The managers of the Miton Global Opportunities fund have increased their exposure to alternative investment trusts as they saw an "enormous dislocation" in markets during the March coronavirus market sell-off.
Co-manager Charlotte Cuthbertson told Investment Week the market had become "incredibly narrow" in recent months, with investors chasing healthcare and technology to the detriment of all other sectors.
That is just as true in the investment company world, with Cuthbertson noting "dislocation[s] between what is going on in the underlying portfolios of our investee trusts and how the share price is reacting".
"We have seen an enormous widening of discounts," Cuthbertson said. "During the crash, we saw market makers marking down the share prices of investee trust between 25% and 30%, irrespective of whether the fundamental portfolio was going to be affected by Covid."
This was particularly the case within alternatives sectors, despite many not being as sensitive to Covid-19 as equity funds.
As a result, the trust, which looks to find "deep-value special situations" within the investment trust space, took the opportunity to add three names, all of which saw little disruption from the pandemic.
Tufton Oceanic Assets
Cuthbertson and co-manager Nick Greenwood met with the management of ship leasing trust Tufton Oceanic Assets a few times pre-crisis, despite the mandate not being an obvious candidate for investors looking for out-of-favour investments.
The trust had traded almost constantly on a premium for the first couple of years since its IPO. As recently as 11 March, the share price was 6% above its net asset value.
However, when markets began to fall, this rating slumped, eventually reaching a 22% discount on 1 April.
Despite this, Cuthbertson said she and Greenwood had liked the management team, as well as the areas the vehicle was investing into and how it was allocating capital.
However, "because shipping is perceived to be so cyclical, we could see in the future an opportunity where investors got nervous of the sector and it fell to a discount".
Indeed, at its share price low, the trust was offering a dividend yield in excess of 8% that was covered 1.5 times by its cashflow.
On the Covid impact, the manager noted around 85% of Tufton's ships had more than three years to run on their leases, at which point the world might, hopefully, have returned to normal.
As a result, "there were no issues of them having to re-lease the ships" during the pandemic.
Further, Cuthbertson added: "In comparison to something like aircraft leasing, which we do not own, the counterparties that Tufton have are strong companies like Trafigura and Maersk so we didn't think there was any counterparty risk."
Yellow Cake says it offers investors exposure to the price of uranium by purchasing and storing it physically while also exploiting a range of expected opportunities connected with owning the metal.
Cuthbertson said the company "should act like an ETF" as a play on the uranium price, which was rising through the pandemic. Despite that, Miton Global Opportunities was able to pick up shares at a 30% discount.
The investment in the trust was "an arbitrage between perception and reality", the manager said. "Most western investors believe that nuclear power is dead, and it might be in Western Europe, but in countries like India, China and the Middle East, nuclear power is integral to their power plans because lots of these countries have real problems with pollution."
Currently, there are 480 nuclear reactors in the world, but predictions are for that number to rise to 650 in a few years' time, "so you can see the demand would be growing for uranium".
"And because the price of uranium has been so low for so many years, people just have not been looking for it - mines have been mothballed; it has not been economic for anybody to set up a uranium mine," she added.
But the manager believes the supply-demand tension will come to the fore soon and the price of uranium, which has been in a bear market since the Fukushima nuclear disaster in Japan, in 2011, will start to rise. That happened during the pandemic, with the uranium price rising by almost 50%, from $23 to $34, between March and May, according to Trading Economics.
Ground Rents Income
Investors turned "very nervous" on the property market during the pandemic, with discounts in the investment companies property sectors widening to as much as 50% at one point, as rent and mortgage holidays disrupted many trusts' abilities to collect rent and, in turn, pay shareholders dividends.
That was not the case for Ground Rents Income, said Cuthbertson, but it still got caught up in the wider sell-off, presenting an opportunity.
At one point, Ground Rents went from a discount of 15% out to 38%. It has since narrowed to 24%.
The trust owns a portfolio of ground rents, which must be paid by a property owner, with the average rent just £250 per annum, paid once every year. S
hould a property owner not pay their ground rent, they forfeit their house altogether, so Cuthbertson reasoned it was unlikely such a small payment would be missed, even during Covid.
"[Ground Rents Income] is much more protected than, say, some of the retail-focused property funds," she said. "We spoke to them a couple of weeks ago and they have not struggled collecting their ground rents."