INVESTMENT TRUST
GUIDEBOOK 2021-2022
IN ASSOCIATION WITH
FIDELITY INTERNATIONAL
INVESTMENT TRUST GUIDEBOOK 2021
INVESTMENT TRUST GUIDEBOOK 2021: FIDELITY INTERNATIONAL
WELCOME
WINNING TRUSTS
At the end of October, over £274bn was held by investors in London-listed investment companies, a 20% increase of £45bn over the previous 12 months. The stock market rebound from the coronavirus crash has been kind to all types of funds, of course, but investment trusts have a shiny, modern sheen that will reassure those that want to see the 153-year-old collective investment schemes stay relevant. This year has seen trusts attract a record surge in inflows, not only as existing funds tap eager investors for more cash but also as new funds launch in response to the challenges and opportunities the post-pandemic world presents. Of particular note are the large sums being raised by infrastructure and renewable energy funds, as investors look to be on the right side of climate change, and hopefully help limit its devastating consequences. Meanwhile, our annual performance awards demonstrate the wide range of trusts that are available as well as the frequently impressive results fund managers can generate from their unique structure.
ello and welcome to Citywire’s second annual Investment Trust Handbook, which arrives at a time when the UK’s closed-end fund sector is going from strength to strength.
H
Gavin Lumsden Citywire Editor in Chief #CWInvestmentTrustAwards @Citywire citywire.co.uk/investment-trust-insider
CONTENTS
CHAPTER 1 The case for investment companies CHAPTER 2 Investment trusts and ESG CHAPTER 3 Growth and value CITYWIRE INVESTMENT TRUST AWARDS 2021 SPONSOR CONTENT Fidelity International abrdn Allianz Global Investors Alliance Trust Schroders Download the pdf version of the magazine
Photo by Erwan Hesry on Unsplash
As interest and assets in investment trusts rocket, we outline 10 tailwinds that have helped closed-ended funds take off in 2021
CHAPTER 1
Source: AIC/Morningstar. All figures are ex 3i. Indices marked with ‘PR’ are capital return only. Indices that state currency are in USD have been converted to GBP. UK CPI and UK RPI figures that are provided are one months in arrears, as they have not been released at the time of preparation.
INVESTMENT TRUST GUIDEBOOK 2021: CHAPTER 1
I
nvestment trust managers and investors are enjoying a stellar year. In the first half of 2021, investment trusts raised a total of £6.3bn – the highest amount ever in a half-year period. By the end of September, assets in trusts had soared to an all-time high of £266bn.
ACCESS TO LONG-TERM GROWTH OPPORTUNITIES
By Jennifer Hill
‘Being structured as a listed entity means investors get a seat at the table and every vote counts’
Kamal Warraich Canaccord Genuity Wealth Management
Superior performance has undoubtedly served to boost assets and interest. Shares in the average investment company rocketed 28% in the year to 30 September, outstripping a mere 7% gain among open-ended funds fourfold, data from the Association of Investment Companies (AIC) shows. But what serves to make trusts such a compelling proposition?
Arguably, the most important attribute of investment trusts is their closed-ended structure. This enables managers to take a longer-term view, knowing they will not have to sell holdings prematurely to meet redemptions – particularly damaging during periods of market stress. It also allows managers to invest in less-liquid investments, such as small and micro-caps. Markuz Jaffe, an investment companies research analyst at Peel Hunt, gives the examples of River and Mercantile UK Micro Cap (RMMC) and Miton UK MicroCap (MINI). ‘Both trusts have net assets of close to £100m, meaning that the portfolios can have meaningful allocations to micro-cap equities without breaching undesirable liquidity or ownership thresholds,’ he said. ‘The attraction of saving for your future and helping people and the planet is a powerful one,’ said James Carthew, head of investment companies research at QuotedData. ‘There is much yet to do and more investment needed, which should underwrite the continued growth of the investment companies universe for years to come.’
INVESTMENT TRUSTS TAKE OFF
1
Lastly, there is the less-discussed but important point of fund managers’ personal preference. ‘Many managers prefer to run investment trusts over their open-ended funds as they don’t have to worry about fund flows or keeping a certain amount of cash to facilitate redemptions,’ said Warraich. ‘Another reason is capacity – the amount of money a manager can run without materially altering their investment process or negatively affecting their return profile. We have seen capacity damage done to so many open-ended funds over time.’ A notable example is a smaller company strategy, the Premier Miton UK Smaller Companies fund, which soft-closed to investors in April.
MANAGER PREFERENCE
10
For FinnCap analyst Monica Tepes, the fundamental benefit of the investment trust structure is the ability to invest in illiquid assets, such as infrastructure, renewables and music royalties, which offer valuable sources of diversification and income, in a liquid vehicle. ‘Without listed funds, such investments would be out of reach or uninvestable for most investors,’ she said. ‘Investing in them via private funds would require very high investment amounts or would tie up investors’ money for seven to 10 years or more.’ Casterbridge Wealth’s exposure to alternatives is predominantly achieved through trusts – International Public Partnerships (INPP) for infrastructure, HgCapital Trust (HGT) for private equity and Sixth Street Specialty Lending (TSLX) for private debt and floating-rate notes. It also uses US-listed healthcare real estate investment trust Welltower (WELL). This year’s crop of new trusts has embraced the flexibility to hold illiquid assets: everything from renewable energy – VH Global Sustainable Energy Opportunities (GSEO) – and digital infrastructure such as subsea cables and telecoms towers – Digital 9 Infrastructure (DGI9) – to hydrogen – HydrogenOne Capital Growth (HGEN) – and space technology – Seraphim Space (SSIT).
DIVERSIFICATION INTO UNQUOTED AND ALTERNATIVE ASSETS
2
Another important factor is the ability trusts have to smooth income payments. They can stash away up to 15% of the income they generate each year to supplement payments to shareholders in leaner periods. ‘Investment trusts have a secret weapon when it comes to dividends – revenue reserves,’ said Anthony Leatham, head of investment companies research at Peel Hunt. ‘The last 18 months have reminded us just how valuable these reserves can be in supporting dividends through difficult and volatile times.’ Only two UK equity income trusts were forced to cut their dividends during the pandemic, compared with every open-ended income fund. Six trusts on the AIC’s ‘dividend heroes’ list – City of London (CTY), Bankers (BNKR), Alliance (ATST), Caledonia Investments (CLDN), BMO Global Smaller Companies (BGSC) and F&C (FCIT) – have increased their dividends for a remarkable 50 years or more.‘For those investors seeking income from their portfolios, investment trusts are invaluable,’ Leatham said.
A STEADY FLOW OF INCOME
3
Investors also have a say in how trusts are run, voting on major issues such as whether a trust should continue to exist. ‘Being structured as a listed entity means investors get a seat at the table and every vote counts,’ said Kamal Warraich, an investment analyst at Canaccord Genuity Wealth Management. ‘This is unlike open-ended funds, where investors get very little say in who manages the fund and how it’s managed.’ One of the most important votes is the continuation vote, which typically occurs every five years. This allows shareholders to decide whether the company should continue to operate or assets should be liquidated and proceeds returned to shareholders. The most recent continuation vote for Allianz Technology (ATT) was proposed and passed by shareholders at its annual general meeting in April.
VOTING RIGHTS
5
Each investment trust has an independent board that acts in the best interests of shareholders, rather than those of the manager. ‘One of the most obvious benefits is the presence of professional boards, providing ongoing stewardship of the strategy,’ said David Johnson, an investment trust analyst at Kepler Partners. The benefits take several forms. The first is the board’s ability to manage dividend payments to produce the smoothing effect detailed above. Beyond dividends, boards can also seek to change the manager, strategy or other aspects of a trust’s operations. Johnson said this could take the form of reducing costs, as Martin Currie Global Portfolio (MNP) did in February when it adopted a simpler fee structure, or the adoption of an explicit environmental, social and governance objective, which BlackRock Sustainable American Income (BRSA) did in July, changing its name to reflect this. Boards can bring about change regardless of history and tenure. In October, the board of the Scottish (SCIN) investment trust, a self-managed company that was established in 1887, unveiled plans to merge with JPMorgan Global Growth & Income (JGGI) after a prolonged period of underperformance.
INDEPENDENT OVERSIGHT
4
Trusts are beholden to stock exchange listing rules and are often far more transparent than their open-ended counterparts, whose annual and interim reports are rarely as detailed. ‘Open-ended funds are not beholden to the same regulatory framework as investment trusts even adjusting for Ucits requirements,’ said Warraich. ‘While both vehicles are governed by fund regulation, only investment trusts are subject to company law and capital markets regulation. This additional regulatory oversight naturally means investment trusts are more transparent in their reporting requirements.’
GREATER TRANSPARENCY
6
Because investment trusts are listed vehicles, there are two prices that investors can follow – the share price of the trust (the price investors buy and sell for) and the value of the underlying portfolio, or net asset value (NAV). When the share price is lower than the NAV, investors can buy the portfolio at a discount. For Nick Wood, head of fund research at Quilter Cheviot, the most important consideration is whether a trust sits at a premium or discount. ‘During 2020, various investment trusts were pushed to some pretty hefty premiums, but at the other end of the scale there are often bargains to be had when trusts trade at a large discount,’ he said. Not only do discounts offer potential entry points, they offer a unique way to gain exposure to blue-chip equities like Microsoft at discounts to market price. ‘The prices of such companies often reflect all available information, making discounted strategies the only way to buy them on the cheap,’ said Johnson. Many trusts have a discount control policy. This gives investors confidence that the board will seek to ensure that the trust trades within a reasonable range around the NAV.
ABILITY TO BUY AT A DISCOUNT
7
Gearing is another unique attraction of investment trusts. Borrowing to invest more than shareholders’ assets supercharges gains provided the investments make more than the cost of debt. The ability to gear is one of the primary reasons that closed-ended vehicles have outperformed open-ended counterparts over time. ‘A well-managed gearing policy can work wonders through the market cycle,’ said Warraich. Peel Hunt’s Jaffe pointed to trusts being ‘well placed to take advantage of market dislocations’ by deploying available cash or gearing at times when open-ended funds are selling assets at depressed values to meet redemptions. With borrowing costs remaining at rock bottom thanks to the effect of low interest rates, investment trust boards are locking in long-term debt at ultra-low levels. Scottish Mortgage (SMT), Mercantile (MRC) and Bankers (BNKR) are just three trusts to issue debt this year, fixing rates as low as 1.67% for as long as 40 years.
PERFORMANCE BOOST THROUGH GEARING
8
It is not uncommon to find trusts with ongoing fees as low as 0.5% or less, and boards continue to negotiate fee changes to the benefit of shareholders. More than 30 trusts have changed their fees this year. Some have reduced or changed their base fee, notably introducing lower or additional tiered rates, while others have removed performance-related fees.
COMPETITIVE FEE STRUCTURES
9
CHAPTER ONE
F
idelity International provides world-class investment solutions and retirement expertise to institutions, individuals and their advisers – to help our clients build better futures for themselves and generations to come.
As a private company we think generationally and invest for the long term. Helping clients to save for retirement and other long term investing objectives has been at the core of our business for over 50 years. Today, we are trusted to manage client assets of £447.4 billion on behalf of 2.7 million investors in the UK, Continental Europe, the Middle East, Asia Pacific and South America.
