17% discount in April to 2015 to currently trading at parity, with the trust ranked second article over one and three years. So the movements in discounts can work for and against investment trusts when a high profile manager departs. However what they are not subject to is large outflows thanks to their closed-ended structure meaning any incoming manager does not have to deal with a firesale of assets on day one. In the case of the R&M UK Micro Cap Trust, it would seem after all the negative headlines, many are realising the strength of the team that lay behind the key man and at its current 11.9% discount to NAV could be sensing a buying opportunity.
Companies: RMMC MIGO MRC ARR
Miton Global Opportunities (MIGO) seeks to achieve capital growth, primarily through exploiting the pricing inefficiencies of investment trusts. The manager, Nick Greenwood, has over two decades of experience in identifying funds trading at deep discounts to embedded value. The unconstrained mandate also focuses on portfolio diversification across a broad range of asset classes and countries. Share price performance over the past two years has been strong in absolute terms and relative to global indices. Added to successful board initiatives to improve liquidity and promote the trust, MIGO has attracted significant interest from investors, and its shareholder base has rebalanced towards self-directed retail investors. The shares currently trade at a 1.4% discount to NAV, a significant narrowing from the five-year average discount of 7.9%. The board is currently seeking shareholder approval for a further issue of up to 10% of share capital.
Miton Global Opportunities (MIGO) seeks to provide absolute returns in excess of those on cash by investing predominantly in other closed-end funds that are under-researched, out of favour or trading on unwarranted discounts. The multi-asset portfolio, managed by Nick Greenwood, has performed strongly over the past 12 months, beating the total return from both UK and world equities and most of its multi-asset and absolute return peers. The introduction of a three-yearly redemption option may have helped to narrow the discount from its long-term average of c 9-10%. Meanwhile, the appointment of Numis as corporate broker and investment company marketing specialist Frostrow Capital has led to a significant increase in liquidity, as well as rebalancing the share register towards retail execution-only platforms as the discount has narrowed over the past 12 months.
Miton Global Opportunities (MIGO) seeks to provide returns in excess of those on cash by exploiting opportunities from pricing inefficiency among under-researched investment companies. With manager Nick Greenwood unconvinced by the near-term prospects for mainstream equity markets, the portfolio is developing more of a focus on specialist strategies and alternative asset classes. Recent performance has been strong and the trust has beaten its absolute benchmark (sterling three-month Libor +2%) over the last four discrete years (see below) and on a cumulative basis over all periods of five years and less (see page 6). Measures to raise MIGO’s profile and improve liquidity in its shares, including the engagement of Numis as broker and Frostrow Capital for administration, distribution and marketing, may be reflected in a narrowing discount.
Miton Global Opportunities (MIGO) aims to produce returns ahead of an absolute benchmark by exploiting inefficiencies in the pricing of closedended funds. This niche strategy differentiates it from peers in the flexible investment sector, while its wide spread of exposures, including Berlin residential property, forestry, second-hand life policies and an Indian equity fund, suggests its performance may also be differentiated from conventional equity funds.
Research Tree provides access to ongoing research coverage, media content and regulatory news on Miton Global Opportunities.
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Ramsdens has reported a strong set of trading results in the last twelve months to March 2020. COVID lockdown has led to store closures, which will lead to weaker trading over the following months. However, Ramsdens has a very solid balance sheet, is diversified and is well positioned to re-open stores and continue its growth. We use an 8x multiple on last 12 months to March 2020 earnings as a reflection of a normalised earnings base which reduces our target price to 162p from 180p. At this target price Ramsdens would trade on a CY20 P/B of 1.5x. This target price offers 15% upside and we re-iterate BUY.
ULR’s finals were in line with on EPRA NAV and earnings a little better than expected. Valuations remain stable and full rent collection has been achieved for the current quarter. We see fundamental quality and resilience in the (now expanded) portfolio – ULR has already invested nearly £100m in the first two months of the new year following the £136m equity raise. We make no material changes to forecasts. Current valuation points to an 7%+ annualised return, with upside remaining from deployment of funding headroom, active management and potential for valuations to improve.
Companies: Urban Logistics REIT
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGR CSH ESP DIGS IHR LXI PHP RESI SIR SUPR THRL SOHO BBOX SHED WHR
Aside from its FY 19 earnings presentation, British Land has adopted a more cautious anticipation about Offices in the City of London. We share this pessimism and have been surprised by the recent share’s bump. The latter is the opportunity to turn negative, again, and update our divestment case.
Companies: British Land Company
The Merchants Trust (MRCH) is managed by Simon Gergel at Allianz Global Investors (AllianzGI). Aiming to continue to provide a high and growing level of income, he is adjusting the trust's portfolio in the wake of dividend cuts sparked by the negative economic effects of COVID-19. If there is an income shortfall in this financial year, MRCH is well positioned to maintain its dividend, with revenue reserves of more than 1x the last annual payment. It has not been an easy period for value managers over the last decade as growth stocks have led the charge; however, Gergel has outperformed the UK market over this period in both NAV and share price terms. The board reduced MRCH's gearing in late January 2020, which was opportune timing ahead of the recent significant stock market weakness.
Companies: Merchants Trust
The covid-19 pandemic has had a devastating effect on the share price of property companies, with 31% wiped off the value of their total market capitalisation during the first quarter of 2020.
