From time to time, I find it is worth checking up on what managers of the funds of funds in the AIC Flexible Investment sector have been up to – managers such as Peter Hewitt of BMO Managed Portfolio (BMPG/BMPI) and Nick Greenwood of MIGO Opportunities (MIGO ). Both trusts have generated decent, and similar, long-term returns for investors, although their fortunes often diverge in the short term. In recent months, widening share price discounts in the underlying portfolios have had an impact.

BMO Managed Portfolio has two distinct pools – one focused on capital growth and the other on income. Hewitt has run the trust since it was listed in 2008. He’s a veteran of the asset management industry, having started working for Ivory & Sime back in 1983.

In 2021, the growth portfolio (BMPG ) was for a time leading many performance tables. The tide turned when sentiment towards growth stocks shifted. The list of investments in the BMPG portfolio at the end of November 2021 was headed up by Allianz Technology (ATT ), Scottish Mortgage (SMT ), Monks  (MNKS ), HgCapital (HGT ) and Chrysalis (CHRY ) – collectively they accounted for 21% of the portfolio.

By the end of April 2022, the picture had shifted dramatically. The list was then headed up by Hg Capital, Fidelity Special Values (FSV ), Law Debenture (LWDB ), Mid Wynd (MWY ) and Ruffer Investment Company (RICA ) and they accounted for 16.7% of the portfolio.

Some of the shifting allocations were driven by market movements. However, Hewitt (above) has also actively repositioned the portfolio to reflect the changing market conditions. He top-sliced many positions before the worst of the falls. FSV was a large position ahead of the switch to value; the portfolio always had exposure to a spread of different styles.

It also had exposure to funds such as BH Macro (BHMG ) and Ruffer, as insurance in case sentiment turned. This paid off, particularly in the case of BHMG, which has been one of the best-performing investment companies of the past six months.

HGT is the only fund that makes both lists. Many private equity funds have seen a sharp, and to my mind unjustified, widening of their discounts. However, helped by a steady flow of good news from its portfolio, HGT has not been hit as hard, despite its growth sector bias.

In the income portfolio, there has been much less activity. Law Debenture features again, a rare example of a trust that generates an attractive yield yet can also be categorised as a growth investment as its trustee business goes from strength to strength.

A couple of other positions that caught my eye were NB Private Equity Partners (NBPE ), which offers a yield of about 3.8% and is currently trading on a ridiculous 40% discount, and Secure Income (SIR ) real estate investment trust (Reit), a top five holding that leapt in value in May following a bid approach from LXI Reit (LXI ).

Clearly, Hewitt does buy funds on big discounts from time to time, but this is not the primary consideration for the inclusion in the portfolio.

Double vote for NBPE

By contrast, Miton Global Opportunities has long been oriented towards closed-end funds that offer the potential for share price reratings. Perhaps unsurprisingly then, it also has a sizeable position in NB Private Equity. This double vote of confidence is making me wonder whether I shouldn’t be looking at the fund.

Nick Greenwood (below) is another longstanding investor in investment companies. His career began in 1979 as a private client stockbroker. He has managed MIGO since its launch in 2004. Since December 2017, he has been assisted by Charlotte Cuthbertson.

MIGO’s largest holding at end April 2022 was VinaCapital Vietnam Opportunity (VOF ). Vietnam has been a good place to invest for the past couple of years. A pull-back in markets in May appears to be reversing. The economic backdrop is relatively good – helped by firms shifting manufacturing operations to the country from China. There is also a good chance that it will be upgraded to emerging market status at some point. VOF has done well over the past 12 months, delivering an underlying investment return of 16.5%, yet trades on a 21% discount to net asset value (NAV), which I think is far too wide.

Apart from NBPE, MIGO holds quite a few other private equity trusts, including Dunedin Enterprise (DNE ) and Oakley Capital (OCI ). Collectively, the sector made up almost a quarter of MIGO’s portfolio at the end of April. I don’t think that is excessive given the potential for these investments to rebound once things settle down.

Another sizeable bet is on the mining sector, with positions in funds such as Baker Steel Resources (BSRT ), Geiger Counter (GCL ), and CQS Natural Resources Growth and Income (CYN ). These stocks can be quite volatile, but their fund managers remain upbeat about the long-term outlook for the sector. The current nervousness about Chinese demand (on the back of new lockdowns) should help postpone any serious attempt to bring on new supply, prolonging the favourable pricing dynamic.

One trust that MIGO has been adding to is Biotech Growth (BIOG ), although it doesn’t yet feature in its top 10, maybe because it doesn’t trade on much of a discount. The attraction as the managers see it is the collapse in valuation multiples for the underlying portfolio. I agree. This is one I have held all the way through the slump, which has been driven by a flood of hot money out of the sector as much as the general antipathy towards growth stories. I am hoping that we are close to the bottom.

Some investors are not keen on funds of funds, mainly because of the double layering of fees. However, both funds rank in the second quartile of funds within the flexible investment sector over 10 years. I think that they are a good way for people with relatively small amounts to invest to get exposure to a wide range of managers and asset classes. They also offer three ways to add value – getting the asset allocation right, picking good managers that outperform, and buying funds on discounts that then narrow.

James Carthew is a director at Marten & Co. Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.