Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Nick Greenwood, chief investment officer, iimia Fund Management
It always amazes me that more investors don’t trade closed-ended funds (also known as investment trusts). Unlike open-ended funds, such as unit trusts, the share price of an investment trust depends on supply and demand, so it can move quite independently of the underlying portfolio.
At the moment, a combination of wild markets and a glut of poorly understood new issues has left opportunities in the trust sector. Discounts are at their widest for two years. This means that the typical investment trust can be bought for considerably less than its intrinsic value.
Falling demand for traditional balanced funds in favour of more specialised opportunities has helped the sector, which is ideal for investing in the newer asset classes. Given the nature of these, it would be hard to cope with the daily inflows or outflows required by a unit trust.
Imagine the problems faced by the manager of a fund investing in, say, Bulgarian property, when it comes to selling part of the portfolio to honour daily redemptions.
This is not a problem investment trusts face and, in the past year or so, we’ve seen at least 100 new issues of this ‘new breed’ of fund, raising a total of £5bn. This has caused indigestion in the markets, which is one reason why discounts are currently so extreme.
Closed-ended funds are structured as companies. So if a shareholder builds a large enough stake, they can force a wind-up or reconstruction, which allows them to exit at a price close to the value of the fund’s portfolio, providing a nice profit. There are a number of activist investors who frequently attack trusts on wide discounts, so it is inconceivable that discounts will remain at these levels.
I would highlight two conventional trusts that are on exceptionally wide discounts – Alliance Trust (ATST) and Herald (HRI) – and one ‘new breed’ fund, Alpha Tiger Property (ATPT), where the market has failed to keep up with progress.
Alliance is one of the oldest funds around, but is in the early stages of evolving from a traditional generalist into a general savings business and fund management group. Currently it’s a rather entrepreneurial, go-getting investment trust. Yet it remains unloved and its 17% discount fails to reflect growth in its subsidiary, ATS. Unless the shares trade on a narrower discount, there is always the risk that a corporate raider is attracted by the difference between Alliance’s gross assets of £2.87bn and the market value of £2.375bn.
Herald has recently traded on a 14% discount and is made up of a portfolio of growth stocks that would traditionally be very appealing. But in recent years, stockmarkets have been dominated by private-equity houses looking for profitable companies with healthy cash flows, not companies that need cash to finance development. However, if the bubble in credit is deflating then it is likely that there will be a rapid rotation into growth, ending the anomaly whereby stocks at the sweet spot in their lifecycle have traded at a discount to dull but dependable companies.
The time to buy ‘new breed’ trusts may be further down the road – but Indian property specialist Alpha Tiger stands out. It develops and then manages commercial property on behalf of multinationals. In the long term, it will become an outsourcing story. Once Alpha’s portfolio matures, the shares should offer a double-digit yield.
The stocks Nick Greenwood likes
Stock, 12mth high, 12mth low, Now
Alliance Trust, 386.5p, 334p, 353p
Herald, 427p, 320.5p, 411p
Alpha Tiger Property, 102.5p, 87p, 99.75p