Merryn Somerset Webb reviews our portfolio of investment trusts. What should you buy now, and which laggards should you drop?
By now you’ll have figured out that when I said I would review our investment trust portfolio every six months, I meant it not as a firm forecast but more as ‘forward guidance’. Just as Mark Carney might start to have a think about UK interest rates when unemployment falls to 7%, I start to look at our portfolio every six months. Neither of us promise to actually do anything. That’s why it has been nearly nine months since I covered the portfolio.
Back then, we made no changes. If you had split your cash equally between the trusts in the table below, you would have made just under 8% in capital returns in seven months, and pocketed some healthy dividends. This time the (annualised) numbers aren’t quite so good: the funds are up on average 8.25% over the nine months, and have, of course, paid out dividends too. The portfolio has mildly underperformed the market, but given we want it to be long term and defensive (and that you all promised there would be no benchmark complaining), that isn’t a huge deal. The trusts have made a good absolute real return, which is what counts.
But look at the list and you will see that much of the heavy lifting has been done by two funds – Scottish Mortgage and Finsbury Growth and Income. So who goes and who stays? I asked the usual panel, Simon Elliott, Alan Brierley and Sandy Cross.
First, the laggards. Personal Assets Trusts (LSE: PNL) hasn’t covered itself in glory. But that shouldn’t be any surprise. It is stuffed with gold, gold-related investments and index-linked gilts, all of which have substantially underperformed. So it is a tribute to all of our faith in its manager that none of the panel suggest dropping it. Consumer price inflation, as Sandy says, doesn’t look much of a risk right now, but “the very extraordinary nature of monetary stimulus means no one really knows what will happen next… inflation could easily be a riptide lurking under the gentle waters of growth upgrades”. Holding the Personal Assets Trust may feel less comfortable than during gold’s great bull market. But now, agree both Alan and Simon, would be “the wrong time to cut”. So it stays.
The other laggards are BH Macro and RIT. Last time RIT was bothering us – there were lots of questions to be asked about its management. But the panel seem to have cheered up. Alan is “comfortable (just)”, and it is now Simon’s “favoured absolute return/capital preservation pick”, which he sees as a “management turnaround story”. Sandy isn’t crazy about it but isn’t a definite seller either. So we’ll keep it. BH Macro is another tough one. It hasn’t done much and none of our panel care for it much. If it can really raise so little interest from anyone at this point, perhaps we should let it go.
On to happier numbers. 3i Infrastructure looks fine: up 9.3% since last time. While there are concerns about charges and – from Alan – “a growing frustration with 3i managers’ ability to reach full investment”, it isn’t obvious it should go. There seems no reason to sell our star performers either. Everyone now has some concerns about the valuations of the companies in the portfolios of both Finsbury and Scottish Mortgage, and Simon suggests changing them for these reasons. But the others aren’t so sure. Sandy and Alan both have faith in the managers; that this portfolio should have as low a level of turnover as possible (suits me!); and that therefore “the frictional costs of shifting into other funds we like would not make sense given that we are content with the managers’ approach”.
So if we did drop anything, what would we buy? Sandy reminds me he suggested we include Henderson Smaller Companies (LSE: HSL) last time. We didn’t. It’s up 30% since. This time, he suggests Caledonia Investments (LSE: CLDN) as a possible replacement for RIT. It invests in quoted and unquoted companies, as well as internationally; has recently put together a more focused strategy; and is trading on a 20% discount to its net asset value. Alan isn’t convinced even that is cheap enough (he doesn’t like Caledonia on “qualitative grounds”), but Simon is into the idea. He sees it as a “turnaround story that offers attractive value at a time when value is hard to find”.
He also likes the Diverse Income Trust (LSE: DIVI). Its small-cap bias makes it different to most “UK equity income funds”. Alan thinks emerging markets deserve a look, suggesting the Templeton Emerging Markets Investment Trust (LSE: TEM) as a way in. He is also tempted by Blackrock World Mining (LSE: BRWM), which has started to pick up after a period of 50% underperformance. Finally, Alan and Simon still think we should buy into private equity. Simon likes Electra Private Equity (LSE: ELTZ), Graphite Enterprise (LSE: GPE) and Pantheon International (LSE: PIN). Alan agrees on the last. I would like to buy the Battle Against Cancer Investment Trust (LSE: BACIT) on the basis that it is a remarkably cheap way to get exposure to the kind of hedge funds we wouldn’t normally get into.
I’m tempted to, once again, do nothing. This isn’t a trading portfolio. We are just trying to outrun inflation every year forever after charges. The two I am wavering on are BH Macro and 3i. We’ll keep 3i for now (the income is nice) but I suggest we sell BH Macro, given the panel’s lack of enthusiasm. In its place, I’ve been torn between private equity with Pantheon (on a 20% discount), or the value and variety offered by Caledonia on the same discount. I’ve come down on the side of Caledonia, on the basis that it offers both value and a catalyst for improvement. There is no need for you to do the same. You can stick to the old portfolio or choose something else. No rules here. I’ve applied for shares in BACIT’s new issue and will probably buy Templeton as well as Pantheon when I get around to putting new money in my Individual Savings Account. So there you are, one change. When I told you I was going to put together an investment trust portfolio, I said it would be boring. On that, at least, I have been entirely correct.
Our favourite investment trusts
|Investment trust||Ticker||Price (p) 9/10/13||Price (p) 16/1/13||% change||Latest NAV (p)||NAV (p) 16/1/13||% change||Prem/ disc 9/10/13||Prem/ disc 16/1/13||Yield 9/10/13|
|BH Macro (SELL)||LSE: BHMG||2,083||2,011||3.58%||2,102||2,080||1.06||-0.90%||-3.32%||n/a|
|Personal Assets||LSE: PNL||32,600||34,260||-4.85%||32,721||34,200||-4.32||-0.37%||0.18%||1.91%|
|Scottish Mortgage||LSE: SMT||927||783||18.39%||958||855.4||11.99||-3.24%||-8.46%||1.68%|
|Finsbury Growth||LSE: FGT||463||401||15.46%||465||398.8||16.60||-0.43%||0.55%||2.48%|
|RIT Capital||LSE: RCP||1,220||1,132||7.77%||1,333||1,180||12.97||-8.48%||-4.07%||2.55%|
|3i Infrastructure||LSE: 3IN||134||122.6||9.30%||119||121||-1.65||12.61%||1.32%||4.85%|