Our panel of experts analyses MoneyWeek’s portfolio and debates future opportunities for investors, as Merryn Somerset Webb explains.
|Investment trust||Ticker||One-year total return||Five-year total return||Dividend yield||Premium/
|Caledonia Investments||LSE: CLDN||13.6%||109.2%||2%||-19%|
|Personal Assets||LSE: PNL||8.3%||26.4%||1.4%||1.4%|
|Scottish Mortgage||LSE: SMT||43.2%||214.3%||0.69%||0.54%|
|RIT Capital||LSE: RCP||12.1%||86.7%||1.6%||7.6%|
|Law Debenture Corporation||LSE: LWDB||21.0%||73.1%||2.8%||-8.5%|
|Temple Bar||LSE: TMPL||13.0%||51.3%||3.2%||-3.9%|
First an apology. When we set up the MoneyWeek investment-trust portfolio in 2012 we said that, while we weren’t likely to change it very often, we would review it every six months or so. We’ve been a bit slow on this – the last review was in February. Sorry. Still, benign neglect has suited us pretty well so far. We never asked much from the portfolio – just that it give us some downside protection as well as access to the exciting parts of the global stockmarket.
So far so good. Since launch we have made a total return of just over 110% – an annualised return of around 20% (the current yield is just under 2%). Can’t argue with that: over the same period the FTSE All Share has given a total return of 70%; the FTSE World just over 90%; and the MSCI World index (including emerging markets) around 120%. I’ve calculated the returns in a very straightforward way – as a simple average of the returns of the components – on the assumption that readers will have been regularly rebalancing to keep a roughly equal weighting in each trust. The costs of doing so might mean your returns are slightly lower than the headline ones here. However, if you haven’t been rebalancing, your returns will look very much better as you will be significantly overweight with Scottish Mortgage (up nearly 300% since we bought it!).
So what next? You can see all six of the trusts we currently hold and their performance over the last one and five years, as well as the yields and discounts, in the table above. All have done nicely; and any clever broker could make a case for keeping them all, or for swapping all of them out. So to work out what to do next, I convened our usual extra-clever expert panel – Sandy Cross of Rossie House Investment Management (disclosure – he is still my husband); Simon Elliott of Winterflood Securities; and Alan Brierley of Canaccord Genuity.
Scottish Mortgage: should it stay or go?
The most obvious subject for discussion is Scottish Mortgage (SMT), with its huge investments in tech companies and start ups. Its performance has been extraordinary; manager James Anderson makes an excellent case for holding all the high-growth stocks he does; and we love the way it invests in unlisted companies (only a very small part of the global economy is listed). But, but, but… after performance such as this, we all worry that a significant pull back is ahead – particularly if the political tide really is turning against big tech, and the interest-rate cycle really is turning too (if you can get a real return on cash, then no-yield growth stocks hold less appeal).
It’s also pretty easy to take potshots at individual holdings. Tesla makes up close to 7% of SMT’s portfolio (about £400bn-worth). It might be the highest-profile firm in the electric-car market, but with competition from the likes of Chinese-owned Volvo (a brand that is both good at making cars and trusted to be good at it), it no longer has the market to itself. It’s also clearly finding it hard to ramp up production of its Model 3 vehicle (I am told that its production line is verging on shambolic and in the three months to October it managed to produce only 260 cars rather than the 1,500 forecast). It is burning through cash at a stunning rate; and it is increasingly unpopular on Wall Street (JP Morgan reckons the shares will fall by 40% over the next year). There is risk here – and in many of the other high-profile firms SMT holds.
The trust’s directors aren’t blasé. The latest report emphasises that the trust “is best suited to those who share its long-term approach… Without wishing to strike an unduly pessimistic note, shareholders are asked to bear in mind that there will almost certainly be periods when the focus of equity markets shifts away from company fundamentals. If this were to be the case, the portfolio investments may well fall out of favour for a period of time.” We take a long-term approach, of course. But, as Brierley notes, we can’t say we haven’t been warned that there is a heap of short-term risk in SMT.
Elliott suggests a shift to another trust, also managed by Baillie Gifford – the Monks Investment Trust (LSE: MNKS). Like SMT, this is a growth portfolio, but it is broader-based, less concentrated, and also “less reliant on the internet stocks that have had such a great run this year. SMT also has around 13% of its portfolio in unquoteds, while Monks has stuck to the public markets. In strong-to-decent market conditions, one might expect SMT to have the advantage”, but Monks “should provide a less volatile ride in more difficult conditions” – which is what the panel agree are probably on the way.
Taking a closer look at Law Debenture
Elliott is also a bit iffy on Law Debenture. He is happy with the value-orientated expertise of its managers James Henderson and Laura Foll, but concerned about its subsidiary business IFS (Independent Fiduciary Services), which makes up a significant part of the trust’s value and so is “an important part of the story”. The (relatively new) chief executive of the overall business, Michael Adams, has departed to be replaced by Tim Fullwood as interim CEO. Fullwood is a “safe pair of hands” given his long service as chief financial officer, says Elliott. But it is an unusual hint of instability in a generally stable and successful trust, and one “that we are monitoring carefully”.
Cross and Brierley remain generally unconcerned. Cross is happy with all the portfolio’s constituents – albeit irritated that we didn’t take up his idea of buying Henderson Smaller Companies last time (it’s up nearly 40% in the last 12 months). If we want to move into a sector offering some value however, he suggests Pantheon International (LSE: PIN) as a decent way to own private equity on an attractive discount (the shares trade for 15% less than the net asset value – NAV). Elliott agrees. Tempting.
Brierley suggests looking at infrastructure funds – they were on a 20%-25% premium, but have fallen sharply since shadow chancellor John McDonnell lobbed a grenade with his bonkers promise made at the Labour conference to cancel (or bring “in house”) the PFI projects underpinning much of the UK’s infrastructure. Last August, shares in the HICL Infrastructure Company traded at a 25% premium. Today – with the political risk of a Jeremy Corbyn government starting to be priced in – it’s under 4%. Ouch. Other suggestions included SQN Asset Finance and Syncona (which used to be known as BACIT, but changed its name after shifting towards life-science investment in 2016).
Exciting – but not too exciting
Both are good funds. However, you won’t be surprised to hear that, having carefully weighed the thoughts of our panel, I have decided to do nothing. I am worried about SMT in the short term. But I have faith in it long term, so it stays. Anderson dismisses worries about the likes of Tesla. Sure, he recently told the Financial Times that all equity investments come with risk of failure (that’s the point). But if Tesla can make the mass market vehicles it promises, his clients will make (more) fortunes (Anderson and I are meeting in a few weeks, so I will let you know if I change my mind after that!). We have also balanced out the risk inherent in SMT with Personal Assets (which is constantly poised to deal with disaster) and Temple Bar, which aims to make long-term investments in the out of favour and the cheap (think HSBC and Shell, rather than Tesla and Alphabet). Caledonia and RIT are also very diversified funds with good long-term track records and – in the case of Caledonia – regular dividend rises.
With all that behind us we can probably afford to keep a little excitement in the portfolio. I’ll try and update again in six months, but please do rebalance if you haven’t already: one thing all of our panel agree on is that this is no time to have too much excitement in your portfolio.