As US president Donald Trump struggles to deliver on his campaign promises, expectations of higher growth and inflation are being dashed.
Nick Greenwood, manager of the Miton Global Opportunities (MIGO) investment trust, says the expectation that interest rates are likely to remain low relative to history has caused ‘yield starvation’ to return once again. By this, he means that investors are stepping up their search for high-yielding investments because cash in the bank pays so little.
With this in mind, he is backing a number of investment companies that pay attractive and growing dividends that haven’t yet been recognised by other investors. In his opinion, these funds offer ‘hidden income’.
‘These trusts are becoming high yielders, but are not recognised as high yielders,’ he added.
MIGO targets investment companies with assets that appear to be undervalued, which have the potential to see their discounts narrow over time.
One example is Real Estate Investors (RLE), a position he added to over the past few weeks. It has significant exposure to the West Midlands, but has seen its share price come under pressure as a result of concerns about the property market in London and the South East.
‘In the West Midlands a lot of the economy there is about high-end manufacturing, largely for exports, so a 15% devaluation in sterling is a massive boost. And there are other things going on, HSBC has moved its headquarters there for example.
‘The state of the Birmingham market is actually very strong, whereas Real Estate Investors is being priced off the London market,’ he explained.
Back in January 2015, Real Estate Investors converted to a real estate investment trust (Reit) and soon after completed a £45 million share placing. It has now put this cash to work and Greenwood notes that cashflow is coming into the revenue account, which can be paid out as dividends.
‘I think it is quite likely that before long it will be paying out 3.5p per share per annum. I bought a lot more stock last week at 58p,’ Greenwood said. The shares closed on Friday at 61p, up 1.5p.
Greenwood also bought Ecofin Global Utilities and Infrastructure (EGL) recently. He feels positive about the corporate changes that took place last September, which saw Ecofin Water & Power Opportunities (EWPO) split into Ecofin Global and EF Realisation Company. The latter holds illiquid assets that were formerly owned by EWPO.
Greenwood also likes the investment team, headed by Jean-Hughes de Lamaze, that is now in place.
‘You get a lot of opportunities in the trust world because trusts tend to trade on the track record of the vehicle rather than the track record of the team that are running it now,’ he said.
Under the previous manager, the trust had a complex capital structure and had ventured into some assets that may not have been appropriate, such as highly leveraged shale oil assets in Texas. It had not been a ‘particularly happy experience for investors’, Greenwood added.
‘It tends to have utilities, airports - the sorts of stable, steady businesses that are chucking out a nice income that people go for. So you have got every chance of a bit of revaluation in Ecofin’s assets,’ he said.
Greenwood bought the trust at a 14% discount to net asset value and this has since fallen to 7%. He expects the discount can narrow further and is pleased with the 5% dividend yield on offer.
Greenwood also bought into Phaunos Timber (PTF) on account of its high discount and yield of 3.1%, paid out of cashflow. Shareholders have since voted in favour of a wind-up, raising question marks about future dividends. The manager suspects its share price could fall from current levels. He adds that much will come down to the sale of its assets, particularly its Matariki stake in New Zealand.
Greenwood believes selective investment opportunities amongst smaller investment trusts have been created by changes that are happening amongst fund buyers. Wealth management companies have historically been big buyers of investment trusts. However, consolidation amongst these businesses means that a handful of individual firms now dominate the industry with tens of billions under management.
As they typically manage assets in a centralised way via model portfolios, this makes it harder for them to buy smaller companies and investment trusts. This is because they need to be able to trade in and out of the company easily.
With this in mind, Greenwood bought the recently launched Downing Strategic Micro-Cap trust (DSM) – and intends to hold it for the long term.
‘You are getting paid royally for accepting illiquidity risk because the bulk of fund selection decisions in the UK are made by a handful of companies,’ he said.
‘I think there is a chance of a lot of mispricing in that core of the market, the £20 million to £40 million market cap companies. The same is happening in the investment trust market,’ he added.
The average trust in MIGO traded on a discount of 32% in December of last year. Greenwood anticipates these discounts will continue to narrow as savvy private investors (who are able to buy smaller trusts) recognise the attractive entry points on offer.
He says changes in MIGO’s shareholder register over the past 18 months demonstrate this trend: the percentage of self-directed investors who have bought the trust via an online broker, such as Hargreaves Lansdown, has increased from 9% to 30%.
MIGO recently moved from a discount to a 0.3% premium to NAV - marking the end of a persistent trend over the past three years. The trust has a market value of £65 million.
Shareholders have enjoyed a stellar 12 months, in which MIGO's share price rose by 50.7%. This is more than double the 21.9% achieved by the average fund in the Association of Investment Companies’ flexible investment sector. Over five years, MIGO is up 107.6%, which compares to a sector average of 70.1%.