Fidelity’s six investment trusts are managed according to the philosophy and approach of each portfolio manager, across different markets. All our trusts utilise a bottom-up approach - leveraging Fidelity’s extensive global research resources to find overlooked or underappreciated investment opportunities. Fidelity Asian Values PLC invests across a large and diverse universe of over 18,000 listed stocks to find Asia’s smaller companies that have the potential to turn into the winners of tomorrow. Fidelity China Special Situations PLC aims to capitalise on China’s new growth drivers and the evolving habits of an increasingly affluent and mobile-centric domestic consumer. Fidelity Emerging Markets Limited uses an extended range of investment powers, identifying great companies from the largest to smallest. The Company can also “short” some stocks to generate returns from a fall in value of poor performing Emerging Markets companies. Fidelity European Trust PLC looks to identify robust and well-managed companies that have the ability to deliver regular and growing dividends, irrespective of the economic environment. Fidelity Japan Trust PLC favours under-researched smaller and medium-sized companies whose future growth potential is not fully recognised by the wider market. Fidelity Special Values PLC seeks out unloved UK companies across the market-cap range whose improving prospects are under-appreciated and not currently reflected. Bottom-up research advantage - through fundamental research, longer-term perspectives and great access to company management, we aim to deliver consistent risk-adjusted performance for clients. Unique investment culture - Fidelity provides a unique environment rich in collaboration, within which analysts and portfolio managers with diverse skillsets can debate and challenge investment ideas from a wide range of perspectives.
Company name Fidelity International Investment Trusts Address Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP Phone numbers For professionals 0800 368 1732 Personal investors 0800 414 161 Website www.investment-trusts.fidelity.co.uk Fidelity International total global assets under management £447.4bn Number of investment managers (including co-portfolio manager) 158 in total (including 11 for the Investment Trusts) Number of investment trusts 6 AUM in investment trusts £6.6bn
Source: Fidelity International, 30 September 2021 and includes assets under management and under administration. Data is unaudited. Investment Trusts AUM as at 31 October 2021.
Past performance is not a reliable indicator of future results. Source: Fidelity Datastream (NAV) and Refinitiv (Share Price and Index), as at 31/10/21. Performance Basis: bid-bid with income reinvested, in GBP, net of fees. Comparative indices: Asian Values PLC = MSCI All Country Asia ex Japan Small Cap (N) Index; China Special Situations PLC = MSCI China Index (Net) ; Emerging Markets Limited = MSCI Emerging Markets; European Trust PLC = FTSE World Europe ex-UK Index Total Return; Japan Trust PLC = TOPIX Total Return Index; Special Values PLC = FTSE All Share Index.
PORTFOLIO MONITORING
PORTFOLIO CONSTRUCTION
WHAT SETS YOUR INVESTMENT TRUSTS APART FROM THE REST?
Across the world, companies are generally coming to market later so having the ability to selectively tap into the unlisted space is a key differentiator for investment trusts. This is particularly in Asia, where the unlisted sector is less well-known, and therefore more mis-priced, offering greater potential upside for investments. While Asian markets and economies are still not as developed as developed markets like the US, they are developing rapidly which offers unique and interesting opportunities for the patient, long-term investor. Fidelity China Special Situations (FCSS), Fidelity Emerging Markets Limited (FEML) and Fidelity Japan Trust (FJV) may all invest in unlisted companies and in recent years have been doing so increasingly. The ability to borrow money and gear up is another advantage of investment trusts. Fidelity takes the view that, with markets generally growing across cycles, the use of gearing both strategically and tactically can enhance shareholder returns over the longer term. As this is adjusted to adapt to market sentiment and applied when the portfolio managers see lots of upside, the level of gearing can vary between trusts and regions, throughout the market cycle. Gearing for the six trusts is currently between 2% - 25%. The majority of Fidelity’s investment trusts pay annual or semi-annual dividends and have a good track record of year-on-year dividend increases, retaining income reserves each year to ensure that dividends can be relied upon. In most years, each company will retain circa 10% of the portfolio income generated and the companies have dividend cover in excess of half the previous year’s total dividend.
INVESTMENT STRATEGY FOCUS:
Portfolios are subject to daily monitoring of portfolio guidelines and constraints (considering regulatory requirements) by compliance and monthly evaluations of portfolio risk exposures and their alignment with expectations. Portfolio managers also participate in a Quarterly Fund Review which covers portfolio construction, liquidity, positions, trading, characteristics, style and risk in detail.
BUILDING BETTER FINANCIAL FUTURES TOGETHER
better futures for themselves and generations to come. As a private company we think generationally and invest for the long term. Helping clients to save for retirement and other long term investing objectives has been at the core of our business for over 50 years. Today, we are trusted to manage client assets of £447.4 billion on behalf of 2.7 million investors in the UK, Continental Europe, the Middle East, Asia Pacific and South America.
idelity International provides world-class investment solutions and retirement expertise to institutions, individuals and their advisers – to help our clients build
CITYWIRE: You’ve been managing the trust for the past 11 years and earlier in your career you were an analyst researching ideas for the portfolio. How has the investment landscape changed for European equities in the past three decades? Sam Morse (SM): The big change for Europe in the past 30 years is the same for all investment markets, and certainly the UK, and that is globalisation. In 1991, you were largely investing in companies that were exposed to domestic Europe and did all their business there. Amazingly, I think less than 50% of the earnings and profits of European companies these days come from Europe. The big multinational European companies, some of which have been regularly in the fund and have been very successful compounders, are businesses that are very much global in their nature, and probably to do less business in Europe than the index as a whole. Investing in Europe really is about investing in companies not in the economy, which is a good thing because the European economy has been somewhat sluggish during this period. CITYWIRE: The trust has only had four portfolio managers in its 30-year history. There are not many football clubs who can point to that level of consistency. SM: It started with Anthony Bolton, followed by Tim McCarron, Sudipto Banerji and then myself as lead manager since 2011. I have two senior colleagues, Cristina Dondiuc, an investment director who leads our client servicing activities, and Marcel Stötzel, who is the co-portfolio manager. We have all employed different stockpicking techniques, but with the same objective of finding good companies in Europe. The other key element that has been consistent is the level of support we get from the Fidelity team of analysts. We have an incredible in-house research department with about 40 analysts covering Europe. That wasn’t the case in 1991, although I’m proud to say I was one of the analysts who was looking at Europe at that time and I hope I made a small contribution in those early years. I did a quick calculation based on average tenure and I reckon approaching 250 different analysts have contributed to this fund over that 30-year period I think that’s one of the key differentiators from other European investment trusts and what has led to the very attractive return. CITYWIRE: How would you describe your approach? SM: My particular focus is on dividend growth and trying to identify attractively valued companies. I look for value-driven growth companies that will grow over time. The one thing all the trust’s managers have had in common is a focus on stockpicking, rather than worrying about the macro or what will happen going forward in the European economy. This is what has helped the 13.9% net asset value (NAV) return per annum of that 30-year period. CITYWIRE: How key are dividends? SM: What is very important are the reinvested dividends. Hopefully, all the shareholders remember to reinvest dividends if they don’t need the regular income. This has meant a return of almost 50 times your money over the past 30 years. I looked at this five years ago to coincide with the 25th anniversary of the trust. The reinvestment of dividends meant a return of almost 25 times your money at that point. Since then we have doubled investors’ returns. That really shows both the power of stockpicking and of compounding. One of the great advantages of investment trusts that sometimes gets overlooked is their ability to gear. Certainly, the gearing level has varied over 30-year periods, depending on our confidence in the stocks. The combination of that compounding and gearing means that if you’d invested in the fund, net of fees, you would have made nearly three times the amount than if you’d invested in the index over the same period. This is quite staggering and ticks the box for active management, which, as active managers, we’re always very pleased about. CITYWIRE: How has Europe performed compared with some of the other major investment markets? SM: It is perhaps a bit counterintuitive to look at the indices for the major stock markets. Europe has pretty much matched the world stock market returns despite the fact that many people tend to read gloomy headlines about how it’s rather sclerotic, but actually European companies have done pretty well. I think what really drives the performance of an index is the performance of the companies and their real dividend growth. Fidelity’s Peter Lynch had a lovely saying: ‘Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.’ I think this is very much a testament to our focus on stockpicking. The general view is that Europe hasn’t done as well as the world in the past 10 years or so, and that’s largely because of the big US tech names. CITYWIRE: When the trust first launched, innovation in the tech sector in Europe was one of its drivers. Is this still an attractive area or should investors look to the US? SM: Technology has become an important part of the benchmark in Europe. It’s now a much larger component. Our weighting in tech is around 15% and we’re probably about 3% overweight compared with the index. The tech companies in the US have done phenomenally, but that may change in the next 10 years. We have one or two companies in the portfolio we think look of value relative to their US peers, German software firm SAP would be a case in point. CITYWIRE: Are you seeing pricing power that would allow companies to generate more cash, which they could pay back to investors in dividends? SM: I think the pricing power is often very much a function of the company’s business and the strength of the franchise.With most businesses I invest in, pricing power is something I really focus on. Although when inflation and interest rates rise, I tend to lose out on the valuation side because a lot of these ‘steady eddy’ businesses get hit on a valuation basis. On the flip side, their earnings are much more robust than many others. Traditionally, some companies haven’t had pricing power but now they do because of supply chain issues and the pandemic. The autos sector has some pricing power currently, for example, but you know it’s going to end. I’m very much a long-term investor so what I’m looking for are companies that can grow their dividends on a three- to five-year view. My question is about the sustainability of dividends. CITYWIRE: If someone is not currently invested in European equities why should they consider them now – and why this investment trust? SM: I don’t have a huge amount of confidence in predicting what’s going to happen in terms of stock market directions or interest rates, etc. The pandemic has demonstrated that it’s foolish to believe we can predict what will happen. I would rather build a robust portfolio of companies that have a good long-term track record in terms of earnings, sales, dividend growth and cashflow growth, where I feel strongly they will be able to continue that track record. We’re not trying to shoot the lights out. Each and every year we’re just trying to add a little bit of extra performance relative to the benchmark. The beauty of this approach is we don’t have too many sleepless nights worrying that the portfolio will go off the rails. We invest in decent companies with good track records that we are confident can help us outperform a little bit each year. With the power of compounding, that little bit of outperformance can deliver a very attractive return ahead of the benchmark over time.
Important information Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments are subject to currency fluctuations. The shares in the investment trusts are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. Some of the trusts invest more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies and their securities are often less liquid. The investment trusts use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Some of the trusts invest in emerging markets which can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
THE SECRET TO SUCCESS
To mark the 30th anniversary of the launch of the Fidelity European Trust, lead portfolio manager Sam Morse looks back on what has changed since 1991.
Important information Past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up, so you may get back less than you invest.
