How to use funds to buy investment trusts

Wide investment trust discounts have not gone away nor have a lot of the risks. Mergers and strategic reviews are rife, volatility remains, and activist investors continue to lurk on shareholder registers. Therefore, closed ended funds remain a choice for the more sophisticated and adventurous investor with time to do the proper research.

However, those who want to own trusts without the risk and hassle of picking individual ones can get more diversified exposure via a handful of fund-of-funds, some of which are trusts themselves. Names such as Migo Opportunities (MIGO), Unicorn Mastertrust (GB0031218018) and the Jupiter Fund of Investment Trusts (GB00B6R1VR15) operate in such a way while there are others which at least partly own closed-ended funds. We take a look and see how good the options are.

The dedicated options

To start with one of the dedicated options, Migo Opportunities looks to make returns by "exploiting the pricing of closed-ended funds" and the fund does have a clear focus on taking advantage of recent disarray in the sector.

The team is among the numerous bargain hunters operating in the investment trust space looking for oversold opportunities. They expect a surge of corporate activity in the spring and summer which will hopefully drive portfolio returns.

Rob Morgan, chief analyst at Charles Stanley, describes the fund as an "interesting way to buy into a basket of underappreciated trusts, especially now with boards under the spotlight to close discounts to net asset value (NAV) and activist investors at large".

But he warns that investors will need patience given it can take a while for oversold trusts to come good, while some may never do so. Migo investment managers Nick Greenwood and Charlotte Cuthbertson try to steer clear of overly indebted trusts while also going to great lengths to establish confidence in a trust’s NAV. However, this has not proved easy when it comes to multiple alternative asset classes such as private equity and infrastructure.

A broader point Morgan makes about funds that buy trusts is they are "quite specialist and focused on value" and could give investors an unusual set of sector and geographic exposures. This means they should be more of a satellite holding rather than the bulwark of a portfolio.

Unhelpfully, this specialist nature means the trusts also tend to disclose their asset allocations in different ways, with some details such as geographic exposure not given at all in certain cases. MIGO breaks out its portfolio by broad asset class, disclosing a 44 per cent allocation to equity trusts, 14 per cent in alternatives, 14 per cent in property and 11 per cent in mining, for example.

Those interested in buying such a fund should also look at manager commentaries to see where they are currently focused and take a close look at the top-10 holdings via monthly factsheets and fuller investment lists given in reports and accounts.

What do they own?

To give some sense of what is going on we have broken out the most prominent positions the trusts have, and, notably, they do tend to have greater conviction in some pretty specialist names.

MIGO's top holdings include VinaCapital Vietnam Opportunity (VOF), Georgia Capital (CGEO) and Baker Steel Resources (BRST), while names such as private equity darling Oakley Capital Investments (OCI) appear a handful of times in our table.

Investors might therefore see such trusts as a more diversified play on niche asset classes such as private equity. The CT Global Managed Portfolio (CMPG) is something of an exception to this rule, with four of its five top positions in other UK and global equity trusts.

Some of these funds are reasonably small, and Morgan warns that with names such as MIGO this can result in "relatively high overall costs even though the management charge is reasonable". But such a fund can still work as a cheaper and simpler way to access multiple trusts than buying several individually.

As always, greater diversification can temper the gains and losses investors might normally experience by buying a deeply discounted trust individually. We have listed recent performance figures for the different trusts to give a sense of how they have fared.

An unusual beast

A name that is very different to peers but has stood out is AVI Global (AGT), which looks to build "a focused portfolio of investments, particularly in companies whose share prices stand at a discount to estimated underlying net asset value".

In practice, this means a focus predominantly on three very distinct areas: holding companies (which make up 48 per cent of the portfolio), closed-ended funds (32 per cent) and Japan (17 per cent). The trust also has a small allocation to a "property/other" category.

Alongside its value focus, AVI Global has an activist streak with the investment manager vocally opposing proposals for embattled music royalty fund Hipgnosis Songs (SONG) to carry out a sale of assets last year. Investment manager AVI also urged fellow shareholders to vote against the company continuing in its form at the time, and Hipgnosis investors have since reaped some rewards via a recent bidding war for SONG's assets.

More generally, AVI Global has a good level of exposure to private equity trusts, with holdings including Oakley Capital, Princess Private Equity (PEY) and Pantheon International (PIN).

The AVI team has praised the recent tendency of such trusts to carry out share buybacks, and readers can hear more from investment manager Joe Bauernfreund in an IC Interviews podcast episode from early April.