INVESTMENT TRUST
GUIDEBOOK 2020-2021
IN ASSOCIATION WITH
FIDELITY INTERNATIONAL
INVESTMENT TRUST GUIDEBOOK 2020: FIDELITY INTERNATIONAL
WELCOME
INVESTMENT TRUST GUIDEBOOK 2020
TRUST IN TRUSTS
Without wishing to pretend investment trusts are front and centre of everyone’s minds in a global pandemic, these are also qualities shared by the 400 or so investment companies listed on the London Stock Exchange. For example, their robust closed-end structure that means investment trust fund managers are not forced sellers of assets in a stock market crash. Then there’s the diverse asset classes to which they provide access, ranging from public and private equities to property, bonds, loans, infrastructure, commodities and royalties. And, of course, the excellent performance they can achieve in the hands of skilled fund managers. To that, I would add longevity. In these uncertain times, it is reassuring to know some investment trusts have invested on behalf of shareholders for generations and are likely to be still doing so when we are long gone!
elcome to the first edition of the Citywire Investment Trust Guidebook, the first of many I hope! I’m sure you will agree that 2020 has been a year in which robustness, diversity and excellence have played important roles.
W
Gavin Lumsden Citywire Editor in Chief #CWInvestmentTrustAwards @Citywire citywire.co.uk/investment-trust-insider
CONTENTS
CHAPTER 1 Where investment trusts do best CHAPTER 2 Five arrows in the quiver for targeting income CHAPTER 3 Historical, yes, old fashioned, no CITYWIRE INVESTMENT TRUST AWARDS 2020 SPONSOR CONTENT Fidelity International Aberdeen Standard Investments Allianz Global Investors BlackRock JP Morgan Asset Management Schroders Download the pdf version of the magazine
Photo by Erwan Hesry on Unsplash
and 11% in the year ended June 30, which, according to its latest results, detracted 2.4% from returns over the period. However, two years ago, in 2018, gearing contributed 0.47% to overall performance, according to the trust’s annual report. That is why investors will ‘think a little bit harder about whether’ they want to invest in trusts that are geared in the current market, according to Wood. Data from Numis and Morningstar show that in the UK Equity Income sector investment trusts have beaten open-ended funds over one, five and 10 years on a NAV basis. When looking at share price total returns, investment trusts come out on top just over a decade. However, in such a sector, where investors will focus on the income they receive, investment trusts have another advantage. ‘It’s always worth bearing in mind the ability of investment companies to consistently deliver income and dividends,’ said Lovett-Turner. ‘They have capital reserves, which they are able to use on a rainy day to support dividends. ’Particularly in the UK, where companies have been cutting dividends as a result of the impact of the Covid-19 pandemic, open-ended funds are at the mercy of what they receive, according to Wood. ‘For investment trusts, having reserves built up for a rainy day, they can continue to pay out dividends. When it comes to equity funds, which are income oriented, there is an advantage to buying investment trusts in terms of the ability to smooth the income stream for the end clients.’ •
The launch of new investment trusts in 2020 highlights some of the advantages investment companies have over their open-ended counterparts
CHAPTER 1
Investment company vs open-ended funds performance
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 2020: CHAPTER 1
T
his has not been a vintage year for investment company launches with less than a handful of new closed-end funds floating on the London Stock Exchange amid the extreme uncertainty caused by the coronavirus pandemic.
SISTER FUNDS
THE ROLE OF GEARING
INCOME ADVANTAGE
By Selin Bucak
‘The inflows and outflows of open-ended funds can have quite a big impact on the behaviour of the manager in terms of being a forced buyer at the top of the market, when everyone’s trying to invest in your strategy, or being a forced seller if you’re trying to fund redemptions’
Ewan Lovett-Turner Director of investment companies research, Numis Securities
Nevertheless, two of the flotations that have got away underline the diversity of the £209bn investment trust sector and the desire of fund managers of to use a structure well suited to delivering long-term returns. Last month, Home (HOME), a new real estate investment trust looking to provide shelters for the homeless and inflation-linked dividends to shareholders, demonstrated that income investor demand remains strong after it raised over £240m in its initial public offer (IPO). Offering something completely different, Nippon Active Value (NAVF) nipped in at the start of the year, before Covid-19 struck the UK, gathering £103m to invest in undervalued smaller Japanese companies. According to figures from the Association of Investment Companies (AIC) and Morningstar, the average investment trust has outperformed the average open-ended fund both in the short and long term. Over 12 months to the end of August, the average investment trust returned 5.11% versus the average fund’s 1% return. Over a 20-year period the returns have been 329.7% versus 142%, respectively.
The ability to invest in the smaller end of the market and hold illiquid assets has been a clear advantage of the investment trust structure. ‘It gives managers investing in illiquid assets the ability to take a longer-term approach and reap the benefits through the time period they like, rather than being impacted by investor flows,’ said Ewan Lovett-Turner, director of investment companies research at Numis Securities. ‘The inflows and outflows of open-ended funds can have quite a big impact on the behaviour of the manager in terms of being a forced buyer at the top of the market, when everyone’s trying to invest in your strategy, or being a forced seller if you’re trying to fund redemptions. ’That’s also why the biggest growth area for investment trusts is alternative assets, he continued. Specialist property, infrastructure, renewable energy and specialist debt have ‘appeared in the closed structure because they’re often not appropriate for Ucits vehicles. That’s an area in the closed end market that exists because the structure is good at holding less liquid assets’. For Nick Wood, head of investment fund research at Quilter Cheviot, an investment trust is an ‘excellent structure if you’re investing in illiquid assets’. For example, in the property sector, data compiled by Investec for the AIC to the end of June shows that investment trusts have outperformed open-ended funds over five and 10 years. In UK small-cap, unit trusts have fared better over one and five years, however, investment trusts have still outperformed over the decade, returning 328%, compared to the 287.9% return of open-ended funds.
WHERE INVESTMENT TRUSTS DO BEST
‘With investment companies you have to look at the long-term performance. The short-term performance will have been very much influenced by share prices falling, any gearing they had and discounts widening’
Annabel Brodie-Smith Spokesperson, AIC
In most cases, according to the Investec data, investment trusts are better performers over a decade, while unit trusts have overtaken investment trusts in all but two sectors out of 15 when compared over one year to 30 June. Annabel Brodie-Smith, spokesperson at the AIC, pointed out: ‘With investment companies you have to look at the long-term performance. The short-term performance will have been very much influenced by share prices falling, any gearing they had and discounts widening.’ More recent data from Numis and Morningstar show even better performance for investment trusts. Over a decade to the end of August, in 10 out of 14 sectors investing in equities, investment trusts have outperformed unit trusts, based on annualised net asset value (NAV) returns. For example, in emerging markets, investment trusts have had annualised NAV total returns of 3.5%, 13.3% and 6.2% over one, five and 10 years. This compares to open-ended funds, which have delivered 1.9%, 10.9% and 4.9% over the same time periods. In the Global - Equity sector, investments trusts, which have outperformed open-ended funds across all three time periods, delivered a whopping 21.1% over one year to the end of August, versus 6.4%. The Europe - Smaller Company sector is another that makes the case for investment companies. On a NAV basis, the annualised performance of investment trusts have been 15.5%, 13.8% and 12.3% over one, five and 10 years, compared to 7.9%, 9.9% and 11.4% respectively for open-ended funds. Digging deeper into individual funds gives a clearer picture of where investment trusts do better. An analysis by Morningstar of sister funds – which have at least one shared manager – found that 62% of investment trusts have outperformed sister open-ended funds on a NAV basis over five years. This figure goes up to 83% over 10 years.
% Of investment trusts outperforming‘Sister’ open-ended funds with the same manager
For example, the Baillie Gifford Japan Trust has returned 323.44% over 10 years, while Baillie Gifford Japanese has delivered 232.83%. Matthew Brett is the lead manager on both strategies, and there is an overlap in holdings – six out of the top 10 holdings are the same, for example. In specialist sectors, such as technology and financials, two Polar Capital strategies demonstrate the higher performance trusts can generate. Over five years, the Polar Capital Global Financials and the Polar Capital Global Technology trusts have returned 18.71% and 247.95% respectively. In contrast, their sister funds – Polar Capital Financial Opportunities and Polar Capital Global Tech – have generated -10.15% and 190.40% - significantly below their investment trust counterparts. Gearing – the ability to borrow money long term – is typically thought to have also helped along the performance of investment trusts due to the extended bull market since the global financial crisis. However, according to Quilter Cheviot’s Wood, gearing can be a double-edged sword. ‘In a long-term bull market, as we have had since 2008, having gearing is going to be beneficial. But equally, as and when the market falls, as it always does, you have the reverse of that,’ he said. For example, The City of London Investment Trust’s gearing was between 8%
F
Fidelity International offers investment solutions and services and retirement expertise to more than 2.5 million customers globally. As a privately held, purpose-driven company with a 50-year heritage, we think generationally and invest for the long-term. Operating in more
than 25 countries and with £373.9 billion in total assets, our clients range from central banks, sovereign wealth funds, large corporates, financial institutions, insurers and wealth managers, to private individuals. Data as at 30 September 2020 and includes assets under management and under administration.
Fidelity’s five 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 European Trust PLC (formerly Fidelity European Values 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 in low valuations. Bottom-up research advantage - through fundamental research, longer-term perspectives and great access to company management, we can 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. ESG integration - our approach to analysing the sustainability credentials of a company mirrors our investment approach. Our proprietary Sustainability Ratings generate a forward-looking assessment of a company’s ESG performance and its trajectory.
INVESTMENT STRATEGY FOCUS:
Company name Fidelity International 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 £276.3bn Number of investment managers (including co-portfolio manager) 123 in total (including 9 for the Investment Trusts) Number of investment trusts 5 AUM in investment trusts £4.1bn
Source: Fidelity International as at 30/09/20
Past performance is not a reliable indicator of future results. Source: Fidelity International, as at 30/09/20. 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) ; European Trust PLC = FTSE World Europe ex-UK Index Total Return; Japan Trust PLC = Tokyo Stock Exchange TOPIX Total Return Index; Special Values PLC = FTSE All Share Index.
PORTFOLIO CONSTRUCTION - DO YOU HOLD ANY UNLISTED SECURITIES - PERCENTAGE OF TOTAL PORTFOLIO? WHAT IS YOUR GEARING LEVEL? WHAT PERCENTAGE OF NET INCOME DO YOU RETAIN (AVERAGE OVER PAST FIVE YEARS?)
PORTFOLIO MONITORING
WHAT SETS YOUR INVESTMENT TRUSTS APART FROM THE REST?