‘Investing in Europe really is about investing in companies not in the economy, which is a good thing because the European economy has been somewhat sluggish during this period’
Sam Morse Portfolio manager, Fidelity European Trust PLC
The latest annual reports and factsheets can be obtained from our website at www.fidelity.co.uk/its or by calling 0800 41 41 10. The full prospectus may also be obtained from Fidelity. The Alternative Investment Fund Manager (AIFM) of Fidelity Investment Trusts is FIL Investment Services (UK) Limited. Issued by Financial Administration Services Limited authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1121/36655/ISSCSO00035/0222/B2C
To find out more, scan the QR code or visit fidelity.co.uk/Europe
‘The beauty of this approach is we don’t have too many sleepless nights worrying that the portfolio will go off the rails. We invest in decent companies with good track records that we are confident can help us outperform a little bit each year’
INVESTMENT TRUST AWARDS 2021
Asia Pacific Equities Emerging Market Single Country European Equities Global Emerging Market Equities Global Equities International Income Japanese Equities North America Equities Specialist Equities UK All Companies
CATEGORIES
SERVICE AWARDS
UK Equity Income UK Smaller Companies Global Multi-Asset Infrastructure Private Equity Property UK Property Specialist Debt Best Board Lifetime Achievement
INVESTMENT TRUST GUIDEBOOK 2021: AWARDS
AWARDS INTRODUCTION
As the UK’s oldest form of collective savings vehicle, investment trusts stretch back 153 years. These stock market listed funds have become increasingly popular as investors recognise the advantages their ‘closed-end’ structure can bring, coupled with the corporate governance strength of having independent boards looking after their shareholders’ interests. According to the Association of Investment Companies, over £265bn is held by investors in 390 funds on the London Stock Exchange. That’s an increase of £36bn on a year ago, reflecting the dramatic rebound in global stock markets after the brief pandemic crash in the spring of 2020. Special awards In addition to 18 sector performance awards, this year sees the return of our ‘Best Board’ award for the group of non-executive directors deemed to have done the best job for their investment trust shareholders. We also have a Lifetime Achievement award to a special individual who made a big contribution to the investment trust industry. Our thanks to our four judges for their time in assessing the performance data and deliberating over the shortlists for our 20 awards. They are: Our 18 performance awards go to investment trusts whose fund managers have delivered the best underlying, risk-adjusted returns in the three years to 31 August. For 13 sectors where investment trusts invest in publicly traded equities, or shares, our winners were the trusts whose growth in net asset value (NAV) achieved the highest ‘information ratio’ in the three-year period. The information ratio is a method used by analysts to calculate how much investment return a trust gets for each unit of risk taken against a stock market index. Any positive reading up to 1 is considered good. One trust this year scores 2, which is exceptional. Basing our awards on the information ratio rewards trusts with smoother investment returns over those that have been more lumpy or volatile. For our remaining five sectors where investment trusts invest in less frequently traded asset classes, we used two different methods. For Infrastructure and Debt we ranked trusts on their three-year ‘Sharpe ratio’, which like the information ratio highlights good risk-adjusted returns, but does so against cash rather than a stock market index. In Private Equity and our two property sectors we simply picked investment companies with the best three-year growth in net asset value. We believe this is the best way to judge the performance of their fund managers rather than simply rewarding trusts with the best shareholder returns, where prices can swing to discounts and premiums below and above the asset value.
itywire’s annual Investment Trust Awards celebrate the range of expertise within the UK investment company sector and applaud those closed-end funds achieving the best three-year performance within their categories.
C
OUR JUDGES
Ewan Lovett-Turner Head of investment companies research at Numis Securities
Genevra Banszky von Ambroz Fund manager at Smith & Williamson
John Newlands Newlands Fund Research
Mick Milligan Head of managed portfolio services at Killik & Co.
HOW WE PICKED THE WINNERS
Pacific Horizon
Pacific Horizon, now managed by Baillie Gifford’s Roderick Snell, was the clear winner for a second time from our shortlist of five outperforming Asia equity investment trusts. Its three-year information ratio of 1.66 reflected the strength of its 134% investment return, as measured by the underlying growth in NAV over three years, compared to both the Asia stock market index and its rivals. Second-placed Schroder Asian Total Return, our winner from two years ago, was left behind with a ratio of 0.92. Pacific Horizon picked up the award last year. We did consider whether to exclude the £827m trust after the departure of lead fund manager Ewan Markson-Brown in June, but viewed that Snell, a Citywire AAA-rated fund manager who has worked on the portfolio since 2013, is maintaining the growth-focused stock-picking approach that has been instrumental to its success.
ASIA PACIFIC EQUITIES
Roderick Snell Fund manager, Baillie Gifford
Source: Morningstar. Trusts ranked by their three-year information ratio based on growth in net asset value at 31 August 2021.
WINNER
Asia Pacific Equities Top Five
It’s been a difficult 2021 for funds investing in China, but the turbulence caused by Beijing’s clampdown on technology companies has not prevented JPMorgan China Growth & Income from clinching its third consecutive win in this category of single country emerging market trusts. The £441m investment trust – whose lead manager Howard Wang is supported by co-managers Rebecca Jiang and Shumin Huang – achieved an impressive 1.78 information ratio in the three years to August, having generated a 134% total return on net assets and a near 145% shareholder return. It beat off strong performances from rival Fidelity China Special Situations, and also Ashoka India Equity and Vietnam Enterprise Investments, which both did very well against their stock market benchmarks. The trust changed its name from JPMorgan Chinese last year after adopting a 4% annual dividend policy. Although its ‘New China’ focus on consumer and tech stocks, such as top holding Tencent, has taken a hit this year, recent weeks have seen a recovery as the market has stabilised.
JPMorgan China Growth & Income
Rebecca Jiang Fund manager, JP Morgan Asset Management
Howard Wang Fund manager, JP Morgan Asset Management
EMERGING MARKET SINGLE COUNTRY
Emerging Market Single Country Top Four
The surge in technology and internet stocks during the coronavirus pandemic has boosted a number of investment trusts managed by Baillie Gifford, none more so than Pacific Horizon (PHI) which surged past last year’s winner, Schroder Asian Total Return (ATR), to take first place. At the time of going to press in October, fund managers Ewan Markson-Brown and Roderick Snell had overseen a dramatic 91% total return in the shares this year, helped in part by their stake in hot stock SEA Limited. The internet platform provider and e-commerce group’s 248% share price gain in the 12 months to 31 July typified the managers’ ‘growth squared’ strategy of investing in the highest growth companies in the world’s fastest growing region. In the three years to 31 August, however, the now £443m growth portfolio advanced net asset value by 62%, underpinning a total return of 89.5% to shareholders, way ahead of its four closest rivals. Because its underlying net asset value growth was significantly ahead of the MSCI AC Asia Ex-Japan, its stock market index benchmark, Pacific Horizon generated a three-year information ratio of 1.04 to clinch the title of best performing Asia Pacific investment trust.
Ewan Markson-Brown Fund manager, Baillie Gifford
INVESTMENT TRUST AWARDS 2020
This competitive sector provides our first upset. You might have thought an excellent 100% three-year NAV total return would be enough for second-placed George Cooke of Montanaro European Small Companies to take home his third Citywire trophy. However, it is BlackRock Greater Europe, co-managed by Citywire AAA-rated Stefan Gries and Sam Vecht, that grabs top spot. Although its otherwise impressive 87% three-year NAV total return was less than Montanaro, its slightly smoother performance generated this year’s highest information ratio of just over two. The £695m trust focuses on high-quality growth companies across continental Europe, including the UK, but mostly in Switzerland, Netherlands, Denmark and France, with smaller holdings in Russia and Poland. It currently favours stocks in the technology, consumer, industrials, health and energy sectors, but is underweight financials, utilities, consumer staples, telecoms, real estate and basic materials. Annual results this month showed it generated 49.4% growth in NAV in the year to 31 August, beating the 27.4% of the FTSE World Europe ex-UK index, boosted by share price rises in semiconductor suppliers ASML, BE Semiconductor and VAT Group.
BlackRock Greater Europe
Stefan Gries Co-manager BlackRock
EUROPEAN EQUITIES
European Equities Top Five
Source: Lipper, Morningstar data. Numis Securities sectors. Trusts ranked by their three-year information ratio based on net asset value (NAV) total return to 31/8/20. All trusts with less than three years performance history were excluded. Index = euro total return
Sam Vecht Co-manager BlackRock
The recent revival in stablemate JPMorgan Global Emerging Markets Income was not enough to thwart Austin Forey from his third consecutive Citywire award for the strong performance of JPMorgan Emerging Markets. Forey has run the £1.5bn trust for 27 years and that experience has helped him steer the diversified growth portfolio, which he has nearly 50% invested in China and India, to a 55.4% investment return in the past three years, meriting a 1.4 information ratio that is miles ahead of arch-rival Templeton Emerging Markets. Austin’s high conviction, low turnover approach meant he made few changes to his long-term growth stocks during the pandemic. His largest holding is a near 9% position in Taiwan Semiconductor, the world’s largest chip foundry.
JPMorgan Emerging Markets
Austin Forey Fund manager, JP Morgan Asset Management
GLOBAL EMERGING MARKET EQUITIES
Global Emerging Market Equities Top Three
It should be no surprise to see Baillie Gifford’s flagship Scottish Mortgage Trust scoop this award. The FTSE 100 listed trust, the largest in the UK, has rallied to a record £22bn market value after recovering from a tech sell-off in the spring. The rebound meant it clawed back and then extended to the historic 110% shareholder return it achieved in 2020. The trust’s dedicated pursuit of the best growth opportunities in the world was amply rewarded in the pandemic when lockdowns provoked a worldwide shift to the internet, to the huge benefit of the leading technology disrupters it has backed. Over three years to the end of August, NAV has soared 161.9%, providing a 1.45 information ratio that is the envy of its closest rivals, including stable mate Monks, and Martin Currie Global Portfolio and Mid Wynd International who were also shortlisted. This is a pivotal moment for Scottish Mortgage as James Anderson, architect of Baillie Gifford’s long-term global growth strategy prepares to leave the trust he revolutionised since taking it on 21 years ago, having become chairman of Kinnevik, a Swedish investment company he admires greatly. Citywire AAA-rated Tom Slater, the joint manager and head of US equities who has worked with Anderson since 2010, will become the trust’s lead manager with Lawrence Burns as deputy. Half-year results this month underlined a shift into healthcare stocks, with Covid-19 vaccine manufacturer Moderna as its largest holding.
Scottish Mortgage Trust
Tom Slater Fund manager, Baillie Gifford
GLOBAL EQUITIES
Global Equities Top Four
The strong performance that made JPMorgan Global Growth & Income an attractive merger candidate for the underperforming Scottish investment trust last month is underlined by the £712m trust winning its first Citywire award. Under lead fund managers Helge Skibeli, Rajesh Tanna and co-manager Tim Woodhouse, the global best ideas trust provided a 51.2% total return on net assets in the three years to August. This performance beat MSCI’s global stock market index and underpinned a table-topping information ratio of 1.45. The judges were happy to give the award to JGGI but pointed out it is different from traditional equity income trusts, such as shortlisted rival Scottish American, which won the award in the previous two years. Having adopted a dividend policy of paying out 4% of net assets a year, the trust offers an attractive yield but doesn’t necessarily invest in conventional dividend stocks, the judges wanted to highlight. ‘It is income paying not necessarily income producing,’ they said.
JPMorgan Global Growth & Income
Tim Woodhouse Co-manager, JP Morgan Asset Management
INTERNATIONAL INCOME
International Income Top Three
Japanese Equities Top Four
Another surprise winner, the £100m Aberdeen Japan trust takes the prize although it hasn’t produced the best overall return in its sector. Under lead manager Kwok Chern-Yeh, the trust has grown net assets by 31.2%, beating Japan’s Topix index but trailing last year’s winner JPMorgan Japanese and Fidelity Japan. Still, the 0.76 information ratio demonstrates the fund manager’s stock picking skills and with lower gearing, or borrowing, the trust does offer a less volatile ride for investors. He believes prospects for Japanese shares, which are generally cheaper than their counterparts in US and Europe, are good as the global economy recovers from the pandemic and the country ramps up vaccinations.
Aberdeen Japan
Chern-Yeh Kwok Fund manager, Abrdn
JAPANESE EQUITIES
After last year’s phenomenal run, it was only a matter of time before Baillie Gifford US Growth ran off with the North America gong. Launched in 2018, the trust has now gained a three-year record to be eligible for our awards. What a record it is. The trust enjoyed a supersonic 2020 under co-managers Gary Robinson and Kirsty Gibson, who report to Scottish Mortgage’s Tom Slater, who also serves as Baillie Gifford’s head of US equities. Last year, the shares returned a gigantic 133.5%, the best of any London-listed investment company, as the global online surge saw it outpace the mighty Scottish Mortgage. Inevitably, performance has cooled this year as investors have begun to question the valuations of some of its big holdings, such as Canada’s e-commerce pioneer Shopify, gene editing specialist Moderna, Amazon and Tesla. Nevertheless, the trust’s three-year 157% total return on assets is remarkable and means it has achieved a £1bn valuation in a short time. It is also streaks ahead of 2019’s winner, JPMorgan US Smaller Companies, and the large company investor JPMorgan American.
