When we set up the MoneyWeek investment trust portfolio in 2012, we had some simple founding principles. Above all, we wanted to help readers build a global, all-weather portfolio that they could set and forget (something we’ve also tried to replicate with MoneyWeek’s ETF portfolio).
That’s why we chose a portfolio of six London-listed investment trusts with exposure to various investment styles and asset classes. Investors often have a home bias when they’re building a portfolio, which can be a significant drawback. There are some great companies here in the UK, but there are also great companies in the US and Europe. In today’s hyperconnected world, where it’s just as easy to invest in international markets as it is to invest here in the UK, it does not make sense to ignore other markets.
In addition to international exposure, we also incorporated a level of protection in the portfolio. It’s never been 100% equities or 100% growth stocks. We’ve always tried to maintain a blend of equities from the UK and around the world, income stocks, growth stocks, value investments, alternative investments (such as private equity), and even a small allocation to bonds and gold. We’ve made some changes to the portfolio over the years, but the underlying principles have always remained the same.
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“The thing about value investing,” says James Henderson, portfolio manager of the Law Debenture Trust (LSE: LWDB), “is there are long periods of boredom, followed by periods of extreme pain” before the profits arrive. This, in a nutshell, describes the performance of the MoneyWeek investment portfolio over the past year.
Investment trusts were chosen because of their unique qualities and ability to invest countercyclically. But this year our preference for investment trusts has been a liability, not an asset.
Trusts have been shunned over the past 12 months: even as their net asset values (NAVs) – the values of their underlying portfolios – have stayed steady or even grown, selling pressure has pushed market prices far away from NAV values, producing discounts not seen since the depths of the financial crisis.
In December 2023, of the 392 investment trusts tracked by the Association of Investment Companies (AIC), 70 were trading at a discount of 30% or more to NAVs. The average discount across the group was 17%. This doesn’t make much sense. If I offered you £1 for 83p, you’d jump at the chance to take my money. It seems investors just aren’t interested in the value on offer. This is partly due to the general malaise that has afflicted British equity markets. It is also a reflection of shifting dynamics in the wealth-management industry. Consolidation has been bad news for smaller trusts, many of which are now merging.
The MoneyWeek Portfolio
The MoneyWeek portfolio contains the following six holdings:
- Personal Assets Trust (LSE: PNL)
- Mid Wynd International Investment Trust (LSE: MWY)
- Scottish Mortgage Investment Trust (LSE: SMT)
- Caledonia Investments (LSE: CLDN)
- Law Debenture (LSE: LWDB) and
- AVI Global Trust (LSE: AGT).
Diverging fortunes
Personal Assets, which aims to protect and grow shareholders’ capital (in that order), illustrates trusts’ struggle over the past year. Its NAV has returned 2.1% over the year to 31 January, but as its discount has increased, the share price has returned just 0.5%. Caledonia’s performance is similar. A 5.5% NAV return over the year has become a 7% overall loss on a share-price basis as the discount has surged to 35%.
Mid Wynd has done slightly better. Since the trust’s board decided to change its investment managers last year, the market has been watching the performance of the new team, Lazard Asset Management, closely. The new managers have aligned the portfolio with the Lazard Global Quality Growth strategy, disposing of all but six holdings and recycling the rest of the portfolio into 35 new positions.
The change paid off last year when the trust outperformed after the managers took over in October, but this year it has underperformed. Still, its overweight technology stocks such as Microsoft and Alphabet, and a 64.4% allocation to the US continue to provide international growth for the portfolio.
Scottish Mortgage Investment Trust is the portfolio’s other global growth play. As sentiment towards growth stocks has turned positive over the past year, the discount on this trust has narrowed from 20% to the mid-teens. There is still uncertainty over the value of its private investment portfolio, suggesting that some level of discount will remain. Still, with its 8% and 6.5% allocation to chipmakers ASML and Nvidia respectively, it has exposure to some of the market’s hottest growth stocks. That said, losses elsewhere in its high-growth, high-risk portfolio have pushed down its NAV by 1.7% over the year to the end of January. The stock has returned 3.9%.
AVI Global, with a NAV return of 13.5% and a share price return of 15.7%, and Law Debenture, with a NAV return of 9.4% to the end of 2023 have been the two best-performing trusts over the past year. Both are value-focused trusts.
AVI seeks out other undervalued investment vehicles or companies, while Law Debenture focuses on undervalued UK equities. AVI has been helped by its 17% weighting towards value in Japan, where markets have recently returned to their late 1980s high.
Law Debenture has benefited from having a division made up of Independent Professional Services (IPS), a company providing services such as pension administration and company secretarial, most of which generate a recurring, predictable income stream, supporting the trust’s dividend while allowing its managers to invest outside the box of a traditional UK equity-income fund.
“It’s a real privilege” to have this flexibility, says James Henderson. It means the trust can invest in stocks that have cut their dividends or have never had one. It also means Law Debenture does not have to hug an index or copy its income-orientated peers.
“You won’t find British American Tobacco in the portfolio,” Henderson says. In fact, the best performers last year were Rolls-Royce (up by 287%) and Marks & Spencer (up by 134%), neither of which are income plays. Henderson says it’s just as important for income investors to think about capital growth as well as income, which is why he has invested 7% to 8% in the UK’s smaller growth stocks.
As a way to invest in the UK’s deeply undervalued equity market, with an alternative income stream and a 4% dividend yield, Law Debenture remains an attractive play.
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