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. 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. Both companies continue to seek new and innovative companies to invest in before they are listed. 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. Each Fidelity trust may gear up to 30%. 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 five 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. UKM1020/32335/CSO10075/0121
D
During the 2008 global financial crisis, China unleashed a huge stimulus package and was very much deemed to be leading the global economy out of the situation. But that led to some inflationary issues, and obviously a marked rise in outstanding debt, which the Chinese government still needs to address today. This time around, we can look at the situation facing each country through three drivers. One
of them being the flattening of the Covid curve, second the pace and sustainability of economic recovery and finally policy implementation. China has really been able to contain the virus and subsequent breakouts with strict tracking and monitoring. In terms of the economic recovery, manufacturing was the first sector to pick-up again and the consumer is looking relatively healthy with support from the government. Notably, the Chinese government wants the domestic demand story to be sustainable so there’s a push to ensure that the labour market is healthy and people spend again. If we look at domestic air travel for example, it’s recovered by 95%. (1) Elsewhere, because of the disruption to supply chains, some of the exports previously coming from ASEAN countries have shifted back to China. This is likely a short-term trend, but it does highlight the issues facing a number of economies across the globe which are not as far advanced on the recovery curve as China. For this reason, we are closely watching export data for an insight into the health of the global economy - just because we’ve seen domestic demand pick-up in China, it doesn’t mean that the rest of the world will follow the same trend. In terms of fiscal policy, as is usual for the Chinese government when it is concerned about growth, it tends to use infrastructure investment as a buffer. It is no different this time, apart from it’s a very targeted infrastructure investment. Take all this together, we do think that China is probably going to come out of the situation, both from an absolute and a relative point of view, better than others. 1. Source - South China Morning Post, September 2020. It was a better than expected Q2 earnings season. Now, some of that was because we had a very weak first-quarter season, but we have recently seen positive revisions. The key area where we’ve seen upward trends is in new China names in areas like biotech and e-commerce. Meanwhile, Banks were the area where we saw weaker results, with the banking sector reporting the first year-on-year decline in net profits since the listed in the early 2000’s. What’s been a really fascinating phenomenon in the market both this year and last year, is the narrow rally that has emerged - of note, investors have tended to gravitate towards biotech and big tech consumer-related names, which has aided Fidelity China Special Situations PLC due to its exposure to a number of consumer and tech-related names. On the flip side, value sectors and ‘old China’ names have significantly underperformed. Some of the leading companies in the new China space like Alibaba will continue to gain market share. Internet companies have posted high margins quarter-on-quarter as well as year-on-year. Even when we were in lockdown in China, which occurred earlier than in the UK, companies were talking to us about the further acceleration of e-commerce, particularly in areas like online groceries where it is likely that habits will stick post Covid-19. Within the consumer space, companies that a strong online and offline presence are being viewed as winners that are expected to gain further market share. Obviously, those companies with very strong brands where it’s very hard even in normal times to erode their market share continue to be market leaders, whether it’s Alibaba or Tencent or other non-ecommerce brands. There’s a company in the portfolio called China Meidong, which is an auto company. It’s an auto distributor and has various brands such as BMW. Its business model is really intriguing because it doesn’t exist in the top-tier cities. During the big lockdown in March in the first earnings season, management were saying to us that pent-up demand was a likely scenario to play out, i.e. people needed to go and look at the car and test drive the car before they bought it. There was this expectation that those brands that had good brand recognition would only see a short-term earnings decline and this is now coming through with the likes of Meidong as people are spending again. Online education companies continue to do quite well too with people spending more time at home. In fact they were doing well anyway as education has long been a key priority for Chinese families. This year we have seen more activity move online as offline services were forced to close down. Some companies have been unable to respond and the clear winners have been those operators with an integrated online and offline offering. The trust can invest up to 10% in unlisted companies which is a great advantage as we see companies generally coming to market later, not only in China but elsewhere across the globe. Some of the names in the portfolio haven’t yet come to market because of various issues relating to market dynamics last year, but in general, this space is really untapped. More recently, we’ve seen very strong initial public offering (IPO) issuance. Shanghai, for example, saw US$15.4bn in IPO proceeds over the first half of the year, which is way up on US$4.9bn in the same period last year. (2) This trend is also evident in Hong Kong and Shenzhen and it is notable that these markets collectively saw the top three IPOs globally in the first half of 2020. There has been strong demand from both on retail and institutional investors, with some IPOs being oversubscribed multiple times. In public markets, there has been a big shift towards growth and momentum in China, driven both by foreigners and domestic Chinese investors. This is likely to continue, but it is a concentrated trade and valuations look extended in certain areas. So, by investing in the trust you can diversify your exposure to China outside of the relatively small number of stocks that have been driving markets so far this year. 2. Source: Bloomberg, September 2020 It’s gone unnoticed because of Covid, but the regulators have continued to focus on liberalising China’s domestic markets. The Stock Connect programme that links Hong Kong with China’s mainland markets has been around for a few years and has helped attract more international investors. We’ve also seen other initiatives include removing quota limits for qualified foreign institutional investors and relaxing equity financing rules for A-share companies. The Star Board, or the Star Exchange, also opened last year to much fanfare. It’s only been around for just over a year and we’ve already seen over 190 companies either having listed or are in the process of listing. Star is a science and technology innovation board, the Chinese equivalent of Nasdaq. While we’re still seeing Chinese companies list in the US, rising regulatory amid US-China tensions is making both primary and secondary overseas listings less attractive for Chinese firms. On the flip side, Chinese capital markets have grown tremendously over recent years and offer strong liquidity and a solid investor base for companies seeking to list. As the make-up of the market continues to evolve, I think you’ll see an increasing number of both domestic Chinese and international investors look to Chinese asset markets to tap into China’s long-term growth story. •
1. IF WE LOOK AT HOW THE CHINESE SHARE MARKET PERFORMED DURING PAST GLOBAL DOWNTURNS, IS THIS TIME DIFFERENT?
Important information 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. Past performance is not a reliable indicator of future returns. 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. Fidelity China Special Situations PLC can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This trust invests 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 the securities are often less liquid. This Investment Trust invests in emerging markets which can be more volatile than other more developed markets. The shares in the investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. 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 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. Fidelity Investment Trusts are managed by FIL Investments International. 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. UKM1020/32267a/SSO/0421
2. WHAT TYPE OF COMPANIES IN CHINA BENEFITED OR SUFFERED THE MOST FROM THE PANDEMIC?
3. WHAT KIND OF DISRUPTION HAVE WE SEEN IN BUSINESS MODELS?
5. WE’VE SEEN A-SHARES OPENING UP THE MARKET TO INTERNATIONAL INVESTORS. IS THAT ENOUGH?
4. LET’S TALK A BIT ABOUT SOME UNQUOTED FIRMS IN THE TRUST. WHY THE INTEREST AND WHAT’S THE OUTLOOK FOR THESE FIRMS?
CHINA RESURGENCE LEADS THE WAY
Hong Kong-based Catherine Yeung, Investment Director, Fidelity China Special Situations PLC, gives a snapshot of a recovering China and what the latest earnings season tells us about businesses moving forward.
INVESTMENT TRUST AWARDS 2020
Asia Pacific Equities Emerging Market Single Country European Equities Global Emerging Market Equities Global Equities International Income Japanese Equities North America Equities Specialist Equities
CATEGORIES
SERVICE AWARDS
UK All Companies UK Equity Income UK Smaller Companies Global Multi-Asset Infrastructure Private Equity Property UK Property Specialist Debt
INVESTMENT TRUST GUIDEBOOK 2020: AWARDS
AWARDS
Pacific Horizon
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.
ASIA PACIFIC EQUITIES
Ewan Markson-Brown Fund manager, Baillie Gifford
Roderick Snell Fund manager, Baillie Gifford
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 = dollar total return.
WINNER
Asia Pacific Equities Top Five
Under its new name of JPMorgan China Growth & Income (JGCI), this £459m trust romped home with the title for a second year in a row, scoring an impressive 1.28 information ratio based on the 79.4% total return on net assets against its MSCI China benchmark. This beat direct rival Fidelity China Special Situations (FCSS) and Weiss Korea Opportunity (WKOF) and stable mate JPMorgan Russian Securities (JRS), which also made the shortlist. Managed by Howard Wang, Rebecca Jiang and Shumin Huang, the 27-year-old listed fund changed its name from JPMorgan Chinese in February after shareholders approved a big change in dividend policy. Distributions to shareholders have been upped from once to four times a year and the yield quadrupled to 4%, with the board authorised to make payments from capital if there is insufficient investment income. This switch has boosted investor demand with the shares halving their discount to 5% by August, a move that contributed to the impressive total three-year shareholder return of 97.8%. The re-rating has continued with the shares recently moving to a 6% premium over NAV as investor interest in the rebound in China’s economy from Covid-19 grows.
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
George Cooke of Montanaro European Smaller Companies (MTE) also maintained his winning form, beating off a challenge from the former European trust which Baillie Gifford took over late last year, to scoop the European Equities performance award for a second time in succession. Performance of the £252m trust, which Cooke has run for 14 years, has continued to be strong this year, enabling it to generate a 2.02 information ratio, the best of this year’s awards. This is based on 58.4% growth in net asset value in the three years to 31 August which beat the closed-end fund’s benchmark, its four short-listed rivals and underpinned a 72.9% total shareholder return. Cooke has benefited from the rally in smaller companies which has occurred in response to the first signs of an economic recovery from the pandemic, although he remains cautious and focused on quality companies with strong balance sheets, positive cash flow and good managements.
Montanaro European Smaller Companies
George Cooke Fund manager, Montanaro Asset Management
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
The two big beasts of this sector, the £1.4bn JPMorgan Emerging Markets (JMG) and £2bn Templeton Emerging Markets (TEM), have been slugging it out but despite a concerted effort by Chetan Sehgal and Andrew Ness at Franklin Templeton, who took over the latter in 2018, it is JMG’s Austin Forey who has come out on top for a second year. Forey, who has managed JMG since 1994, grew the trust’s portfolio by 25.9% in the three years to August, which against the performance of the MSCI Emerging Markets index gives it a credible 1.24 information ratio that puts runner-up Templeton and a dozen other contenders in the shade. JMG’s returns have spiked in the past 18 months, with its long-term, low turnover backing of stocks with high returns on equity putting it in some of the technology and internet names that have prospered during this year’s lockdowns. It should all bode well for the company when shareholders meet later this month for its triennial continuation vote.
