John, ma'am. What was the most Exactually, I'm not even going to argue that. I'm going to start with the most exciting bit of the budget for me yesterday I thought it was the British ISA, or what I'm going to call the BISA, because I've been looking for that for so long, waiting for it, very keen on it. It wasn't exactly how I wanted it. It was still exciting. We'll come back to that. Most exciting bit was a
bunk to the Space center in Shetland. Yes, you know we've talked about the space a lot on this podcast and the idea that the government are behind the idea of Shetland being a center for satellite launches, and I thought was really something. It's finiche but kind of exciting.
I was very surprised that you didn't tweeked on it as soon as it came out, But then I realized it obviously missed it amid the flood of other exciting things that came out in that that section of the project.
No, I didn't miss it. I was just so excited by britt Iss or Bises or Bisas or Brices. I don't know. We'll figure out where we going with this one?
That I kept all my excitement about the space center to myself, But then, of course, the day after the budget had suddenly realized how exciting it wasn't also realized that I'm probably and someone let me know if I'm wrong, I'm probably one of the very few, maybe the only UK journalists who has visited visited the Saxford Space Center on the island of or Is it yell, yell, yell, and a lot of ioland to go through on the way affects this one thoroughly recommended? Is it? Yeah? I'll look it up.
The thing is with Shetland is yeah, I'm sure a lovely place. But I can imagine that most journalists with the more luck getting a trip to Australia didn't kind of get the expenses to go up to share and the days off the John, Yeah.
The flight cancelations and flights to Shatland are super expensive, way more expensive than going to Australia to be right, Moving on from that, because most people aren't interested in space sessions in Chatland. They are interested is John? And what you thought was the most interesting part of the budget.
You know what if this had been the first budget of a five year term or you know, the second budget. I would actually be quite exciting now because the Chancellor basically turned around and put the idea of getting rid of National Insurance and merging it with income tax I sualy very funly on the table. You know, he not only cut it by another two percentage points, but he also said in the long run it would be nice to get rid of this problem is of course he
doesn't have the long run. He's probably got about kind of six months and then that is not going to be kind of maintained by the next government. I wouldn't have thought unless there's a very big surprise. So I think from my point view that was the most disappointing element, and that this would have been a good budget to do about three years ago, and the things That also feeds into a problem with the British ISA because they're having to consult on it. The consultation doesn't end until June.
Half of the people who are going to be you know, talking, are going to be asked about in this consultation, so you know, the investment platforms et cetera. Certainly from the points on Twitter, seem to be kind of thinking, well, chances are this isn't going to happen before the next election, and so it's never going to harm So I think that's probably the big disappointment. That's would actually been a pretty good budget if they had any room left to run, but they don't.
Yeah, I agree with you. I mean, you know, I've been you and I have been calling for the merger of national insurance and income tax for a long long time. But this is a really interesting way to do it, to gradually cut national insurance down, desiri abolishing it. It's just making it kind of disappear, and income tax goes up at the same time to compensate. And what would have been absolutely amazing. You know, I know I bang on about this a lot, but here you have riches,
Unak and Hunt. They haven't got much time left. And with that in mind, they haven't got much time left. We know they've got nothing to lose. They're very probably going to lose. It is miracle to win, right, So they have this one off chance, one off chance to do a couple of things that would really move the dial for the UK, really change things. And one of those things would have been actually to go all the
way with National Insurance yesterday. You got to got that through before April if you'd really pushed it or had been done and dusted, And what a gift to the nation it would have been.
Yeah, And if they felt like really going for it, they could have offset it by in poison capital gains tax or in residential property and getting a distamp duty at the same time.
Well, we've been calling for that, you and I again for a couple of decades, haven't We never happened, but again.
Incredibly politically unpopular, but would be really great for the economy, for the housing market, for everything, But impossible to do unless like this too, you've got nothing left to loose.
Yeah, I mean, so I think this is the one. Well again, it's the other slightly disappointing thing is like, this is your one chance to grasp a political natal that no one else is going to be able to go in the year, and you let's it go, presumably because you don't want the back being trobellions and things like that that we've come about.
Yeah, and let's go back to the British I said briefly, because one of the things I found interesting about that is that you and I agree it's a good idea. Lots of people agree it's a good idea. It didn't come out in quite the form we would have expected. Obviously it's only a consultation, but it doesn't if it comes into play as it is at the moment, it doesn't take up part of the existing allowance. It's a new allowance on top of which means that as most
people don't use their full allowance anyway. I think it's between ten and fifteen percent of people use their full allowance depending on the year. In a way, it's more simpbolic than anything else in that you know, anyone who's going to invest in UKCUI can easily do so within the within the twenty thousand, So there aren't that many people who are going to use that five thousands who are not expecting, you know, tens of billions of pounds
to suddenly flow into the UK market. And then we got lots of people going straight down into the weeds of what is a UK company? Why would a company with foreign operations count? How we're going to divide this up? Doesn't investment trust? It invests a broad count. Does this count? Does that count?
Well?
I think completely missing the point, which is not about specific companies and where their operations are. It's about the popularity, liquidity and valuations inside the UK market. So to me, even the symbolism of it is enough, a symbolism of showing that the government is aware of this problem, prepared to put in place incentives to move into the UK market.
