As discounts on investment trusts reach lows not seen since the 2008 crash, MIGO Opportunities manager Nick Greenwood has found plenty of chances to nab new names.
He said it was a prime environment to seek out the perfect spot of rising net asset values and shrinking discount – a combination that can lead to “explosive returns”.
“My goal is to exploit mispricings in the trust world and share prices are purely the balance of supply and demand – they can go absolutely anywhere and we're seeing a lot of that at the moment,” Greenwood said.
“You have these long periods of being asleep and basically watching paint dry, and then you have short sharp periods of explosive performance.”
Greenwood’s ideal scenario
Source: Premier Miton
Only 22 of the more than 400 trusts on the market are trading on a premium, opening up a heap of opportunities for investors to make returns higher than that of a trust’s net asset value (NAV).
Greenwood added: “If you bought an investment trust at a big discount and then it comes back into favour trading at par, then you could more than double your money on the same underlying portfolio – that's the Holy Grail we're looking for.”
Here, he told Trustnet which trusts he is buying to “exploit mispricings,” one of which was Georgia Capital. This trust invests in the small pool of equities in Georgia, which means it may not appeal to the everyday investor on first glance, but Greenwood said the investment case is strong.
He made this specialist trust his second biggest holding, with shares in Georgia Capital accounting for 4.4% of the MIGO Opportunities portfolio’s holdings.
Greenwoods said: “We joke that it’s is a small investment trust that owns a small Eastern European country, but it's not entirely a joke. At one stage it represented 19% of the country's gross domestic product.”
There is little demand for the trust and it is likely to be closed down as a result, but that is where the opportunity lies.
Investors who buy in now at a sizable discount of 59.8% would be repaid their shares at its full NAV value. It is currently selling at £8.55 per share, but at its true value shareholders would be returned £21.27.
“There isn't really any demand for a single country Eastern European fund and therefore it trades at ridiculous discounts,” Greenwood said.
“What will happen at some point is the shareholders will want their money out or recognise that it just doesn't work as a UK investment trust. They'll dismantle it and hand it back to at 100% of the net asset value.”
Another trust that Greenwood hopes to profit from an eventual wind-down is EPE Special Opportunities. The £47m trust that invests in companies on the Alternative Investment Market (AIM) is up 122.9% over the past decade, but its share price has more than halved (down 62.8%) from its peak in 2021.
Since launching in 2003, it made an overall loss of 37.1%, making Greenwood expect a closure at some point in the future – one that investors who bought it now at a 50% discount could benefit from.
Total return of trust vs sector since launch
Source: FE Analytics
“It's not going to happen imminently, but shareholders are going to take the money back at some point. It’s just a case of what that catalyst for the end exit is going to be,” he said.
After announcing a 45% drop in its most recent annual report, QuotedData investment analyst Andrew Courtney said it was “difficult to draw too many positives”.
He added that EPE Special Opportunities’ large discount “reflected the challenges that exist when investing in distressed, growth or buyout opportunities during periods of market turmoil”.
Another trust that investors stand to benefit from regardless of whether it closes or not is Schroder British Opportunities, which Greenwood bought earlier this year.
The £50m trust was launched in 2020 but has struggled to find investor’s with an appetite for its distinctive strategy.
Managers Rory Bateman and Tim Creed have created a blended portfolio of quoted and unquoted companies, but a lack of investor demand has caused shares to drop to a discount of 35.2%.
Greenwood said: “I don't think there's much demand for the hybrid approach of having half the portfolio in listed and in unlisted at all in the UK. The portfolio ticked over alright but the shares languish on an enormous discount.
“Two things can happen in the situation. The most likely is Schroders puts its vast resources behind the trust to market it and get it better known. Otherwise, they’ll quietly winded down.”
Either way, shareholders look likely to benefit, according to Greenwood. Those could get the “powerful combination” of rising NAV and a shrinking discount if the trust remains open and performance recovers, or get a “massive uplift” if shares are returned at full value.
Despite dropping 33.5% since launching in December 2020, Greenwood said it performed well considering the challenging market conditions and expects improved performance in future.
Total return of trust vs sector since launch
Source: FE Analytics
“It’s difficult to market because people either like private equity or they like UK small-caps,” he added. “Having both makes it difficult to find a corner of a portfolio to put it. It can work for us, but putting it in a client portfolio is trickier.”
Another trust Greenwood bought at an attractive entry point this year was AVI Japan Opportunities , although he said he should have seen the buy signs earlier.
Improving corporate governance standards among Japanese companies was well-heralded this year, but Greenwood said he was overly-sceptical at first.
“For someone of my advanced years, sometimes experience can be an impediment because I’ve been told Japan is different so many times over the past 40 years and it's never been true – ignoring it this time was probably a mistake,” he said.
“Activism is making progress for the first time I can remember yet Japanese domestic stocks are so cheap.”
The £161m trust is up 18.3% since launching in 2018 and its board have done a good job of keeping its discount under control, according to Greenwood. Shares are currently selling 2.5%, which is at the higher end of where AVI Japan’s board allow it to wander.
Total return of trust vs sector since launch
Source: FE Analytics
Its focus on small-caps is also a key appeal for Greenwood – he said bigger names on the Japanese market are reliant on international cashflows and therefore vulnerable to moves in the global economy, whereas smaller stocks are safer in a safe position among the more comfortable domestic economic environment.