Baillie Gifford US Growth
Gary Robinson Fund manager, Baillie Gifford
NORTH AMERICA EQUITIES
North America Equities Top Three
Kirsty Gibson Fund manager Baillie Gifford
This commentary feels like a cut-and-paste job as Marcus Phayre-Mudge’s TR Property scores a record fourth win in these awards. Specialist Equities is one of a few categories where we combine trusts from different sectors, which is why the £1.6bn investment company is competing with tech-focused Herald and utilities specialist Ecofin. Our award goes to the trust with the best return relative to its index, not necessarily the one with the highest overall return, which is why TR Property triumphs again, adding more value against its European real estate index than the other two do against their benchmarks. A member of the BMO Global group, TR Property is unique among London-listed property funds, taking a pan-European approach to investments that are mostly in the shares of property firms and developers, although it does have a small portion in physical property. A 1.65 information ratio illustrates how Phayre-Mudge and co-managers Alban Lhonneur and George Gay understand this sector well.
TR Property
Marcus Phayre-Mudge Partner, Thames River Capital
SPECIALIST EQUITIES
Specialist Equities Top Three
Fund managers Iain McCombie and Milena Mileva have built on their award last year, gaining the top spot again in our sector ranking with Baillie Gifford UK Growth. If anything, the duo deserves the prize even more as this summer saw them notch up three years on the £360m trust, which was previously run by Schroders. Their performance has justified the board’s decision to appoint Baillie Gifford in 2018, with an improved 30.3% rise in NAV and a 36.3% shareholder return in the three years to 31 August. The pair’s long-term, patient approach to picking growth stocks is demonstrated in their 0.64 information ratio. It was a close thing, however. as Henderson Opportunities Trust, a value-style smaller company focused fund managed by James Henderson and Laura Foll, has done very well in the ‘vaccine rally’. The £110m trust generated a higher return, but according to our calculations scored a slightly lower information ratio. The £150m Invesco Select UK Equity trust run by James Goldstone and Ciaran Mallon was the other runner up.
Baillie Gifford UK Growth Trust
Iain McCombie Fund manager, Baillie Gifford
Milena Mileva Fund manager, Baillie Giiford
ALL UK COMPANIES
All UK Companies Top Three
Is there a link between corporate actions and improved performance? Earlier we saw JPMorgan Global Growth & Income win its International Income award after being chosen as the merger partner for Scottish. Here, in the core UK Equity Income sector, we see £1bn Murray Income, which nearly doubled in size after absorbing with Perpetual Income & Growth last year, secure its second Citywire prize. The 4%-yielding ‘dividend hero’ has increased shareholder income for 48 years. The quality growth style of Abrdn (formerly Aberdeen Standard Investments) fund managers Charles Luke and Iain Pyle has struggled somewhat in the value rally this year, but over the three years to August the trust has extracted an impressive 1.36 information ratio from their 32.4% investment return. Stable mate Dunedin Income Growth, run by Abrdn’s Ben Ritchie and Georgina Cooper, and Law Debenture, whose investment portfolio is run by HOT’s James Henderson and Laura Foll, who we saw on the previous page, both put up strong challenges and notched up higher returns. Dunedin Income Growth generated a particularly strong 50% shareholder return as its stock rerated and moved from an 8% discount to NAV to stand at ‘par’ or NAV.
Murray Income Trust
Charles Luke Fund manager, Abrdn
UK EQUITY INCOME
UK Equity Income Top Four
Georgina Brittain and co-manager Katen Patel have pinched back the award that second-placed BlackRock Throgmorton’s Dan Whitestone took from them last year. Under Brittain, who has run the £306m trust for 23 years, and Patel, who has helped her for seven years, JPMorgan UK Smaller Companies has prospered. The impressive 78.4% return on net assets reflects how the pair responded to the pandemic crash last year: blending defensive quality names benefiting from the intense pressure on rivals, with stocks that had suffered in the sudden downturn but rebounded quickly once lockdown restrictions were eased. That skill also shows up in the 1.35 information ratio that while only slightly ahead of Throgmorton, leaves other rivals such as JPMorgan’s mid-cap Mercantile trust and Henderson Smaller Companies for dust. The strong portfolio returns did not go unnoticed. Investor demand pushed the shares higher and clocked up a 109.6% total return over the three-year period, as the trust eliminated its discount for a while. The discount has since re-emerged and the shares stand back on an attractive 10% discount to NAV.
JPMorgan Smaller Companies
Katen Patel Fund manager, JP Morgan Asset Management
Georgina Brittain Fund manager, JP Morgan Asset Management
UK SMALLER COMPANIES
UK Smaller Companies Top Five
The Rothschild backed global investment trust wins its first Citywire award with a performance that testifies to its remit of providing investors with exposure to rising markets while avoiding excessive falls. In the three years to August, the £4.2bn multi-asset fund grew NAV by 46.3% from a spread of investments in private equity, listed stocks, credit and specialist hedge funds overseen by Ron Tabbouche, chief investment officer of J Rothschild Capital Management. Although this was less than the 64.1% investment return of Lindsell Train, our winner in the previous two years, it offered a smoother and better risk-adjusted performance than Nick Train’s volatile and concentrated trust, which is over 50% invested in the unquoted shares of his and Michael Lindsell’s fund management company. RIT rang up an information ratio of 0.87 against 0.42 for Lindsell Train. Momentum Multi-Asset Value, formerly Seneca Income & Growth Trust, came second with a similarly diverse portfolio of funds and shares.
RIT Capital Partners
Ron Tabbouche CIO, Capital Partners
GLOBAL MULTI-ASSET
Global Multi-Asset Top Five
The extreme volatility of equity and commodity markets in the past two years has put even the ‘steady Eddie’ reputation of infrastructure funds to the test. We’ve tweaked our methodology this year. Instead of looking at the simple underlying performance in NAVs, which we did previously, we have calculated the three-year risk-adjusted return against cash (as measured by the Sharpe ratio). On this measure, the near £3bn Renewables Infrastructure Group, currently the largest of the dozen pure London-listed renewable energy funds, beats our previous three-time winner, the £2.9bn 3i Infrastructure. TRIG, a Guernsey investment company that is 90% invested in onshore and offshore wind farms and split 60-40 between the UK and Europe, has withstood a buffeting from falling power price forecasts in the past three years. Although gas price hikes this summer have reversed this pressure, fund manager and Infrared Capital Partners’ Richard Craword has also had to deal with wind generation falling below budget this year in several markets. Nevertheless, a 29.9% return on assets coupled with a Sharpe ratio of 1.97 in the three-year period shows the premium-rated, 5%-yielder is doing more than enough to keep its green income investors happy.
Renewables Infrastructure Group
Richard Crawford Fund manager, Infrared Capital Partners
INFRASTRUCTURE
Infastructure Top Three
Source: Morningstar. Trusts ranked by their three-year Sharpe ratio based on growth in net asset value at 31 August 2021.
Our last three alternative asset classes see investment companies ranked on their simple NAV total returns in the three years to 31 August. In Private Equity, HgCapital Trust secures its second win, retaining the award it won last year when it beat 3i Group, this time notching up an impressive 91.4% NAV gain that underpinned an even better 122.4% total shareholder return from the premium-rated shares. HgCapital has gained investor support from its focus on 42 unquoted software and business services firms, out of a total portfolio of 175 investments, which leads fund manager Hg to describe itself as Europe’s second largest tech firm. The £1.8bn trust invests alongside Hg funds in a process overseen by Nic Humphries, senior partner and executive chairman. For a second year, it knocked Oakley Capital Investments – its media and communications focused rival – into second place. Hamish Mair’s BMO Private Equity fund of funds came in third.
HgCapital Trust
Nic Humphries Hg senior partner
PRIVATE EQUITY
Private Equity Top Three
Source: Morningstar. Trusts ranked by their three-year growth in net asset value.
The strength of the logistics market since the pandemic pushed the world online is underlined by three warehouse funds grabbing the top slots in our short list. Warehouse, a £681m real estate investment trust run by Andrew Bird, managing director of Tilstone Partners, beats hot rivals Tritax Big Box and Urban Logistics with a 58.8% return on net assets that translated into an 88% shareholder return as the highly-rated shares soared to an 18% premium over asset value. This is the last we will see of fourth-placed GCP Student Living as the £958m DIGS fund is about to be gobbled up by a Blackstone-led consortium.
Warehouse Reit
Andrew Bird Fund manager, MD Tillstone
PROPERTY SPECIALIST
Property Specialist Top Five
Small is not weak when it comes to UK commercial property. Certainly, £170m AEW UK, one of the smallest of the listed generalist real estate funds, has punched above its weight. Under fund managers Alex Short and Laura Elkin, AEWU has established a sector-leading 39.8% investment return over three years, while avoiding the dividend cuts that rivals were forced to make during the pandemic lockdowns last year. The state of near panic the restrictions produced has been replaced by cautious optimism as landlords see most tenants returning to some kind of normality. The 7.4%-yielder has upped its exposure to retail warehouses and forged a good reputation of buying properties low and selling high after reletting them on higher rents.
AEW UK Reit
Laura Elkin Co-manager, AEW UK Investment Management
Alex Short Fund manager, AEW UK Investment Management
UK PROPERTY
UK Property Top Four
The concentrated portfolios of some debt funds can make them vulnerable to individual corporate borrowers being hit with unexpected bad news. First-time Citywire winner GCP Asset Backed Income has had some of the shine removed from its three-year performance with the recent write-off of a loan to property developer co-living group. In the 36 months to end-August, Gravis fund manager David Conlon generated a 22.5% return from the £435m portfolio of secured loans which belied its impressive 2.1 Sharpe ratio. However, in September, the write-down knocked 3.7% off NAV equivalent to 3.77p per share. Although a blow, this is the first problem loan the Jersey investment company has faced since launch six years ago. The 6.4%-yielding shares have recently recovered to stand at ‘par’, or NAV, after investors were assured there would be no impact of dividends and that co-living’s problems were isolated and did not reflect problems with its 50 other social infrastructure, energy and asset finance loans.
GCP Asset Backed Income
SPECIALIST DEBT
Specialist Debt Top Five
Source: Numis Securities. The best trust from each Debt sub-sector (loans & bonds, structured finance, direct lending, infrastructure, real estate) are ranked by their three-year Sharpe ratio based on growth in net asset value at 31 August 2021.
David Conlon Fund manager, Gravis
It is often unkindly said that turkeys don’t vote for Christmas and therefore investment trust boards don’t choose to wind up or merge their funds to hang on to their fees as non-executive directors. The decision in July 2020 of Perpetual Income & Growth to merge with rival Murray Income and create a £1bn UK equity income trust therefore came as a pleasant surprise, proving that when it is best for shareholders that a trust cease to exist, a board will follow that course. Perpetual Income’s board, chaired by Richard Laing, had been criticised for not tackling several years of underperformance by its long-standing fund manager Mark Barnett. When Laing finally served notice on Invesco in April 2020, having seen a short-lived ‘Brexit bounce’ falter, investors had expected him and his board to select another fund manager in the way that Barnett’s other trust, Edinburgh, had done in moving to Majedie at the end of 2019. However, a beauty parade of 10 fund managers soon identified Charles Luke at the formerly Aberdeen Standard Investments – now Abrdn – as a front runner. Instead of giving him a second mandate in the same sector, Perpetual Income’s board took the braver and more rational decision of combining with Murray Income. Although Luke’s quality growth style has underperformed the UK stock market in the past year, the merger has created a bigger cheaper and more highly-rated trust that bodes better for long-term shareholder returns. Citywire awards judge Ewan Lovett-Turner, head of investment companies research at Numis Securities, said at the time: ‘We believe it is positive for the investment companies sector to see a merger, particularly of funds already of reasonable size to create a vehicle that has the potential scale to appear to institutional investors and retail platforms.’