And it's about the efficiency and efficacy of the UK market as a whole, not about wibbling away about whether you know one company counts as a UK company or another company doesn't count as the UK company. It's about our capital markets. Am I missing something? No?
I mean, that's exactly right. And the things a lot of people wibbling about that are the same people who are wibbling about ARM not listing in the UK and kind of like, well, Arms a UK company but was not listed here and we were all moaning about that when it happened. Now this is about addressing that it's not actually a book, and of boosting British business as
in businesses that are in Britain. And also but the other thing I thought was important is that idea of getting DC pension schemes to explicitly say where they are. The auto enrollment schemes basically say explicitly how much of their portfolio is in UK equities. So it's that whole nudge towards a market that is clearly being neglected for reasons that are not related to the actual companies that
are listed on it. And that's what I think is really interesting is that today's guest kind of delves into something very very similar because you talk about the investment trust market and a lot of the issues surrounded investment trusts and have come desk going so purely to do with market structure and nothing to do with the underlying companies and the UK market as a wholeways basically get the same problem. So addressing that is what we're doing. And yeah, I mean they should have got read the
stamp duty when shares. That would have been good that with the course of money, So at least this is a start.
Yeah, there is a hint and actually I've written about this week. There is a hint in here of the return of financial oppression. Though isn't there a hint of the direction of capital and directions that the state wants it to go in? And I was looking back to the end, you know, or the last gasps of financial oppression last time around, financial oppression, by the way being just a it'sually complicated. Look it up, look it up.
We haven't got time to run through financial oppression. Here lots of different ways to help governments run down their debt without explicitly taking extra money from people to do so. But looking at the last gasp of financial oppression in the nineteen seventies, in late nineteen seventy nine, when capital controls were removed, and at that point the point which we went allowed to send money abroad or investor broad. At that point, UK penton funds have pretty much all
their money in UK equities. Right the day that capital controls were removed, the FT index fell by about three percent, and it did so because everyone immediately believed that people would stop sending their money in broad investing in foreign markets. And do you know what they expected absolute tiptop max. They expected that UK pension funds would allocate about ten percent of their equity allocations abroad. In fact it ended up being closer to one hundred percent. That's fascinating. So
this is a little pullback, isn't that. It's a little pullback saying you know, come on to take here. Let's go back a little. Let's go back a little, son, I sense the beginning of a pullback towards the repression of the post war period.
Well, on that point, where I thought was interesting is that as part of the consultation these sort of noddy to the idea or should guilts be allowed to be held as part of your five grand UK only allowance? I thought that's quite interesting. You know, this nigsty Ward is getting retail investors buying more government io use basically and having a specific allowance that allows them to do so.
So effectively, you're kind of saying it's a cash iSER, but a cash isser that can hold guilts or uk O westate the equities.
And do you know what I think, John, I think it's quite likely that over time it wouldn't be you can hold gilts if you want, it'll be, oh, do you know what, you have to hold guilts? You have to hold guilts. And that's classic financial oppression, directing people's capital such that they are forced obliged to help finance the government whether they want to or not. And that's the hint that I think we saw in this budget, and that's one of the reasons that I found it searched.
Welcome to Merin Talks Money, the podcast in which people who know the markets explain the markets. I'm mere and sumset web. This week it's all about investment trusts for those who might not know. And investment trust is that it is simplest just to company the business of which is to buy other companies. So it's a quoted company, it's listed on the Stock Exchange and in the main
you will only find the structure in the UK. So to walk us through everything there is to know about investment trust and to tell us why we should be buying them right now, I spoke with Nick greenwot he co manages the Migo Opportunities Trusted as a Value Partners and before that he was at Premier My investor. Nick, Hi, thank you so much for joining us today.
It's a pleasure listen.
I want to start Nick by talking about the structure of investment trust. You and I are both great fans of investment trusts and both think of them as being one of the greatest of investment vehicles for the retail investor in particular, and I wondered if we could just
start with you explaining what exactly it is. We're talking about, what is an investment trust as opposed to any other kind of collective investment vehicle, and what makes it, to your mind superior in some ways to other types of investment vehicle.
Yeah, investment trusts are peculiarly British thing. They don't really exist elsewhere in the world. There are pockets in various places, but the most collectives are open ended funds. So you put your money in, you take money out on a daily basis, and if you redeem you want your money back. The fund manager has to sell stuff in the portfolio to hand it back to you, which means that you have to run any really works if you have quite
a liquid portfolio. Where an investment trust is structured a bit like an industrial company, a fixed number of shares in the market, and you want to buy or sell, you've got to go to the stock market to get an order, just as if you were buying or selling Marks and Spencer, and it's a bit fiddly, But what that means is the fund manager doesn't have to buy or sell from the underlying portfolio, which means they can put a lot more conviction into the portfolio and really
focus on their strongest views and not worry too much about having an investment that they couldn't sell instantly. I run both, and the differences are really that in some of some really interesting stocks that aren't particularly liquid, I
might have four percent of the portfolio in it. In the open ended fund, where I've always got to know where a few million is going to come from by twelve o'clock the following day, that might only be a two percent position because the liquidity isn't there to be certain that you can sell there's a run on your fund. And therefore what you find is investment trusts with the same managers tend to outperform their equivalent TOIG.
