When Queen Victoria told her prime minister, Lord Salisbury, that the people were crying out for change, he is reputed to have replied: “Change, your majesty? Aren’t things bad enough already?” Change is not always for the better, so when directors of investment trusts change their investment manager, it doesn’t necessarily work out well.
After persistently poor performance or the departure of the nominated fund manager, the directors simply used to ask the management company to come up with a new team. In recent years, they have conducted what is known as a “beauty parade”, inviting other managers to pitch for the contract. Investors are often offered a cash exit at close to net asset value (NAV) but if the new team is well-regarded, few will exit and there will be plenty of new buyers to take their place.
The crest of a wave?
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The new manager will have told a good story supported by strong performance numbers, but they may be just riding the crest of a wave rather than offering a durable investment strategy. So it proved with Keystone and Edinburgh (LSE: EDIN) investment trusts, which moved to Invesco when Neil Woodford’s star was shining at its brightest. When he left, the trusts continued to follow his investment style, which soon started to fade. Both trusts moved again in 2020.
Is this a triumph of hope over experience? Edinburgh’s new manager, James de Uphaugh of Majedie, has at least started well, returning 39% in the year to the end of April against the All-Share index’s 29%. He avoids the “value” or “growth” label for the portfolio by describing it as “flexible, all-weather with a blend of stocks that reflect our global perspective but which also includes some idiosyncratic opportunities”.
These include Ashtead Group, which rents out industrial and construction equipment; Electrocomponents, a distributor of electronic and industrial products; housebuilder Redrow; Weir Group, an engineer concentrating on the mining, energy and industrial markets; and data-analytics specialist RELX.
The UK market offers “world class companies at low valuations while our market is now much more diversified and skewed towards higher-return companies than in the past”. EDIN shares trade at a 4% discount to NAV and yield 3.8% following the recent announcement that the dividend has been rebased downwards.
Given the phenomenal success of Baillie Gifford in recent years, it is hardly surprising that four trusts have moved there in the last three years. The directors of what was Schroders UK Growth Trust eventually lost patience and moved the trust in 2018, to be followed by what are now BG European Growth (LSE: BGEU), BG China Growth and Keystone Positive Change. All are prospering – Chris Brown of JP Morgan Cazenove points to “the dramatic improvement in returns at BG European Growth since the managers took over in late 2019 and implemented a growth strategy while the shares have rerated from a double-digit discount to a small premium”.
The departure of Alastair Mundy in early 2020 came as a shock to Temple Bar (LSE: TMPL) investors after excellent performance in 2019. Mundy departed in the market chaos at the start of the pandemic after which the directors moved the trust to RWC, a little-known boutique with no other investment trusts under management. The sceptics have been confounded. Since RWC took over in early November, TMPL’s performance has been by far the best among the mainstream UK trusts, returning 44% against 22% for the All Share index. It has been helped by the return to favour of “value” investing but shrewd stockpicking has undeniably helped.
The rotation to value is only just beginning
Ian Lance, the co-manager, describes this as “the start of a rotation to value that will last several years. In November, cyclical stocks were very cheap relative to defensives” and value stocks were at their cheapest in 20 years. His forecast that financials, energy and materials sectors would prosper in the recovery is proving prescient, while “quality stocks are not defensive if you pay too much.”
Favoured stocks include Marks & Spencer: “The food retailing division and joint venture with Ocado are worth more than the whole market value yet it is still the top clothes retailer in the UK and second in online sales.” Standard Chartered, meanwhile, “is trading at half book value and on just six times earnings; there is 100% upside”. Royal Mail, the largest holding, “has doubled since we bought it; the market value bottomed at just £1.25bn against 2020/21 profits of over £700m”.
What is most notable is that TEMPL, BGEU and EDIN have very different styles but are all performing well. This must give the managers confidence to go on taking risks and the directors confidence that they chose well. In recent years, change has consistently proved to be for the better.
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.
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