“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 SOND
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 JAGI 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.
We currently have 12 research reports from 2
Trading in the royalty partner portfolio over Q1/21 shows a material rebound from May, which has been sustained to date, as the portfolio as a whole returns to more normalised trading. Consequently, Duke's cash receipts, while down 20% YoY currently, are set to step up in H2/21 as forbearance measures largely expire and deferred royalties realised. This bodes well for a rebound in earnings and a return to cash paid dividends. A share price down over 55% since Feb 20, standing at p/book of 0.56x H1/20A's NAV p/s thus appears overdone. We await further clarity on the portfolio before reissuing forecasts, thus leave our recommendation U/R.
Companies: Duke Royalty
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
What’s new: Purplebricks Group results for the year to 30 April 2020, show the Australian and US units as discontinued; but include the Canadian unit sold for C$60.5m (i.e. £35m) in July. Investors will focus on the UK unit which revealed:
11% fall in UK revenue to £80.5m (FY19: £90.1m), as the number of instructions fell 23% (impacted by early Covid uncertainty and lockdown), but the average revenue per instruction “ARPI” rose 12% to £1,394;
UK gross profit margin improved to 64.1% (FY19: 63.0%);
UK marketing costs to revenue improved to 25.6% (FY19: 29.6%);
Spend on Digital capacity pushed UK operating costs 32% to £26.2m (FY19: £19.9m), as new management team pursued initiatives which are being “delivered at pace with significant opportunity for further innovation.”
UK adjusted EBITDA fell 53% to £4.8m (FY19: £10.2m).
Companies: Purplebricks Group Plc
For this Monthly, we are delighted that Rooney Nimmo and 24Haymarket have allowed us to reproduce a recent report they jointly published, entitled An analysis of UK exits (2015-2019), which provides a granular analysis by sector of the activity in our dynamic private companies world. We hope you find the insights of interest.
Companies: AVO AGY ARBB ARIX CLIG ICGT NSF PCA PIN PXC PHP RECI SCE TRX SHED VTA
H1 20 operating profit declined by 12% to £1,225m and the COVID-19 claims impact was £165m. Cash remittances from business units to the group was only £150m. The insurer said that it will focus on the UK, Ireland and Canada, which means an exit from other European and Asian markets. The Board has declared a second interim dividend in respect of the 2019 financial year of 6p/share and will inform shareholders about the 2019 final dividend in Q4 20.
Companies: Aviva Plc
Since the restrictions were lifted in mid-May, Belvoir has seen a surge in activity due to pent-up demand, resulting in June being a record breaking month for the group’s Newton Fallowell estate agency network in terms of instructions and sales and the financial Services division in terms of written income. Management have stated that with the positive impact of the stamp duty reductions still to take effect they are confident that the Group is well positioned to capitalise on the current market upturn and to take advantage of the opportunities arising from more challenging conditions. We have upgraded our PBT forecasts for FY 2020 to the level we forecast pre-COVID. We have also upgraded our target price from 169p to 233p and highlight that H1 2020 has demonstrated the resilience of the group, management’s ability to navigate difficult market conditions and the power of the franchise-led strategy.
Companies: Belvoir Group Plc
We believe now is an interesting time to invest in Northgate, with a new executive board and a capable management team in place who have already delivered progress on an ongoing turnaround as we await a full strategic review. The group now has a clear and well communicated capital allocation strategy in place and improved earnings quality, in our view. We believe that the growth opportunity in the UK, the value of the Spanish business and the progress made to date with the turnaround are not being reflected in the share price, which is currently 15.9% below book value (414p per share in FY19A rising to 468p in FY22E). We use a variety of valuation methods including P/B, SOTP, DDM and DCF modelling and arrive at an average implied share price of 450p, 29.0% above the current share price.
Companies: Redde Northgate Plc
Vacancy strongly increased in Q2 20. LTV surpassed the 50% mark on 30 June 2020 due to strong value destruction in H1 20. Hammerson announced a £550m cash capital increase coupled with a disposal of £270m. Its ex-post pro forma net debt should be £2.2bn, i.e. LTV of 42% on a proportionate basis. Too high?
Companies: Hammerson Plc
Today's update highlights that despite the Covid-19 outbreak and UK/IRE lockdown, which has affected trading, Duke has continued to collect cash royalties from most of its royalty partners. Short-term alternative payment terms have been agreed with those partners hardest hit, to support them to periods where royalties can be fully recouped. Therefore the 61% fall in p/b from 1.3 (at 20 Feb) to 0.5 today, appears overdone.
The group’s earnings surprise was driven by goodwill impairments. On the negative side, management upgraded, albeit slightly, its full-year loan impairments guidance and warns about revenue and CET1 pressure. It also reckoned that the tensions between the US and China will impact the group.
Companies: HSBC Holdings Plc
The Law Debenture Corporation (LWDB) has reported another strong set of results for its independent professional services (IPS) business in H120, with EPS growth remaining in the target mid- to high single-digit range despite a more challenging economic backdrop. With the trust’s largely UK investment portfolio having been hit by the widespread stock market sell-off in February and March, IPS has provided a larger than average contribution to revenue returns. This means fund managers James Henderson and Laura Foll can continue to search for attractive total return opportunities in a broad range of sectors, while maintaining LWDB’s focus on both capital appreciation and above-inflation dividend growth.
Companies: Law Debenture Corporation
Despite challenging market conditions, Picton’s Q121 DPS was well-covered by EPRA earnings and robust portfolio capital values. Combined with low gearing, NAV per share was just 1.3% lower versus Q420 and including DPS paid, the NAV total return was -0.6%. With encouraging rent collection data continuing and the lockdown easing, we have reinstated our estimates and look for the quarterly DPS run-rate to increase in H221.
Companies: Picton Property Income Ltd.
Duke delivered significant YoY growth in H1/20A results, as earlier efforts to broaden the royalty portfolio came through this year. This strong growth will continue with recent debt & equity raises forward funding investments to income levels of £15m by FY21E. Met with an enhanced, but now stabilised cost base, operational leverage should drive continued strong adj EBIT growth (to £13m, at a c85% margin) and further DPS rises.
The scaling of Duke's royalty portfolio was progressing as expected up to March 2020, with record cash receipts that month. Due to Covid-19 and the UK's economic shutdown, macro conditions have worsened and become highly uncertain. This is likely to see some royalty partners' future cash royalties decline, which in turn, will negatively impact FV's in the FY20E results. Duke's high margin and cash generative nature ensures it is well placed to trade through these challenges. Given the degree of uncertainty in outlook, we remove forecasts and put our recommendation Under Review and await further clarity on the portfolio.
Raven’s positive trading update was reassuringly robust, despite ongoing uncertainty regarding the long-term impact of Covid-19 on the Russian market. We believe that kind of performance deserves attention, although we plan to reinstate detailed forecasts post (a) the General Meeting scheduled for 31 July, which will decide upon proposals designed to create a simplified capital structure (outlined below) and (b) the interim results due in August.
Companies: Raven Property Group Ltd.