JPMorgan Emerging Markets
Austin Forey Fund manager, JP Morgan Asset Management
GLOBAL EMERGING MARKET EQUITIES
Global Emerging Market Equities Top Two
The Baillie Gifford effect is most evident in this sector with no less than three of the four shortlisted trusts managed by the Edinburgh-based partnership. Scottish Mortgage Trust (SMT) has returned to steamroll the opposition, both in and outside Baillie Gifford, winning the prize for a second time after a three-year gap with an impressive 1.68 information ratio. This score underlines SMT’s dominance in net asset value and shareholder returns as fund managers James Anderson and Tom Slater have successfully pursued some of the world’s fastest growing businesses. Shares in the Baillie Gifford flagship have soared 78% year to date, swelling its market value to £15bn and making it easily the largest investment trust listed on the London Stock Exchange. Stable mates Edinburgh Worldwide (EWI), the global smaller company counterpart to Scottish Mortgage that won last year, and Monks (MNKS), a ‘best ideas’ fund that serves as a less racy version of SMT, have done very well over the three years but are nevertheless eclipsed by their big sibling. Oryx International Growth (OIG) makes a plucky also-ran but the £152m largely UK portfolio run by veteran engaged investor Christopher Mills is an anomaly in this grouping, gaining entry with a 0.94 information ratio after outpacing the easier-to-beat FTSE All-Share.
Scottish Mortgage
Tom Slater Fund manager, Baillie Gifford
James Anderson Fund manager, Baillie Gifford
GLOBAL EQUITIES
Global Equities Top Four
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 = dollar total return except FTSE All-Share in sterling.
There is no doubting this is a tough sector. High-yielding value stocks, in which equity income trusts partly invest, have fallen out of favour as investors chase a dwindling number of growth opportunities. On top of that, widespread dividend cuts during the pandemic have compounded the challenge for income investors this year. Although most global and regional equity income trusts generated positive three-year NAV returns, against their benchmarks their performance looked mediocre and generated negative information ratios. This left Baillie Gifford’s Scottish American (SAIN) and Schroder Oriental Income (SOI) squeezing onto our shortlist with barely positive scores of 0.09 and 0.04. Scottish American, a £514m, 3.3% yielding growth portfolio run by James Dow and Toby Ross, therefore gathers the prize for a second year in a row. In August Schroders announced that Matthew Dobbs, who had managed SOI and Schroder Asia Pacific (SDP) since their launches in 1995 and 2005, would retire next year after 40 years with the fund group. Richard Sennitt, his co-manager for 13 years, will take on both trusts.
Scottish American
Toby Ross Fund manager, Baillie Gifford
James Dow Fund manager, Baillie Gifford
INTERNATIONAL INCOME
International Income Top Two
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 = total return.
For the neutral observer, it’s good to see Baillie Gifford is not getting its way everywhere and in Japan we have a bit of an upset for the company. A ‘blockbuster’ 12 months to the end of August saw last year’s third-placed JPMorgan Japanese (JFJ) overtake former sector leader Baillie Gifford Japan (BGFD) to win our award this year. Stifel analyst Anthony Stern was impressed with JFJ’s 20% growth in net asset value for the financial year, not just because it trounced the 1% dip in Japan’s Topix index (in sterling terms), but because Nicholas Weindling and Miyako Urabe’s portfolio of growth stocks proved comparatively defensive in the coronavirus crash, declining 15% in the February-March sell-off, which was about half the descent of rivals BGFD and Fidelity Japan Values (FJV). Although the other two trusts have rebounded faster since then, JFJ’s 42% rally from the March lows is still impressive and, combined with its earlier resilience, leaves it with the best three-year NAV return and information ratio, with BGFD not making it into the short list although the smaller companies focused Baillie Gifford Shin Nippon does.
JPMorgan Japanese
Miyako Urabe Fund manager, JP Morgan Asset Management
Nicholas Weindling Fund manager, JP Morgan Asset Management
JAPANESE EQUITIES
Japanese Equities Top Four
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 = yen total return.
It’s a curious fact that North America, home of the world’s largest stock market, provides one of the smaller sectors in the UK investment trust world. There are just eight investment trusts investing in US large and small companies and Canada with a total market value of £2.8bn. Excluding Baillie Gifford US Growth (USA), which does not yet have a three-year track record after launching in 2018, and ignoring five others for having negative information ratios, left only two contenders for our award. They are the same two that made the very short list last year. Fortunately, to keep things interesting they have swapped places with Jupiter US Smaller Companies (JUS) pipping JPMorgan US Smaller Companies (JUSC) to the post with a 0.87 information ratio over its rival’s 0.55. The result leaves JUS fund manager Robert Siddles going out on a high. The manager, who has been beaten by Don San José, his opposite number at JUSC, in the previous three years, announced last month he would retire next April, by which time he will have run the trust for 20 years. Siddles’ long-term record has been very good, growing the trust’s NAV by 408% since 2001, but in the past decade his value approach to small-cap stocks has been out of favour, which makes it all the more surprising he has turned the tables on the more growth-oriented JPMorgan trust this year. However, his defensive approach had led Siddles to have over 40% in technology and healthcare stocks which have done well this year, lifting his three-year NAV return to 27.8%, which looked good compared to the Russell 2000 small-cap index.
Jupiter US Smaller Companies
Robert Siddles Fund manager, Jupiter Asset Management
NORTH AMERICA EQUITIES
North America Equities Top Two
In categories like this, in which we combine trusts operating in different markets and against diverse indices, it is possible for a closed-end fund to win with a lower return because it has done well against a more difficult benchmark. So it is that TR Property (TRY), the only London-listed property investment company largely investing in real estate shares rather than physical bricks and mortar, goes home with the Specialist Equities gong for the third year in a row despite the obvious challenges of the asset class during this year’s lockdowns. Overseen by fund manager Marcus Phayre-Mudge, the £1.1bn trust has grown asset value by 12.4% over three years, way behind UK technology trust Herald (HRI), which surged nearly 51% under its long-standing manager Katie Potts. However, in a repeat of last year, that lower return offers more value against TRY’s European property benchmark than Herald did against its FTSE UK Technology index, giving the property trust a clear lead with an information ratio of 1.64 versus its opponent’s 0.62. Biotech Growth (BIOG) managed by OrbiMed in New York was a new entrant in third place, achieving a 0.56 ratio from its 38.4% return against the US Nasdaq Biotechnology index.
TR Property
Marcus Phayre-Mudge Partner, Thames River Capital
SPECIALIST EQUITIES
Specialist Equities Top Three
We switch to the home market and judging from the low returns in the first two of the three UK tables, it’s clear what a miserable time domestic investors have had! But, looking at the bright side, there are lots of new entrants to our shortlists, with much less of the continuity we’ve seen in our other categories. Baillie Gifford UK Growth (BGUK), which fund managers Milena Mileva and Iain McCombie took on over two years ago when Baillie Gifford won the contract to run what had been Schroder UK Growth, sweeps into top place in the UK All Companies sector with just under 7% net asset value growth in three years. That’s better than the losses on the FTSE All-Share index, though, and gives the £283m trust an information ratio of 0.78. Although a 2.6% rise in NAV over three years is extremely modest, Kartik Kumar, manager of Artemis Alpha (ATS), will be pleased his efforts to turn round the previously struggling £116m ’best ideas’ fund are beginning to pay off with a 0.4% information ratio. However, the shares trailing on an 18% discount below NAV shows he has more to do to convince investors. Similarly, the £70m Henderson Opportunities Trust (HOT) managed by contrarian value fund manager James Henderson, stands on an unloved 18% discount, though at least his negative NAV return generates a modestly positive information ratio of 0.28.
Baillie Gifford UK Growth
Iain McCombie Fund manager, Baillie Gifford
Milena Mileva Fund manager, Baillie Giiford
ALL UK COMPANIES
All UK Companies Top Three
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 = sterling total return.
Shareholders in both Murray Income (MUT) and Perpetual Income & Growth (PLI) can rejoice in the sight of the former carrying off the UK Equity Income crown this year, having knocked three-time winner Finsbury Growth & Income (FGT) into third place. Murray Income, a £495m trust managed by Charles Luke at Aberdeen Standard Investments (ASI), is effectively taking over Perpetual Income although technically the two are combining in a £1bn merger after the latter decided in July to call it a day after sacking fund manager Mark Barnett and Invesco in April following five years of poor performance. The sight of Murray Income’s high information ratio of 1.65 will offer some reassurance to shareholders in £470m Perpetual Income that they are not jumping from the frying pan into the fire, although its positive NAV and shareholder returns are not as good as second- and third-placed Dunedin Income Growth (DIG), managed by Ben Ritchie and Georgina Cooper also at ASI, and Finsbury Growth & Income (FGT) run by star fund manager Nick Train. Luke has run Murray Income for 14 years with a similar emphasis on quality growth companies to Train, although he holds more stocks and trades more often than his famously low turnover rival. Over 10 years he has doubled the NAV with a 99.9% total return that beats the 81.8% UK Equity Income sector average and the FTSE All Share’s 57.8%.
Murray Income Trust
Charles Luke Fund manager, Aberdeen Standard Investments
UK EQUITY INCOME
UK Equity Income Top Four
This is a very competitive sector as can be seen by £219m JPMorgan Smaller Companies (JMI), not shortlisted last year, jumping into pole position and knocking Dan Whitestone’s BlackRock Throgmorton (THRG) into second place, thereby preventing the fund manager from lifting his third successive prize. The Georgina Brittain and Katen Patel managed portfolio achieved a top 1.59 information ratio with net asset value up 25.3% over three years and 14.6% over the past year. This was matched against the Numis Smaller Companies index (excluding investment companies) that four of our five short-listed trusts use as their performance benchmark. Harry Nimmo, manager of Standard Life UK Smaller Companies (SLS) for 17 years, had to settle for third place, though this was ahead of colleague Abby Glennie, manager of Aberdeen Smaller Companies Income (ASCI), and Mercantile (MRC), the £1.6bn JPMorgan ‘mid-cap’ stock focused trust run by Guy Anderson and Anthony Lynch. JMI shareholders will vote this month whether to continue the trust for another three years. They should be happy to do so after the trust won this award and provided them with a fabulous total return of 283.5% over 10 years, considerably ahead of the index 115% return.
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
Any disappointment felt by Nick Train for not gaining a fourth win for Finsbury Growth in UK Equity Income will be mollified by the result here. Train’s Lindsell Train (LTI) is a clear winner for the second year with an information ratio of 1.08 backed by the impressive 73.7% growth in net asset value over three years. It is worth pointing out that the three-year shareholder returns of just over 40% have been lower because of a de-rating in the shares, which soared to an astonishing 96% premium over NAV in the first half of last year but have tumbled to sit just 6% above asset value today. The volatile £234m investment trust is the exception to the general rule in this category which we introduced last year to highlight the role of defensive, ’multi-asset’ funds investing across different classes of assets in order to protect them from turbulent equity markets. Lindsell Train has a similar equity portfolio to Finsbury Growth but is classified here due to its big stake in Lindsell Train Limited, the private fund management company founded by Train and Japan fund manager Michael Lindsell. It is benchmarked against the MSCI World index, whereas our two runners-up, the Rothschild family-backed RIT Capital Partners (RCP) and Capital Gearing Trust (CGT), are measured against the Morningstar UK Moderately Adventurous sector as there is no index that covers the wide range of private and public equity, credit and bonds and currencies they can hold. RIT Capital edges ahead of CGT with a slightly higher information ratio and NAV growth, although its shareholder return was lower after its shares also de-rated and fell from a 10% premium to a 7% discount, somewhat diminishing their defensive appeal.
