Going off-piste with a guide
The MIGO Opportunities Trust invests in other funds dabbling in specialist and often illiquid areas
The news that Nick Greenwood, manager of the £80m MIGO Opportunities Trust (LSE: MIGO), would be leaving its management company, Premier Miton, was unwelcome for shareholders but should not have been a surprise. His co-manager, Charlotte Cuthbertson, left abruptly last November without explanation and now works at Tyndall.
MIGO buys investment trusts at a large discount to their intrinsic value. These trusts invest in listed equities but also private equity, commodities, property and debt. This is a risky area; some of the trusts are bargains offering compound returns through both strong underlying performance and narrowing discounts, but others will prove to be lame ducks, justifying the high discount.
The trust’s performance over three years, 41%, is good for one well diversified between different asset classes and thus offering less risk overall, but the past year has been difficult (-2%) and the five-year record of 19% is disappointing.
However, there is a very good explanation for this. The discount to net asset value (NAV) at which the investment-trust sector trades has widened in the past year from negligible levels to 16%, constituting a substantial headwind for MIGO to battle against.
In addition, all sub-sectors have suffered in underlying performance terms, so the trust has, in fact, done well to preserve value. From here, high discounts and the prospect of better underlying performance should steer the trust towards much better times.
So why have the managers left? The fact that MIGO’s independent directors have terminated Premier Miton’s management contract and invited tenders from other management companies, albeit allowing Premier Miton to compete in the process, gives a valuable clue. Neither they nor those that know the trust can doubt the commitment of Greenwood and Cuthbertson to both the trust and to a segment of the market in which they have deep and expert knowledge.
What is likely is that the managers have fallen badly out of favour with their employer. The relationship between investment and corporate managers can be a fraught one; corporate management often resent the relationship between fund managers and their investors and, in particular, the role played by independent directors of investment companies.
A different set of rules
For investors, these independent directors are a key attraction of investment trusts but corporate management, keen on maximising profits, can see them as a pain in the neck. Perhaps Premier Miton just didn’t understand that a trust investing in specialist and often illiquid investment trusts could not be managed according to the same rules as an open-ended fund investing in larger firms. Premier Miton’s chance of keeping the contract without the required in-house expertise looks slim. The directors are more likely to move the trust to another management company on the understanding that Greenwood and Cuthbertson would settle there.
Why should investors care about the future of a relatively small trust? Not only does MIGO’s portfolio offer the prospect of excellent returns, but those who invest in it can more easily resist the temptation to buy off-piste funds themselves. Most investors have limited time to spend on their investments and should focus on more mainstream propositions, using MIGO to cover this awkward, risky and time-consuming area of the market.
Forty holdings account for 83% of the portfolio, while cash awaiting investment accounts for the rest. Larger holdings include Georgia Capital, which has benefited from the phenomenal performance of Bank of Georgia, on a 55% discount to NAV. Phoenix Spree Deutschland (Berlin residential property) trades on a 48% discount. Out-of-favour areas such as biotechnology, private equity, Japan and Vietnam are also represented. It is tempting to wait for the dust to settle, but the opportunity to buy MIGO at a discount to NAV that is itself on a large discount to the NAV of funds investing in undervalued areas of the market is now. Trust the directors to make the right decision.