Okay, so what you effectively have in most cases not all, of course, because will come later maybe to buybacks in discounts and redemptions and windings up, etc. But in essence, what you've got is a permanent portfolio.
Yeah, permanent capital is one way of describing it.
Which is very different to having a portfolio that constantly fluctuates in size. And that's the key difference.
Yeah, and you don't have to obsess about the liquidity, which is important. It gives you more stocks and more companies and more investments to choose from than the rivals who are running open ended funds.
And the other differences are that an investment trust will have or should have a fairy engaged board of directors whose job it is to look out for the shareholder, and that's something that's quite important. And of course an investment trust can borrow money to try and improve returns overall, and that's something that most open ended funds can't.
Do indeed, all right.
And the other thing that's very important when you're talking about investment trust is the idea of discounts and premiums. So because an investment trust is effectively a listed company, the business of which is to invest in other assets, be they shares in other companies or be they a stake in a renewable energy project or something like that, it is possible for the shares and investment trust to trade add a discount to the nests aut of value or at a premium to the ness aut of value.
Right.
So that's a very important part of investment trust investing is to understand how that works. Is that fair?
Yeah, it's fair because as when you go into the stock market and the price you pay is not decided by the value of the underlying port Foilio. Well, there are obviously influences that the price where the balance of buyers and sellers comes and when you get periods of oversupply and lack of interest, that the share price that you can pay can be a substantial discount to the value of the underlying portfolio. And we'll touch on it later, I'm sure, but that's the number of what we're looking for.
We're looking for things that are just effectively trading at the wrong price just because nobody cares about them at the moment.
Yeah, And this is where we come back to what we were talking about earlier. Whereas in the main and investment trust has a sort of permanent portfolio in the cash under management doesn't change all the time with people coming in out. But if there's a very big discount, the directors may decide to buy back shares, which of course shrinks the size of the trust, or if it's trading at a premium, they may decide to issue more shairs,
which enhances the size of the trust. So it's not necessarily always a portfolio that isn't changing, but it's the discretion of the directors.
But the interesting point on buybacks is, unlike with an open ended fund where you just get an email at half past eleven saying please give me x million by two twelve o'clock, if we find on the investment trust there's no supply that if not dealt with it is going to lead to a discount, then that then the actual trigger is in our hands and therefore we can make certain that we've got the money in the portfolio to do a buyback before we actually push the button.
And where so we have control where in the OIK it's the unit holder that has controlled of the timing.
Right. Okay, so I think we've established what an investment trust is. Now we've established how they work. Let's talk about where we are in the UK investment trust market at the moment. And as you say, the UK investment trust market pretty much being the only investment trust market at the moment, it's not looking that great. Is We've talked about how these wonderful attributes that investment trusts have and we've said that over the very long term or
the medium term, investment trusts have historically outperformed. Are the types of collective vehicle in the UK, but right now it's not looking good. Now.
The trust sector has suffered a near death experience that bad.
I was expecting you to say it was that bad.
In October, it did feel that this perfect storm of events could be enough, particularly the cost disclosure, but we had a lot of things all happening at once, and it's still not bounced back at The average discount is around seventeen eighteen percent, which is pretty well the widest ever apart from briefly during the credit crunch. It's definitely our touching widest discount of all time in normal conditions.
And what's caused all that We've had an absolute perfect storm and there was a new issue boom in ste of twenty twenty twenty twenty one of high yielding trusts because as you remember, deposit rates were effectively zero for a long period of time and a number of trust particularly things like renewables or shipping or whatever, were structured with quite a high yield and a way of advisors getting their customers at a decent return demand for those
and there was an enormous amount of issuance and supply, but recently with guilts at one point getting up to five point four percent. Why would you want to own an infrastructure fund yielding six say, when you could get in theory risk three, a short dated guilt yielding five point four which killed demand for a whole raft of investment trust and ken as I said before, if you've got limited demand and plenty of supply, share prices will just keep falling till the balance of buyers and sellers
gets into equilibrium. So that was one of the factors too. Traditionally the natural buyer of investment trust were the old private client stockbrokers, and in the last decade or so they've all been merged into these vast wealth management chains and we've seen Vestic and rack bones being put together. That's going to be one hundred billion pound pot, and you're seeing quite a lot of standardization of portfolios simply because of the size. The direction of travel is standardization.
You've got one hundred billion pound pot there. If you say that you need one percent in an investment to move the needle to make it worthwhile the manager actually taking a position, you need a billion pounds worth of stock and that would be difficult to achieve even in Scottish mortgage, one of the largest investment trusts that natural buyer will steadily disappear over the years, and that's an ongoing challenge now, particularly more for the larger trust rather
than the smaller ones, because the smaller ones have been off the buy list for some time. Just to running down the list. We've had a bizarre situation with the cost disclosure and the methodologies, which mean that you end up with vastly higher figures theoretical figures for an investment trusting you do. For annoy there was at one point, as I said before, I run both that the EUT version,
same managers, same sixty five basis point annual fee. But at one point the open ended fund had an OCF or the cost disclosure of eighty nine basis points and the investment trust three hundred and nine basis points for us virtually the same portfolio, and that right the way across means that for a number of trusts that come up with very high figures and very strange results on the methodology become almost unbiable for some investors who have
to add those costs to their product costs and disclose it to their clients and very often don't get the opportunity to actually explain to their clients what's going on.
