Investment companies have suffered ‘a perfect storm’ in recent weeks, says Migo Opportunities (MIGO ) fund manager Nick Greenwood, but the veteran bargain hunter believes the latest selloff in infrastructure and property will come to be seen as a ‘golden opportunity’ to buy quality funds at cheap prices.

Greenwood, who will shortly leave Premier Miton to join Asset Value Investors, played down claims that investment companies were facing a ‘death knell’ from a combination of factors, including the derating of share prices caused by surging inflation and gilt yields.

Baroness Bowles, a LibDem peer and former non-executive director of the London Stock Exchange Group, was, for example, this week reported to have said the £267bn listed investment companies sector could ‘wither and die’ if regulators did not revoke cost disclosure rules that unfairly penalise closed-end funds over open-ended rivals.

‘This is a call that we have heard many times over the decades, however, the sector continues to evolve. Natural selection remains alive and well in the world of investment trusts,’ said Greenwood in his latest monthly commentary.

Buybacks and mergers

Greenwood based his optimism on recent trends such as ‘aggressive’ share buybacks launched in response to a sector-wide slump that has seen investment companies fall to an average 17% discount below asset values.

Investment trusts such as Pantheon International (PIN ) and Aquila European Renewables (AERS ) were removing unwanted shares from the market, he said, in an attempt to rebalance supply and demand and narrow discounts that sapped investor returns.

A spate of mergers, several of them involving Abrdn funds, would create trusts ‘large enough to be attractive to the major wealth management chains who typically can’t buy into the smaller investment trusts due to their size’.

Greenwood, who has picked investment trusts for MIGO since its launch 19 years ago, has previously decried the negative impact of consolidation among wealth managers, whose growing size and centralised buying policies were prejudicial to buying investment companies for investors.

Now however he sees a positive side to the sector’s rapid consolidation, saying staff released in the big combinations had created new smaller boutiques that could own investment trusts in client portfolios.

Meanwhile, individual DIY investors were not limited to buying just big trusts, he said, while the closed-end structure made investment companies ideal for illiquid areas of investment such as property, private equity and shipping that open-ended investment companies struggled to serve.

‘It would be impossible sell a fraction of an office block or a containership within 24 hours to meet a client sale,’ he said.

All of which made Greenwood anticipate a passing of the current storm. ‘We firmly believe that we will look back at the summer of 2023 and reflect that it represented a golden opportunity to buy discounted investment trusts,’ he said.

Unloved shares

The past month has seen London-listed infrastructure, renewable and real estate funds suffer a renewed selloff on concerns of ‘higher-for-longer’ interest rates. Sector average falls of 5%-8% have compounded a difficult year that has seen their formerly highly-rated shares decline 11%-16% on average with widespread discounts of 20%.

Despite signs of a recent rally, private equity funds, apart from 3i Group (III ), remain unloved with shares trading 40% below net asset value.

But the problems range beyond alternative assets with only a handful of the 377 investment companies trading at or slightly above below NAV. The discount blight has also seen a growing number of equity funds post negative returns over five years as a result of the market’s move away from ‘growth’ investing in the past 20 months.

Difficult year for MIGO

Although these create good buying opportunities for Greenwood, they have hurt MIGO’s investment trust portfolio. Its annual report this month showed a 9.4% drop in NAV in the year to 30 April. While stakes in Japan small company activist Nippon Active Value (NAVF ), UK small cap fund Rockwood Strategic (RKW ) and private equity fund Oakley Capital (OCI) did well, their gains were more than offset by declines in the likes of mining fund Baker Steel Resources (BSRT ), uranium fund Geiger Counter (GCL ), Berlin residential property investor Phoenix Spree Deutschland (PSDL ) and EPE Special Opportunities (EPE).

Among new positions in which Greenwood deployed cash, was JPMorgan Indian (JII ) which on a current 17% discount offers upside through a promised tender offer in two years’ time that will take place if its new managers do not succeed in improving performance and beating their stock market benchmark.