Miton Global Opportunities

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1 Material produced by Kepler Trust Intelligence is a marketing communication, and is not independent research. Miton Global Opportunities A focused fund of investment s that has delivered annualised NAV total returns of 7.8 since launch A highly experienced manager investing in a differentiated portfolio of special situations the kind of s that would not make it by themselves into a more generalist portfolio The growth of retail money in the investment sector means discounts are increasingly volatile, which suits the manager s style perfectly his aim being to identify mispriced investment s Recent action by the board has seen the s own discount narrow sharply, and a much larger footprint of retail investors on the register means better liquidity for this relatively small fund Update 3 May 218 Price (p) 273 Discount () -.7 Charge () 1.34 Ratio () 24.3 Shares 27,24,985 Market cap ( ) 75,765,883 Summary Miton Global Opportunities aims to deliver returns in excess of sterling threemonth LIBOR +2 by investing in other investment s that fund manager Nick Greenwood, who has almost 4 years experience in the sector, believes are trading on discounts which are wider than they should be. The, which sits in the AIC s Flexible sector, has little in common with its stablemates in this sector, and has few comparable peers as a fund of investment s, particularly because of its unique focus on cash-plus returns. It is highly focused, with more than half of its assets held in the top ten holdings, and the investment process is very much driven by the expertise of the manager, although we understand that Miton is taking steps to put more resources behind the fund. Nick uses few quant screens or filters, barring a system that allows him to monitor investment NAVs in real time estimating the real NAV of a by looking at its underlying holdings and working out their value, rather than waiting for endof-day NAV updates from the itself, or indicative NAVs that largely reflect the movements of the major index constituents in a s given market. The is focused wholly on capital growth and has outperformed the average in the AIC Flexible sector by a broad margin over five years. Since launch in 24, it has delivered annualised NAV total returns of 7.8. Performance comes in fits and starts, however, with very strong years coming between more modest bouts of performance though the trajectory of returns has only been negative twice in the last ten years. The was stuck on a significant discount of its own until recently, but after a major overhaul by the board which introduced a number of new strategies to deal with it the discount has narrowed sharply. A much greater retail presence on the shareholder register means the discount going forward looks set to be more volatile than it has been in the past, but this is also a major opportunity for the itself in Nick s view. He says the large volume of small trades going through platforms means opportunities arise far more frequently than they did in the past, and this, he Analysts: William Heathcoat Amory +44 () Pascal Dowling +44 () Thomas McMahon, CFA +44 () William Sobczak +44 () Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only. This report is provided for general informa-tional purposes only. It is not an invitation or inducement to buy, sell or subscribe to any product described, nor is it a statement as to the suitability or otherwise of any investments for any person. This material does not consti-tute a financial promotion within the meaning of the FCA rules or the financial promotions order. Persons wishing to invest in any of the securities discussed herein should take their own independent advice with regard to the suitability of such investments. 1