Can I stop you there, sorry and ask you to explain what that methodology is? What are we talking about here? How can the same portfolio be eighty nine basis points and three hundred and nine basis points, so under one percent and over three percent at the same time.
Yeah, there are some reasons for that. You've got the cost of the board. You're a listed company on the stock market, and they are to a certain extent, they are generally more expensive. You looked at our funder genuine figure might be one hundred and forty, so still a lot higher than the EU version, But you get all the benefits of being an investment trust and it's a better portfolio, etc. But probably the big change is that you now have to add all the costs of anything
you invest in on top of your own costs. So that's almost like if you invested in Glaxo, reflecting all the costs of running Glaxo, but none of the income, and you get some And because of the investment trust sectors specializes in some specialist asset classes, for example second hand life policies. For example, there the methodology means that you have to the premiums, which is part of the
investment function, get added to the costs. So it might work on a long only equity fund, but once you get into the world of the renewable energy, or shipping lines or second hand life policies, the equity is a big example. These costs are more kin to businesses and it gives a very strange figure which is misleading. To be honest to investors who are looking to use these funds.
Just be absolutely clear, Nick, What you mean is that, let's say, for example, the fees on one investment trust would be one percent, and then the fees of investing in other things would be two or three percent, whatever it is, and you have to add them all together, so you've got effectively a double fee, whereas on an open ended fund you don't have to do that.
You don't although you're investing in the same stuff.
Yeah, but we are expecting this to be resolved right very much under conversation.
Yeah, Director of Travel has changed for the better. Yeah, there's I think that the chance to exchequer in the notes to his autumn statement reflected or acknowledged the problem. It's just the bureaucracy to try and get this sorted, and you could have it carrying on like this for another year or so. There is the risk. Certainly, when I was talking about the near death experience before this change of direction, it did feel like the regulator is
going to accidentally kill the investment trust movement. Something that survived two World wars could just get accidentally shot. Because I don't think any regulator has set out to kill the investment trust sector. It's just it comes back the trust sector because it's so different. And they said it's purely British thing that every time you try and standardize something,
you just get very strange results. And the investment trusts don't cope very well with standardization because they are different.
Can I just take you back then to the second problem that you mentioned, which is the size issue, with the wealth managers getting bigger and bigger and therefore not being able to invest in smaller trusts anymore because they can't get a large enough percent into their portfolio for it to make sense. What sort of size then makes a trust viable?
Yeah, they used to say one hundred and two hundred and four hundred, but the figure keeps going higher. Is these portfolios become ever larger but if you think about it, even a billion pound trust, I don't think it may be fine today, But the area that's most vulnerable is probably around the five hundred to the billion pound mark, which until recently would have been large enough for the wealth managers to use. But as they merge and they
get ever bigger, a billion pounds is relatively small. As I said, the Investigo Raftbats combination will be one hundred billion. We're not there yet, but that's the direction of travel. They might need a billion pound ticket each time they invest in something. If you can't buy into a billion pound investment trust, you need to buy one hundred percent of all shares an issue. So I think that the
problem is actually the medium and larger size trust. At the moment, the trust like the one I run have been off their buy lists for seven or eight years, and therefore it's less of an issue. So it's not small trust that they're struggling. Because the small trusts that
exist they've found a reason for existing. They've they found an audience to play to, and I think probably size isn't simply if you've got a one hundred million pound investment trust owned by high networth individuals wealth managers are splintered away from the chains and retail investors that can live quite healthily. But if you're a two hundred and fifty million pound trust purely owned by the wealth management chains, you've got a problem. So the one hundred million pound
trust in that example is healthy. The two hundred fift million pound trust in that situation is doomed.
So we've talked about the cost of closures, to size, etcetera. You were about to offer me yet another problem, I think, what is it?
Yeah, Certainly, when we were well, we were touring the North thirty recently, a lot of people were making the point that a lot of the advisors are not coming anywhere near their benchmarks because you've got these six or seven of the Magnificent seven I think they called them, the big tech companies in the States, dominating the gains
in the stock market. And therefore some of these investment trusts that have fallen in too big discounts look particularly bad, and the knee jerk reaction has been to sell them to get them off the register. So the whole event of the perfect store was then triggered. Another type of seller.
It's what I used to call the killing the dog trade in the back in the distant past, in the early eighties, I was a private clans stockbroker, and if you had a dog in the portfolio and say fifteen stocks, and your clant's coming in, you know that stock is still in the portfolio fifty five minutes of your one hour, the cloud is going to be talking about that stock.
