Private equity, energy and Vietnam boost MIGO Opportunities - QuotedData

2022-07-26 13:48:38 By : Mr. Edison Wang

MIGO Opportunities has published results for the 12 months ended 30 April 2022. Over that period, the NAV return was 4.7%, the share price return 2.7% and the return on the benchmark – the return on cash, as measured by SONIA , plus 2% – was 2.2%.

The chairman says that the principal drivers of performance were holdings in the energy sector, Vietnam and India, and Industrials REIT . The main detractors were Atlantis Japan Growth and EPE Special Opportunities.

MIGO plans to pay its first dividend which will be 0.4p. The trust just pays whatever it needs to to maintain investment trust status. The portfolio is not managed to produce income.

During the year 685,000 new shares were issued when the shares were trading at a premium between mid-November 2021 and the end of January 2022. Against that, 1,504,729 shares were repurchased in order to restrict any undue widening in the discount. This number includes the 149,729 shares bought back following the annual realisation opportunity. While the company does not target any particular share price or discount level for buybacks, the buybacks conducted during the year were at discounts ranging from 1.5% to 5.1%. As at the date of this report, the discount stands at 5.4% and 1,200,000 further shares have been repurchased. The board is unanimous in its support of the buyback policy to keep any discount volatility to a minimum and is firmly of the view that buying in at a double discount (MIGO shares’ discount to NAV and the unweighted average discount to NAV of the underlying holdings – currently 28.0%) is accretive to shareholders .

Dunedin Enterprise proved to be the biggest contributor towards our portfolio’s performance. This private equity trust has been in orderly wind down for some years, selling holdings when the investments have reached fruition usually at a significant premium to their carrying values. Recent sales have included Incremental (IT services), GPS (payment processing technology) and UPOL (automotive refinishing), all of which were sold at far above carrying value. Dunedin periodically returns the proceeds of these disposals via a tender at around net asset value or through paying useful dividends. Despite some attractive businesses remaining in the portfolio, Dunedin still trades at a discount.

Elsewhere within the private equity sector Oakley Capital made particularly strong gains and NB Private Equity also made progress. Write ups within these trusts’ underlying portfolios, however, were not fully replicated in their share prices. At the time of writing NB Private Equity trades at a discount in excess of 40% whilst Oakley Capital shares can be acquired at a discount of well over 30%. There are two factors behind this sector becoming overlooked and unloved. Firstly, running costs are higher than for traditional equity funds. Under the latest disclosure rules, advisers now have to include underlying charges in their own product disclosures. This makes these trusts extremely unattractive to certain investors who are selling in response. With private equity trusts, performance fees are often included in the ongoing charges figure (“OCF”). This makes the most successful trusts also the most expensive and so those which have performed the best have often seen the most selling. The market is also assuming that given recent weakness in asset prices, these trusts will have to write down some valuations. We believe that the extreme discounts more than reflect any likely adjustments in net asset values.

Our exposure to uranium also proved helpful during the year. This metal’s principal use is in the generation of nuclear energy. This industry had been out of favour for many years, however, recently it has gained acceptance as part of the move away from fossil fuels. COP 26 in November 2021 highlighted that if economies wanted to achieve ambitious zero carbon targets they would not be able to rely solely on traditional renewables such as wind and solar. The war in Ukraine which has caused enormous disruption in the oil and gas market has also made energy security paramount to governments in Europe. We have seen several countries, such as France, increase the life of their reactors in order to mitigate interruption of oil and gas supplies from Russia. Whilst uranium is not a rare mineral , the time taken to develop new mines to cope with increased demand will be many years. Therefore, uranium is likely to be in short supply for some time. The two uranium trusts we own are very different vehicles. Geiger Counter invests in the shares of mining companies whilst Yellowcake holds the physical metal. In our other commodities exposure, generalist trust City Natural Resources, which has a large weighting in the oil and gas sector, performed strongly whereas Baker Steel Resources had a tough time. However, this partially reflected consolidation post its very strong run during our previous financial year.

Another winner was Vietnam, our favoured overseas market. The country is benefiting from the trade war between the US and China and more recently China’s zero Covid policy which has caused several areas to go back into lockdown further disrupting supply chains. Multinationals are continuing to diversify their supply chains and manufacturing bases away from China to Vietnam. A growing middle class and increasing urbanisation as a result of these moves are helping maintain a healthy GDP growth rate, with the economy expected to expand by 6-6.5% this year. In recent months, the markets have been choppy with margin calls causing volatility. Since the Ukraine war, VinaCapital Vietnam and Vietnam Enterprise have seen their discounts widen despite good progress being made at portfolio level and the Vietnamese market remaining cheaper than its Asian peers.