Perpetual Income & Growth
BEST BOARD
The many expressions of sadness from investors and former colleagues at the death in August after a short illness of Simon Fraser, chairman of Murray International, has prompted us to make our first Lifetime Achievement award. The posthumous award reflects the high regard and affection with which Fraser, 62, was held by all who knew him after a 28-year career with Fidelity saw him rise to chief investment officer. After leaving Fidelity in 2008, Fraser, a Scot and graduate of St Andrew’s university, embarked on a series of investment company directorships. Most notable of these was his chairmanship for 10 years of Foreign & Colonial, now F&C, the UK’s oldest investment trust, culminating in the celebration of its 150th anniversary in 2018. Fraser also chaired Merchants for seven years until 2019. This did not mark a disengagement with investment trusts as he went on to join the boards of both Murray International and Impax Environmental Markets. In addition, he oversaw the influential shareholder lobby group the Investor Forum from 2014 and had served on the boards of Barclays bank and emerging markets fund manager Ashmore. Citywire awards judge John Newlands, who worked with Fraser on books about Merchants and F&C, said: ‘Simon was a modest and meticulous man whose ability and quiet determination commanded the respect of all who knew him.’
Simon Fraser Chairman, Murray International
LIFETIME ACHIEVEMENT
ALPHA FEMALE REPORT 2021
INVESTMENT TRUST GUIDEBOOK 2021: ALPHA FEMALE REPORT 2021
ABRDN
INVESTMENT TRUST GUIDEBOOK 2021: ABRDN
M
urray Income Trust aims to achieve a high and growing income combined with capital growth through investment in a portfolio principally of UK equities.
In pursuit of its objective, the Company’s investment policy emphasises investment in high quality companies with good management, strong cash flows, sound balance sheets and the potential to generate reliable earning streams.
The strategy is focused on being dependable, diversified and differentiated. Dependable: investing in high quality companies, leveraging the strength of the abrdn UK equity team and pursuing a patient, buy and hold investment approach. Diversified: thoughtful diversification by sector, and income and capital, investing up to 20% of gross assets in overseas-listed companies, maintaining a healthy exposure to mid-cap companies and a modest option-writing programme. Differentiated: focus on quality companies, diversification, a strong ESG focus (AAA rated by MSCI and no tobacco holdings), overseas-listed holdings, mid cap exposure and option writing. Uniting all of those factors provides an attractive yield, scope for capital and income growth, capital resilience in down markets and very attractive risk adjusted returns over time.
Company name Murray Income Trust PLC Address 1 George Street, Edinburgh, EH2 2LL Email Murray.Income@abrdn.com Website www.murray-income.co.uk Assets under management abrdn: £532bn as at 30 June 2021 Number of investment trusts 22 AUM in investment trusts £12.3bn total assets as at 27 Oct 2021 Number of investment managers abrdn: 1000+ investment professionals worldwide
Past performance is not a guide to future results.
AVERAGE INCOME PAYMENT OVER LAST FIVE YEARS
UNIQUE SELLING POINTS
The average dividend payment over the last five years has been 33.75p.
We see the Company differentiated from it’s peer group by a combination of the following factors:Focus on high quality companies; healthy mid cap exposure; overseas holding; ESG focus; diversification by income, capital and sector; option income; and a long term patient buy and hold approach.We see the Company differentiated from it’s peer group by a combination of the following factors:Focus on high quality companies; healthy mid cap exposure; overseas holding; ESG focus; diversification by income, capital and sector; option income; and a long term patient buy and hold approach.
No unlisted securities are held. The current gearing level is 10.0%. Over the last 5 years, on average, the percentage of net income retained is -0.6% or in other words the dividends paid have been very marginally higher than earnings/net income.
The performance track record is below. On a risk-adjusted basis returns are very healthy (the Company is the reigning Citywire UK Equity Income Trust award winner which is based on a 3 year information ratio). A characteristic of the performance profile is typically outperformance in down markets.
TRACK RECORD
T
he outlook for dividends has improved considerably as 2021 has progressed. This is due to several factors including greater management confidence driven by a strong rebound in earnings, the removal of restrictions on banks to pay dividends and the re-basement of dividends during 2020 that now provides a solid base for growth. It is also worth noting that numerous studies
highlight the importance of dividends and their reinvestment in generating attractive total returns over time while the yield available in the UK market is at a premium to most other regional equity markets.
AFTER SUCH A TURBULENT YEAR WHERE MANY COMPANIES CUT THEIR DIVIDENDS, WHAT’S THE DIVIDEND MARKET LIKE NOW?
Important information Risk factors you should consider prior to investing: • The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested. • Past performance is not a guide to future results. • Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years. • The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV. • The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares. • The Company may charge expenses to capital which may erode the capital value of the investment. • Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss. • There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value. • As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen. • Certain trusts may seek to invest in higher yielding securities such as bonds, which are subject to credit risk, market price risk and interest rate risk. Unlike income from a single bond, the level of income from an investment trust is not fixed and may fluctuate. • Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends. Other important information: Issued by Aberdeen Asset Managers Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. The information contained in this document should not be considered as an offer, solicitation or investment recommendation to deal in the shares of any securities or financial instruments. GB-041121-160474-1.
HOW HAS THE FUND PERFORMED AND WHAT POSITION HELPED PERFORMANCE?
WHY IS THE UK EQUITY INCOME SECTOR STILL UNLOVED? WHAT COULD CHANGE THIS AND HOW ARE YOU OFFSETTING THE TREND?
HOW DOES THE FUND PROMISE DIVERSIFICATION IN SUCH A CONCENTRATED MARKET AS THE UK?
WHAT HAVE BEEN THE MOST IMPORTANT PORTFOLIO MOVES OVER RECENT MONTHS AND WHY?
DO YOU THINK THE UK MARKET IS UNDERVALUED RELATIVE TO OTHERS?
THE CASE FOR UNLOVED UK EQUITIES
The unloved UK equity income sector is experiencing something of a revival, with the return of dividend payouts fuelling optimism Charles Luke, Investment Manager, Murray Income Trust PLC
The company outperformed the market during 2020 by 4.7% on an NAV basis and by 7.4% on a share price basis. The focus on good quality companies with resilient earnings streams and strong balance sheets helped to provide capital resilience during a very challenging market environment. In particular, an underweight position in oil companies and banks relative to the market was helpful.
The UK equity income sector is unloved following a challenging time for income and perceived historic concerns around Brexit and the attractiveness of the UK market in general. However, at the headline level and across sectors, UK equity valuations – and dividend yields - are now compelling versus other markets which is translating into a record-breaking period of M&A activity. UK companies provide access to global growth opportunities operating under a first-class corporate governance framework. As patient ‘buy and hold’ investors, rather than offsetting the trend we are happy to wait for the fundamentals of the holdings to win through over time, but we also believe it is important to focus on high quality companies with growing dividends rather than just those with high yields.
The portfolio’s capital is thoughtfully diversified by sector and company, as is the income. In addition, up to 20% of gross assets can be invested in overseas-listed companies which has the benefit of diversifying concentrated sectors but also providing access to high quality companies and industries not available to UK investors. Furthermore, diversification is achieved by a healthy exposure to mid cap companies and the income is diversified through a modest option writing programme.
There have been no particularly important portfolio moves over recent months. The philosophy of the investment process, as stated above, is to maintain a patient approach and allow the fundamentals of high-quality companies to win through over time.
Although stock selection is based on individual company analysis rather than a macro-economic overlay, we think that optimism around the economy is justified given that government actions have significantly reduced the scarring that might have been caused by the pandemic and there remains significant pent-up demand.
Total return; NAV to NAV, net income reinvested, GBP. Share price total return is a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value.Source: Aberdeen Asset Managers Limited, Lipper and Morningstar. Past performance is not a guide of future results.
Investment managers outline how investment trusts can tackle the world’s problems thanks to their lack of liquidity requirements, board structure and ability to invest in real estate for social good
CHAPTER 2
INVESTMENT TRUST GUIDEBOOK 2021: CHAPTER 2
t would appear that very little can stand in the way of the rise of investing based on environmental, social and governance (ESG) factors – not even the pandemic.
ENGAGEMENT
OVERCOMING CHALLENGES
By Danielle Levy
‘Green hydrogen is clearly going to be a big part of the energy transition. From an investment perspective, it is incredibly exciting’
Daniel Bland EQ Investors
As investors have looked to use their money more responsibly and work towards the goal of net-zero carbon emissions, the asset management industry has responded by launching ESG-focused and sustainable open-ended funds. At the same time, several underperforming strategies have been repositioned and rebranded in line with ESG objectives. In the investment trust world, it has been a slightly different story, but an encouraging one, nonetheless. It has been a formative decade for investors seeking to achieve ESG objectives via investments in closed-ended funds. There have been a growing number of environmental and social impact trusts, while many funds have integrated ESG criteria into their investment processes. Today, 215 trusts of a possible total of 390 are signatories of the internationally recognised Principles for Responsible Investment (PRI), according to the Association of Investment Companies (AIC). Supported by the UN, the PRI provides asset managers with a framework to integrate ESG into their investment decisions. In addition, the AIC said 75% of its members have voluntarily disclosed their ESG strategies on the trade body’s website.
As investment trusts do not have the same daily liquidity requirements as their open-ended peers, they can invest in less-liquid infrastructure assets that facilitate clean energy and energy efficiency. This enables investors to align their portfolios with the goal of achieving net-zero emissions. What’s more, trusts can help contribute to the $1tn a year of new green investment capital needed for the economy’s net-zero transition, according to Quilter Cheviot fund analyst Melissa Scaramellini. For example, Quilter Cheviot currently holds The Renewables Infrastructure Group (TRIG), which invests in renewable energy infrastructure assets, as well as Impax Environmental Markets (IEM), which invests in listed companies seeking positive environmental outcomes. Daniel Bland, head of sustainable investment management at EQ Investors,
TRUSTS’ UNIQUE TRAITS MAKE THEM WELL-EQUIPPED FOR THE ESG REVOLUTION
‘We want boards to build their own ESG expertise because that is how they can assess the fund managers and whether they are doing enough to invest responsibly’
Melissa Scaramellini Quilter Cheviot
said one of the biggest advantages associated with trusts is that they provide access to private markets where there are exciting opportunities relating to energy transition and climate change. These include the hydrogen economy, a theme investors can buy into via HydrogenOne Capital Growth (HGEN), the first London-listed fund dedicated to clean hydrogen, which raised £107m at its initial public offering (IPO). ‘Green hydrogen is clearly going to be a big part of the energy transition. From an investment perspective, it is incredibly exciting,’ Bland said. Another theme EQ has exposure to via investment companies is battery storage. Like green hydrogen, he said it is critical to the energy transition. These companies rent out batteries to National Grid to complement the use of renewable energy and to make sure there is sufficient power during times of high demand. Alongside environmentally focused funds, there have been a growing number of social impact trust launches, not least those investing in social housing and care homes. Meanwhile, Schroder BSC Social Impact (SBSI), managed by Big Society Capital, supports housing for homeless people and lends money to charities. It also provides capital to specialist charities and social enterprises that deliver government contracts, with payments linked to desired outcomes, known as social outcomes contracts. Bland described the trust as a pioneer in impact investing. ‘It is an absolute must to look at for anyone looking to achieve a positive effect on society and the environment. It is leaps and bounds ahead of everyone else in what they are trying to do,’ he said. ‘At EQ, we were effectively cornerstone investors at IPO. What you are buying into there is a deeply impactful set of private market investments.’ Bland would like to see more social impact trust launches of this kind that ‘serious impact investors can get behind’. As with any fledgling sector, there have been teething problems along the way. The social housing sector, typically associated with stable income streams and low share price volatility, has found itself in the spotlight for the wrong reasons recently. Over the past three years, the Regulator of Social Housing has identified failings at several housing associations to which real estate investment trusts lease properties. In addition, Civitas Social Housing (CSH) was the target of an attack by short-seller ShadowFall in September following allegations of a conflict of interest relating to a deal Civitas completed in 2018.
