Witan: the "lame duck" investment trust has become a winner

My categorisation of Witan Investment Trust (LSE: WTAN), the £2bn global investment fund, as a “lame duck” at the start of the year brought an immediate response from its lead manager, Andrew Bell. I had written that its investment record, a 4% return over one year and 15% over five, was dismal, it had been too slow in reducing a heavy UK exposure and that the “fund-of-funds” investment model had proved inflexible.

Bell admitted to being “wrongfooted” by the pandemic but explained that they had taken early action, allocating 14% of the trust to two new “quality/growth” managers. He expressed confidence that the reduced but still large UK exposure was starting to work in the trust’s favour and was keen to avoid being whipsawed by making radical changes. The trust had bought back 7% of its shares and he had twice added to his personal holding. Performance in absolute terms and relative to benchmark had been positive for seven consecutive months.

Eclipsing the World index

Since then, performance has been strong so that the 12-month return is now 36%, more than 11% ahead of the MSCI All Countries World index and among the best in the sector. Comparing Witan to Alliance Trust, Iain Scouller of brokers Stifel writes: “While Alliance is still ahead on two-year performance, Witan’s performance has rebounded strongly.” Alliance is managed by the investment consultancy arm of Willis Towers Watson using a similar “multi-manager” approach: it subcontracts investment management to carefully chosen investment managers around the world.

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Witan uses Willis Towers Watson’s database to screen for promising managers but no longer takes advice from them. This looks sensible. The departure from Willis Towers Watson last year of David Shapiro, Alliance’s day-to-day manager, has left Alliance’s performance, a 30% gain in the last year, lagging Witan’s. Without Shapiro, it is hard to believe that Willis Towers Watson’s institutional culture is suited to managing a trust with shareholders looking for a bit of flair.

Growth at a reasonable price

By contrast, the commitment of Bell and his co-manager, James Hart, is indisputable. Their style “is centred on growth at a reasonable price” but the six core managers, accounting for 75% of the portfolio, include the value-orientated Veritas. Five of these managers are global and only one, Artemis, is UK-focused. 23% of the portfolio is in specialist funds, including 11% directly invested in trusts in the areas of private equity (Electra, Apax Global and Princess), property (Schroder Real Estate) and biotech (Syncona). Bell points to the 66% return on Electra shares in the second quarter as evidence of how this adds value.

About 7% is invested in an emerging-markets fund and 4% in the GMO Climate Change Fund. Bell accepts that they were late in buying into this theme but is adding on setbacks. Meanwhile, 2% is in an S&P 500 exchange-traded fund (ETF) to raise US exposure to 38% of the portfolio, excluding the investment trusts. And 21% is in the UK, showing that this is through the stockpicking of the underlying managers rather than a top-down allocation. Witan’s managers clearly deem UK equities undervalued.

Holdings are reviewed quarterly: “There is a danger in getting too much information but it’s useful to keep an eye on what the managers are doing,” says Hart. Borrowings finance nearly 10% of the portfolio, reflecting an optimistic view of long-term potential. The shares trade at an 8% discount to net asset value (NAV) and yield 2.3%. This sounds underwhelming but the dividend has been increased every year for 46 years.

Witan’s revival looks set to continue. It should deliver steady, benchmark-beating low-risk performance with rising income. Most importantly, it has shown an ability to resolve performance issues promptly.