Six investment trusts to tuck away now – and six to sell
Max King presents his round-up of the “lame ducks” of 2020 and highlights six “Cinderella” trusts: strong performers that have not received the recognition they deserve.
This year has been an excellent one for investment trusts. They have, on average, significantly out-performed both the overall market and their benchmark indices, but the dispersion between the best and the worst has been huge. The share price of the £16bn Scottish Mortgage trust has risen by 92%, making it the best performer; that of Riverstone Energy has fallen by 32%, following a 17% and 62% decline in 2018 and 2019 respectively.
Riverstone struggles on. In other cases where poor performance in 2020 was the last straw for directors, management contracts have been moved, merger proposals accepted, or the trust liquidated. But in some, the directors seem loath to take action beyond buying back a few shares in a vain attempt to prevent the shares dropping to a wide discount to net asset value (NAV). For investors, it’s time to throw in the towel and sell.
As well as lame ducks, there are Cinderella trusts with strong records that don’t seem to get the recognition they deserve. Either they prosper in the shadow of better-known trusts with “star” managers, or they prefer to prosper without drawing attention to themselves. The competition for investors’ attention is fierce and good managers focus on investing rather than on marketing. First, here are my top six lame ducks, followed by six Cinderellas.
Six investment trusts to sell
RIT Capital Partners (£3.4bn of assets)
RIT still has a good long-term record, sacrificing long-term performance relative to global indices for capital protection in difficult times. However, since Lord Rothschild retired from active involvement in late 2019, its sparkle has gone. In the last year its investment return has been just 4% and its share-price return -8% as the shares have moved to a discount to NAV. Due to most of its investments being in funds rather than held directly, annual costs at 1.8% of net assets, excluding performance fees, are high. UK exposure is 8%, but sterling exposure is a bafflingly high 65% due to “hedging”. Without Lord Rothschild’s magic touch, performance is likely to remain dull.
Scottish Investment Trust (£680m of assets)
SCIN’s performance has been hampered over the years by its ”contrarian” style of value investing, but it gained no advantage from its supposedly defensive portfolio in the Covid-19 crash. It has since failed to recover and the portfolio shows why. The top three holdings are gold miners yet they have fallen as the gold price has retreated from its August peak near $2,000 an ounce. There are plenty of cheap stocks in the portfolio in the food retailing, pharmaceutical, telecoms and, low down the list, in the oil and gas sectors, but none in the pandemic-hit contrarian plays in travel, leisure or related areas. Warren Buffett advocates “waiting for the fat pitch” before investing – but when the fat pitch came, SCIN was hiding in the locker room.
Murray International (£1.6bn of assets)
MYI is the largest trust in the global-equity income sector, but its performance, once sector-leading, has lagged in the last three years and is far behind Scottish American and JPMorgan Global Growth & Income. Its shares still trade at NAV and yield 5%. What was once the driver of performance has become a problem: high exposure (50%) to Asia and emerging markets. Yet trusts specialising in Asian income (Aberdeen, Invesco, JPMorgan and Schroder Oriental) and JPM Emerging Markets Income have performed much better. MYI has failed to straddle both developed and emerging markets, underperforming income trusts in both.
Witan (£2bn of assets)
Witan may boast 45 consecutive years of dividend growth, but its performance record (4% over one year, 15% over three) is dismal and it still yields less than 3%, despite a 10% discount to NAV. Management of all but 13% of the portfolio is outsourced to nine external managers, but Witan has had to shuffle a third of the portfolio after poor performance. The trust hung on to a high UK exposure too long, perhaps to maintain its dividend record, but has now reduced it to 19% while raising US exposure from 25% to 46% and appointing two new “growth” managers. These changes are all belated and Witan is in danger of being whipsawed if market leadership changes. The “fund-of-funds” investment model works satisfactorily for Alliance, but has proved inflexible for Witan.
BMO Global Smaller Companies (£900m of assets)
In theory, a global smaller-companies trust is just what many investors should want: a one-stop shop for investing in smaller firms around the world, an asset class that outperforms global markets persistently. In practice, the universe of companies is so huge it is nearly impossible for any investment team to cover it properly. Two new entrants to the sector, Smithson (SSON) and Edinburgh Worldwide (EWI), have returned 24% and 61% over one year, while BMO (BGSC) has returned just 2%. Over three years, it is nearly as embarrassing for BGSC: 14% versus EWI’s 116%.
