Since 2012 we have been suggesting a small group of investment trusts for those of you who want to hold a diversified portfolio of funds run by active managers. I promised when we first wrote about it that I would update you on it occasionally (with the help of a panel made up of investment trust experts Sandy Cross, Alan Brierley and Simon Elliott) and change it even more occasionally.
I have mostly stuck to my guns on that. There are six trusts in the portfolio at present: Scottish Mortgage Investment Trust (LSE: SMT), Mid Wynd International Investment Trust (LSE: MWY), Caledonia Investments (LSE: CLDN), Personal Assets Trust (LSE: PNL), RIT Capital Partners(LSE: RCP) and Law Debenture Corporation (LSE: LWDB). So how are they doing? As a group, pretty well.
Over the last year (to 1 March) the six have risen by an average of 29.5%. The standout (as usual) has been Scottish Mortgage. It has returned a whopping 103% in the last 12 months. Myd Wynd, our new addition, is up by 25%, Law Debenture 32.4%, Personal Assets 8.5% and RIT Capital 12.5%. The only negative performance came from Caledonia, which has slipped by 4%. Who’d have thought there was a global pandemic underway?
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The last change we made in the portfolio was in 2020 (1 May). We dumped value-orientated Temple Bar when its longstanding manager left and we had no idea what might happen next. Mid Wynd has gained 24% since. However, so far the switch has been pointless: Temple Bar is also up by 24% since 1 May. Overall, since the switch the portfolio is up by just over 40% (against a 30% rise in the FTSE All World index) and would have been even without the agonising about its construction. This is why I hate making changes to the portfolio.
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In November we also wondered whether we should let Law Debenture, our worst performer at the time, go. We decided not to. We like the managers, we like the UK focus and we like the value tilt of the portfolio. This is a bet that has paid off. Phew. Scottish Mortgage and Mid Wynd both stay too. They are performing well and offer a good growth element to the portfolio (in different ways; their top stocks are very different). There has been quite a lot of volatility in Scottish Mortgage’s share price and an increasing number of voices are prepared to dismiss it on the basis that it is little more than a quasi-tech play for gamblers. However for most of the panel the trust is, as Simon puts it “a compelling investment for those prepared to take a long-term view”. You might worry about the valuations of some of its holdings but the managers have a stunning record of stockpicking and performance. Personal Assets is also staying. It just keeps doing what it promises to (protecting the real value of capital) and that works for us.
A safe harbour
So what are we worried about this time? RIT has been causing some mutterings. It has performed well for us recently but only after a fairly drab run. The concern, says Max King, who writes about investment trusts for MoneyWeek and has been invited to chuck opinions into the mix, is that without Lord Rothschild’s “magic touch” (he stepped down as chairman in 2019), RIT might eventually turn into a high-cost, multi-asset fund with nothing to distinguish it from all too many others.
Alan begs to differ. Look back at how RIT has performed since its inception in 1988, he says. The trust has participated in 73% of market upside but only 38% of market declines. That translates into “meaningful outperformance... achieved with lower volatility.” Its “six-cylinder approach” (which involves everything from active currency management to private equity and outsourcing to “exceptional equity managers”) works.
It is a “safe harbour” at a point in the cycle when there is very likely to be some brutal market action ahead. I think it stays – particularly given that it is currently trading on what seems to us to be an entirely undeserved 9% discount to its net asset value (NAV).Caledonia is also causing me mild concern. Alan prefers Pantheon for private-equity exposure; it’s in his own Investec Flexible Model Portfolio. The portfolio, he says, is high-quality with a focus on “defensive sectors such as education, healthcare and technology, which offer growth through innovation or favourable demographic trends [and] are not dependent on GDP growth.”
It is an excellent suggestion. But I’m going to ignore it (for now). Caledonia has definitely been a drag on our performance, but I’d be almost more nervous if all the portfolio constituents rose as one (that’s not how diversification is supposed to work). And Caledonia does at least offer some value: it trades on a discount to NAV of around 20%. I’d also note that the quoted-equity portfolio (36% of the total) has been doing perfectly well (up by 28.5% on a total-return basis in the nine months to the end of December), as has the fund portfolio (26% of the total). The problem then, such as it is, is the private-equity portfolio, which contains a good few lockdown-affected consumer- focused businesses (3% of Caledonia’s total portfolio is in pub chain Liberation Group and another 1% in Buzz Bingo, for example) and which produced returns of a mere 0.5% from March to December.
The private investments are revalued for NAV purposes twice a year, with the next one due in March when, as Sandy points out, there is obvious potential for uplift to valuations and hence to the trust’s NAV. A bias to taking no action has generally served our portfolio pretty well. I think we will stick with it (again).