This shows that while there is much to celebrate when it comes to ESG in the investment trust world, there is scope for improvement. Quilter’s Scaramellini would like to see more trusts integrating ESG into their investment processes as a matter of course, particularly equity funds. ‘This is something investment trusts need to do to stay relevant,’ she said. Bland agreed: ‘If you are not considering those points then your investment process is broken, because you are not recognising the financially material ESG risks to the companies you are investing in.’ He believes there are ‘pockets of absolute excellence’ across the investment trust universe, as well as ‘pockets of real laggards’. Scaramellini acknowledged that, for some asset management boutiques, it can be hard to lead the way on ESG if they lack the resources or expertise in-house. ‘To pay to become a PRI signatory and the reporting onus is not an insignificant thing,’ she said. This is why large asset managers with big open-ended fund ranges are
Photo by Annie Spratt on Unsplash
ENVIRONMENTAL IMPACT
IMPROVING SOCIAL OUTCOMES
typically making better progress integrating ESG into their processes in comparison with boutiques. For progress to be made across the board, engagement is needed at two levels. First, shareholders must engage with boards if they believe they are not being active enough on ESG. And secondly, boards must engage with the underlying fund manager to make sure they are meeting the mark on ESG. ‘We want boards to build their own ESG expertise because that is how they can assess the fund managers and whether they are doing enough to invest responsibly,’ Scaramellini said. She would also like to see improved ESG reporting from trusts, particularly on climate risk. This highlights another important factor: corporate governance. Trusts have a natural advantage here over open-ended funds because they have fully independent boards. For open-ended funds, only a quarter of the board is independent, equating to at least two independent non-executive directors. In theory, investment trust boards should be more effective at bringing about change. However, when it comes to the make-up of investment trust boards, investment managers are calling for greater diversity in terms of gender, ethnicity and backgrounds to encourage better decision-making. ‘Having more diverse boards on investment trusts would be a win for shareholders and the boards as well. It will add differentiated opinions, viewpoints and skillsets. It would be great to see that mix changing and evolving as it has done in other markets,’ said EQ’s Bland. Female directors currently make up around a third of trust boards, according to the AIC. This figure rises to 40% for closed-ended funds listed on the FTSE 250. This is a marked improvement on 2010, when women only accounted for 8% of trust boards .‘It is great to see progress being made on gender, but there is more work to be done,’ said Annabel Brodie-Smith, communications director at the AIC. The trade body has launched Pathway, a website with resources for prospective investment trust directors that aims to encourage a diverse group of candidates to apply for these roles.
‘Any equity launch nowadays is tough unless you are offering something really different’
James Burns Smith & Williamson
Looking ahead, investment managers expect to see further impact trust launches. However, for a launch to get off the ground, it will need to offer something new or different to what is available across the broad range of open-ended ESG and sustainable funds. James Burns, co-head of Smith & Williamson’s managed portfolio service, suggested that Liontrust failed to meet its target raise of £100m in July for an ESG trust because there was too much overlap with its existing Sustainable Future open-ended fund range. ‘Any equity launch nowadays is tough unless you are offering something really different,’ he said. He expects to see more examples of boards and shareholders voting in favour of transitioning equity trusts with mediocre or poor returns into ESG mandates. This was the case with Keystone, the underperforming UK equity trust, last
WHAT LIES AHEAD
February. Invesco was sacked as manager and the mandate was awarded to Baillie Gifford. It has since become a global sustainable equity fund, renamed Keystone Positive Change (KPC). While there is scope for improvement, trusts still have an important role to play in helping investors to achieve their ESG objectives, not least when it comes to impact investing. ‘The investment trust market is very exciting from an impact investor’s perspective because you can access markets that are very difficult to invest in otherwise,’ Bland said. ‘There are some very exciting investment trusts out there to buy.’
highest amount ever in a half-year period. By the end of September, assets in trusts had soared to an all-time high of £266bn. Superior performance has undoubtedly served to boost assets and interest. Shares in the average investment company rocketed 28% in the year to 30 September, outstripping a mere 7% gain among open-ended funds fourfold, data from the Association of Investment Companies (AIC) shows. But what serves to make trusts such a compelling proposition?
CHAPTER TWO
nvestment trust managers and investors are enjoying a stellar year. In the first half of 2021, investment trusts raised a total of £6.3bn – the
ALLIANZ GLOBAL INVESTORS
erchants aims to provide an above average level of income and income growth together with long term capital growth from a diversified portfolio of leading UK listed companies with strong balance sheets and the potential to pay attractive dividends. The company’s benchmark is the FTSE All-Share Index. Many UK listed companies are truly international in nature, including some of the
world’s largest and best known multinationals. This provides exposure to global end markets whilst benefiting from the UK’s leading corporate governance standards. Merchants seeks out the best opportunities for dividend yield and long term capital growth from a concentrated portfolio of leading UK companies. Merchants aims to achieve a spread of investments, with no single investment representing more than 15% of assets. The portfolio is diversified into at least five market sectors, with no one sector comprising more than 35% of the portfolio. Having conviction allows portfolio manager Simon Gergel to concentrate the portfolio into his team’s very best ideas. Simon looks for shares with a dividend yield, but also with strong cash flows and good fundamentals. He also looks to pay a reasonable price for the shares. Although past performance is no guide to the future, Merchants has paid rising dividends to its shareholders for 39 consecutive years. Average over past five years 25.9p but paid rising dividends each year for past 39 years (5 year history: 2017, 24.2p / 2018 24.8p / 2019 26.0p / 2020 27.1p / 2021 27.2p). Allianz Global Investors and its predecessors have been managing investment trusts since 1889. Our trusts span investor needs – from income, to growth, to the specialist sector of technology – and offer a path to investment opportunities around the world. Whatever your investment goals, we believe that Allianz Global Investors’ broad experience makes our investment trusts worth a closer look. No unlisted securities held. Merchants can gear – borrow money – with the objective of enhancing future returns. The board monitors and decides on the level of gearing based on the advice of the manager and the future prospects of the company’s portfolio with a policy to maintain gearing in the range of 10-25%. Over the past year Merchants has performed strongly, both in an absolute sense and relative to the benchmark index. Over the longer term, the trust has also delivered strong absolute and relative returns, despite many years where the market environment has been difficult for a value investment approach. Merchants has grown its dividend in each of the last 39 years.
INVESTMENT STRATEGY FOCUS
Company name The Merchants Trust PLC Address 199 Bishopsgate, London, EC2M 3TY Email investment-trusts@allianzgi.com Website www.merchantstrust.co.uk Phone number 0800 389 4696 Number of investment managers Over 690 investment professionalsas at 30 June 2021 Number of investment trusts 3 AUM in investment trusts £2.7 billion as at 30 September 2021
INVESTMENT TRUST GUIDEBOOK 2021: ALLIANZ GLOBAL INVESTORS
10 YEAR PERFORMANCE
irst, be prepared for the unexpected. Obviously, you can never totally prepare for that, but what you can do is have a diversified portfolio where you have exposure to many different companies, industries and geographies.
Secondly, you’ve got to hold your nerve. When things looked really grim in April last year and it was hard to know how bad the pandemic was going to get, there were still strong companies that were trading well below what they were worth on a long-term basis. Ask yourself what has and hasn’t permanently changed in this new scenario. Think about what will come back and focus on that. It’s about trying to not get carried away by the noise and the uncertainty, which were very high at the peak of the pandemic.Secondly, you’ve got to hold your nerve. When things looked really grim in April last year and it was hard to know how bad the pandemic was going to get, there were still strong companies that were trading well below what they were worth on a long-term basis. Ask yourself what has and hasn’t permanently changed in this new scenario. Think about what will come back and focus on that. It’s about trying to not get carried away by the noise and the uncertainty, which were very high at the peak of the pandemic. I don’t think there’s a secret, really. Our process is based on a combination of focusing on business fundamentals, taking a long-term view and buying companies with a decent yield. We’re not just looking for high yielding stocks where there can be a lot of value traps, but companies that are fundamentally sound. We’re aiming to identify long-term themes that are affecting businesses and industries. Value traps often look cheap and seem like good businesses, but they’re affected by long-term structural themes like digitalisation or demographic changes. Those can be incredibly powerful over a long period of time, meaning that shares become cheaper because the fundamentals are deteriorating. That’s why we try to find companies within a positive thematic environment, companies that actually benefit from those long-term structural themes. That’s easier said than done, though. Sometimes we have to spend a considerable amount of time analysing and discussing issues, but I won’t complain - that very process has allowed us to avoid some of the worst value traps in the last 10 years. This whole area around people putting money into their homes is booming right now. People spend more time at home, so the demand for a nicer environment, bigger houses and new furniture is rising. Housebuilders are among the beneficiaries of that development. We also like businesses that are on the cusp of a transformation by aiming for higher quality products. Companies are often valued based on where they have been in the past, rather than what they’re becoming. We take a more forward-looking approach in that regard. And thirdly, it’s businesses that are enabling the climate transition, from copper producers to companies that are responsible for providing a part of the new infrastructure.
SIMON, WHAT HAVE THE PAST 18 MONTHS TAUGHT YOU?
All sources Allianz Global Investors GmbH unless otherwise noted. This is no recommendation or solicitation to buy or sell any particular security. A security mentioned as example above will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. Past performance is not a reliable indicator of future results. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer and/or its affiliated companies at the time of publication. This is a marketing communication issued by Allianz Global Investors GmbH, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, D 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Further information on Investor Rights are available here (www.regulatory.allianzgi.com). Allianz Global Investors GmbH has established a branch in the United Kingdom, Allianz Global Investors GmbH, UK branch, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk, deemed authorised and regulated by the Financial Conduct Authority. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the UK for a limited period while seeking full authorisation, are available on the Financial Conduct Authority’s website (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. The Merchants Trust PLC is incorporated in England and Wales. (Company registration no. 28276). Registered Office: 199 Bishopsgate, London, EC2M 3TY.
EVEN SO, THE MERCHANTS TRUST HAS CONSISTENTLY INCREASED ITS ANNUAL DIVIDENDS FOR THE 39TH TIME THIS YEAR. WHAT’S YOUR SECRET?
WHAT DOES THAT LOOK LIKE IN PRACTICE? HOW DO YOU SEPARATE VALUE TRAPS FROM CHEAP COMPANIES?
WHICH THEMES ARE YOU FINDING PARTICULARLY APPEALING AT THE MOMENT?
HOW DO YOU GO ABOUT PICKING STOCKS?
WHAT ROLE DO RESERVES PLAY FOR YOU?
WHAT DOES YOUR PORTFOLIO POSITIONING LOOK LIKE?
‘YOU’VE GOT TO HOLD YOUR NERVE’
Nobel laureate Rudyard Kipling’s poem ‘If’ is as relevant today as it was more than 120 years ago. That’s not to say keeping your head when all about you are losing theirs has become any easier over the course of a century, though. Simon Gergel, head of the UK equity team at AllianzGI and manager of The Merchants Trust, still gives it a try.
‘The themes are important because they hopefully keep us out of trouble, but they’re not our primary decision criteria.’