Schroder Japan Growth (£300m of assets)
Schroder’s dismal record in Japan is an embarrassment, but there is still no evidence of a solution. A change of manager in the middle of 2019 has made things worse. JPMorgan, Fidelity and Baillie Gifford have generated nearly three times the return over five years and much more over one and three years with a growth style, so the 14% discount to NAV is richly deserved.
Finally, Edinburgh Investment Trust (LSE: EDIN) with £980m of net assets deserves a dishonourable mention. Its management has moved from Invesco to Majedie Asset Management so it gets the benefit of the doubt for now. EDIN is the Zsa Zsa Gabor of the sector, now on its fifth manager in 30 or so years, thereby testing to destruction Samuel Johnson’s quip that second marriages represent the triumph of hope over experience. The dismal record of the Majedie Investments trust, Majedie’s flagship, doesn’t inspire confidence. On a happier note, here are my top six Cinderella trusts.
Six investment trusts to buy
BlackRock Greater Europe (£470m of assets)
The disastrous fall from grace of Alexander Darwall’s European Opportunities Trust has pushed BRGE into pole position in the European sector. The somewhat sinister name is due to the trust investing in eastern as well as western Europe, a dividing line that has become anachronistic. The addition of BlackRock’s emerging-market star, Sam Vecht, to Stefan Gries’s team has surely helped, but Gries, who took over as lead manager in mid-2017, has focused the portfolio on fewer, high-quality companies with long-term growth prospects. Despite performance of 115% over five years, the shares trade on a 13% discount.
Martin Currie Global Portfolio Trust (£292m of assets)
Despite a well-below benchmark exposure to North America, MNP is near the top of the performance table for global trusts and well ahead of the global indices. Only Microsoft among the US tech majors is among its top-ten holdings and there are just 30 holdings in total, all high conviction. Since the manager, Zehrid Osmani, joined Martin Currie in 2018, the portfolio has become more focused while stock selection has been excellent.
Mercantile Investment Trust (£2.1bn of assets)
MRC is the largest trust in the UK mid- and small-cap sectors, but its performance is ahead of its two mid-cap rivals. Its focus on up-and-coming non-FTSE 100 companies (though it doesn’t necessarily sell stocks that are promoted to the FTSE 100) make it an excellent way to invest in any rerating of the UK market, while a 3% yield and 7% discount to NAV offer value. Its total costs of 0.44% of net asset value are some of the lowest in the market, but mean little marketing. It’s not a trust to shoot the lights out, but nor is it one to worry about in difficult times.
Montanaro European Smaller Cos (£260m of assets)
MTE is the star of the European small-cap sector with returns of 34%, 71% and 160% over one, three and five years, so its shares trade close to NAV. Its manager, George Cooke, invests in “quality growth” companies, so the portfolio, on nearly 30 times 2021 earnings, looks expensive. But earnings growth of 20%, margins of 20% and, on average, no debt, show that he looks for “reassuringly expensive” investments.
JPMorgan Asia Growth & Income (£433m of assets)
An income bias (JAGI yields 3.4%) usually holds performance back. But JAGI’s performance record is not only better than its direct competitors’, but is second-equal (after Pacific Horizon) with the lower-yielding Asian trusts. This is because JAGI, like its Global Growth & Income sister trust, pays quarterly dividends, mostly out of capital, of 1% of net assets, so stock-picking is not constrained by the need for high-yielding investments. Around 44% of the portfolio is in China and another 40% in Taiwan, Korea and Hong Kong, while the largest holdings are Alibaba, Tencent and Taiwan Semiconductor.
Miton Global Opportunities (£80m of net assets)
It’s always tempting to invest in “bargain” trusts on high discounts to NAV, but these trusts are normally cheap for a reason. Invest in MIGO, however, and you can leave the expert team of Nick Greenwood and Charlotte Cuthbertson to look for the jewels among the rubbish. MIGO shares are on a discount of 5%, but the underlying discount of the trusts in the portfolio is 26%. The five-year record – a return of 63% – is good and the current opportunities mean that the one- and three-year record should continue to improve.
Finally, Schroder UK Public Private (SUPP), formerly Patient Capital, deserves an honourable mention. The shares still trade at a 44% discount to net assets of £417m. Schroders has now spent a year cleaning up the mess, but manager Tim Creed sees light at the end of the tunnel. “There are some companies that are really good,” he says, “and some that could be great.” This requires time-consuming active involvement, helped by Creed no longer being a forced seller. SUPP should turn out to be not so much a Cinderella as a phoenix.