So you kill the dog before the meeting. It's a term from many years ago, and I think that's what we're seeing in trust as well, in that if you've got a trust you've paid a pound for and it's trading at sixty p because it's trading at a big discount, you really want to sell.
Yeah, absolutely, get rid of it so you don't have to explain.
It, right, exactly, That's exactly it.
Brilliant or not brilliant, that's how you look at it. The plus side here, right, assuming have you got to the end of the litany of problems? Nick?
Yep, that's enough?
Yeah, okay, good. That is the deprising bit of this conversation over because the next bit is about I hope, and I hope you're not going to correct me on this. I hope. The next bit is about these really are still great investment vehicles. All these problems exist. We've talked about how one of them may be resolved, but they exist.
It's fair. I'm not going to deny that, but that might provide some absolutely fantastic opportunities for the value orientated retail investor who would like to look at what they can buy out of what been great discount to it net asset value.
Yes, discounts are pretty well as wide as they've ever been. But whenever we've had discounts this wide with normally in the middle of a financial crisis, which clearly is not happening at the moment. There are for all sorts of reasons the trust trade on why discounts at the moment, as we've discussed, But basically the point is the market, for internal reasons, can't value assets properly, then the real world will come and take them. So we've got trust
sitting on a fifty discount. Maybe the real world comes in and pays twenty five discount to take the decent assets and leave. So, yeah, the odds are stacked in your favor if you buy into the trust sector at the moment.
Yeah, and possibly something of an opportunity for retail investors. If professional investors can't buy, particularly the smaller trusts and size, they're leaving them there. For us, a.
Lot of professional investors have been frightened off by the sector. They've taken some losses on some things they didn't expect to and they've lost their confidence, which is part of the reason why discounts are so wide at the moment.
Now. One of the other things I noticed when I look at your portfolio is that there's pretty much no home bias there. Everyone often talks about it. You will have a natural home bias when it comes to investing, You absolutely do not. Do you notice, for example, there's even a trust investing in Georgia.
Yes, we've probably got slightly more in Georgia than we have in the UK. Having said that, I think the institutional benchmarks in the UK is about four and we're about seven. Actually, you could say we've got nearly twice the exposure of the UK than some of the benchmarks. But it's all focused on very small companies, and what's happening in microcaps is exactly what's happening investment trusts. For slightly different reasons.
The institutional investors become so large that they really need to be investing a few hundred million at a time. And therefore, if you invest in a company with a market value of fifteen million or one hundred million, even thought doubles of travels, you just don't move the needle.
So there's no point in them doing it. So these listed companies trade ever cheaper, but they're real companies in the real world, generating real cash, real profits, and there's a great opportunity for retail investors, and it's one that we're taking in the in the fund. Basically, it's like a Russian doal of discounts than the microcaps because the UK trades are a big discount to the rest of
the world. Small caps trade on a discount to large caps, microcaps even bigger discount, And every now and again you can actually buy a perfectly good portfolio of microcaps in it within an investment trust, trading on a twenty percent discount. So, as I said, it's the sort of Russian doll type situation.
Institutions aren't coming back to smaller there's a structural problem, but the real world, the individual companies will get taken out, will find a new way of ownership at a reasonable premium to where they're languishing in the stock market at the moment.
Nick, let's just move around the world a little bit. You've got you're holding two I think you're holding two investment trusts with investments in India. Right.
We're optimistic on India in the longer term. It's not massive position. We've certainly seen small and medium sized companies perform extremely well. India is another very big beneficient of the change in the world order there. We equities are quite expensive at the moment, but times you can be too clever and just they're too expensive this week, and then sell and they drift down ten percent. Then then define the level and start going up again, and you
never get around to jumping back on board. So more of a long term macro view there. There's not really that much speciation in Indie capital growth welthough there is a little bit in JP Morgan India because it has investment windows every five years and if it's underperformed over that period of time then they have to give twenty five percent of the money back at nav and it has at times traded on a twenty discount in the
not too recent past. There was a change of manager a year or two ago and it's a stronger trust than it's been in the past. But when they took over, they were a long way away behind in the current performance window. Although they've made up quite a bit of ground, but they don't make up all the ground. Then they've got to give twenty five percent of the money back at par and yeah, that's obviously where we brought in a sort of around eighty pence in the pound getting
a twenty percent movement on that. The pork failio is quite a big percentage for no movement in the underlying portk foilio. There is an element and that's more of a large cap exposure in what you find with investment trusts is that when there's a change of manager where or a trust that's underperformed for a number of years, such as Japie Morgan India, they carry on training on the track record of the vehicle rather than who's running it now and maybe takes a year or two to
catch up with the current reality. So you do get that arbor charge free perception reality with things like Japie Morgan India.
Okay, but let's look at where Some of the really big discounts are which is in the private equity sector the trust a hold private companies Chrystalis for example, or billy Gifford Trust. You have fairly big holdings in those. Talk about that a bit.
Yeah, Our biggest is is Oakley. We've also got nb private Equity in the.
Private equity area and Hallie and the Bailly Gifford one.
