Article from Investment Trust Newsletter August 2024.  For full access to all articles and back copies, please SUBSCRIBE HERE.

MIGO OPPORTUNITIES TRUST 

(MIGO, 360p)

As one of the highest profile investors in what we might term ‘second rank’ investment trusts, we always take notice of what MIGO thinks of the holdings in its portfolio and its views on the wider market.  The managers Charlotte Cuthbertson and Nick Greenwood – now at Asset Value Investors - provided an update after the trust’s final results for the year ended April 30th, which showed a very respectable one-year total return of 11.3%.

MIGO invests almost entirely in other investment companies, looking for discount opportunities, and it is a sign of their abundance that the trust has decided to employ gearing (currently 6.1%) for the first time since 2020.  Charlotte says there are many of the “overlooked and unloved” trusts that they seek with a contrarian view, trading on supersized discounts that provide great opportunities.  Unlike the sharp rebounds from the credit crunch of 2009 and the Covid period of 2020, discounts have become wide and remained wide this time, allowing considerable time for the trust to build positions.  The trust says it has generated its best returns historically when the average underlying discounts in the portfolio are at their widest.  The managers says that a combination of rising inflation and interest rates, mergers in the wealth management industry, and the unfair cost calculations have created a perfect storm for the sector, but they see the trust sector emerging from this hostile environment on a powerful combination of rising NAVs and narrowing discounts.  Both Charlotte and Nick talk of an “arbitrage between perception and reality” that allows MIGO and other investors to buy into good quality trusts in attractive areas on very wide discounts that prove temporary, citing The Schiehallion Fund (MNTN, US$1.03) as a good example.  MIGO bought into the trust on a 50% discount in late 2023 and achieved a good return as the discount narrowed again to its current 11.1%.  The Schiehallion Fund has moved to become the top-performing trust in share price terms over the last twelve months, having been the worst performer in the twelve months to November 2023, so that is quite a turnaround.

Other additions in the last financial year included a number of other growth trusts and alternative asset trusts, namely Seraphim Space, Augmentum Fintech, Riverstone Energy, Atrato Onsite Energy, Ecofin Global Utilities, Cordiant Digital, Tufton Oceanic Assets, and VH Global Sustainable Energy Opportunities. The trust has undergone quite a big shift into alternative assets and private equity over the last 18 months, deploying all of the cash balance and also reducing the allocation to equity trusts where the discounts are generally lower.  Nick says “there is a fantastic arbitrage, particularly in the alternatives.  There is a lack of demand for the vehicles because they were designed for interest rate periods when deposit rates were virtually zero.  You can get income from all sort of places at the moment, and that has killed demand and there’s a lot of paper out there, but of course there is plenty of demand in many cases for the underlying assets, and the real world will come and take these assets if the stock market cannot properly value them.”

The discount on the trust’s top ten holdings at the end of April was 32.5% (still 32% at the end of June), and Charlotte says “in normal times we would say that 20%-25% is very wide; 32.5% is the widest that myself and Nick have really seen it.  We think we have built a portfolio of really exciting opportunities.”  Interestingly, whilst the barrage of corporate activity we saw in the sector during the earlier months of the year appears to have quietened for the summer, Charlotte thinks it is far from over.  She believes M&A will be a continuing catalyst in the sector and that “four or five” of MIGO’s top ten holdings could be taken off the market in the medium-term.  She says that corporate activity now is very different from just a few years ago, with boards being held to account much more, and much more scrutiny of ways to extract value.  In the trust’s latest factsheet the commentary points to the wide discounts and concludes “given this extreme situation, we expect to see that there will be a surge in mergers and acquisitions unlocking value for investors who have done their homework.”

It is good to see that MIGO has a positive view on the sector and has introduced gearing as a result.  The views expressed by Charlotte and Nick accord very much with our own, that this is a period of great opportunity for well-informed investment trust watchers.  MIGO itself trades on a relatively narrow discount of 3.3%, so there is not much of an additional discount layer on offer at present.

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