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Trust discount hunter targets miners and Chinese property
Nick Greenwood of Miton Worldwide Growth is buying investment trusts in junior miners and Chinese property.
by Jennifer Hill on Oct 08, 2014 at 12:30
Nick Greenwood, manager of Miton Worldwide Growth (MWGT ), a fund of funds, looks for opportunities in potentially mispriced investment trusts. He currently sees opportunities in mining, Chinese property, and trusts being wound up.
He thinks the bear market in small mining companies provides an attractive entry point into the stocks. In July, he added three trusts from the junior mining sector: St Peter Port Capital (SPPC), Praetorian Resources (PRSS) and Global Resources Investment Trust (GRIT).
‘The savage bear market in junior mining stocks has reached a critical point. Open market prices suggest none of these companies will ever raise the capital needed to turn promising deposits into working mines and will bleed to death. But this is overly pessimistic,’ he said. ‘There will be plenty that bleed to death. But the upside for those that become working mines from hopeless cases is price momentum of many multiples.’
For Greenwood, a ‘double whammy’ of soaring net asset value (NAV) and a rapidly narrowing discount of an investment trust’s shares to the NAV is a compelling proposition. ‘The exposure to junior miners comes via a package approach, holding small positions in six trusts to get enough to move the needle,’ he said.
Another sector he likes on valuation grounds is Chinese property. Positions in Macau Propert Opportunities (MPO ), Forterra Trust and Pacific Alliance China Land (PACL) account for almost 10% of Miton Worldwide. Dale Nicholls, successor to Anthony Bolton on Fidelity China Special Situations (FCSS), recently described Chinese property to Greenwood as ‘the most hated asset class on earth’.
Greenwood points to different fundamentals in Macau, China’s gambling capital, compared with the mainland, and Forterra’s strength in large commercial projects in Shanghai. These are two areas largely removed from the Chinese residential property market, where concerns of an asset bubble are growing.
‘They are very different, but are affected by the same sentiment, with Chinese property plays trading at discounts of 50%-60%,’ said Greenwood.
Miton Worldwide Growth aims to outperform three-month Libor by 2% over the longer term, principally through exploiting inefficiencies in the pricing of closed-ended funds. The trust has 63 holdings at present, trading on average discounts of 27%.
Since launch in April 2004 it has underperformed on a share price basis, but outperformed on a NAV basis. Its share price is up 50.2% and NAV 78.5% against a target 63%. The graph above shows its performance against the FTSE World over five years.
Berlin Wall play
Greenwood uses a combination of top-down and bottom-up approaches, with some investments being made on the strength of the macroeconomic environment.
The trust bought into Taliesin Property Fund (TPF), a specialist in Berlin residential property which was trading at a premium of 18.7% in the second quarter of 2011 and has carried on adding to it until recently. Taliesin snapped up cheap property around the Berlin Wall before its fall in 1989. Now, as the city booms, it is where everyone wants to live.
‘It’s without parallel for a city to move from urban wilderness to major European capital within a generation,’ said Greenwood. ‘The German capital’s property slump in the 1990s was one of the world’s most spectacular. Over a decade later, despite playing catch up in recent years, the open market value of Taliesin’s apartment blocks remain well below replacement cost.
‘Its micro call of buying solid early 20th century apartment blocks near the former wall anticipated local demand for this type of property,’ he said.
Bund yields recently dipped below 1% – another factor set to play to its favour. ‘There’s a possibility that Germans might view property ownership as an alternative source of income,’ said Greenwood. ‘Historically, they’ve not shared the Anglo-Saxon love of home ownership.’
Foul is fair
Taliesin Property Fund is the only European investment trust Greenwood believes is worth holding for the long term. He has been scaling back exposure to Europe, taking it from 19% in May to around half of that today.
In August he sold out of TR European Growth (TRG ), run by fund group Henderson. He took profits in European Investment Trust (EUT), run by Edinburgh Partners, amid a ‘fantastic’ run for European equities and a weak euro, that meant any gains on shares could be lost on currency.
‘Our residual exposure to Europe has been proving a drag,’ he said. ‘It would be rational to expect poor economic news to be followed by a burst of central bank stimulus. Perhaps we’ve moved into a world where bad news is no longer good and good news is no longer bad.’
Around half of the Miton Worldwide Growth portfolio is winding up, selling assets to return cash to shareholders, an area Greenwood (pictured) believes will be a source of returns for the foreseeable future.
Consolidation, with small market makers being swallowed up by larger players, has left the vast majority of trusts in the £50 million-£100 million range with no natural buyers.
‘A lot of these trusts have done nothing wrong: it’s just that their client base has moved on,’ said Greenwood.
‘Wealth managers and private client stockbrokers have been consolidated into the likes of Rathbones, Brewin Dolphin and Investec. They need to buy a large amount of shares, meaning they can only really look at the top 60 trusts.’
In recent months, two of Miton Worldwide’s holdings, Aurora (ARR) and Pacific Asia China Land, started winding up following their respective annual general meetings. Their shares were marked up in response to the news.
‘We’re holding a lot of deep discount plays and probably will do for the next couple of years,’ said Greenwood. ‘There are a lot of orphan assets, which either have to find new life or cease to exist.’
Monica Tepes, investment companies analyst, Cantor Fitzgerald
Miton Worldwide Growth holds a portfolio of predominantly less liquid, special situations and deep value investment trusts.
They are generally the type of investments that require in-depth due diligence and close monitoring and, given their higher risk individually, are better held as part of a portfolio rather than as one-offs.
The fund offers a diversified approach to higher risk investing left to a specialist fund manager, namely veteran investor Nick Greenwood.
Greenwood is a contrarian investor and believes markets generally move in cycles and themes, or sectors regularly fall in and out of favour, giving rise to asset mispricing and opportunities to profit.
Illiquidity is one of the portfolio themes Greenwood currently runs. He believes investors are well rewarded for taking illiquidity risk, as the market interest and corresponding high ratings are presently on income and safety.
This means investors are now taking on equity-like risks for bond-like returns in some sectors.
Emerging markets is another area Greenwood favours. Trusts investing in shares in this sector are trading on relatively wide discounts.
Additionally, the region continues to be out-of-favour and trades on relatively more attractive valuations, despite sound long-term fundamentals.
More about this:
Look up the shares
- St Peter Port Capital Ltd
- Praetorian Resources Ltd
- Global Resources Investment Trust PLC
- Pacific Alliance China Land Ltd
- Fidelity China Special Situations Closed Fund
- Aurora Investment Trust Closed Fund
- Taliesin Property Fund Ltd
Look up the investment trusts
- Miton Worldwide Growth (Ordinary Share)
- Macau Property Opportunities (Ordinary Share)
- TR European Growth (Ordinary Share)
- European Investment (Ordinary Share)
- Aurora (Ordinary Share)
Look up the fund managers
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