Simon Gergel Manager of The Merchants Trust
We’re bottom-up investors. What that means is, we don’t say ‘we want to have exposure to the decarbonisation theme - let’s go and find every company that’s exposed to that’. Instead, we look at individual businesses and check if they’re fundamentally sound businesses that are cheap or trading below what we think they’re really worth. What we won’t do is pay a high price for a company just because it’s exposed to one of those themes. The themes are important because they hopefully keep us out of trouble, but they’re not our primary decision criteria. An important one because they help us grow dividends every year. As an investment trust, we can put money away in good times to draw on in tough times. That’s what reserves are about. We came into the pandemic in quite a good position as we had almost a year’s dividends in reserves. In fact, the dividend was about 110% covered in the year before the Covid outbreak, so we don’t need earnings to go back to where they were to cover the dividend again. We’ve still got significant reserves, but we are already seeing a substantial recovery in income. In the summer of 2020, we took advantage of some great investment opportunities, which have led to very strong performance in the last 12 months. The UK market is still highly polarised. It’s cheap compared to other markets and you’ve got this wide spread of valuations, which is allowing us to buy many really good companies at very sensible or even cheap prices. Our portfolio is significantly cheaper than the overall market on most measures, but it’s still a portfolio of good quality stocks and fundamentally strong businesses. There are great opportunities for stock pickers out there.
The unloved UK equity income sector is experiencing something of a revival, with the return of dividend payouts fuelling optimism
Charles Luke, Investment Manager, Murray Income Trust PLC
strong rebound in earnings, the removal of restrictions on banks to pay dividends and the re-basement of dividends during 2020 that now provides a solid base for growth. It is also worth noting that numerous studies highlight the importance of dividends and their reinvestment in generating attractive total returns over time while the yield available in the UK market is at a premium to most other regional equity markets.
he outlook for dividends has improved considerably as 2021 has progressed. This is due to several factors including greater management confidence driven by a
Company name Alliance Trust PLC Address River Court, 5 West Victoria Dock Road, Dundee, DD1 3JT Email Investor@alliancetrust.co.uk Website www.alliancetrust.co.uk Phone number 01382 938 320 Number of investment managers 1 Number of investment trusts 1 AUM in investment trusts £3.7bn
ALLIANCE TRUST
INVESTMENT TRUST GUIDEBOOK 2021: ALLIANCE TRUST
consecutive years of rising dividends. We offer a multi-manager portfolio that is style neutral. Each of the 10 managers, all with different approaches to investing, contributes a maximum of 20 stocks, with the exception of emerging markets specialist GQG which is more diversified. From the top-down, the portfolio has similar country, sector and style positions to MSCI ACWI, but at the stock level 75-80% of the positions are different from the index. We have increased our dividend every year for 54 years. Diversified, High Conviction Portfolio provides unique access to the best ideas of 10 top-rated global equity managers. The portfolio is diversified across countries, industries and styles to control risk. But it retains strong alpha potential by only investing in high-conviction positions. Our track record of increasing dividends is one of the longest in the investment trust industry. No unlisted; gross gearing 10%.
lliance Trust aims to deliver long-term capital growth and rising income from investing in global equities at a competitive cost. We blend the top stock selections of some of the world’s best active managers, as rated by Willis Towers Watson, into a single diversified portfolio designed to outperform the market while carefully managing risk and volatility. Alliance Trust PLC is an AIC Dividend Hero with 54
A
Risk warnings Past performance is not a reliable indicator of future returns. The value of shares and the income from them can rise and fall, so investors may not get back the amount originally invested. Net Asset Value (“NAV”) performance is not the same as share price performance and investors may not realise returns in line with NAV performance. Exchange rate changes may cause the value of overseas investments to go down as well as up and can impact on both the level of income received and capital value of your investment. Investment trusts may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the NAV, meaning that a relatively small movement, down or up, in the value of an investment trust’s assets will result in a magnified movement, in the same direction, of that NAV. This may mean that you could get back less than you invested or nothing at all. Notes: All data is provided as at 30 September 2021 unless otherwise stated. All figures may be subject to rounding errors. Sources: Investment Performance data is provided by The Bank of New York Mellon Performance & Risk Analytics Europe Limited, Morningstar and MSCI Inc; Key Statistics, Key Facts and Charges data is provided by The Bank of New York Mellon (International) Ltd. NAV and NAV total return is based on NAV including income with debt at fair value, after all manager fees (including Willis Towers Watson’s fees) and allows for any tax reclaims when they are achieved. The NAV total return shown in factsheets up to May 2018 was based on NAV excluding income with debt valued at par. ISIN stands for International Securities Identification Number; TIDM stands for Tradable Instrument Display Mnemonics; AIC stands for Association of Investment Companies; and ATST stands for Alliance Trust PLC. 4: MSCI All Country World Index Net Dividends Reinvested. 5. 1 April 2017 was the date that Willis Towers Watson was appointed investment manager.
he trust invests in global equities and aims to deliver attractive capital growth over the long term to help investors meet their future financial goals, as well as providing a rising dividend year on year, something we’ve achieved every year since 1967. Alliance Trust is designed to be a solid core fund for investors, so it’s diversified across countries, sectors and styles.
As a style-balanced equity fund, it will never shoot the lights out over short time periods, but investors won’t lose their shirts through us taking highly risky concentrated positions. Over time, the portfolio should provide investors with more consistent returns. We offer a multi-manager strategy that blends the best investment ideas of 10 expert Stock Pickers from around the world. They all have different styles and investment philosophies. Some favour innovative, fast growing companies in sectors like technology and health care, while others look for bargains in more established industries. We’ve deliberately chosen a broad mix of styles and approaches to ensure we have multiple drivers of returns, all within the one balanced approach designed to add value over the long term through different market cycles. All of the Stock Pickers have good track records in the institutional market. Some may be well known to UK retail investors; others less so. But they all have different approaches which complement each other. To get on our buy list, the managers are subjected to a lot of quantitative and qualitative analysis, with particular emphasis on the latter. We look beyond the numbers of achieved past performance to try to understand what ‘competitive edge’ each manager has and whether that edge is likely to be sustainable in the future. We spend a lot of time with the managers getting to know them, their processes and the cultures of the firms they work for, the resources and operational structure, before selecting them for the portfolio. At any one time, we have a deep bench of around 20 managers who are skilled at running concentrated, global portfolios, so we can easily replace managers if necessary. Our portfolio invests across developed and emerging markets, but it doesn’t have any major regional or sector biases. That’s deliberate because – and there’s a lot of academic evidence to back it up – in the long run, the best returns come from selecting the right individual stocks, as opposed to favouring particular countries or industries. From the top-down, the portfolio can look quite like the benchmark (MSCI All Country World index), but that’s deceptive; in term of stock exposures, it’s quite different. The fund’s active share is between 75% and 80% on average, that’s high for a multi-manager strategy. We provide exposure to some degree to many key global themes, including biotech, artificial intelligence, cloud computing, emerging market consumers and a low carbon economy. We have a particularly robust framework for ESG investing and are managing the portfolio to achieve net-zero carbon emissions by 2050. We’ve recently introduced exclusions on stocks with significant exposure to tar sands and thermal coal, though generally we prefer to engage rather than exclude. Engagement occurs at two levels, through our Stock Pickers and via EOS at Federated Hermes, a stewardship overlay specialist, which effectively gives us the power of collective bargaining with large corporates by pooling resources with other asset owners. There are three major differences from multi-manager peers. First, unlike most multi-manager strategies, we don’t have high fees. Because of Willis Towers Watson’s scale (we advise institutional investors with over $3tn of assets* and directly manage more than $160bn ourselves**) we have negotiated very competitive fees with the Stock Pickers, some of whom can only be accessed by retail investors through Alliance Trust. All in, including our fee and the costs of running the trust, the OCR is less than 0.65bps. Secondly, we avoid being over-diversified and looking like the benchmark by restricting pickers to up to 20 of their best ideas, apart from our emerging markets specialist who can choose a few more. This highly focused approach to stock-picking means our holdings are very different from the index, providing plenty of scope for outperformance. The third difference is that each of the managers’ selections of stocks is exclusive to us. We use bespoke mandates rather than bolting together the managers’ standard products.
WHAT IS THE TRUST’S OBJECTIVE AND WHY IS IT INTERESTING?
Footnote: The Alliance Trust Board has appointed Towers Watson Investment Management Limited (TWIM) as its Alternative Investment Fund Manager (AIFM). TWIM is part of Willis Towers Watson. Issued by Towers Watson Investment Management Limited. Towers Watson Investment Management Limited, registered office Watson House, London Road, Reigate, Surrey RH2 9PQ is authorised and regulated by the Financial Conduct Authority, firm reference number 446740. * Willis Towers Watson, as at 31 December 2019 (latest data available). ** Willis Towers Watson, as at 30 June 2020.
WHAT’S YOUR STRATEGY AND STYLE OF INVESTING?
CAN YOU OUTLINE THE KEY GLOBAL THEMES TO WHICH SHAREHOLDERS CAN GAIN EXPOSURE VIA THIS STRATEGY?
HOW DO YOU SELECT MANAGERS FOR THE ALLIANCE TRUST PORTFOLIO?
CAN YOU TELL US ABOUT THE GEOGRAPHICAL SPLIT AND KEY SECTORS IN WHICH THE TRUST INVESTS?
KEEPING IT SIMPLE
Alliance Trust’s philosophy revolves around keeping the risk of its portfolio low, with strong expected returns over the long term.
WHAT MAKES YOUR APPROACH DIFFERENT TO YOUR PEERS?
Nobel laureate Rudyard Kipling’s poem ‘If’ is as relevant today as it was more than 120 years ago. That’s not to say keeping your head when all about you are
While value stocks have staged a comeback this year, wealth managers are using both value and growth trusts to strike a balance for investors
CHAPTER 3
INVESTMENT TRUST GUIDEBOOK 2021: CHAPTER 3
W
hen investing, how important is valuation? The answer depends on who you ask. For the team at Scottish Mortgage (SMT), it is largely irrelevant. In its pursuit of transformational growth companies, it prioritises potential over price.
When you have thousands upon thousands of people believing that value exists as a prime motivation in an investment, that value is measured by a near-term [price-to-earnings ratio], that macroeconomic conditions over the next six to 12 months matter, then I don’t think you have much chance of being able to produce returns for shareholders,’ co-manager James Anderson told investors at this year’s annual general meeting. ‘Most companies do not matter at all and do not, over the long term, produce returns, and that transcends the divide between value and growth. We are just as uninterested in the average growth company as we are in the average value company. We’re interested in the companies that, culturally, in the scale of their markets and scale of their returns, can produce those extremes of performance.’ However, for Temple Bar (TMPL) managers Nick Purves and Ian Lance, starting valuations provide the best guide to future returns. ‘Given some of the low valuations available today, we believe investors will be handsomely rewarded by sticking with value investing,’ they wrote in their October 2021 letter to shareholders. The managers see great opportunity in the energy sector – an industry that has been written off by investors, believing it to be in secular decline as the world transitions to a carbon-neutral future. Valuations are at their lowest in years. Furthermore, recent research suggests there are more growth traps than value traps. Growth stocks tend to have high expectations embedded into their share prices, hence when they disappoint, they tend to fall further than value stocks where investor expectations are far lower. Wealth managers see merit in both investment styles, often blending investment trusts from both camps. We spoke to four of them to discover the growth and value trusts they are using across global, UK and emerging market equities.
