An investment trust worth waiting for

published 30 November 2018

924_MW_P20_Funds- — Investments include Asian consumer staples such as convenience stores

Investors should take this opportunity to invest in the ScotGems investment trust.

Every autumn, there is a cascade of stockmarket flotations. And despite soggy market conditions, this year was no different.

Professional investors are treated to a presentation in person by the managers and their sponsors, but ordinary investors have no more to go on than an unreadable prospectus and the occasional media write-up. Naturally, investment platforms are keen that their customers subscribe, since they receive a commission of 1% on all sales far more than their normal dealing charges. This and other flotation expenses mean investors usually get no more than 98p of assets for every £1 subscribed in an unproven, uninvested investment vehicle.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Worth a look

With rare exceptions (such as the Baillie Gifford US Growth Trust earlier this year), it makes sense for individual investors to wait a year or so. That will mean paying 0.5% in stamp duty on a share price that may have gone up, but the money raised will have been invested, information on the portfolio and its initial performance will be available, and the shares may be available at a discount to asset value.

One of the trusts launched in 2017 that is now worth a look is ScotGems (LSE: SGEM), managed by Stewart Investors, which also manages Pacific Assets and Scottish Oriental. It raised barely £50m to invest in 20 to 30 small- and mid-cap companies (up to $2.5bn of market value) focused on and normally listed in Asian and emerging markets (EMs).

Stewart Investors is a firm believer in "responsible stewardship", which means investing for the long term in companies concerned with environmental, labour and governance issues, rather than short-term profit maximisation.

They also believe in putting their money where their mouth is, subscribing £5m at the launch for their Employee Benefit Trust. Non-executive directors invested another £2m.

Stewart Investors want managers to be aligned with shareholders, so many of their investments are in family-controlled companies, though locally listed subsidiaries of multinationals may also qualify. They are interested in absolute returns without regard to benchmark indices, and try to avoid over-paying for growth.

"We are not in a rush but have a list of companies we are looking to buy or increase our holdings in," says Harry Gladstone, the relationship manager, "but a lot of the companies we are looking at haven't come off in price yet." For that reason, the portfolio was only 62% invested at the end of September, though that figure should have risen subsequently. Asia and EMs have been weak in the past year, so it has paid to wait, though there is no guarantee that individual share prices will drop to the levels the managers are prepared to pay.

The portfolio is strong on companies in the consumer-staples sector, including Unilever Nigeria, Philippine Seven (convenience stores) and RCL (South African food products), but the largest holding is Cyient, an engineering outsourcer.

Don't miss the boat

ScotGems' own share price has dropped to 82.5p, an 11% discount to net asset value of 93p. It is tempting to go on waiting until the portfolio is more fully invested and the market has turned upwards.

Against this, sister trust Pacific Assets performed well in the year to 31 July, beating the MSCI Asia ex-Japan index by 10%. Its shares trade just 2% below asset value. The Stewart Investors' style is clearly working, and waiting for a slightly better opportunity risks missing the boat entirely. Better to be early and buy now.

As for the 14 funds that have just listed this autumn, or are now fundraising, wait until later next year, when another batch of new issues will be chasing your money.

Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.

After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.