Migo Opportunities finds gems among the unloved and overlooked

Investors are always advised that they should diversify their portfolios, spreading your investments across various asset classes, industries, or geographic regions. The goal is to reduce risk by minimising the impact of a single event or market downturn on your overall portfolio.

In many cases though Investment Trusts are single market, such as Europe or North America, single country, such as UK or Japan, or in some cases single asset class such as Biotech or Environmental. This allows investors, who know what they want, to drill down into the individual asset classes or regions that they feel offers the best opportunities for them and their financial objectives.

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Many of the investment trusts that you can invest into are diversified funds where the managers have to operate within strict guidelines – or mandates – that do not allow them to have any individual holdings that are over a specified percentage of the total assets of the fund. If the fund breaches, or exceeds the mandate, the mangers have to sell-down the holding to below the specified mandate. Others do not and have highly concentrated – in fund manager-speak ‘conviction driven’ – portfolios of a few stocks and rarely trade them.

This is great if the stocks go up more than the market – which is the intention – but if they fail to meet their promise, it can have a significant impact on the overall portfolio and an investor’s returns. Which brings us back to diversification.

Diversification – a bit of a brainache

You could try diversifying yourself, for example, buying numerous investment trusts so that you can replicate a recommended 70% equity to 30% fixed interest split (although, if you are following Modern Portfolio Theory  as you get older you will have to diversify more into bonds and debt as you age ending up with a fixed income-heavy portfolio just before retirement) and with your equity holdings following the MSCI global weightings by putting 65% of your assets in a number of North American investment trusts, around 17% in Europen investment trusts (inclusive of the just over 3% weighting in global equity terms to the UK), 9% in Emerging Markets (allocating about 2.5% of total equity assets to China as part of the Asia allocation) and the rest in Emerging Markets. Of course this is the most simplistic model, if you really want to do a proper job you have to integrate real estate, private equity, hedge funds, venture capital, money markets and even cryptocurrency into the mix.

Obviously, you would need to keep an eye on the performance of all these funds and alter your exposure on a dynamic basis as markets grow and fall and funds outperform and perform. Then you need to be able to extract then roll any dividend returns in proportionate amounts back into your model before fees (which of course you’ve constructed using the best and most expensive systems available on the market – for the record a Bloomberg Terminal costs about USD25,000 a year to licence), and of course keep a track of the various management fees and dealing fees that you’ll pay.

This can end up being something of a full-time job. However, most smaller investors have a proper job, which occupies a large part of their time. Then with family commitments, walking the dog and the need to eat and sleep, when investing across multiple global markets and asset classes, sometimes you might miss an important trade. However, most investors use investment trusts as a fire-and-forget way of earning extra income or growing their capital. If only there was a way that you could get all this diversification without having to buy and track multiple funds.

The odd-squad of investment trusts

Well maybe the Association of Investment Companies’ Flexible Investment Sector might be your cup of tea. This sector encompasses funds with a wide range of investment objectives and strategies that are characterised by their flexibility to invest in a variety of asset classes, including equities, fixed income, cash and cash equivalents and alternative investments, which includes real estate, commodities, and other non-traditional asset classes. The sector is made up of 20 funds, which are vastly different in size, makeup and mandate. However the ‘odd-squad’ funds in this sector are so different to other funds that they don’t fit in any other sector comfortably, so they all get lumped in the Flexible Investment sector. They say there’s no creativity in fund management (which to some might seem a good thing) but it’s in this sector that the real Picassos and Kandinskys of fund management reside, the real creative thinkers with their own investment world visions. That said, because of the mixtures of assets they use, sometimes their performances don’t stack up to the more plain vanilla sectors.

This week The Armchair Trader highlights the MIGO Opportunities Trust [LON:MIGO] a GBP86m fund managed by Asset Value Investors, who took over the management advisory of the investment trust from Premier Miton last year. The fund was launched in 2004 and celebrated its 20th anniversary in April.

MIGO is a fund-of-funds, in that it invests in discount opportunities in the closed-ended sector, or other investment trusts, where the managers believe there is a catalyst to extract the value. The trust is able to invest in any geography or asset class providing it is held in an investment trust structure. As the AIC will tell you, there’s about 600 investment trusts operating today, and MIGO initially sieves the market to identify the investment trusts that are trading at a discount, where their Net Asset Value is higher than their share price.

Managers, Nick Greenwood, who was managing MIGO under Premier Miton’s banner, where he had been since 1997 and jumped the fence to AVI when the investment manager acquired MIGO, and Charlotte Cuthbertson, also a Premier Miton alumni, then look at what’s left in the colander and pick the asset classes they like.

Seeking the catalyst

Once they’ve narrowed down the universe to investment trusts they like, they then assess the NAV and if the team is confident that it will hold up, they then analyse the level of leverage the fund holds, rejecting investment trusts that are in their opinion overleveraged. They then look for the ‘special sauce’, something MIGO calls ‘the catalyst’ that will allow it to extract value. The managers try to follow thematic investment strategies. Greenwood and Cuthbertson then take their remaining basket of potential investments and go into deeper due diligence, which often leads to meetings with the investment trusts themselves. After this part of the process is concluded the management team decide whether to invest. All holdings are reviewed on a biannual basis.

Greenwood said: “…we’re trying to spot mispriced investment trusts – trusts that are simply trading at the wrong price. So on a daily basis I’m monitoring prices with regards to where they are compared to the underlying assets and interviewing managers […] when it comes to which trusts we’re going to look at, we’ve got a wide universe of funds to choose from […] and because we’re looking for the unloved and overlooked, real good ideas aren’t obvious and we have to do a lot of meetings and the real gems will be often be uninspiring on paper. In fact, about 95% of the meetings that we do that look uninspiring on paper, are uninspiring in reality as well. But the process means that we do find a few gems each year that our competitors never spot.”

The MIGO fund focuses on diversification, whilst also ensuring position sizing is large enough to contribute to performance. Individual stocks rarely exceed 6% of NAV and a theme is capped at 8%. MIGO Opportunities was, according to the AIC, the top performer (on a share price total return basis) over the last year to 11th October, with a +11.96% return against a sector average of +5.99%. Over five-years MIGO Opportunities was again top of the chart with a +36.75% return versus a sector average return of +8.32%, proving that the process had indeed uncovered a few gems along the way. Over 10-year MICO is again top-of-the-pops, offering investors a +134% return against a sector average of +67.75%.

The fund, which of course looks for investment trusts trading at a discount to NAV, was itself trading at a -2.7% discount and has an ongoing charge excluding performance fees of 1.5%.

The fund’s top five holdings as at 31st August 2024 were:

MIGO Opportunities Trust offers investors a unique and diversified approach to investing in investment trusts. By digging through the trash to find treasure, focusing on undervalued opportunities and leveraging the expertise of multiple uncorrelated management teams, MIGO has consistently outperformed its peers.