2 believes, could prove to be a significant driver of returns going forward. Portfolio Miton Global Opportunities pursues an opportunistic deep value strategy that seeks to exploit the inefficiency of the investment market, relying on the ability of the manager, who has almost 4 years experience in the sector, to spot likely opportunities. The 73.4m portfolio is highly focused with c.5 holdings, almost all of them investment s, and concentrated; the top ten makes up nearly 5 of the s AUM. It is diversified across a range of global regions and asset classes, presently offering a mix of equities, property and private equity. Asset allocation, however, is the result of stock selection and while equities are likely to dominate in terms of underlying exposure at all times the asset classes, geographies and sectors in the portfolio depend wholly on the opportunities Nick has identified at an individual level. Weightings, therefore, may vary dramatically over the years. One factor that does persist is a preference for smaller investment s, as these tend to be the ones that are less well researched, allowing the manager to gain an edge on the wider market. Historically this is very much a Nick Greenwood -driven investment process although we note that he has recently been joined by Charlotte Cuthbertson, who has worked in a number of positions on the fund management team at Miton. The manager has a potential investable universe of 418 London-listed funds, and many of his ideas come from conversations with other investors and his personal knowledge of the market. Nick tends to buy a small holding initially and build up a position; he says owning a little piece of a helps to focus the mind on it before a more high conviction decision is made. He has no favourite sectors or themes and uses few quant screens or filters, barring a system which allows him to monitor investment NAVs in real time estimating the real NAV of a by looking at its underlying holdings and working out their value, rather than waiting for endof-day NAV updates from the itself, or indicative NAVs which largely reflect the movements of the major index constituents in a s given market.the portfolio, consequently, is highly idiosyncratic and has some very niche s among its holdings. Nick s aim, in his own words, is simply to find s which are trading at the wrong price. Having an edge in terms of information helps Nick to identify these s. India Capital Growth Fund one of the s largest holdings is a good example. The had a rocky start in life, getting through two management teams (both of which produced dreadful results) before the current team took over in 21 and turned performance around. The perception, Nick says, remained until recently that the was a dog and investors in the region ignored it in favour of better known offerings like the JPMorgan Indian and Aberdeen New India s both of which it has outperformed by a significant margin over the last five years. That perception finally shifted in the closing days of 217 and the, which had been trading on a discount in excess of 2 less than six months ago, saw its discount narrow sharply; prompting Nick to top slice his holding. Baker Steel Resources Trust (4) is another example. The will in 222 see a deal come to fruition giving it 4 of the revenue generated by the world s second largest silver mine, but it trades on a discount of more than 17. It is ignored, Nick says, because for most investors anything beyond 18 months away simply isn t on the radar. Lack of research into an underlying market as opposed to a itself is another potential driver for opportunities that has produced good results. Taliesin, a core holding in the since 211, was a classic example of a special situation where the market had not recognised its potential. The held a portfolio of residential property in Berlin during a period when the city at the heart of the EU s most successful economy was undergoing a dramatic transformation. Recognition was finally achieved in March this year, when Taliesin recommended a cashoffer acquisition by US investment giant Blackstone at five times the price Nick paid for the shares. Phoenix Spree Deutschland, the s third largest holding and another Berlin property specialist, is a similar example. Structural change in the investment industry itself is also important. The rise of centralised buy-lists means that investment s are increasingly disregarded by the brokers, institutional investors and discretionary fund managers who used to be their primary owners. Liquidations or wind-ups are a major theme in the s portfolio, and around half of the s Nick owns are currently either in liquidation or in the process of a managed wind down. Identifying s which are likely to end up in this situation is a key element of the strategy and BlackRock Absolute Return is a good example. Launched amid a rash of similar new issues after the Great Financial Crisis, the fund of hedge funds slipped to a wide discount as it struggled to liquidate underlying investments to meet buybacks from ordinary shareholders, and tabled windup proposals in 21. Anticipating the move, Nick bought shares in 29 at 5.21 and saw them bought back via liquidation distributions in 212 at just under 1. While falling demand from traditional buyers might seem like a falling tide for all s long term (where s the upside if the bucket has a hole in it?), Nick thinks this 2

3 trend has a positive implication for his strategy, in that self-directed private investors are increasingly interested in the sector. Miton Global Opportunities itself has seen private investors move from 9 of the shareholder register to 44 in the last two years alone. This money is traded faster and in smaller trades than the institutional money which it replaces, creating share price volatility that will, in Nick s view, lead to more discount opportunities on a more frequent basis. Top ten holdings NAME Macau Property Opportunities Fund 6.5 India Capital Growth Fund Limited 6.1 Phoenix Spree Deutschland Ltd 5. Atlantis Japan Growth 4.8 Establishment Trust plc 4.7 Alpha Real Trust 4.7 Artemis Alpha Trust plc 4.6 Baker Steel Resources Trust 4.5 Real Estate Investors plc 4.4 Rights & Issues Trust plc 3.7 Source: Miton Gearing Gearing is used structurally and has generally rested at around 7-1 over the last ten years, coming off completely only once in 212 after a difficult year for the (see performance). Gearing currently sits at 6.8, via a revolving credit facility charged at LIBOR +.9. The also has some cash Fig.1: Gearing Miton Global Opportunities : Gearing (at year end) on the books, equivalent to around 7, which Nick says is there as a war-chest, ready for opportunities that may arise, rather than as a precaution. Returns Miton Global Opportunities has delivered solid NAV total returns of 74.2 over five years, outperforming its benchmark, LIBOR + 2, and leaving its peers in the AIC s Flexible sector where the average delivered 37.5 behind; albeit they have little in common in terms of investment strategy or indeed holdings, making comparisons somewhat odious. Fig.2: Performance Miton Global Opportunities : Performance vs indices Miton Global Opportunities Ord (Cumulative Fair NAV) Miton Global Opportunities Ord (Price) Morningstar IT Flexible N (Cumulative Fair NAV) LIBOR 3 Mon Interbank Eurodollar Inv TR (Cumulative Fair NAV) The choice of LIBOR for a benchmark might seem somewhat odd for a fund that normally has the majority of its money invested in equities, but it was chosen to reflect the manager s desire to differentiate the from the index huggers that were so prevalent at the time when it was launched in 24. Whilst it is not an absolute return fund, Nick says his focus is on absolute not relative returns with no regard for the performance of any index and since launch in 24, the s annualised NAV total returns of 7.8 are an admirable achievement. The has delivered negative returns in only two of the last ten years falling a long way in 28 when investment discounts plunged with the financial crisis, and losing ground again in 211, at a more modest rate, when the smaller, more niche investment s of the type Nick favours came under pressure as wealth managers began to move aggressively away from investing in funds below 25m. Whilst they have been generally reliable, returns tend to be rather lumpy however, with big spurts of outperformance coming between more modest returns. The also sees 3