Yes, the area has been particularly hard by this cost
disclosure because private equity is quite quite an expensive mandate. Now, if this issue with the cost disclosures and the methodologies gets resolved, private equity is going to be a big beneficiary because some of these trusts get up to declaring those of seven hundred bases points and that means that they're uninvestable to maybe models being run by IFA and wealth managers, because you've got to declare that figure on top of your own costs, and it just looks all
your clant seedes is the seven percent from the private equity done plus the one percent perhaps that the wealth manager is charging. They think they're being charged eight percent, and therefore it's impossible for a number of investors to actually own this sector.
So Nick, you think that The biggest problem with the private equity trusts is not so much allows the investments or investments that are valued incorrectly, but a cost structure that makes them uninvestable for wealth managers.
Yeah, that's that's the main problem. There were in the past that those have also been problems in that people didn't trust the valuations. But we've gone through a couple of years, big four accountants will have crawled all over those valuations and signed them off and they will be parent at the moment, so I think that issue has passed. And also you have more visibility on where the winners and losers are a couple of years on from the
big sell off in that area. So that was those were concerns, but I think you don't need to worry about those now. The big concern is supplied demand in the market. And let's say when these rules came in that fifteen percent of some of these private equity trusts were owned by people who would have to clear or add these underlying cost to their own product details. They really need to get out, and probably half of that's already been sold. But it's that selling pressure that's triggering
the very, very wide discounts. Of sort of twenty five to thirty maybe forty percent in some areas. As Again, a lot of this just boils down.
Life out of all that you hold, quite a few of them. Out of the ones that you hold, which is your favorite?
I think Oakley Capital is the is the favorite long term. Just very good at what they do and have created some amazing businesses and that's that's been a great one for us. Recent ones that have gone in tend to be the more early stage type unlisted that say, Shahllian Chrysalis and Seraphim Space.
Tell us a bit about Seraphim Space that's popped up on this podcast before, and we've had a couple of podcast where we've talked about nothing but space. What's the interesting holdings inside Saraphim. Did it get a little pop from that landing on the moon recently, etc.
No, it sounds quite outlandish at first, but when you actually start looking at some of the business models, they are becoming more mature. It's amazing how much you know, how much is done in the space and just things like mapping and insurance claims, for example. You can check with everything's been photographed all the time, and you can check out insurance claims by just looking at images from space. So it's much more mature than pact. You thinking we're
much closer to profitability. And it just got to a point where it was trading on about sixty five discoun I think we paid thirty three pence for our holding, and they bounced quite sharply in there. So it was just really a case of when the market was really nervous in October, there was almost no price for these that people were completely averse to risk and perceive this as risky, and therefore the shares spiked down to a very low level and literally, I think again sixty sixty
five discounts. We used to think twenty percent discount was pretty wide. The extremes of discounts we've seen with the last year or two, it is something I've not seen before, and I've been doing investment trusts since since the late eighties. Sixty five you wouldn't even dream of. So when you think, when you can see that, the portfoilio is quite interesting as well, and it does give you the special situation to exploit.
Yeah's certainly fun. There were a couple two more that I wanted to ask you about. Particularly because I find them rather interesting. The first is the ground Rents Fund, which is fascinating, isn't it, Because we've been through this whole cycle in the UK of discussing quite rightly the appallingness of our leasehold system and how bizarre it is that people get caught up in these huge service charges and difficulties of having a leasehold. And then of course
there's ground rents. Ground rents, which is how any people pay for nothing. There is there to lease a piece of land that most people rather believe that they already owned, and it turns out that they don't. And ground rents on olderlase holds are very low peppercorn stuff, but on newer lease holds we found that they can be very expensive.
So as this conversation has become increasingly political, and there's been conversation about positively a polishing the lease hold system altogether, which apparently my go now tells us is quit too complicated. The ground rent as share price of the grounds Rent Trust genuinely collapsed, didn't it.
Yes, I think still the nethactic values in the nineties, the shares are training around thirty odd. I think we've paid a bit more than where we are at the moment. I think most of the shares we've bought for sort of thirty seven to thirty eight pence. I think that ground rents has work perfectly wealthy as in years, but going back five or ten years, there were excesses, particularly introduction by the housebuilders of ground rents on houses, because
that makes no sense whatsoever. The point of a ground rent is if you've got a block of flats, you don't want the person who owns the ground floor not looking up the foundations, for example, and therefore it's practical that there is a three holder and you lease from them. That's a practical reason. But a house there isn't that need, and therefore they should never have ground rents, And it was the excesses a few years back has then created
a bit of a backlash. But if you wanted to and I don't think ground rents will exist in the future in the way and there won't be an asset class of owning ground rents. But what's going to happen to the existing ones is what we're looking at. And if the effectively they were abolished and the owner's asset was wiped out, I think it would all end up in the courts because the law lords have said it's people's human rights to actually retain what they're actually purchased.
There will be a compromise somewhere down the road which ground rents won't be effectively confiscated, but these things won't exist in the future. There won't be new ground rents or there'll be a new system for it. So basically it's a call that there will be a compromise. You might get fifty or sixty pence a share for your ground rents, but it's kind of grind on for a
long period of time there. God was talking about it last night and clearly the bits and piece I saw just from the from the news is he's backing off a long way from his previous position, which is which should inferior be very positive for Grammar Rents income Trust. But I haven't had a look to see this morning. I don't think there's been any change in the share price, but then they probably wouldn't even if there were dramatically
good news. Nobody would notice because nobody cares. And that cuts back to a lot of the opportunities that we exploited, just overlooked and unloved rather than.