Lindsell Train
Nick Train Fund manager, Lindsell Train
GLOBAL MULTI-ASSET
Global Multi-Asset Top Three
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 = sterling total return except MSCI World in dollars.
For our last five categories of trusts investing in infrastructure, private equity, physical property and debt, we drop the information ratio which is less meaningful in illiquid assets revalued quarterly, in contrast to the constant revaluation provided by trading in publicly listed shares. Instead we simply rank investment companies by their net asset value (NAV) return over three years to 31 August. Infrastructure - whether investing in ‘social’ assets such as toll roads, accommodation, schools and hospitals, or renewable energy infrastructure - remains a popular area for investors. Both offered a safe haven during this year’s stock market mayhem and more secure dividends at a time when many listed companies have cut or suspended pay-outs. Falling energy prices have exerted some downward pressure on the valuations of renewables funds, however. 3i Infrastructure (3IN) took a year off in 2018 but in 2020 picks up its third award in this category after the £2.6bn, 3.3% yielding investor in communication, energy, transport and utility projects grew NAV by just over 59%. Overseen by 3i managing partner and head of infrastructure Phil White, the investment trust offered lower overall returns with higher dividends: the £2.3bn, 5%-yielding Renewables Infrastructure Group (TRIG) managed by Infrared Capital Partners, came second with a 34.8% NAV growth; ahead of Greencoat UK Wind (UKW), a £2.4bn trust from Greencoat Capital yielding 5.3% and 30.2% NAV growth.
3i Infrastructure
Phil White 3i managing partner and head of infrastructure
INFASTRUCTURE
Infastructure Top Three
Source: Lipper and Morningstar data. Numis Securities sectors. Trusts ranked by their three-year net asset value (NAV) growth to 31/8/20. All trusts with less than three years performance history were excluded.
It’s all change here as HgCapital Trust (HGT) deposes 3i (III), the £10.4bn sector giant that has won the award in the previous three years. HgCapital, a highly rated £1.1bn investor in technology and business service providers, grew its portfolio by over 63% in the three years to 31 August, underpinning an even better 73.6% return to shareholders. It invests in and alongside Hg private equity funds, such as the Saturn fund range managed by senior partner Nic Humphries. By contrast, 3i generated a perfectly acceptable 55.5% return on net assets although shareholders received just 7.7% from their stakes as the share price shed half of its former 50% premium over NAV due to concern about the impact of coronavirus on its large investment in Action, the Dutch discount retailer. Media and communication specialist Oakley Capital Investments (OCI) secured second place with a 60.9% NAV advance after some profitable disposals. Its 52.7% shareholder return reflected increasing efforts through share buybacks to reduce the wide discount on its shares and get the price closer to NAV. Apax Global Alpha, an £808m investment company investing in the private equity funds of Apax Partners, joined the shortlist with a 37.6% portfolio return.
HgCapital Trust
Nic Humphries Hg senior partner
PRIVATE EQUITY
Private Equity Top Four
A focus on Berlin’s undervalued residential property market has secured Phoenix Spree Deutschland (PSDL) a second consecutive win. Although the investment company’s net asset value return of 63.6% comfortably beat the UK specialists on the shortlist, it was sharply down on the 115% three-year portfolio growth recorded a year ago, reflecting the impact of Berlin city council’s attempt to pass a rent freeze. PSDL, which is managed by QSix, the specialist real estate manager previously known as PMM Group, remains confident the legislation will be overturned or that its condominium development plans will preserve shareholder returns. The uncertainty has hit the shares, however, with shareholder returns of just 6.9% over three years. The 43.5% NAV growth of second-placed LXI (LXI) demonstrates the investor interest over the past three years in the long-leased properties the £598m, 5%-yielding real estate investment trust owns, although the more subdued 22.9% shareholder return reflects this year’s uncertainties as well. Third-placed GCP Student Living (DIGS) provides further evidence of this trend with a credible 37.7% return from its portfolio of premium student accommodation in London and Brighton translating to a three-year shareholder return of just over 6%, as investors worry about the consequences of social distancing restrictions on campus life. Fourth-placed Urban Logistics (SHED) is the only one on our shortlist whose shareholder return outstrips its NAV growth, testament to the 5% premium at which shares in the real estate investment trust trade as investors flock to a warehouse and distribution sector enjoying the pandemic boom in online shopping.
Phoenix Spree Deutschland
Stuart Young QSix head of investor relations
PROPERTY SPECIALIST
Property Specialist Top Four
Source: Lipper and Morningstar data. Numis Securities sectors. Reit = real estate investment trust. Trusts ranked by their three-year net asset value (NAV) growth to 31/8/20. All trusts with less than three years performance history were excluded.
Three of our four shortlisted UK generalist real estate investment trusts (Reit) display negative three-year shareholder returns, which underlines the trauma the sector has endured through the pandemic this year. Plunging rent collection levels have led to some trusts to suspend or cut dividends, while uncertainty over commercial tenants’ trading prospects has hit property valuations. Nevertheless, the positive three-year net asset value figures suggest a turnaround could occur quickly once confidence returns. AEW UK (AEWU), a £119m Reit, wins our award this year with 26.6% portfolio NAV growth over three years. Managed by Alex Short and Laura Elkin at AEW UK Investment Management, AEWU is the only to have recorded NAV growth in the year to August with the portfolio up 3.75%, although recently it posted a 0.7% decline in the third quarter. So far AEWU is the only UK Reit not to have cut shareholder pay-outs, maintaining a 2p per share quarterly dividend this year. This offers a high 10% yield on its depressed share price, although with the most recent dividend uncovered by earnings – or rental income – of 1.6p per share, the board noted the outlook for future distributions was unclear.
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
Our final performance award category brings together a variety of funds from the direct lending, loans & bonds, real estate debt and structured debt sub-sectors. This has been another difficult area for some investment companies, with investors worrying about the implications for an economic downturn on bad debts and loan losses well before this year’s Covid-19 recession. Like their equity income counterparts, these areas of ‘alternative income’ were faced with sudden drops in revenue as some borrowers struggled to make repayments, leading to cut or suspended dividends. Although these have been reinstated at lower levels, investors remain nervous and share price discounts wide. VPC Specialty Lending (VSL), a £181m investor in consumer and small business loans in the US, Latin America and Europe, is our clear winner with a 40% return on net assets over three years and a 14.5% NAV gain in the year to August. This performance reflects the way US fund manager Victory Park Capital, co-founded by Brendan Carroll, suspended lending to de-risk the portfolio during the height of the pandemic. Fourth-placed GCP Infrastructure (GCP) stands out as the only debt fund on the list whose shares trade at a premium of 10%, which is reflected in the smaller gap between its NAV return of 22.5% and three-year shareholder return of 15.5%. The £1bn Jersey investment company lends to renewable energy providers, social infrastructure and supported living and yields over 6%.
VPC Speciality Lending Investments
SPECIALIST DEBT
Specialist Debt Top Five
It’s a curious fact that North America, home of the world’s largest stock market in the US, provides one of the smaller sectors in the UK investment trust world. There are just eight investment trusts investing in US large and small companies and Canada with a total market value of £2.8bn. Excluding Baillie Gifford US Growth (USA), which does not yet have a three-year track record after launching in 2018, and ignoring five others for having negative information ratios, left only two contenders for our award. They are the same two that made the very short list last year. Fortunately, to keep things interesting they have swapped places with Jupiter US Smaller Companies (JUS) pipping JPMorgan US Smaller Companies (JUSC) to the post with a 0.87 information ratio over its rival’s 0.55. The result leaves JUS fund manager Robert Siddles going out on a high. The manager, who has been beaten by Don San José, his opposite number at JUSC, in the previous three years, announced last month he would retire next April, by which time he will have run the trust for 20 years. Siddles’ long-term record has been very good, growing the trust’s NAV by 408% since 2001, but in the past decade his value approach to small-cap stocks has been out of favour, which makes it all the more surprising he has turned the tables on the more growth-oriented JPMorgan trust this year. However, his defensive approach had led Siddles to have over 40% in technology and healthcare stocks which have done well this year, lifting his three-year NAV return to 27.8%, which looked good compared to the Russell 2000 small-cap index.
WEALTH MANAGER RETREAT 2020
INVESTMENT TRUST GUIDEBOOK 2020: WEALTH MANAGER RETREAT 2020
ALLIANZ GLOBAL INVESTORS
INVESTMENT TRUST GUIDEBOOK 2020: ALLIANZ GLOBAL INVESTORS
Income investors can be forgiven for feeling they are chasing a moving target, but investment trusts have many tools in their armoury
CHAPTER 2
INVESTMENT TRUST GUIDEBOOK 2020: CHAPTER 2
I
n an environment where cash is losing value in real terms, quantitative easing has suppressed bond yields and dividends from equities are under the cosh, investors looking for strong and stable income streams are increasingly finding value in the investment trust structure.
1. REVENUE RESERVES
4. GEARING
5. BUYING AT A DISCOUNT
By Jennifer Hill
‘The events of this year have not only highlighted the importance of diversification of income streams by asset class and region, but also shown the value to be had in diversifying fund structures’
Helen Bradshaw Portfolio manager, Quilter Investors.
‘The events of this year have not only highlighted the importance of diversification of income streams by asset class and region, but also shown the value to be had in diversifying fund structures,’ said Helen Bradshaw, a portfolio manager at Quilter Investors. Equities are a case in point. Distributions from many open-ended equity income funds have dropped this year due to dividend cuts amid the coronavirus pandemic. Investment trusts can retain up to 15% of the income they generate each year and hold it in revenue for tougher times. ‘This year particularly we’ve seen the value of this structural quirk come to the fore, as corporate dividends have collapsed in the face of the economic damage done by Covid-19,’ said Pascal Dowling, a partner at investment trust specialist Kepler Trust Intelligence.
It is by virtue of revenue reserves that many investment trusts have exemplary records of dividend growth. City of London (CTY), a UK equity income trust, and two global trusts, Bankers (BNKR) and Alliance Trust (ATST), top the Association of Investment Companies’ (AIC) list of dividend heroes. CTY has surpassed 54 consecutive years of growth with BNKR and ATST on track to follow suit this year. All three have either used their reserves to support quarterly dividend payments in the past year or indicated their intention to do so. Another structural advantage is the ability to convert capital growth to income. This means trusts like International Biotechnology (IBT), which invests purely in growthy biotechnology and healthcare stocks, can offer a yield even though underlying holdings pay little or nothing in the way of dividends. IBT pays a dividend equivalent to 4% of its net asset value (NAV) at the end of its financial year, making it the highest-yielding fund in its peer group. ‘Because paying income from capital means the fund manager can invest anywhere and still generate income, investors can find investment trusts like IBT that offer an income but aren’t exposed to the same concentrated group of blue chips – think Glaxo, Shell and British American Tobacco – that until recently at least tended to be found in traditional equity income portfolios,’ said Dowling.
