MoneyWeek portfolio: How our trusts have fared – August 2014 update

There’s no change as Merryn Somerset Webb reviews our portfolio of investment trusts.

When I first produced the investment trust portfolio for you in summer 2012, I did warn you that the idea of reviewing it every six months was more an aspiration than a promise.

I also warned you that the reviews would be mostly entirely pointless, in that I was unlikely to make many changes – trading being the biggest enemy of performance there is. Both warnings were entirely justified.

The portfolio has been running for just over two years. We have reviewed it twice and made one change (swapping BH Macro for Caledonia at the last review, in October 2013).

So, how is this working out for us? Pretty much as expected. Since launch in June 2012 until the close of play last Friday, the total return of the portfolio has been 33.47%. That’s a mild underperformance if you compare it to the FTSE All Share (35.54%) and to the MSCI World index (40.8% in sterling terms).

However, this isn’t an altogether reasonable comparison, as our portfolio is not just an equity portfolio – it includes the likes of Personal Assets Trust, 3i Infrastructure, and RIT Capital, specifically so that it is rather more diversified than a pure equity fund.

So it makes sense that you should see some underperformance (to be honest, I’m surprised it isn’t much more) in an equity bull market such as the one we have seen in the last few years.

When that bull market finally gives up the ghost, we’d expect some outperformance. But either way, the idea is to create reasonable long-term absolute returns – and on that basis, so far so good.

So what next? Let’s start with what looks like our obvious turkey, Personal Assets. As you can see from the table, it has fallen by nearly 2% since we suggested you buy it – take it out and the portfolio has been a fantastic outperformer (up 40.54%).

However, our panel of investment trust experts – Simon Elliott of Winterflood, Alan Brierley of Canaccord Genuity, and Sandy Cross of Rossie House – all agree with me that it stays.

Why? First, all trusts have their ups and downs and Personal Assets (PNL) has begun to outperform again this year. Sandy notes that it has less than 50% of its assets in equities – the other holdings, all designed for prudence, include gold, short-dated government debt and inflation-linked debt.

None of this has done us much good over the last few years, but you’d have to be considerably more optimistic than we are to think that this will always be the case.

I went to the PNL annual general meeting at the start of the summer (all shareholders should go if they can – good talks, amusing questions and a fine lunch). There the manager, Sebastian Lyon, told us that there is “agony and ecstasy” in being a PNL shareholder. The ecstasy in this cycle, he says “is still to come”. Fingers crossed.

On to our massive outperformers – Scottish Mortgage and Finsbury Growth & Income. Alan is a little nervous about the former. It’s a “brilliant fund”, he says, but given its clear growth orientation, not one to hold in a “risk-off environment”. We’d agree. But we’d also agree with Simon, who notes that the two are “well-managed funds with potential for significant outperformance over the long term”.

Sandy is also happy with them. Will they make us short-term losses when this bull market ends? Yes. Do we know for sure when this bull market will end? No. Are we short-term investors? No.

I’ve been reading the latest portfolio review from the Scottish Mortgage managers. They contend that the world still grossly underestimates the power of today’s technological change. They add that “amidst the general apathy” towards emerging markets, China’s many excellent companies are being regularly overlooked.

They also argue that the world of finance is now less about traditional systems, and more about “great and disruptive companies” coming to the rescue.

We want to be invested in all those themes and will happily accept a degree of volatility of returns in order to do so – particularly given that we expect PNL to protect our capital in the downturns.

Caledonia has been our other good performer recently – up 19% since we put it in the portfolio, partly because of the discount narrowing, and partly because it has sold some unquoted businesses at good prices.

Sandy, who suggested it in the first place, still considers it a good long-term holding. So that stays. The same goes for RIT – none of the panel have any reason to change their views there, and nor do we.

That leaves 3i Infrastructure. We like to dither over one trust with every review, and this is the one I am worrying about this time.

Like everything else in the infrastructure sector, it trades on a high premium to its net asset value (NAV), thanks to the income it offers – in other words, the shares are worth more than the value of the underlying portfolio. This is something that makes both Sandy and Simon nervous.

Alan, on the other hand, wrote a pretty comprehensive note on the infrastructure sector earlier in the summer, stressing that in a “lower for longer” interest-rate environment, the sector’s attractive, sustainable and growing dividends give it “significant value”.

Its “low correlations” with other asset classes also make it something of a haven for the nervous.

3i isn’t officially his favourite in the sector (he rates it a ‘hold’), but he likes its focus, is impressed by some new additions to the management team and sees several factors that are “likely to prompt a more positive recommendation”.

Given this – and the fact that there isn’t much value elsewhere in the sector – I think we will keep it for now. So there you go, just as I thought might be the case, there is no change. We will keep the portfolio as it is.*

* The panel did, however, have various suggestions as to what alternatives I might put into the portfolio if I did decide to dump 3i. So I’ll run through those in the magazine next week.