The last two times the average investment trust discount went into double digits, shares in Migo Opportunities Trust (MIGO) went on to rally hard. Could we see the same again for this £82 million investment vehicle?

The average discount to net asset value for investment trusts went from 2.4% at the start of 2022 to 12.6% at the end of October, according to Refinitiv. Reasons why trusts have traded so far below the underlying value of their assets in 2022 include investor fears over inflation, rising interest rates and a potential recession.

Many investors have been selling down their investment trust holdings and buyers have been thin. However, it feels as if risk appetite is starting to improve which might suggest a new wave of bargain hunting.

STRONG REBOUND

In 2015 the average investment trust discount hit 10% during a brief market wobble and then reached 21% in 2020 when Covid hit. Interestingly, Migo – formerly called Miton Global Opportunities – subsequently enjoyed strong share price gains soon after each of these periods.

Its shares jumped 87% in value between April 2016 and January 2018, while they doubled in price between March 2020 and November 2021.

‘Opportunities tend to come when the outlook is miserable,’ says Migo fund manager Nick Greenwood. ‘The likelihood is that now might be a good time to buy into investment trusts.’

Migo takes stakes in other investment trusts trading below the market value of their underlying assets, typically ones that are misunderstood by generalist investors. Its top 12 holdings are trading on an average 29% discount to net asset value – in simple terms you’re getting £10 worth of assets for £7.10.

It could enjoy a double whammy if two catalysts play out. The first is to invest in investment trusts that subsequently see a rise in their net asset value, which can be driven by earnings growth from their investee companies. The second is to see a narrowing of the discount to net asset value for its portfolio holdings, something that’s called a ‘rerating’.

Some of the styles and sectors with widening discounts to net asset value this year include growth, Europe and small caps but this isn’t typically where Migo looks for opportunities. It focuses on more specialist areas as this is where it is more likely to find mispriced assets in areas of the market that a lot of people don’t understand.

VIETNAM EXPOSURE

Migo’s joint biggest holding is VinaCapital Vietnam Opportunity Fund (VOF), accounting for 7.3% of the portfolio and itself trading on an 18.7% discount to net asset value. It is an investment trust with stakes in companies that operate in areas such as financials, real estate, materials, and supply chain sectors.

‘Vietnam is a big beneficiary of the US/China trade war and the pandemic lockdowns. Many companies are now looking at their supply chains and wanting less exposure to China. Vietnam and India are now seen as more favourable places for manufacturing,’ explains Green. ‘As the macro view gains attention, more investors are likely to look at Vietnam.’

The other joint biggest holding is Dunedin Enterprise (DNE), a private equity trust in the process of selling its investments and being wound up. ‘This is the gift that keeps on giving,’ says Green. ‘Since the decision to put the trust into rundown, everything it touches turns to gold.’ Dunedin has, in many cases, managed to get a better-than-expected price when selling assets which means more money to be handed back to shareholders including Migo.

Dunedin is about to return another chunk of cash to investors via a tender offer, which means Migo will have even more money with which to make investments while equities are in the doldrums. Migo had 15.2% of its assets in cash at the end of September.

BIG HOPES FOR URANIUM

Other investments in Migo’s portfolio include Yellow Cake (YCA:AIM) which is a play on the uranium price as it owns physical uranium oxide.

The fund manager says years of weak uranium prices following the Fukushima nuclear plant disaster in 2011 have made it uneconomical to build new uranium mines. Russia’s invasion of Ukraine has made governments think hard about future energy supplies and so nuclear is back on the agenda. It had already been gaining traction in recent years as countries sought more clean energy solutions.

‘Nuclear power is moving back to the mainstream but where will they get the uranium to power new nuclear plants? There is also the fact that Kazakhstan is the world’s biggest uranium producer, and it is arguably under Russian influence,’ says Green. He argues there is scope for supply interference which could push up the uranium price and thereby lift Yellow Cake’s net asset value.

UNDERSTANDING THE CHARGES

Owning shares in Migo will also give you exposure to the biotech industry, German property, and activist investors in Japan. These are the types of investments where it often pays to leave it to the experts to find opportunities rather than pick individual stocks yourself. On that basis, it is understandable that Migo’s 1.3% ongoing charge is higher than you might find with a mainstream global equity fund.

The dividend yield is minimal at 0.12% and the shares currently trade in line with its net asset value. It has generated total returns (share price gains/losses and dividends) of 23% over three years and 151% over 10 years, versus 7% and 82% respectively from the FTSE All-Share index, according to FE Fundinfo.

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