16th April 2025
While the Trump Tariff Turmoil continues to impact global markets, we have been truffling through the undergrowth of the investment trust sector, particularly with our more adventurous fund, Global Opportunities, in mind. Going into April we had a higher than average allocation to trusts for a number of reasons. The sector trades on historic wide discounts with the average hitting 20% during the Tariff Turmoil, a level which exceeds the Covid average. We have confidence in the average discount narrowing from here because of clear signs of improving corporate governance. Boards are holding investment management teams to account to a far greater extent than we have seen for many years, with fee reductions, strategic reviews, continuation votes and robust capital allocation policies. As a result, we observe record amounts of share buybacks and loads of M&A activity. Some of this has been initiated by Boards themselves given the widening discounts and shrinking demand from wealth managers and other institutions, but there can be no doubt of the direct and indirect impact of activist investors such as Saba Capital and Robert Naylor and Christopher Mills via their newly launched Achilles Investment Trust (of which we are the largest shareholder).
The mandate of Global Opportunities is to invest in long-term structural growth themes alongside short-term special situations. The long-term growth themes are sectors like healthcare, technology, private equity, emerging markets and high alpha equity managers. Most of these will be accessed via open-ended funds. The special situations will include investment trusts on wide discounts where there are likely catalysts for a rerating such as improving sentiment towards an asset class, upcoming corporate events or activists on the shareholder register. Ideally we want the special situations to be in asset classes that also fit the long-term growth themes. Or in other words, we have to like the net asset value as well as the discount – we don’t just buy wide discounts and hope that it narrows by itself.
Since Liberation Day, discounts have widened in certain pockets of the investment trust sector. We have spent time assessing whether this might be justified because the outlook for the net asset value has been negatively impacted by the tariff uncertainty, or if the widening is irrational. On the whole, rationality prevails. For example, private equity is the most notable sub-sector that has seen widening discounts, despite them trading on very wide discounts before the start of April. This is likely to be because the long-awaited exit environment was improving only for deals to be put on ice amid the heightened uncertain outlook for the US and global economy. Indeed Klarna, the well-known ‘By Now Pay Later’ fintech held in Chrysalis announced it was pausing its IPO plans. Meanwhile, the most notable sub-sector seeing a narrower discount is European equities on the back of good Q1 performance and the potential to benefit from a reallocation of capital flows away from the US on the back of decreased investor confidence in the American exceptionalism story.
However, as always, there are opportunities where discounts have widened or remain wide despite clear catalysts on the horizon. A quick analysis of Global Opportunities’ portfolio shows almost 20% of assets across 15 trusts that are in the midst of some form of corporate activity such as a strategic review, managed wind down, upcoming realisation opportunities or continuation votes; or where we assess the trusts to be simply unsustainable in their current sub-scale form and have communicated this view to the Board and Managers, who typically concur. Those 15 trusts currently trade on a weighted average discount of 34%. Although we are not expecting all these 15 to wind up and return cash to shareholders within days, we expect some material changes over the next 12 months that will see some of them wind up or be taken over, or at least be in a different structure. A realistic halving of those discounts across that portion of the portfolio would make a significant contribution to returns. It’s worth remember the power of ‘discount narrowing maths’. A halving of a 34% discount, assuming a flat NAV, is a 26% return. A full narrowing to par is a 51% return.
These idiosyncratic drivers of return haven’t mattered during the recent global equity bull market. However, looking ahead at the potential new world order without the US at the head of the table, we believe uncorrelated alpha will be a very important source of returns. Global Opportunities is well placed to provide this.
Daniel Lockyer – Senior Fund Manager
For professional advisers only. This article is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC25358