Elsewhere in emerging markets, we enjoyed positive returns from our Indian investments. Prime Minister Modi’s reforms are focused on encouraging the formal economy which pays tax over the informal economy which does not. This means that listed companies are generally growing profits more swiftly than the economy as a whole. In January we took the opportunity to tender some shares in India Capital Growth at an extremely narrow discount and well above the open market price at the time.

It was particularly pleasing to see Industrials REIT (formerly Stenprop) generate a total return approaching 40% during the year. This investment is typical of what we seek to do, finding unloved and overlooked vehicles, usually trading on discounts, where we see a catalyst for change. We first met the Stenprop management when it was a global generalist property trust with a South African heritage. Their plan was to create a UK-listed pure play on mixed light industrial property. At a time when increased use of the internet meant that companies did not need to be as close to their customers as before, so that the cost of building new units would exceed their open market value, the logic was that the lack of supply would squeeze valuations higher once new demand for this sort of property was triggered. The shares traded at a wide discount amidst cynicism that this transformation could be achieved. The strategy was successfully executed, the portfolio has increased sharply in value and the shares now trade at a premium. We have benefited from the powerful combination of a rising net asset value and the evaporation of the discount.

Conversely, the most significant detractor during the year was EPE Special Opportunities. Listed lighting specialist Luceco dominates this trust’s portfolio. EPE backed this company at an early stage and helped create the business it is today. Like many consumer-facing companies, demand has recently proved disappointing. Furthermore, Luceco’s margins have been under pressure given the increased costs incurred shipping products from its manufacturing base in China. EPE’s shares trade at a wide discount to the latest portfolio valuation at a time when Luceco’s shares are lowly rated.

Another holding which suffered a tough year was Atlantis Japan Growth. Its manager follows a growth style which is an attractive approach given growth can be hard to find in the Japanese economy. However, Atlantis really suffered during the early months of 2022 amid a global rotation away from growth strategies towards value focused investment styles.

Two smaller positions that fell significantly but had a limited effect on overall returns were Macau Property Opportunities and Biotech Growth Trust. The Macau fund continues to suffer from the imposition of anti-speculation requirements that dictate that buyers of upmarket residential property settle transactions predominantly in cash. This is a China-wide policy and it is difficult to understand its retention given the property slump on the mainland. This has left the luxury end of the local property market moribund. Macau’s economy is largely founded on casinos and entertainment and inevitably has been hard hit by the global pandemic. We used the weakness in Biotech Growth’s share price to build a more significant position. Most of these trades occurred subsequent to our year end . Many branches of medicine have seen resources diverted to the battle against Covid-19. Progress achieved by this sector, therefore, was disappointing relative to earlier expectations. Furthermore, the sector was savaged during the rotation away from growth stocks. Finally, healthcare as a whole has been undermined by uncertainty over whether the Democrats will seek to control drug pricing. We believe that the US Government has too many distractions at present to allow it to reform healthcare. Nevertheless, sentiment towards the sector is so poor that many smaller biotechnology companies are trading below cash on their balance sheets.

The final months of our year proved to be a tricky one for investors in closed-ended funds. Discounts widened across the range especially for smaller and medium sized trusts. Self-directed investors are significant players in this area and were largely absent post Russia’s invasion of Ukraine. Turnover in many trusts’ shares tended to be low but there was largely selling, so prices drifted lower as market makers didn’t want to build inventory. Our retention of significant cash balances and exposure to uranium and traditional energy helped reduce the pain.

New entrants were Nippon Active Growth and Biotech Growth. The former has an activist mandate seeking to benefit from the trend towards improved corporate governance in Japan. We discussed the challenges facing biotechnology earlier and post our year-end we purchased International Biotech, building on our exposure to the sector whilst diversifying manager risk. Departures were Polar Capital Financial and Tufton Oceanic, a shipping trust. In both cases, the investment had achieved all we had hoped. Post the end of our financial year we have initiated a position in Amedeo Air Four Plus which leases aircraft to Emirates and Thai Air. The airline industry suffered a challenging time during the pandemic leaving Amedeo’s share price trading at a fraction of its launch price. Prospects have improved as demand for air travel is recovering strongly. The fund owns a number of A380 planes – a model no longer in production – and expectations were that many of these planes would soon be retired. Problems at the major aircraft manufacturers suggest that Emirates new fleet will be significantly delayed and that the A380s will stay in service generating revenue for longer than expected. We have disposed of three positions since the end of our financial year: Third Point, Strategic Equity Capital and Artemis Alpha . Whilst solid funds, we felt that in the event of meeting their objectives they would still generate negative absolute returns. These disposals have provided cash to exploit opportunities in potentially volatile markets which will build conviction within the portfolio.

MIGO : Private equity, energy and Vietnam boost MIGO Opportunities

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