FIVE ARROWS IN THE QUIVER FOR TARGETING INCOME
‘The managers geared up in the depths of market falls and bought good quality bonds at relatively low prices. They feel this should help to underpin the fund’s income for the next couple of years’
James Carthew Head of investment trust research, QuotedData.
The third arrow in investment trusts’ quiver is that the closed-end structure means managers do not have to worry about redemptions. This makes them ideally suited to less liquid opportunities. Testament to that is that property trusts have been protected from the forced selling and suspensions seen among open-ended property funds in times of crisis. Investment trusts also afford access to otherwise inaccessible investments like renewables, infrastructure and private equity – generally illiquid asset classes offering attractive levels of income and diversification. An analysis by N+1 Singer shows that 20% of investment trusts in areas like property, infrastructure and asset leasing have increased their dividends or guided for growth since the February/March stock market sell-off and another 43% have maintained dividends in-line with previous levels or targets. A favourite of senior research analyst Markuz Jaffe is BBGI, which generates availability-based cash flows from infrastructure projects globally, thereby insulating revenues from reductions in use due to Covid-19 restrictions and allowing it to maintain its dividend.
Some funds boost income by using low-cost gearing to invest in higher-yielding assets. Henderson High Income (HHI) and Shires Income (SHRS) supplement their income from mainstream equities through bonds and preference shares respectively. They had net gearing of 23% and 20% at the end of August. ‘This allows them to invest in lower-yielding equities with higher dividend growth potential and should stand them in good stead,’ said James Carthew, head of investment trust research at QuotedData. Managers can dial gearing up or down as they see fit. In the debt sector, Henderson Diversified Income (HDIV) was robust going into the crisis thanks to its focus on companies and sectors with sustainable earnings, said Carthew. ‘The managers geared up in the depths of market falls and bought good quality bonds at relatively low prices,’ he added. ‘They feel this should help to underpin the fund’s income for the next couple of years.’ IpsoFacto Investor reckons ‘very attractive opportunities’ remain in the UK equity income sector thanks to some large discounts.
Photo by Annie Spratt on Unsplash
2. CAPITAL TO INCOME
3. ALTERNATIVE ASSETS
We asked four under the age of 35
How are the next generation of wealth managers using investment trusts for income?
Kamal Warraich Canaccord Genuity Wealth Management
CJ Cowan Quilter Investors
Nick Craze Ravenscroft
Cléo Fitzsimons Cazenove Capital
The UK boasts many mature companies generating surplus cash and at the cheapest ever relative to the rest of the world, said Canaccord Genuity investment analyst Kamal Warraich. The 32-year-old likes Nick Train’s Finsbury Growth & Income (FGT) for its focus on high quality companies and dividend growth. ‘It’s avoided deeper pitfalls through its zero weighting to energy and banks,’ he said. It yields only 2%. Something a little different with a superior yield of 6%, Law Debenture (LWDB) combines equities with an unlisted professional services business that contributes a third of dividends and ‘supports dividend growth in harder times’, added Warraich.
While many investors are understandably cautious over the prospects for traditional property sectors, like offices and retail, specialist property such as distribution and logistics, supermarkets, social housing and healthcare have been key sectors for dividend growth since March. CJ Cowan, an assistant portfolio manager at Quilter Investors, likes Assura (AGR), which invests in and develops modern purpose-built healthcare properties, principally let to GPs and primary care trusts in the UK. It increased its quarterly dividend in June. ‘Its long and inflation-linked leases are effectively government backed,’ said 32-year-old Cowan. ‘Investors can take confidence that the income will be more stable despite a challenging economic backdrop.’
Searching for income might seem a Herculean task, but investors should ‘make it easy for themselves’, said Ravenscroft’s Nick Craze, who believes ‘new is not always best when seeking sustainable income’. The 28-year-old cites CTY, incorporated in 1861, as a ‘tried and tested part of UK portfolios’. It yields just over 6%. Job Curtis, its manager for almost 30 years, runs a portfolio of almost 100 stocks with a bias to large multinationals. It is weathering the dividend drought better than others thanks to substantial holdings in bond proxies. Its top three holdings are British American Tobacco, Unilever and Diageo.
Cazenove Capital holds several renewable energy trusts in its sustainable portfolios. One is the Renewables Infrastructure Group (TRIG), which yields more than 5%. ‘These trusts are often backed by government contracts and linked to inflation – providing an excellent hedge to the erosion of real returns while also paying a steady income stream to shareholders,’ said 34-year-old sustainable investment lead Cléo Fitzsimons. All renewable energy infrastructure trusts are trading on premiums to NAV – TRIG is on more than 18%, for example – but momentum behind the sector means most trusts raise capital for new investment opportunities semi-annually, which affords an ‘attractive entry point for new investors’, she added.
IpsoFacto Investor reckons ‘very attractive opportunities’ remain in the UK equity income sector thanks to some large discounts. Edinburgh Investment (EDIN) can be bought at a discount of almost 11%. Even if its dividends fell by 25% it would still yield nearly 5%. It has been run by Majedie since March, whose investment philosophy favours lower valuations and leans toward value as an investment style. IpsoFacto CEO David Liddell suggests balancing it with Dunedin Income Growth (DIG), which is more oriented to defensive bond proxies and ‘just might’ be able to maintain its current yield of 5.2%. Shares in it can be picked up at a discount of almost 6%. For regional equity exposure, he likes JP Morgan European Income (JETI), North American Income (NAIT) and Aberdeen Asian Income (AAIF), which are trading on discounts of around 13%, 10% and
8% respectively and ‘should all be able to pay worthwhile yields at current prices’. •
By Kathrin Schindler
BAILLIE GIFFORD & CO
INVESTMENT TRUST GUIDEBOOK 2020: BAILLIE GIFFORD & CO
INVESTMENT TRUST GUIDEBOOK 2020: BAILLIE GIFFORD & CO.
BAILLIE GIFFORD & CO.
ABERDEEN STANDARD INVESTMENTS
INVESTMENT TRUST GUIDEBOOK 2020: ABERDEEN STANDARD INVESTMENTS
he Company is an investment trust with a premium listing on the London Stock Exchange. The Company’s objective is to achieve growth of income and capital from a portfolio
invested mainly in companies listed or quoted in the United Kingdom.In pursuit of its objective, the Company’s investment policy is to invest in high quality companies with strong income potential and providing an above-average portfolio yield. The Company’s benchmark index is the FTSE All-Share Index (total return).
We have a concentrated portfolio (45 stocks) focussed on long-term investments in companies with strong business models, robust balance sheets and excellent management teams that can consistently grow profits and cash flow over the cycle. Stylistically we favour quality companies but the portfolio has a balance of exposures. The emphasis is on fundamental company analysis and bottom up stock picking. We also look to construct a portfolio with a range of different economic exposures to provide effective diversification. Modest levels of gearing are employed with the aim of enhancing returns over the long-term. The portfolio is monitored closely on a daily basis reviewing any significant price movements or company specific developments. Georgina and Ben also have a formal weekly portfolio construction meeting where they review the holdings and make most of the decisions. We take a long term view and focus on balancing income generation with dividend growth and total return in a portfolio that is prepared to be very different to both benchmark and peers. The Company does not hold any unlisted investments.Gearing of 9.4% of shareholders’ funds as at 31/8/20Dividend cover of 95.1% for the year to 31/1/20Average dividend cover of 103.0% for the five years to 31/1/20 •
Company name Dunedin Income Growth Investment Trust PLC Address 1 George Street, Edinburgh, EH2 2LL Email company.secretary@aberdeenstandard.com Website www.dunedinincomegrowth.co.uk Assets under management ASI: £455.6bn (€501.2bn/$562.9bn) as at 30 June 2020* Number of investment managers (including co-portfolio manager) ASI: 1000+ investment professionals worldwide* Number of investment trusts 23* AUM in investment trusts £9.9bn at 30 Sep 2020*
*Source: Aberdeen Standard Investments
Past performance is not a guide to future results.
UNIQUE SELLING POINTS- WHAT SETS YOUR INVESTMENT TRUSTS APART FROM THE REST?
PORTFOLIO CONSTRUCTION- DO YOU HOLD ANY UNLISTED SECURITIES- PERCENTAGE OF TOTAL PORTFOLIO? WHAT IS YOUR GEARING LEVEL? WHAT PERCENTAGE OF NET INCOME DO YOU RETAIN (AVERAGE OVER PAST FIVE YEARS?)