4 periods where very little happens at all to the NAV that, in the manager s own words, is when looking at it is like watching paint dry was a particularly strong period, for example, as Nick s holdings in India, Berlin and private equity s all did well at the same time, and discounts across the portfolio narrowed from around 3 to 25. This year returns have been fairly muted because, in the manager s own words, not much has happened. This is symptomatic of the waiting game Nick plays when he buys into a stock. Indeed, a major part of his role is to reassure shareholders in the that the market will, eventually, recognise the opportunities he s bought into, which can linger on large discounts for a long time. Fig.3: Calendar Year Returns 75 5 Miton Global Opportunities : Calendar year returns Peer group The s official peer group the AIC Flexible sector is something of a mishmash of different strategies and this has little in common with its official peers, the best known examples of which are probably RIT Capital, Personal Assets and Ruffer Company, all of which are multi-asset family-office style wealth preservers. More similar are the funds of investment s openand closed-ended though here again Nick s focus on absolute returns, unique amongst these vehicles, makes too close a comparison of limited use. That said the table below provides a snapshot of the versus the funds and s it most closely resembles, among which it has performed very well over three and five years. Dividend Values The complies with the investment rules regarding distributable income but its objective is to provide capital growth rather than income. Any dividends and distributions will be at the discretion of the board from time to time. Miton Global Opportunities Ord NAV Morningstar IT Flexible Miton Global Opportunities Ord Price Peer Group GROUP/INVESTMENT FUND TYPE ONGOING CHARGE 12 MO YIELD DISCOUNT NAV TR NAV TR NAV TR Lazard World Trust Fund Ord British Empire Ord Halifax Fund of Invmt Trusts A M&G Fund of Invest Trust Shares A Acc Unicorn Master A F&C Managed Portfolio Growth Ord Jupiter Fund of Trusts LF Miton Worldwide Opportunities A Acc Miton Global Opportunities Ord n/a n/a n/a n/a n/a

5 Management Nick Greenwood has 38 years experience in the investment sector and was a founder member of the Christows stockbroking operation in He joined Miton following the merger with Exeter Fund Managers in November 27. He has managed Miton Global Opportunities for 14 years, and also runs the s mirror Miton Worldwide Opportunities. Nick is sole manager on the and does not have dedicated analysts, but many of his ideas come from conversations with brokers, his own investors, and other members of the management team at Miton including small caps specialist Gervais Williams who sit on the same floor (in what we are assured is a small room, which encourages a collegiate approach). Nick has until recently worked alone on the, but was joined last year by Charlotte Cuthbertson. Miton Worldwide Opportunities recent strong performance means there has been more interest in the and, given Nick s focus on maintaining shareholder communications, the longer shareholder register left him at full capacity. Therefore Charlotte Cuthbertson has been recruited internally to work alongside Nick. She has previously fulfilled a number roles within the fund management team at Miton. Discount Until fairly recently Miton Global Opportunities had a discount problem of its own, rarely trading on a discount of less than 1 in the last ten years. The board took decisive action in 215, introducing a realisation opportunity allowing investors to exit the every three years the first opportunity to do so being in 218. Shareholders who elect to leave the see their shares moved into a realisation pool comprising the assets attributable to them, taking the negative pressure off the shares for those who wish to remain invested. The assets in this pool are then managed in accordance with an orderly realisation programme with the aim of making progressive returns of cash to holders of realisation shares as soon as practicable. The s appeal to individual investors combined with this new focus on marketing has proved beneficial more recently, however, as self-directed private investors have become aware of it and trading via platforms has rocketed, taking private investor ownership of the 9 to 44. The s discount has narrowed sharply as a result of these various innovations and this year saw it hit a premium of 4. The has issued c.1.85 million new shares in the last 12 months. As one might expect, however, with such a large retail following discount, volatility has increased. Fig.4: Discount Charges Miton Global Opportunities : Discount Jul '15 Jan '16 Jul '16 Jan '17 Jul '17 Jan '18 Miton Global Opportunities Ord Miton Global Opportunities has an ongoing charge of 1.4, putting it in the middle of the range in terms of cost among its fund of investment peers, and toward the top in its official peer group the AIC Flexible sector. The has a KID RIY cost of The board successfully negotiated the removal of the performance fee in September 215; however, a performance fee does apply to shares in the realisation pool described in the discount section, and would apply were the as a whole to wind up. This fee equates to 15 of all cash realised and returned to shareholders in excess of a hurdle of sterling three-month LIBOR +5. The also appointed a new broker offering greater liquidity and making the tradeable for larger investors and appointed Frostrow to market the. Nick says the has always been popular among professional investors as a personal account trade, and a regular frustration in recent years has been listening to wealth managers say they want to buy the for themselves but that it is no good for their clients. 5

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