Over their long history, investment trusts have provided ordinary investors with a way to make money from extraordinary investments, and this continues today, although spaceships are the order of the day rather than trains. SMT, run by Edinburgh-based asset manager Baillie Gifford, is arguably the flagship fund for investors hoping to tap into ‘unicorns’ and the investments of the future. The £14.3bn fund is the only trust in the FTSE 100 and is famed for holding tech giants Tesla (TSLA.O), Amazon (AMZN.O) and Tencent (0700.HK). Manager James Anderson is an outspoken backer of Tesla founder Elon Musk and has invested around £45m of the fund in Musk’s unlisted space rocket company SpaceX. Chris Salih, research analyst at FundCalibre, the fund ratings arm of Chelsea Financial Services, said there are a number of trusts run by Baillie Gifford that ‘fit the high growth category nicely as growth is the company’s strategy’. Salih highlighted Shin Nippon (BGS) which invests in Japanese smaller companies in ‘emerging or disrupting sectors’ and Edinburgh Worldwide (EWI) that invests in global smaller companies.
GROWTH AND VALUE:
I am a long-term investor, so invest in businesses that I expect to benefit from changes in society. This leans to technology companies – and every sector in the modern economy is reliant upon technology. It is futile to predict market trends; markets react to events. Since the onset of the Covid-19 pandemic in March 2020, there have been several rotations from growth to value and back again. I have held Scottish Mortgage (SMT) in portfolios since 2012 and continue to buy it. With a philosophical investment approach, it is concentrated in growth firms such as Illumina, Tesla and Moderna. It also invests in unlisted companies, which I can’t access directly. With supply shortages, increased demand, persistent inflation (possibly) and surging energy prices, we are seeing bond yields rise. This may suppress share prices of growth and technology names in the short term. AVI Global Trust (AGT) buys companies whose market price does not reflect their intrinsic value. They may be trading at discount to net asset value or events may have soured investor sentiment towards a company. While many other value trusts hold the likes of BP, Aviva, Legal & General and GlaxoSmithKline, with a huge overlap between them, this trust is different, with the likes of Third Point, Pershing, KKR and Christian Dior. Its team used the March 2020 market crash to increase exposure to tech, which has been good for performance. Does that rest the case for growth versus value?
WE SPOKE TO FOUR INVESTMENT MANAGERS TO DISCOVER THE GROWTH AND VALUE TRUSTS THEY ARE USING ACROSS GLOBAL, UK AND EMERGING MARKET EQUITIES.
THE BEST OF BOTH WORLDS
INVESTMENT DIRECTOR, JM FINN
VALUE: AVI GLOBAL TRUST
LUCY COUTTS
GROWTH: SCOTTISH MORTGAGE
Growth has dominated in the past decade but the headwinds curtailing value subsided during the vaccine rollout. Today, there is a tug of war between growth and value, with inflation and rising interest rates often seen as beneficial for value. However, the ability to pass on cost increases through price rises enables better-quality, growing companies to prosper too. Market leadership may be more about stocks than styles in future. BlackRock Throgmorton (THRG) invests in small and mid-sized enterprises (SMEs) in the UK with growth potential. It buys high-quality companies exposed to structural trends, such as digital transformation. Most of the portfolio is in companies with market caps of up to £5bn, so we use it when we want exposure to slightly larger SMEs. It combines a long-only equity portfolio with a long/short contracts-for-difference portfolio, allowing the manager to profit from stocks he believes are good value and those he feels are overvalued. He has a very good record of combining the two. A rarity in the small-cap world, Aberforth Smaller Companies (ASL) favours value companies at the lower end of the UK smaller companies universe. The vaccine rally at the end of last year was a shot in the arm for the trust. We like that it has benefited from interest in private equity firms for its underlying holdings, as well as the reopening boom. Despite the strong earnings recovery of many of the trust’s holdings, it trades on a double-digit discount and is an interesting way to access the cheap UK market.
FUND RESEARCH ANALYST, QUILTER CHEVIOT
VALUE: ABERFORTH SMALLER COMPANIES
GROWTH: BLACKROCK THROGMORTON
MATT ENNION
Sometimes we may increase our value or cyclical exposure if a recovery is evident. We did just that in the last quarter of 2020, before recently taking some profits on value positions and rebalancing our models. Surprise earnings data suggests the rerating trade for value stocks has been had, and we are unlikely to see such extreme movements repeated. It’s now a stockpicker’s market. We have used BlackRock Smaller Companies (BSC) as a core strategy for investors seeking UK smaller companies exposure for many years. It is managed by BlackRock’s emerging companies team, which has consistently identified high-quality businesses that can grow quickly. The trust’s valuation tends to be quite stable, with the shares trading at a consistent discount. The discount widened considerably in 2016 after the Brexit vote, and again last summer when allocators favoured global over UK equities. Buying on these dips can augment returns. Fidelity Special Values (FSV) is a good example of a contrarian strategy. It boasts a stable team and consistency of approach that has outlasted many of its rivals. We started buying this strategy prominently in September and October last year when the market began to price in a hard Brexit scenario and the discount widened to levels not seen since 2016. This trade meant we received the double benefit of positive Covid-19 vaccine news and a smoother-than-anticipated exit for Britain from the EU.
INVESTMENT ANALYST, CANACCORD GENUITY WEALTH MANAGEMENT
VALUE: FIDELITY SPECIAL VALUES (FSV)
GROWTH: BLACKROCK SMALLER COMPANIES
KAMAL WARRAICH
We focus on long-term themes, which leads us to favour growth over value. There will be periods when this will not work, however. This year, we took a tactical position in UK value equities. Brexit and Covid-19 created a perfect storm for the asset class and bargains remained even after the initial rebound. Our tilt towards emerging markets has led us to hold Ashoka India Equity (AIE) for the past couple of years. An exceptional local team looks for stock-specific opportunities. Its incredible level of knowledge and research has impressed us since the trust launched in mid-2018. Its charging structure is attractive, too. There is no fixed annual management fee; instead, fees are based on performance. This creates a true alignment between management and investors. Even the directors are rewarded in shares and the analysts are compensated for their stock-picking abilities. Utilico Emerging Markets (UEM) looks to play the theme of growing urbanisation and rise in the middle class through exposure to utility and infrastructure assets. It aims to deliver a long-term total return that includes a predictable and sustainable income stream, so this is not an all-out capital growth play. We also like the fact that, while environmental, social and governance (ESG) criteria are not a prime driver, they are a major consideration. The team has already had discussions with investee companies on minority voting and greater ESG factor disclosure in financial reports.
PORTFOLIO MANAGER, RAVENSCROFT
VALUE: UTILICO EMERGING MARKETS
GROWTH: ASHOKA INDIA EQUITY
CHRIS BELL
CHAPTER THREE
SCHRODERS
S
chroder Investment Management Limited’s head office is in London, UK. The Schroders Group is a world-class asset manager consisting of over 200* legal entities operating in over 37* locations across Europe, Middle East and Africa, the Americas and the Asia Pacific regions. Our international presence supports us in understanding the needs of our clients and delivering them the right expertise from
across the business. *Source, Schroders, as at 30 September 2021 Fundamental Research is at the heart of the investment process and the fund manager aims to identify the best ideas with a consistent focus on mispriced opportunities. The focus is not exclusively on growth, value or earnings momentum factors but on each company’s individual ability to create value for shareholders. In order to meet the income objective and to provide diversified sources of income in a concentrated stock portfolio (45 holdings, 30/09/2021), the fund managers employs a barbell approach to income, looking at both yield today and growth in the future. Concentrating on the greatest dividend payers alone can leave a strategy more vulnerable to prominent income stocks cutting dividends which is increasingly important given the uncertain economic backdrop for business today. 12.16p per share (last five years ending 31 August 2021) The portfolio’s holdings and risk factors are reviewed and monitored formally at twice-weekly meetings and informally through day-to-day discussion. The fund manager and team continually assesses and reviews the individual merits of each company’s investment case, especially in the context the income needs of the portfolio, among other considerations. The fund does not hold any unlisted securities. The gearing level is at 7.9% as 30 September 2021. Looking to the Company’s last five financial years (ending 31 August 2021), 4.9% of net income is retained in average per year. The company continues to aim to provide real growth of income (growth of income in excess of the rate of inflation) as well as capital growth as consequence of the rising income.
Company name Schroder Income Growth Fund Plc Address 1 London Wall Place, London, EC2Y 5AU Website www.schroders.co.uk/incomegrowth Assets under management £716.9bn as at 30 September 2021 Number of investment trusts 12 AUM in investment trusts £4.7bn gross assets as at 09 November 2021 Number of fund management employees (permanent) 349 as at 30 September 2021
INVESTMENT STRATEGY
WHAT IS YOUR GEARING LEVEL?
INVESTMENT TRUST GUIDEBOOK 2021: SCHRODERS
DO YOU HOLD ANY UNLISTED SECURITIES - PERCENTAGE OF TOTAL PORTFOLIO?
Sue Noffke is the Head of UK Equities and Fund Manager of Schroder Income Growth Fund
WHAT PERCENTAGE OF NET INCOME DO YOU RETAIN (AVERAGE OVER PAST FIVE YEARS?)
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Some performance differences between the company and the index may arise because the company performance is calculated at a different valuation point from the index. Source: Morningstar, net income reinvested, net of ongoing charges and portfolio costs and where applicable, performance fees, in GBP. The five year performance chart above reflects ex income performance. We have reflected cum income up to 10 years in the tables above.
tock selection is at the heart of our investment approach for the fund, with income and capital growth the key features that are taken into consideration. One of Schroders greatest strengths is our network of research analysts based in the Pacific region, whose focus is on identifying companies that are able to grow shareholder value in the long term. A country allocation process is also carried out on a
monthly basis. The fund manager then constructs the portfolio using the most attractive bottom-up ideas together with this top-down overlay so as to produce a diversified portfolio of some 60 to 80 stocks. This is an unconstrained fund and, although it does not specifically target a particular investment style, tends to have a value bias, which accords well with the income objective. 9.96p per share (last five years ending 31 August 2021) Risk is monitored and managed both by the fund manager and by independent sources. Active positions in stocks, sectors, countries and factor risks are regularly reviewed to ensure that we are not taking either undue or unintended risks within the portfolio. Exposures outside the control ranges will be highlighted and discussed, with corrective actions being agreed if considered appropriate. • Relatively few funds target income in the Pacific region; this focus gives an alternative way to gain exposure to a high growth region. • For investors seeking income, the region provides some of the highest yields globally and can be used to diversify away from UK income. • Lead manager has over 25 years’ investment experience and is supported by a team of 40 equity analysts based across the Pacific ex Japan region. The Fund does not hold any unlisted securities. The gearing level is at 2.7% as at 30 September 2021. Looking to the Company’s last five financial years (ending 31 August 2021), 1.8% of net income is retained in average per year. Shorter term performance over the last year has been strong relative to the reference index. Longer term, 2017 and 2020 calendar years were particularly difficult periods for income orientated strategies in Asia with lower yielding names, such as Chinese internet stocks where we are underweight given the lack of dividend, outperforming strongly. Throughout, we have maintained a bottom-up investment approach looking for good companies where we can see a strong income case and potential for capital growth.
Company name Schroder Oriental Income Fund Limited Address 1 London Wall Place, London, EC2Y 5AU Website www.schroders.co.uk/orientalincome Assets under management £716.9bn as at 30 September 2021 Number of investment trusts 12 AUM in investment trusts £4.7bn gross assets as at 09 November 2021 Number of fund management employees (permanent) 349 as at 30 September 2021
Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. The return may increase or decrease as a result of currency fluctuations. Source: Morningstar, Schroders, at 30 September 2021. 1: Cum-income fair NAV Total Return (since inception Total Return NAV), net of fees, GBP. Reference index is MSCI AC Pacific ex Japan (NDR)
Richard Sennitt is Fund Manager of Schroder Oriental Income Fund
AWARDS INDEX
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