Companies: AEWU CREI CSH BOOT INL HLCL THRL SUPR RESI RGL DIGS GR1T SOHO PHP BOXE ASLI UTG AGR UAI BLND UANC CAL SHED CWD WHR EPIC WKP GRI YEW HMSO PCA INTU NRR
In the past month the group has made significant progress in pivoting its business away from its traditional face-to-face model. Although lending levels remain appropriately subdued, it has achieved an impressive collections performance, with its largest business running at about 90% of pre-lockdown levels. This, combined with the group’s high risk-adjusted margins has enabled it to generate £3m of FCF in the first three weeks of April, taking its net cash position to £38.7m as of 21 April. This strong financial position, combined with the group’s innovative approach to product development puts it in an extremely strong position to serve its clients and win share when the current government restrictions are eventually lifted. Reflecting this positive outlook we reiterate our BUY rating.
Companies: Non-Standard Finance
In this note, we analyze the indebtedness of 35 international E&Ps publicly listed in the UK, Canada, Norway, Sweden and the USA. For each company, we look at (1) cash position, (2) level and nature of debt (including covenants), (3) debt service and principal repayment framework and (4) Brent price required from April to YE20 to meet all the obligations and keep cash positions intact. We also estimate YE20 cash if Brent were to average US$20/bbl from April to YE20. While the oil demand and oil price collapse are of unprecedented historical proportions and the opportunities to cut costs much more limited than in 2014, most companies (with a few exceptions) entered the crisis in much better position than six years ago, with stronger balance sheets and often already extended debt maturities. In addition, this time around, many E&Ps have already been deleveraging for 1-2 years and are not caught in the middle of large developments that cannot be halted. The previous crisis also showed that debt providers could relax debt covenants for a certain period as long as interest and principal repayment obligations were met. This implies that as long as operations are not interrupted and counterparties keep paying their bills (Kurdistan), the storm can be weathered by most for a few quarters.
With (1) Brent price of about US$50/bbl in 1Q20, (2) reduced capex programmes, (3) material hedging programmes covering a large proportion of FY20 production at higher prices and (4) limited principal repayments in 2020, we find that most companies can meet all their costs and obligations in 2020 at Brent prices below US$40/bbl and often below US$35/bbl) from April until YE20 and keep their cash intact, allowing them to remain solvent at much lower prices for some time. In particular, Maha Energy and SDX Energy are cash neutral at about US$20/bbl. When factoring the divestment of Uganda, Tullow needs only US$9/bbl to maintain its YE20 cash equal to YE19. Canacol Energy, Diversified Gas and Oil, Independent Oil & Gas, Orca Exploration, Serica Energy and Wentworth Resources are gas stories not really exposed to oil prices and Africa Oil has hedged 95% of its FY20 production at over US$65/bbl.
Companies: AKERBP AOI CNE CNE DGOC EGY ENOG ENQ GENL GKP GPRK GTE HUR IOG JSE KOS LUPE MAHAA OKEA ORC.B PEN PHAR PMO PTAL PXT RRE SDX SEPL TETY TGL TLW TXP WRL
The positive market movements (£19.5bn) offset the net outflows of £1.3bn. The adjusted operating profit before tax reached £1,149m, down 21.9% yoy. The insurer benefited less from longevity assumption changes (£126m vs. £441m in 2018) in the Heritage business and the lower Asset Management fees margin (38bp vs. 40 bp in 2018) in the Savings and Asset Management one. The current context has led to a decrease in the Solvency II ratio by 10%, but the capital position remains resilient at 166%.
Today's news & views, plus announcements from VOD, POLY, SMDS, BLND, BYG, WEIR, DC, SNR, SHI, INTU, IHR, CNC, ARE, INCE
Companies: INTU SHI INCE
U+I’s post-close trading update confirms c. £16m of development and trading gains for FY20, which includes Harwell. This is broadly in line with our revised expectations. Proactive steps are being taken to preserve liquidity in the short-term, including suspending the final dividend and stopping all non-essential spend. Positively, benefits of the cost saving programme will now be realised 12 months early. The balance sheet is strong, with ample liquidity; covenant levels are a long way off. Management’s time is being spent repositioning teams to be ready when restrictions are lifted, when there will be a renewed focus on the short-to-medium term value gain opportunities, of which there are plenty. The shares currently trade at 59% spot discount to our updated NAV forecasts, vs the UK sector at a 9% discount. We leave our recently lowered 180p target price unchanged and continue to see upside from here.
Companies: U&I Group
Recent news: On 21 April CLIG’s 3Q trading update to 31 March 2020, revealed:
27% fall in Funds Under Management (“FUM”) from US$6.0bn to US$4.4bn
- with weaker Sterling, FUM in £ fell 20% from £4.5bn to £3.6bn.
In 3Q, while Diversification CEF strategies (Opportunistic Value and Developed funds) had net inflows of US$25m, the Group’s Emerging Market Funds had net outflows US$68m
The Group has an active pipeline across all its major CEF offerings with increased interest in the Diversification CEF strategies
Post COVID-19, income to FuM remains unchanged at c. 75 bps of FuM
Companies: City Of London Investment Group
The COVID-19-related crisis further increases the top-line pressure. However, the quarter showed ongoing efficiency gains and, above all, management’s cost of risk guidance stood significantly below our stress test based projections.
Companies: Lloyds Banking Group
Smaller companies are usually a problematic area to invest in during significant downturns or recessions; and the sharp fall in 2020 hasn’t been an exception. In this article we assess the performance of smaller companies trusts throughout the pandemic, while identifying the factors that have differentiated the winners from the losers. This includes the impact that cash, market cap exposure, sector allocation, revenue exposure and growth or value biases have had, with some surprising results. We also ask whether now is an attractive time to invest in smaller companies, highlighting the trusts which stand out to us…
Companies: THRG GHE MINI RMMC ASIT ASL MTE TRG BRSC DSM
We wrote on 7 May, about the shape of the music global industry following the publication of the IFPI 2019 report. Taking a deeper dive into this report we examine the prospects of further growth in streaming numbers as the nonwestern markets come online.
Companies: Hipgnosis Songs Fund