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 great companies in the US and Europe as well. 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.
As well as 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.
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We’ve made some changes to the portfolio over the years, but the underlying principles have always remained the same.
After making a change to our holdings earlier this year (we lost confidence in RIT Capital’s ability to protect and grow investors’ capital) the portfolio consists of the following six holdings: Scottish Mortgage Investment Trust (LSE: SMT), Personal Assets Trust (LSE: PNL), Mid Wynd International Investment Trust (LSE: MWY), Caledonia Investments (LSE: CLDN), Law Debenture (LSE: LWDB) and AVI Global Trust (LSE: AGT).
The past two years have been tough for investors. Unfortunately, this portfolio has also suffered. However, our decision to stick with diversified investment trusts is yielding results.
Structured as investment companies, trusts have been shown to achieve better returns in the long run than traditional investment funds. As closed-ended vehicles, they don’t have to worry about daily inflows and outflows and can, therefore, invest in less liquid assets as well as take a longer-term view when picking stocks. Law Debenture, for example, is part investment fund, part operating business. Its business deals with administrative matters for other companies, such as whistleblowing and secretarial services and backend system management for pension schemes. The income from this business provides a steady stream of cash to support the investment company’s dividend while giving the portfolio managers more flexibility when it comes to picking and choosing stocks for the portfolio.
Caledonia and Scottish Mortage also own a selection of private businesses. Personal Assets holds a portfolio of inflation-linked bonds, gold, and some equities.
The portfolio's performance year-to-date shows our chosen approach is paying dividends.
Overall, for the year to October 10, the portfolio produced a total return of -2.2%. However, these figures do not reflect the true picture. Most of the trusts in the portfolio have increased underlying value for shareholders, but widening discounts to net asset value (NAV) have disguised the performance.
This is another quirk of investment trusts. As the shares are openly traded on the market, they can trade at a discount or premium to their underlying NAV value based on market demand and supply (market sentiment, in other words). This can provide an opportunity for investors to buy portfolios of assets at a significant discount. Take Caledonian. At the time of writing, this trust trades at a discount to NAV of approximately 35%. That means investors can acquire its portfolio of private businesses and public market equities For 67p in the pound - in my opinion, that’s terrific value although investors should never buy a trust for its discount alone.
We know all UK assets are unloved at the moment, and investment trusts are no different. The latest figures show the average investment trust trades at a mid-teens discount to NAV. Those are levels not seen since the depths of the financial crisis. These discounts could persist for some time, but investors will benefit from the double tailwind of closing NAV discounts and rising asset values when sentiment improves.
On that basis, it’s worth looking at the underlying NAV performance as well as the headline figures to get a better understanding of what the portfolio looks like after the turbulence of 2023.
On an underlying NAV basis, the MoneyWeek investment trust portfolio has produced an overall return of 3.8% year to date. The FTSE all-share index has produced a total return of 2%.
A more appropriate benchmark is the MSCI PIMFA Private Investor Balanced Index. The index is part of the Private Investor Index series published by MSCI, which has been designed to be used as a non-biased benchmark for investment managers. The balanced index “aims to represent the investment strategy of a client seeking a balanced approach between income and capital growth in their portfolio.”
The benchmark portfolio is roughly in line with the investment trust portfolio’s allocations and in line with what we want to achieve. It has a 25% allocation towards corporate, government, index-linked bonds, and cash. That’s probably a bit higher than the investment trust portfolio, and an alternatives allocation of 12.5% is probably lower than the trust portfolio, but it’s a good benchmark nonetheless. International equity exposure is 40% and UK exposure is 20%.
This benchmark has produced a total return of 4.1% year to date, so the MoneyWeek portfolio is lagging behind by 0.3% on an underlying NAV basis. The underperformance is understandable, given the portfolio’s slightly higher exposure to private investments (which have been a significant drag on returns this year). Still, it’s not enough to make us reconsider the approach.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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