So that's at a whopping great discount and that will probably come good over time.
Massive discount, but obviously bear in mind, yeah, the NAV, I think it's like in the low nineties, but there is a material uncertainty crawls in there from Sevil's because nobody really knows what they're worth. You have to treat the NAV figure with extreme caution. But even if it was even if it was halved, that would still be a reasonable gain from where the share price is today.
Now there has been there is a catalyst coming into the maked in the form of a few activist investors right who are looking at some of the investment trusts on Discounts Center, attempting to push the directors and the management to do buy bags to merge this kind of thing. And the one we hear the most about is Saba, which is an American activist investor that has been quite active in the investment trust market recently, and that to a degree is a beginning of a catalyst, right.
Yes. Now, ever, it comes back to the point I was making earlier that you know that if the stock market can't value these things properly, if they leave them trading at wide discounts because of an oversupply situation, because of at the moment the cost disclosure problem. For example, it doesn't affect the quality of the underlying assets. So if all these trusts sit trading at sixty seventy pens in the pound, somebody likes SABA or the others coming
behind them will will come and take those assets. Because if you if an investment trust trades on a massive discount, in theory, there's nothing stopping you buying lots and lots of shares and forcing it into wind down, which is what SABA. That's their gameplay, and therefore that as you said, that's the next catalyst coming along. If these things stay where they are trading at the moment, then it will be m and A that narrows the discount.
Yeah, as John and I keep saying over and over again about cheap things, if you don't buy them, somebody else will and then you'll be sorry. Nick, are there any investment trusts in your portfolio that we haven't talked about that you feel there and absolutely must mention?
Oh, let's have a look a couple of final ones, one sort of two or three I think one recent acquisition is Ship, which is effectively a shipping line. Ship is the ticker. Its actual name is tough To Oceanic.
But we think that's an interesting one in that they've put a date on the fund that they will start winding down after twenty eighteen or sort of not eighteen twenty twenty eight, so you know that there's a trust they're trading on a big discount, where the discount will narrow and you will get an exit if you stick around for three or four years at a time, where you know, environmental pressures means that regulations dictate that ships or commercial shipping has to travel much slower to be
more green, which effectively removing capacity, which will help pricing. The other thing that's removing capacity is that there's been a booming building container ships, and Toughan doesn't own that that sector, but that's blocked out all the boat yards
and the construction yards for many years. Hence, again it's coming back to the point, you've got increasing demand and you've got shrinking supply, and therefore shipping rates are likely to increase, and therefore buying into a shipping trust on
a big discount seemed to a rather attractive route. One that slightly amusing one was Eco fin Us Renewables, which had as a solar farm wiped out in South Texas at a place called Whirlwind, And maybe we should have been asked questions about why the name of Whirlwind, But then that asset was wiped out by a tornado and the share price absolutely tanked. But of course it was all covered by insurance, and therefore that was an opportunity.
And also we have exposure to the UK small caps, and we don't think institutions will ever come back to buying UK small camps, but the ratings are just so low that the UK trades are the much at a big discount of the world mid and small caps tried at a trade at the big discount to large caps and microcaps trade at the bigger discount. All it's almost
like a sort of a Russian doll of discounts. You then say, you can actually buy these assets within an investment trust at a twenty percent discount to these bond out levels. So as I said, and again that's very similar to what's happening into the trust world, that these things are very lowly rated because the institutions can't buy them because the institutions, institutional traders now so large and even all of one hundred million bound companies just wouldn't
move the needle, so they're not coming back. But these are the companies chatting out decent profits in the real world and somebody will come and take them. And if you can buy into that world on a twenty discount, then over time, that's the value is going to be extracted.
And which trust is it you hold to reflect that? Is that River Mercantile.
We've got ryver working on microcapitters the largest, but we've also got rights and issues. We've got downing for a little bit longer because that's being weighn down, so it's more of a package really, but working on microcapures is the largest one.
Okay, brilliant Nick, thank you so much. I think I've taken up enough of your time and that was really interesting and lots of fascinating trusts as well. But before you go, I have to ask you the final question that I always ask everybody on this podcast, and you do have to answer it, whether you want to or not. Although I was told by a listener the other day that it's getting boring and I need to add something else to the question. But I'm not going to do
that today. If I asked you to choose between gold and bitcoin over a ten year period, which we you choose.
I think I understand gold. I'm not sure I'm the generation understands bitcoin, and I'm just concerned that one day we find out it's worthless, which isn't going to happen on gold. But that's probably an answer typical of my generation.
I'm afraid it is. I'm afraid it is. It's the normal answer that we get on this poddle that we have had a couple of surprises along the way, a couple of surprises along the way, and I always come down on the side of gold. And we have a lot of listeners and a lot of readers who are constantly explaining to me why I'm wrong. So one day maybe I'll understand why I'm wrong and why you're wrong as well. But we'll wait for that to happen. Nick, thank you so much for joining us today.
