Our investment trust portfolio has been running since mid-2012. There have been very few changes – we said at the outset that we would choose our first six constituents very carefully and hope to do as little as possible after that. That’s mostly been a good decision. When I last updated the portfolio in December 2021 we were showing a rather impressive return of 17.68% a year since inception. Unfortunately things have taken a turn for the worse.
As of 21 February, the portfolio is down 9.7% since the last update, and our annualised return has fallen to 13.3%. Year-to-date we are about level with the S&P 500, horribly underperforming the FTSE 100 and (thank goodness) outperforming the Nasdaq. The good news, such as it is, is that this still has us outperforming most major indices longer term: the MSCI World Index is up just under 9% and the FTSE 100 around 4% a year since June 2012. It’s also worth noting that for the sake of simplicity we have not included dividend payments in our calculations – just share prices. It’s a bit disappointing.
That said, we know where to lay the blame – Scottish Mortgage (LSE: SMT). We have held this from the start, and it has been the main driver of our outperformance (at one point it was up 1,000% on our purchase price). It’s also been our main source of worry. Thanks to the managers’ focus on growth potential over price, we have been constantly convinced that it is on the verge of collapse (we have always had a bit of a value bias at MoneyWeek). We have kept it in the portfolio not out of confidence in its medium-term potential, but as a hedge against being wrong. The bad news is, we’ve been proved right (for now, at least). The share price is down 33% since our last update and 25% this year alone, as key holdings such as vaccine maker Moderna have struggled.
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A terrible trade
I wish I could say the portfolio’s other five constituents were innocent. They are not. Again, as of 21 February, Caledonia (LSE: CLDN) is down 5.2% since our last update. Personal Assets (LSE: PNL) is down 2.7%, RIT (LSE: RCP) 9.8% and Mid Wynd (LSE: MWY) 9.2%. The only positive performance has come from Law Debenture (LSE: LWDB), up 0.5%. I’m particularly irritated by Mid Wynd. In early 2020 we felt we had no choice but to remove value-orientated Temple Bar from the portfolio as it was changing manager (thanks to the perceived failure of its value strategy) and we were concerned about what might come next. We replaced it with Mid Wynd.
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Terrible trade. We should have sat tight – particularly given a study the analysts at GMO alerted me to recently. It’s from 2008, but shows that the average investment management firm outperforms in the three years after it is fired by clients (the point at which investors lose patience is also often the point at which performance improves). Temple Bar is up 8.6% so far this year and 24% in the past 12 months. When we sold it I fretted that losing its value orientation from the portfolio would be a mistake. So it has proved.
Now is not the time to make big changes
So what next? Personal Assets stays – it is designed to protect capital and is clearly doing its job. Law Debenture stays – we have some value bias there and this is no time to dump that. Caledonia we still like for all the reasons we did before (a reasonable discount, some interesting private equity exposure). The same goes for Mid Wynd and RIT. And Scottish Mortgage? It might be behaving appallingly at the moment but, as our advisory panel member Simon Elliot of Winterflood points out, without it we’d all have been much the poorer over the last decade. He still sees it as a “unique vehicle in the investment trust sector with a relatively concentrated portfolio of high-growth companies.” He also notes that while we think of it as being all about the giant tech companies, its managers should be given credit for the way in which they have recycled capital away from them into “less well-known companies with greater long-term growth prospects”. Simon makes a good case. I’ll keep it in.
The rest of the panel (Sandy Cross of Rossie House and Investec’s Alan Brierley) are also relatively unbothered. It might rather feel as if one is “holding for further losses” they say, but this is a long-term portfolio and it is a “mug’s game trying to call short-term, albeit painful fluctuations”. Simon agrees – the portfolio was “built to last” and despite the recent dip “has delivered on that promise since inception”.
The only thing I would say (again) is that rebalancing really matters. If you still have much more than a sixth of this portfolio in Scottish Mortgage (which you will have if you have never shifted cash into the less well-performing names as it has soared) now might be time to think about fixing that.
