Talk to most market experts and they will tell you that at this late stage in the long bull market, there are no good opportunities left. It’s time to start taking cash off the table.
They could be right. But there are notable and interesting exceptions to this downbeat market vibe. In the past week alone, I have talked to the managers of three soon-to-be-launched investment trusts – all of which you should know about.
The first is the AVI Japan Opportunity Trust (AJOT), coming from Asset Value Investors and run by Joe Bauernfreund, who also manages the British Empire Trust. The idea is to get into a portfolio of some of the extraordinarily cheap smaller companies in Japan at a time when an improving corporate governance regime is forcing them to rethink some of their strategies.
The average firm in the trust’s indicative portfolio will have net cash of 48% of its market capitalisation; a dividend yield of 1.8%; an EV/Ebitda ratio of five times. Don’t worry about what this means – just note that the average for the S&P 500 is about 20 times. These firms are cheap partly because they are relatively unknown; 56% of the firms Bauernfreund is interested in are not followed by any brokers.
Next up is a new offering from Terry Smith’s firm, Fundsmith, to be called the Smithson Investment Trust. This is being set up specifically to get into the stocks that he and the men who will manage the new trust, ex-Goldman Sachs analysts Simon Barnard and Will Morgan, have found are both fast-growing and fit stringent quality criteria, yet are too small to put into Fundsmith’s giant flagship fund, Fundsmith Equity, which now has £17bn under management.
So far, 83 investment possibilities have been identified, about half in the US and most of the rest in the EU, including the UK, with a couple of outliers in Australia, New Zealand and Japan.
Finally, coming later this month is a trust from Mobius Capital Partners. This one is to be dedicated to small and medium-sized firms based in emerging and frontier markets with what the managers call an “ESG overlay”, in other words incorporating environmental, social and governance factors.
Mobius reckons that with many emerging market currencies in freefall and their equity markets weak (the average emerging market is down by about 20% since January) now is the perfect time to get in, particularly given how many “dynamic and entrepreneurial” firms the team knows across the market. We are, the company says, in “clear overshoot territory”.
Simple fee structures
These are three potentially good funds coming from three good managers. But what is really interesting are the things they have in common.
First, their managers appear to understand that costs matter. Fundsmith is charging a management fee of 0.9% a year for Smithson, based on the market capitalisation of the trust rather than the net asset value (NAV) of the stocks within it. I’d like it to be a bit cheaper (or at least there to be a guarantee that it will fall as the trust grows). And I’m not convinced that charging on market cap is the right thing to do: after all, it is the net asset value that the fund manager is supposed to have some control over, not the premium or discount to it (this is an issue for the board of a trust) so it makes sense that his reward should be tied to the NAV.
Still, the fee is at least lower than that on the flagship Fundsmith fund (the 1% charged on much of the £17bn in that must bring in a pretty penny) and I appreciate Smith’s gesture in financing the start-up costs of Smithson himself. Most firms take that back from the money they raise. This concession alone is probably worth two years of management fees.
I’d also like the AJOT offering to come in under the planned 1%, but it at least makes some show of sitting on the side of the investor by saying it will calculate its fee on the lower of the market cap or NAV.
The Mobius investment trust is likely to do the same – but is expected to come in with the sweetener of the 1% initial fee falling to 0.85% if the fund grows to more than £500m. I always want fees to be lower than they are, but given the intensity of the investment strategies for all these funds – all that travel, analysis and engagement doesn’t come cheap – these fees are OK. There are at least not ridiculously complicated and exploitative performance fees for us to have to pick through.
Second, all three funds are focused on one of the few strategies that has historically done particularly well for investors – sticking with smaller companies. Research from Fundsmith suggests that companies in the MSCI World SMID Cap index have returned an average of 9.3% a year over the past 20 years, against 6.2% from those in the MSCI World Large Cap index.
If the past is any guide to the future (and with trends such as this, it can be) it clearly makes sense to be in small caps for the long term.
Genuinely active – and activist – funds
Finally, and absolutely crucially in today’s market, these are all genuinely active funds run by real stock pickers. Each manager will be forced to justify decisions on stocks, each of which will materially affect the performance of their funds.
In the case of AJOT and Mobius the managers will not just be active but genuinely activist. Bauernfreund intends to add his own voice to those of the Japanese government and other foreign activist investors to put pressure on firms to behave better – selling their cross shareholdings, handing back cash to shareholders and appointing independent directors, for example.
You will say I am going soft in my old age, but the truth is that each of these launches represent, to my mind at least, some genuine progress made by the fund management industry over the past decade.
They are the exact opposite of the closet tracker funds of the miserable old days – and for those not dedicated to passive investing and able to cope with some volatility, they are exactly the kind of funds to hold.
Buy all three, by the way, and you will have the small-cap world totally covered. You might not want to buy them at launch: if global markets find they can’t outrun emerging-markets misery over the next year you could perhaps pick them all up at a nice discount to NAV later in the year.
But if you agree with me that it is time to move out of the tech titans and global dividend heroes that have done you so well for the past few years into stocks that are a bit cheaper, a bit more focused on their own markets and very much more interesting, you might want to think about it soon.