Wrong Thanks Nick, brilliant.
Thanks so much, John. I thought that was pretty interesting. I tell you what, Nick really knows what he's talking about when it comes to investment trust. He's always my favorite investment trust guest, what did you learn from this?
I mean, next fascinating and I think that he really does get into the weeds or in the structural benefits, but also they should structural problems that can investment trust face right now. And I just think it's interesting because again sort of seeing this weird deck over the UK market as a whole, where you've got perfectly decent kind of companies that are being essentially undervalued because there are flaws in the regulatory regime and also because of consolidation
within the wealth management area. Means that a lot of these trusts and a lot of these companies are just not big enough for any of these kind of big managers to want to put their money in because they won't make a difference to their portfolios overall, so I.
Thought, and liquidity, they can't get in an out when they're too small.
I know, I mean, but yeah, because that's the other thing. Even whenever I've been writing about investment trusts, you know, on an on and off basis for years obviously, and one of the things that you notice particularly now is whenever if I'm writing about for Bloomberg is you start
to say, oh, wait, a minute. If you know, the bid offer spread on that one, as in, the gap between the price of which you can buy today and then immediately sell is so big that you can't realistically tell a private investor that that's a good idea because they have to make ten percent before they've even you know,
got back to zero. So I do think I mean, I thought this was like really interesting and also it's really good to have someone out there who is basically an investment trust, a treasure that normal people can get access to. You know, he's because a lot of this is just activism that he's talking about. I mean, the
JP Morgan India Trust is a good one. You know, he's kind of he's done, he's done the details, read the paperwork, and has kind of said, well, actually, wait a minute, if if this trust, you know, has to follow its rules, then it means that I'm going to be up because you know, this amount of it is going to be redeemed at par and so yeah, that kind of I just I really like they can away thinks about trust.
One of the things that I was found attractive. But the so many things I find attractive. Listen and Nick and I talk about this, but one of the things that that we wrote as nown is that and longer term, investment trusts have tended to outperform open ended funds particularly often have an open ended fund and a closed ended fund closed ending another way of saying, investment trust run by the same investment house, by the same fund management group,
and historically have found that the investment trust outperforms the other. Now, what we don't know is if that's going to keep happening going forward, because one of the reasons for it historically has been that investment trust has been cheaper than open ended funds, and I kind of not anymore because the cost of open ended funds has come down so much, partially thanks by the way, to you and me, John, all the years we've spent agitating for reduced fees, we
have managed to get a lot of these fund management houses to push down their management fees, and that has had the effect of making investment trust not quite as cheap as they used to be. So now we get to find out. We get to find out whether the other great things about investment trusts having bores that are beholden absolutely to the shareholder, having the ability to use some leverage, etc. Whether these things are enough to keep
the app performance going over the longer term. I personally believe that they are, because I think that the in particular the idea of having a pool of permanent capital is very attractive to a manager and should make a difference to the way they operate. But it's not a given,
so it's an interesting time. The only other thing to say about that, of course, is that the discounts at the moment are phenomenally high relative to history, or that they've closed a better over the last six months, and whenever discounts are at this kind of level, you end to see very good performance afterwards. The AIC and we might put a link to the a C and the show notes because they've done some excellent work on this and everything you need to know about investment trusts of
any kind as on the AIC website. Or are there any of the trust that we talked about in particular John that you thought, oh, we aren't going to go and buy that one? Not financial advice obviously.
So the ones are more interested in at moments though. Are the plavate equity points? Yeah? I just think here's point about they have been particularly widely hurt by the feed this closure screw up basically, and then on top of that, you've got the concerns about what the underlying
valuations are. But if you look at I mean, like rec Capital came out the other day and their private assets had kind of nudged a bit higher, and when you look at stock markets, stock markets have all gone higher, it's hard to believe that the underlying value of these businesses, assuming that they generate cash flows, which a lot of them do, are not basically what they say on the NAV. And even if they're a bit below that, there's still
a massive discount. So I do I'm still reluctant. I don't know why I'm reluctive, but I sort of feel as if there's I'm not high conviction about it. But I think the private equity is probably the most interesting area at the moment.
Still all right, to capital that has been so disappointing. That has been one of the most disappointing trusts. I think I remember thinking even fifteen years ago, this was a great, solid, long term trust to hold, and it kind of hasn't been. If that private equity stuff came good, that would be great, but that would be great for
lots of our listeners. I'm sure. Anyway, I commend thiscast to you because it really is very good, and then have a look at next Fund, have a look at the trust that he talks about, and have a look at the AIC website. The investment trust market is really interesting. If you're interested in any of these niche areas in the market, there aren't very many ways to get access to them, and the investment trust sector is probably the place to look. Thanks for listening to this week's Marin
Talks Money. We'll be back next week. In the meantime, If you like us, show rate, review, and subscribe wherever you listen to your podcast, and of course do tell your friends. This episode was hosted by me Maren Sunset Web. It was produced by some Mesidi and cam Grave. Additional editing by Rushi B J. Cole and special thanks to Nick Groomed and to John Staff.