Exploiting inefficiencies: Miton Worldwide Growth

One of the attractions of investing in closed-ended funds is that the shares can trade at a discount to their underlying Net Asset Value (NAV). This gives you the chance to pick up a real bargain, which is not something you can do with an open-ended fund.

There are several fund-of-funds that aim to exploit these sorts of inefficiencies with a good example being Miton Worldwide Growth (MWGT). The manager, Nick Greenwood, looks for under-rated trusts where the discount is likely to narrow, as well as funds with understated NAVs, where there is a time lag between the actual valuation and the last stated market value.

He has about 500 closed-ended funds to choose from but has put together a relatively concentrated portfolio of 61 holdings with the top 10 accounting for 44.4% of the assets. Many of these sorts of products are not followed by professional investors so there is an opportunity for them to trade well below fair value.

One of his current themes is to invest in Chinese property companies. Greenwood describes this as ‘a classic arbitrage trade between perception and reality’. All the headlines are about falling prices in the largest mainland cities, but his holding in Forterra provides exposure to prime commercial assets in Shanghai, while Macau Property Opportunities invests in residential property in Macau with both trading on very wide discounts.

Other interesting holdings include: the Taliesin Property fund, which mainly invests in residential property in Berlin; Pantheon International Participations, a mature private equity fund; and the India Capital Growth fund.

Investing in trusts trading at a high discount is a contrarian strategy that will typically generate alpha rather than beta. This means that it will typically lag behind rising stock markets albeit at a lower level of volatility. It is benchmarked against 3 month LIBOR plus 2% and over the last 5 years has returned 24%.

Miton Worldwide Growth has a market value of £40m and is trading at a discount to NAV of 10%. It has 8% gearing and ongoing charges of 1.17%.

Investment trust discounts have narrowed to historically low levels, but Greenwood is still finding opportunities especially in some of the more esoteric areas. The fund is trading on a 10% discount and the average underlying discount is a further 27%, which suggests that it is capable of delivering a decent return if its holdings are positively re-rated.