Our investment trust portfolio has been a great success. Merryn Somerset Webb assesses the outlook.
Six years ago we thought it would be interesting to see if we were as good at choosing whole portfolios ourselves as we are at carping about other people’s choices. So we started a small investment trust portfolio, the idea being to choose six that between them provided a good level of high-quality diversification; to check on them every six months but to trade them as rarely as possible; and to hope for the best.
I haven’t quite managed the six-month bit. But the rest has gone pretty well. We’ve made only three changes to the portfolio over the last six years. It now consists of Scottish Mortgage, Personal Assets, Caledonia, Temple Bar, Law Debenture and RIT, and our total return now sits at just over 116%. That number assumes that all investors are regularly rebalancing so they have equal amounts of all six, and it doesn’t take account of the transaction costs of doing so, but it nonetheless compares well with the 64.5% return from the FTSE All-Share and the 91% return from the MSCI World index over the same period.
We have benefited hugely from the inclusion of Scottish Mortgage in particular. Its shares are up a satisfying 297% since the 15th of June 2012 (launch date!). Caledonia has also done nicely. We bought it in late 2013 (as a replacement for the rather disappointing BH Macro) and it has gained 78% since. Finsbury provided a good boost in the first few years (116% to January 2017) and RIT has been satisfactory: up 78%.
Our slower movers have been the more value-orientated trusts. Personal Assets has done its core job of preserving capital regardless of market conditions. It is up 22%, beating inflation over the period (which has risen 13%), while Law Debenture (up 21% since September 2015) and Temple Bar (just under 2% since January 2017) are yet to have their time in the sun.
|Law Debenture Corp||LWDB||-8.5%||21.3%||3.3%||-11.7%|
The skew from Scottish Mortgage
So what should you do now? I have been back to our panel of IT experts, Simon Elliott of Winterflood, Alan Brierley of Canaccord Genuity and Sandy Cross of Rossie House Investment Management (usual disclosure: Sandy is my husband) to ask. They are still happy with the portfolio. It is, says Simon, a “pretty decent, balanced portfolio that should generate long-term attractive returns, while providing some protection in more difficult market conditions”.
Alan is also “very comfortable with the current composition” and Sandy says he is “inclined to not change”. The last time we updated the portfolio we strongly suggested that you make sure you had rebalanced your Scottish Mortgage holding on the basis that if you had not, you would be frighteningly overweight its mix of fabulous growth stocks going into a difficult market period (the top holdings include 10% in Amazon and over 5% in Tesla). We hope you did that (the shares are down 10% in six months) and we all expect the trust to depress rather than boost our returns over the next few years. That said, there is still no appetite for removing the trust from the portfolio; we all want exposure to the technologies the managers of the trust find so exciting.
There is no reason, says Simon, why it should not generate good returns over the long term, assisted by its unquoted holdings. If there are any components to our portfolio that make the panel feel a tiny bit nervous they are RIT and Law Debenture: the former because it trades at a premium (Sandy isn’t sure anything should be trading at a premium to its net asset value at the moment) and the latter because as well as running an equity portfolio the trust owns a professional services business that has changed its management too often for Simon’s liking. But if we took one out what would we replace it with?
The changes we considered
Everyone also agrees the UK and sterling are cheap and that this could represent a great opportunity. We could perhaps add to our exposure there with Sandy’s old favourite, Henderson Smaller Companies, but otherwise Temple Bar remains a “good way to play the value that undoubtedly exists in the UK market at present”. Alan is keen on Bruce Stout’s Murray International, on the basis that Stout is an excellent manager; that the trust is a “cheap contrarian play: and that given the uncertainty across global markets all cheap diversification must be good diversification”. Simon is also keen to think about adding in some private-equity exposure. There is some “cyclicality in the asset class”, but the balance sheets in the sector are “reasonably resilient” and the discounts on some of the trusts possibly a bit too large. He suggests we look at Pantheon International (on a 23% discount), Standard Life Private Equity (21% discount, 3.8% yield) and ICG Enterprise Trust (18% discount, 2.5% yield).
As usual I have thought about all these suggestions at length. I am very tempted to take up Alan’s suggestion of selling nothing but adding in Murray. However, I have dismissed the thought on the basis that part of the original idea was to keep the whole thing small and contained. I’m also uncertain about Law Debenture (not least because its portfolio and that of Temple Bar are too similar). However, I am not going to change anything right now. Instead, I am putting Law Debenture on a watching brief with the idea that early next year we could swap it for Murray.