Find out more at www.dunedinincomegrowth.co.uk or register for updates here
e have experienced a hit to income in the financial year so far of approximately 13%, which we believe to be a good outcome set against a c.40% fall for the wider market. It was always our expectation pre-Covid-19 that we would pay an uncovered dividend this year as we shifted the trust towards more total return and income growth opportunities. That strategy has helped us to avoid a
number of areas that have traditionally been large contributors to dividends within the UK market but where we felt businesses were unattractive from a total return perspective such as the bank and oil and gas sectors. Many companies are naturally cautious around cash preservation to ensure they can trade through a tougher scenario if it were to emerge. However, a number of companies, such as Games Workshop and Pets at Home, are experiencing a rebound in activity ahead of their expectations. We have also seen some companies reinstate dividends earlier than anticipated, such as Close Brothers and Direct Line, as trading has been more resilient than forecast. It is also encouraging to see multiple companies, including Marshalls choose to pay back furlough money, which removes any restrictions, both socially and economically, from paying a dividend later on in the year. As such, we are cautiously optimistic that the outlook for income generation will gradually improve from here, underpinned by the strength of the business models and balance sheets of the companies we invest in, all of which will help support our current dividend policy. The trust retains 10.9p of revenue reserves (against a 12.7p dividend in 2019/20), which positions it well to manage this challenging period. We also have the ability to pay the dividend out of capital if the need did arise. We expect to see a return to income growth in 2021/22, but it is likely we will have an uncovered dividend for a number of years as earnings rebound. The dividend policy remains to grow the dividend ahead of inflation. In early 2016, the board supported a strategy shift to focus on total return and income growth and to move the portfolio away from an overreliance on high-yielding companies. This change has really paid off during recent years, allowing the managers to focus on investing in the companies they really like and reducing the constraints imposed from income generation. In particular, in 2020, being able to have limited exposure to sectors such as oil and gas and banks, which have significantly reduced their dividend payments, while at the same time being able to put more capital to work in lower-yielding but higher-growth sectors such as technology and healthcare has been a significant advantage. Amid significant uncertainty, we think our strategy of focusing on companies that are less exposed to the economic cycle and more exposed to structural growth drivers makes a lot of sense. As a result, we are underweight oil and gas, banks and consumer services and overweight healthcare, technology and consumer goods. We are putting capital to work in areas with a history of high returns and sustainable earnings growth. It is worth noting that we are fairly balanced from a geographic perspective, so we’re not overweight domestic or overseas revenues. We are also overweight financials, where we find an interesting selection of businesses with different drivers from stock exchanges to reinsurance and niche asset management companies. If we do see higher inflation, we think we are reasonably well hedged. The initial view is that inflation would be good for value and commodity sectors, and we have a balance of exposures and a portfolio valuation that is only at a very modest premium to the wider market. High levels of cost inflation also benefit companies with strong pricing power and punish those without. As a result, our focus on good-quality businesses should prove supportive. The UK market looks optically much cheaper than many but, when adjusted for its sectoral exposures and their prospects, we are less convinced that it is stunningly cheap. When we compare UK companies with like-for-like international competitors, it is not obvious that they are much cheaper or suffering from a Brexit discount. Pure domestic plays can be modestly valued, but we believe that is as much about significant structural threats and changes, such as the shift to online retailing, as it is about Brexit or political risk. For a long-term investor, and particularly for a long-term income investor, we think focussing on companies that have the high-quality attributes we seek makes a great deal of sense and there is significant alignment with income investing. The elements we look for are strong business models, attractive industries, robust balance sheets and cash generation, excellent management teams and good management of ESG risks. We find companies with these characteristics are in a great position to manage through uncertainties, generate cash flow consistently and return it to their shareholders. Coca Cola Hellenic Bottling is a good example of the kind of business we like. It trades at an unjustified 25% discount to the sector despite the growth on offer. This growth is offered both in the near term, where recent data suggests a better recovery against a leaner cost base, and long term as its exposure to emerging markets and their subsequent lower consumption per capita, coupled with further scope for improving mix underpins high single-digit earnings growth. Its strong balance sheet also continues to offer further optionality for portfolio optimisation or cash returns to shareholders. Despite challenging end markets in 2020, it has maintained its dividend pay-out. •
WITH DIVIDEND INCOME CURRENTLY IN SHORT SUPPLY IN THE MARKET, HOW ARE YOU POSITIONED TO MAINTAIN THE TRUST’S HISTORIC 4.9% YIELD?
Disclaimer The various securities referenced above have been used for illustrative purposes only to demonstrate the investment management style and not as an investment recommendation or indication of future performance. Important information Risk factors you should consider prior to investing: • The value of investments and the income from them can fall 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. • Movements in exchange rates will impact on both the level of income received and the capital value of your investment. • 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 which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 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. Under no circumstances should this information be considered as an offer or solicitation to deal in investments. GB-161020-131637-1
HOW ROBUST ARE THE TRUST’S RESERVES AND WILL THEY BE USED TO MAINTAIN INCOME PAYMENTS IF NECESSARY?
CAN YOU DESCRIBE THE FUND’S RECENT STRATEGY SHIFT, AND HOW IT HAS HELPED THE FUND DURING THE VOLATILE MARKETS THIS YEAR?
WITH SO MANY UNKNOWNS, PARTICULARLY FOR THE UK MARKET, HOW ARE YOU POSITIONING IN TERMS OF SECTORS?
WHAT WOULD BE THE EFFECT ON THE PORTFOLIO OF A RISE IN INFLATION?
DO YOU THINK THE UK MARKET IS UNDERVALUED RELATIVE TO OTHERS?
HOW IS YOUR FOCUS ON ‘QUALITY’ STOCKS POSITIONING YOU FOR THE FUTURE?
PLEASE GIVE A STOCK EXAMPLE THAT DEMONSTRATES THE TYPE OF INVESTMENT PROPOSITION YOU LIKE.
DUNEDIN KEEPS ITS HEAD ABOVE WATER
ASI’s Ben Ritchie and Georgina Cooper reveal how they plan to preserve Dunedin Income Growth Investment trust’s high yield while shifting strategies during volatility
M
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 38 consecutive years. Merchants has paid rising dividends each year for past 38 years (5 year history: 2016, 24.0p / 2017, 24.2p / 2018 24.8p / 2019 26.0p / 2020 27.1p). Established in 1889, The Merchants Trust PLC has, throughout its history, provided shareholders with an opportunity to benefit from investment in a diversified portfolio of leading companies with strong balance sheets and the potential to pay attractive dividends. Merchants aims to provide its investors with an efficient, competitive and cost-effective way to achieve an above average level of income and income growth together with long term capital growth through a policy of investing mainly in higher yielding large UK companies. 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%. Though 2020 has been difficult, this is in the context of a period of very strong outperformance in the previous financial year. Over the longer term, the trust has outperformed the FTSE All-Share Index, before fees, in six of the last ten discrete years and has grown its dividend in each of the last 38 years. •
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 760 investment professionals as at 30 June 2020 Number of investment trusts 3 AUM in investment trusts £2 billion as at 30 September 2020
Source: Thomson Reuters DataStream, percentage growth, mid to mid, total return to 30.09.20. Copyright 2020 © DataStream, a Thomson Reuters company. All rights reserved. DataStream shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon. Past performance is not a reliable indicator of future returns. You should not make any assumptions on the future on the basis of performance information. The value of an investment and the income from it can fall as well as rise as a result of market fluctuations and you may not get back the amount originally invested. This investment trust charges 65% of its annual management fee to the capital account and 35% to revenue. This could lead to a higher level of income but capital growth will be constrained as a result.
AVERAGE INCOME PAYMENT OVER LAST FIVE YEARS
UNIQUE SELLING POINTS
TRACK RECORD
N
either have changed. In its more than 130-year history, the trust has seen its fair share of market ups and downs, demonstrating time and again that both can work through difficult periods. But even though our investment process and philosophy remain unaltered, we have adapted the way we apply them to different sectors and stocks.
The views we take in our portfolio today are different than they would have been six months ago. Personally, I think the pandemic will have a permanent impact on companies’ attitudes towards risk. Businesses may not be as keen on leverage in a normal environment as they have been and could become more risk-averse in general. We are lucky to have a highly active, independent board of five directors. Every single one of them brings their own specialist knowledge to the table and has made it their priority to look after shareholders’ interests. We have more than a year’s dividends in reserves, and the board has been very clear about its willingness to dip into them to continue growing dividends. There seems to be some negativity about investment trusts using their reserves when the going gets tough, but that’s the whole point of reserves. It’s exactly what they are here for. Reserves are supposed to smooth out rough periods – and this is a rough period. Interestingly, there are opportunities in both defensive and cyclical areas. It’s often either one or the other, but now you have a polarisation between high-growth, high-quality stocks on the one hand and everything else on the other. We want to make the most of the opportunities this exposes. On the more defensive end of the spectrum, you have areas like telecommunications and tobacco, which are pretty stable and resilient. Historically, we don’t have big investments in those sectors, but the valuations are very attractive at the moment. There are also lots of opportunities among cyclical stocks – for example, in companies associated with the housing market. As people spend more money on their homes, housing transactions are on the rise, and housebuilders and providers of furniture and products related to home improvements can benefit from an increasing demand. If valuations get sufficiently cheap, things will happen. Think of the current phenomenon as a piece of elastic pulling a brick. Even as you continue to pull, something may not happen for quite a long time. At some point, however, the brick will start to move, and it might move quite fast. You just need to be patient. We already saw takeover bids for British companies like G4S and William Hill that are based on cheap valuations. There are lots of reasons why the dispersion should change at some point. No one knows when we will see a change, but there are several factors to look out for. The trajectory of interest rates is one of them. The market has been associated with a low-interest/low-growth environment for a while now, and any change in that could have an impact on the polarisation. Due to the huge level of stimulus we are seeing at the moment, inflation could pick up and cause a rise in interest rates over time. The level of polarisation in the TMT bubble at the end of the millennium was similar to the one we are experiencing now. We saw how long polarisation can last and what impact a shift in environment and views can have. The financial crisis was eye-opening as it shed a light on massive shortcomings in the financial sector. All of a sudden, banks needed to increase capital and were subject to far stricter regulations. I learned two things in those environments: first, short-term events can lead to long-term changes, and, second, stick to your investment approach and discipline because the markets eventually do come back and recover. UK equities are a special case. They have been de-rated significantly over the last three to four years, especially since the Brexit referendum. Many investors are concerned about the implications of Brexit on the UK economy, which has resulted in UK equities trading at a 30% discount to European equities. From a valuation point of view, UK equities do stand out. As for dividends, I think we may be past the worst point. Companies had more than six months to work out what’s happening and have taken action to protect their balance sheets. We are actually seeing businesses exceeding expectations on their cash preservation and, in many cases, even on their profits. We have certainly made adjustments, but we don’t throw companies out of the portfolio just because they cut dividends. We look at stocks from a total return point of view and take a long-term perspective. Right now, many firms have started to pay back furlough money, which is a good precursor for paying dividends. In fact, several firms, including BAE Systems and Keller, have already reinstated them. However, I think we will have to wait until the end of 2021 to get meaningful dividends from companies that have either paid nothing or only a modest amount this year. The Brexit issue is an interesting one. About 75% of the sales and profits of UK-listed companies come from abroad, so the direct impact of Brexit on most UK-listed businesses is comparatively small. Take the car industry as an example. It’s big in the UK, but the majority of UK automakers are owned by foreign companies, and only one of them, Aston Martin, is listed in the UK. Even in the supply chain, there aren’t many listed British companies that are totally dependent on the UK car industry. Brexit will undoubtedly have an impact on the UK economy, but it won’t necessarily affect the UK stock market that much. I think the undervaluation of UK equities due to the fear around Brexit represents a big opportunity for investors. Once we have gone through the transition period, there’s a good chance people will see the UK as investable again, which could lead to money coming back into the country. The economy will continue to function even if we don’t get a trade deal.
WHAT IMPACT DID THE MARKETS’ ROLLERCOASTER RIDE HAVE ON YOUR INVESTMENT PHILOSOPHY AND PROCESS?
click here to learn more about the Merchants Trust 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 (1388238) 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). Allianz Global Investors GmbH has established a branch in the United Kingdom, Allianz Global Investors GmbH, UK branch, which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). The Merchants Trust PLC is incorporated in England and Wales. (Company registration no. 28276). Registered Office: 199 Bishopsgate, London, EC2M 3TY.
WHAT’S THE TRUST BOARD’S STANCE ON THE CURRENT DIFFICULT INVESTMENT CONDITIONS?
WHERE CAN VALUE INVESTORS STILL FIND OPPORTUNITIES, DESPITE THE HEADWINDS THEY ARE FACING?
DO YOU THINK THIS PERIOD OF HIGHLY POLARISED MARKETS WILL END ANY TIME SOON?
YOU HAVE BEEN THROUGH AT LEAST TWO MAJOR BULL-AND-BEAR MARKETS. HOW HAS THAT HELPED YOU NAVIGATE THE CURRENT ENVIRONMENT?
WHAT’S YOUR VIEW ON UK EQUITIES AND DIVIDENDS AT THE MOMENT?
DID YOU MAKE ANY PORTFOLIO CHANGES DUE TO DEFERRED PAYMENTS?
HOW DO YOU THINK BREXIT WILL AFFECT INCOME-SEEKING INVESTORS?
SORRY, NOT SORRY: ‘THAT’S WHAT RESERVES ARE FOR’
Simon Gergel can tell you a thing or two about the challenges of delivering a healthy income stream in times of turmoil. The fund manager of Allianz’s Merchants Trust, a high-yielding portfolio of UK blue-chip stocks, talks about polarised markets, the role of revenue reserves and the importance of sticking to your guns
Company name BlackRock Smaller Companies Trust plc Address 12 Throgmorton Avenue, London, EC2N 2DL Email cosec@blackrock.com Website blackrock.com/uk/brsc Phone number 020 7743 3000 BlackRock’s Assets under management USD $7.32 trillion Number of investment managers 1,144 Number of investment trusts 9 AUM in investment trusts £3.5 billion
BLACKROCK
INVESTMENT TRUST GUIDEBOOK 2020: BLACKROCK
Source: BlackRock, as of 30 June 2020. All amounts given in USD unless otherwise stated.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The BlackRock Smaller Companies Trust plc has a proven strategy with an impressive and consistent track record, outperforming its benchmark for 17 consecutive financial years. Since inception the Trust has delivered 14.4% per annum, outperforming our benchmark by +7.2% p.a. This performance has been delivered through our focus on owning high quality, cash generative companies that can manufacture their own earnings growth regardless of the wider market environment. 25.6p per share The figures shown in the chart and table relate to past performance. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Source: BlackRock, as at 30 September 2020. *NAV Total return net of fees. Performance benchmark is Numis Smaller Companies Ex Investment Trusts + Alternative Investment Market. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. ** Benchmark: FTSE SmallCap index (excluding investment companies) until 31/8/07; Numis Smaller Companies + AIM index (excluding investment companies) since 31/8/07. BlackRock assumed management: 31 December 2004.
he BlackRock Smaller Companies Trust plc aims to achieve long-term capital growth for shareholders through investment mainly in smaller UK quoted companies.
PORTFOLIO CONSTRUCTION - PERCENTAGE OF TOTAL PORTFOLIO
REASONS TO INVEST
PORTFOLIO CONSTRUCTION - DO YOU HOLD ANY UNLISTED SECURITIES?
*Source: Datastream. For the period 1955 to 2020. Numis Smaller Companies Index + AIM ex Investment Companies Total Return Index (previously known as Hoare Govett). Barclays Equity Total Return (December 1955 to December 2006). FTSE All-Share Total Return (January 2007 to February 2019).
e have always believed that the best way to manage risk within the portfolio is through position sizing and suitable diversification. One of the core attractions of our universe is the sheer number of fantastic growth companies that are available to us, and there is never a shortage of potential ideas for inclusion in the portfolio.
By maintaining a well-diversified portfolio, we are able to appropriately size new positions that might be less liquid, and as we see evidence of our investment thesis playing out, allow positions to grow organically over time as they become core holdings. Importantly, we ensure we are not overly exposed to single-stock disappointments, because as we all know, with smaller companies, things can and often do go wrong. Diversification and asset allocation may not fully protect you from market risk. We have often argued that one of the key attractions of investing in small and mid-caps is their ability to adapt quickly to change. The outbreak of Covid-19 and the disruption caused to many industries has been unlike anything many businesses have ever experienced. Smaller companies tend not to demonstrate the organisational inertia of their larger cousins; there are fewer layers of decision making, managers are often the owners, there is a strong entrepreneurial spirit and often there is less capital employed. We have seen in lockdown how a number of our businesses have rapidly adapted to new distribution (think Games Workshop’s accelerated shift to online) or have responded to shifting customer requirements (think YouGov offering research products tailored to Covid-19 client demand). The pandemic is changing many industries, but often these changes are an acceleration of existing trends, and the companies that were leading that change pre-pandemic are the ones that are benefitting now. Risk: The specific companies identified and described above do not represent all of the companies purchased or sold, and no assumptions should be made that the companies identified and discussed were or will be profitable. Smaller companies have typically grown their earnings at a greater rate than larger companies. Typically, in tougher years, the immature business models can be impacted more than the diverse, mature revenue streams of larger companies. If we are predicting a secular, low-growth environment, rather than a negative-growth environment, I would expect to see a return to smaller companies leading the charge as the attractive characteristics of their businesses return to the forefront – their ability to develop new markets and adapt to change while agitating and disrupting existing markets. In simple terms, the income generated by the Trust is the dividends paid by the portfolio holdings. It comes as no surprise that income this year has fallen. In the immediate aftermath of lockdown, most companies withdrew earnings guidance and held back on dividends in order to preserve cash and prepare for the unknown. Many took government support through furlough or lending schemes, while others found themselves closed for business with no revenue. As the summer has passed, it’s clear some businesses have done far better than feared, driven by accelerated industry change. We have seen a number of companies return to the dividend list, while others are looking to repay government support before doing so. It will be some time before dividends return to pre-Covid-19 levels. Balance sheets need to be repaired before we see a full restoration, but as time passes, more companies will have the confidence to resume payments. Our investment strategy focuses on those with stronger balance sheets and sustainable cash flow – businesses that should find themselves in a position to pay dividends again more quickly than the average firm. In a word… no. Whichever direction Brexit takes, it doesn’t necessarily matter over the medium to long term. Smaller companies are nimble and agile, they don’t have the same organisational inertia present in many larger companies, so we believe they will react the fastest and be able to make the quickest decisions based on new rules and regulations that will come with whatever form Brexit takes. We try to identify companies with good long-term growth prospects over the next five to 10 years – those companies with earnings momentum resulting from their market position or pricing power. Longer term, the earnings growth of these companies will compensate investors for any short-term headwinds. Good companies, run by strong management teams will adapt and thrive, regardless of the outcome of Brexit. There are several advantages. The first is the ability to utilise leverage (using borrowed money) to augment the investment returns, amplifying the already attractive return characteristics of the small and mid cap (SMID) sector. The Trust has the ability to gear up by 15% of NAV. The second benefit relates to liquidity. The closed-ended nature of an investment trust means the manager doesn’t have to worry about outflows, reducing fund liquidity as a consideration and allowing the manager to invest with confidence in less liquid companies. This can be vital with smaller companies, where it can take time to get the potentially substantial returns. It also limits the potential distortion if the fund suddenly becomes the flavour of the month, whereas open-ended funds that suddenly become popular will have to deploy the capital at a time when the manager may find it difficult to identify value. An investment trust structure enables the portfolio manager to keep a proportion of the dividend income received in a revenue reserve. The benefit of having an income reserve is that when companies may be holding back on the cash that they return to shareholders, the Trust will be able to continue with our progressive dividend policy. Finally, investment trusts often trade at a discount to their net asset value. For instance, the BlackRock Smaller Companies Trust currently trades at a 7.7% discount (as of 15 October 2020), allowing you to buy £1 for 92p, and who doesn’t like that?
YOU’RE MORE DIVERSIFIED THAN MOST OF YOUR PEER GROUP. HOW HAS THIS HELPED YOU IN VOLATILE MARKETS?
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of October 2020 and may change as subsequent conditions vary. For more information on this Trust, the risks involved and how to access the potential opportunities presented by smaller companies, please visit www.blackrock.com/uk/brsc Risk Warnings Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Trust Specific Risks Liquidity risk: The Trust’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Trust may not be able to realise the investment at the latest market price or at a price considered fair. Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall. Smaller companies risk: Smaller company investments are often associated with greater investment risk than those of larger company shares. Important Information Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence. Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance. The BlackRock Smaller Companies Trust plc currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust. Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This material is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. © 2020 BlackRock, Inc. All Rights reserved. ID: MKTGH1120E-1388348-4/4
HAVE SMALLER COMPANIES SHOWN AN ABILITY TO BE NIMBLER THAN THEIR LARGER PEERS IN THIS EXTREME ENVIRONMENT?
ARE YOU WORRIED ABOUT THE EFFECTS OF BREXIT, PARTICULARLY A NO-DEAL SCENARIO?
IN A SECULAR, LOW-GROWTH ENVIRONMENT, ONCE ‘NORMALITY’ RESUMES, CAN SMALLER COMPANIES CONTINUE TO GROW THEIR EARNINGS?
INCOME IS IN PARTICULARLY SHORT SUPPLY. WHAT’S THE CURRENT PICTURE FOR THE TRUST AND HOW WILL IT LOOK ONCE MORE NORMAL CONDITIONS RESUME?
WHAT ARE THE ADVANTAGES OF INVESTING IN SMALL CAPS VIA AN INVESTMENT TRUST STRUCTURE?
NAVIGATING THE UNKNOWN
How Roland Arnold, Portfolio Manager of the BlackRock Smaller Companies Trust plc, continues to believe that innovative and nimble UK smaller companies can navigate the current market challenges, whatever is thrown at them
JP MORGAN ASSET MANAGEMENT
The Mercantile Investment Trust seeks long term capital growth, and dividend growth at least in with inflation. This is achieved through a high conviction portfolio of between 70-90 stocks, from UK listed medium and smaller companies outside of the FTSE 100. The managers are bottom up stock pickers, seeking companies that they believe the wider market does not accurately appreciate the long-
term potential for the businesses. Our average dividend over the past five years has been 5.4p. Dividends have increased from 4.3 to 6.6p over the past five years. In addition, over this period the Company has on average contributed over 0.9p/share per annum to its revenue reserves. We monitor the operational and financial performance of every portfolio holding against both our own and the market’s expectations over time, as well as monitoring broader measures such as competitor performance and industry or macro-economic data. We also meet frequently with management teams to discuss strategy, performance, future expectations and targets. • Large highly resourced team looking solely at UK mid and small caps • Strong long-term investment performance versus benchmark and peers • Large and liquid – portfolio size £1.8m, with ~£3m average daily volume • Low cost - 0.44% ongoing charges • Revenue reserves in excess of 1 year, offset near term uncertainty 1 historic unquoted investment comprising 0.2% of the portfolio. The Mercantile is not currently considering any further investments in unlisted companies. Gearing 10% as at 13 October 2020.Average percentage of net income retained 15%. The Mercantile has delivered compelling long term performance versus both peers and benchmark. The benchmark itself has doubled the returns versus the FTSE 100 reinforcing the investment case for UK mid and small caps, furthermore The Mercantile is a stand out performer within this asset class across all time periods (August 2012-August 2020)
Company name The Mercantile Investment Trust PLC Address 60 Victoria Embankment, London, EC4Y 0JP Phone number 0800 20 40 20 or +44 (0) 1268 444470 Website www.jpmorgan.co.uk/mrc Assets under management $1.9tr as of 31 March 2020 Number of investment trusts 23 AUM in investment trusts c.£12bn
INVESTMENT TRUST GUIDEBOOK 2020: JP MORGAN ASSET MANAGEMENT
SCHRODERS
undamental research is at the heart of the investment process and the fund manager aims to identify 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 (34 holdings, 30/09/2020), the fund manager 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 businesses today. 11.5p dividend per share (last five financial years ending 31 August 2020) 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 of the income needs of the portfolio, among other considerations. • The trust has consistently raised its dividend for the past 25 years • Sustainability is a building block of the investment process, benefitting from Schroders’ proprietary sustainability investment tools and sustainable investment resource. • Proven, long-standing investment approach executed by four person investment team with combined 73 years’ investment experience The Fund does not hold any unlisted securities. The gearing level is at 9.8% as at 30 September 2020. Looking to the Company’s last five financial years (ending 31 August 2019), 11.3% of net income is retained on average per year. The Company continues to provide real growth of income (growth of income in excess of the rate of inflation) as well as capital growth as a consequence of the rising income. The near-term performance of the Fund, both in terms of net asset value and share price, has been very positive, outperforming the FTSE All Share TR index.
INVESTMENT STRATEGY:
Company name Schroder Income Growth Fund Address 1 London Wall Place, London, EC2Y 5AU Website www.schroders.co.uk/incomegrowth Assets under management Schroders is a global asset management company with £536.3 billion assets under management as at 30 September 2020. Number of investment managers 295 (As at 30 September 2020) Number of investment trusts 10 AUM in investment trusts £4.1bn gross assets (As at 29 October 2020) Office locations Schroder Investment Management Limited’s head office is in London, UK.Schroders is a world-class asset manager consisting of over 200* legal entities operating in 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.
WHAT IS YOUR GEARING LEVEL?
INVESTMENT TRUST GUIDEBOOK 2020: SCHRODERS
PORTFOLIO CONSTRUCTION: DO YOU HOLD ANY UNLISTED SECURITIES?
*Source: Schroders, as at 30 June 2020
Sue Noffke Head of UK Equities
WHAT PERCENTAGE OF NET INCOME DO YOU RETAIN?
To learn more about the fund, visit the Schroder Income Growth Fund website. To learn more about investment trusts at Schroders, please subscribe to our Investment Trust Newsletters. For private investors: https://www.schroders.com/en/uk/private-investor/fund-centre/funds-in-focus/investment-trusts/schroders-investment-trusts/never-miss-an-update/ For professional investors: https://www.schroders.com/en/uk/adviser/fund-centre/funds-in-focus/investment-trusts/schroders-investment-trusts/never-miss-an-update/ Reference index: FTSE All Share Total Return 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 for table: Morningstar, net income reinvested, net of ongoing charges and portfolio costs and where applicable, performance fees, in GBP. Funds Risks: – Companies that invest in a smaller number of stocks carry more risk than funds spread across a larger number of companies. – The Company will invest solely in the companies of one country or region. This can carry more risk than investments spread over a number of countries or regions. – As a result of the fees and finance costs being charged partially to capital, the distributable income of the Company may be higher, but the capital value of the Company may be eroded. – The Company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.
Investment trusts have been around since the Victorians, but that doesn’t make them fusty, quite the opposite given their strong returns from adventurous investments
CHAPTER 3
INVESTMENT TRUST GUIDEBOOK 2020: CHAPTER 3
ith 150 years of history behind them, investors could be forgiven for thinking investment trusts are the staid old grandfather of investing, but they’d be wrong – closed-ended funds have always been, and remain, at the cutting edge of growth.
BEYOND THE TRADITIONAL
By Stephanie Hoppe
‘How can investors gain exposure to the new generation of companies with superior growth and cashflow characteristics and less need for equity capital?’
Alan Brierley Investment trust research team lead, Investec
The first investment trust was launched in 1868 by Philip Rose of Foreign & Colonial Government Trust, which has morphed into what we know today as F&C Investment Trust (FCIT). Rose used the trust to raise private capital to fund everything from railway construction to the building of plantations in places as far-flung as the US and New Zealand, which would have been considered a frontier market by the Victorians. Scottish American (SAIN) followed five years later, allowing investors with small amounts of cash to benefit from the huge network of railroads being built in the US. Scottish Mortgage (SMT) was launched in 1909 to provide loans to Malaysian rubber plantation owners hoping to benefit from the rubber boom that resulted from the creation of the Model T Ford car.
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.
HISTORICAL, YES, OLD-FASHIONED, NO
‘The US has provided most opportunities in the past because of the size and maturity of the market. Europe is catching up and may present more opportunities in the future’
Myrto Charamis Director of investment company research at Numis Securities
‘Away from Baillie Gifford, technology is a sector that is experiencing accelerated growth at the moment, and Polar Capital Technology (PCT) is a good option,’ said Salih. ‘It’s been run by Ben Rogoff for many years and has participated in the recent boom.’ Pre-IPO companies are becoming increasingly sought after for managers of investment trusts, which in turn provide wealth managers with a way to give their clients access to exciting high-growth, although higher-risk, companies that they would otherwise not have the funds to buy into. The popularity of investing in unlisted stocks led the Association of Investment Companies (AIC) to launch a spin-off sector last year, Growth Capital, which covers trusts that take non-controlling stakes in high-growth potential companies. Annabel Brodie-Smith, communications director at the AIC, said the creation of the sector was in response to a trend that has developed ‘over the past five years’. There are currently three trusts in the sector: Merian Chrysalis (MERI), Baillie Gifford’s Schiehallion (MNTN) and Schroder UK Public Private (SUPP). Growth Capital is set apart from the more traditional Private Equity (PE) sector, which for decades has been at the forefront of using investor money to back growth-oriented companies outside of the traditional investment universe, mimicking the original aim of the original investment trusts. Alan Brierley, who leads the investment trust research team at Investec, said while PE’s success in democratising the private market has been ‘decidedly mixed’, the sector ‘provides a solution to the ongoing de-equitisation of global financial markets’.
This de-equitisation has seen the plethora of technology-backed, capital-light companies stay private for longer, as funds vye to deploy the millions of ‘dry powder’ they hold means the most popular companies can cherry-pick where their cash comes from and have no need to list. Brierley said the trend will have ‘increasingly significant ramifications for traditional equity investors moving forwards’. ‘Just how can investors gain exposure to the new generation of companies with superior growth and cashflow characteristics and less need for equity capital?,’ he asked. ‘Meanwhile, what happens to growth-challenged, overly-indebted quoted companies in a post-Covid-19 world that is likely to see sub-trend economic growth for many years. ’He said the closed-ended structure is ‘critical’ for managers who can focus on ‘building long-term value’ rather than worrying about flows and redemptions, like their open-ended peers have to. Brodie-Smith said the ‘collapse of Woodford Equity Income provided a
UNLISTED ACCESS
In order to back growth, the managers of modern-day investment trusts do not have to travel to far-flung places like their Victorian counterparts, with growth very much centered on developed markets.
reminder of the dangers of trying to access unquoted companies in an unsuitable structure’. In order to back growth, the managers of modern-day investment trusts do not have to travel to far-flung places like their Victorian counterparts, with growth very much centered on developed markets. The bias towards the US is determined by the preference of growth trusts for technology and healthcare, where historically there are outsized returns to be made. Myrto Charamis, a director of investment company research at Numis Securities, said PE companies are ‘mostly geographically exposed to the US and Europe’. ‘The US has provided most opportunities in the past because of the size and maturity of the market,’ she said. ‘Europe is catching up and may present more opportunities in the future. ’Salih said growth managers are starting to have their interest peaked by Asia, as is the case with Shin Nippon. ‘As far as emerging markets go, the region all the managers I speak to like is Asia,’ he said. ‘It has dealt with Covid-19 well, so that gives growth a bit of a head start. A weaker dollar certainly won’t hurt either and valuations are better than the US, for example. ‘It could be the next stage [of growth], but I think developed markets still have some way to go.’ In terms of sectors, technology and healthcare remain the stalwarts of growth trusts and are even more so following the outbreak of the coronavirus pandemic. Charamis said pre-Covid-19, PE companies were ‘positioning their portfolios towards defensive, resilient sectors’, such as software, healthcare, education and consumer staples. ‘Use of cloud services and software-as-a-service (SaaS) were accelerated by the pandemic contributing to the growth of software companies,’ she said. As PE funds continue to allocate to these sectors, they have shown ‘resilient’ performance this year, while AIC data reveals the sector has delivered an average total return of 187% over 10 years. Although global recession is throwing a shadow over potential future returns, Salih said growth strategies can still perform well post-crisis as the funds are ‘investing in structural trends that have been accelerated by Covid-19, but which were strong in their own right’. ‘With interest rates lower for much longer, low growth in economies, and inflation nowhere in sight, it’s hard to see how growth strategies couldn’t continue to do well,’ he said. ‘The only time they might falter would be if we maybe get good vaccine news, at which point value may do very well in the short term at least. But over the long term, I think the things these growth trusts are invested in, should still do well. ’Brodie-Smith said PE funds tend to do well after recessions and in periods of low growth as ‘they can invest in good companies at low valuations, then actively manage them to add value and realise them at a good price when things improve’. She said a growing number of PE funds are also paying dividends that will encourage income investors to diversify their portfolios with growth funds. ‘PE investment companies offer exposure to companies of all sizes, from venture capital-type investing to large buyouts, so there is likely to be something for everyone,’ Brodie-Smith continued. ‘Small does not necessarily mean more risky, as smaller companies can be nimbler and adapt more quickly to the new environment and use technology effectively to gain market share.’ With the growth sector incorporating more types of trusts than ever, with a broader range of underlying investments, wealth managers should be looking to widen the scope of the types of growth they bring to investor portfolios. ‘I believe PE investments have a place in wealth managers’ and retail investors’ portfolios as they provide exposure to high-growth private companies that are not easy to access elsewhere,’ said Charamis. •
AWARDS INDEX
INVESTMENT TRUST GUIDEBOOK 2020: AWARDS INDEX
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INVESTMENT TRUST GUIDEBOOK 2020: DISCLAIMERS
