How the 20 trust tips fared in ‘relief rally’ and mini-budget carnage

It is quarterly review time for Andrew Pitts’ trust tips, a period that saw performance initially pick-up before unfunded tax cuts caused havoc for both equities and bonds. 

A ‘relief’ rally over the past quarter among some of the hardest hit constituents of the two investment trust portfolios certainly came as some relief. The 10 investment trusts that make up the adventurous portfolio gained an average 2.1% over the three months to 30 September but their compatriots in the conservative portfolio lost -0.8%.

Both did better than the FTSE All-Share index, down -3.5%, while our other benchmark, the FTSE All-World index, gained 1.3%. However, these point-in-time performance numbers mask extreme volatility over the period, specifically in September.

• Explore our: Sustainable Funds List | Top Investment Trusts  | Transferring an Investment Account

In the wake of chancellor Kwasi Kwarteng’s ‘mini-Budget’ last month (23 September), global investors dumped sterling, government bonds and stocks with high exposure to the UK.

The rout of the pound helped boost performance of sterling-quoted investment trusts which invest overseas, particularly those that invest in US dollar-denominated assets.

The currency effect boosted returns over the quarter from the likes of Baillie Gifford US Growth (LSE:USA), up 17.5%, Allianz Technology Trust (LSE:ATT) (7% gain) and NB Private Equity Partners (LSE:NBPE) (up 6.6%).

Conversely UK-focused trusts that invest mainly in smaller companies such as BlackRock Throgmorton Trust (LSE:THRG) and Fidelity Special Values (LSE:FSV)were down -5.8% and -8.9%, with September proving to be particularly punishing.

Slim pickings as volatility resurfaces

Notes: Performance of the portfolios as at 30 September 2022, before deduction of underlying trading charges. Data source: FE Fundinfo. 

• Why each of Andrew Pitts' 10 adventurous investment trust tips was chosen 
• Why each of Andrew Pitts' 10 conservative investment trust tips was chosen 

Adventurous selections

Returns over the quarter from the 10 trusts were highly dispersed, ranging from a loss of -10% for Montanaro European Smaller Companies (LSE:MTE) to a gain of 17.5% for Baillie Gifford US Growth.

Most of the damage to valuations came in September: the Montanaro-managed trust lost -15%, while the Baillie Gifford-managed trust was the only constituent of the adventurous and conservative portfolios to register a gain over that month, of 4.8%.

Had September been less brutal for adventurous investors the portfolio’s 2.1% gain over the quarter would have been more impressive.

More positively, seven of the 10 trusts ranked in the first quartile among sector peers over the quarter.

Pacific Horizon (LSE:PHI), the Baillie Gifford-managed trust that was added to the portfolio in July’s annual review, was not among them. Its quarterly loss of -4.2% compounded what is proving to be a poor year with the shares down -32.8%. It is useful to view this in the context of two previous annual periods to 30 September: in 2021 the shares had gained 51.3% and in 2020 they were up 87.9%.

Manager Roderick Snell aims to identify companies that can double in size within five years, an approach he describes as “growth squared”, because he is also investing in the world’s fastest growing region.

Last year, in a bid to maintain the trust’s impressive outperformance of peers and its benchmark MSCI AC Asia ex-Japan index, Snell tilted the portfolio away from China and towards India, with more emphasis on companies in the materials and industrials sectors, at the expense of technology.

That strategy has largely been reversed: holdings in Indian industrial companies have been sold or reduced and exposure to materials is now focused on metals such as nickel and copper miners, which should be beneficiaries of the ‘green revolution’.  

Meanwhile Snell, clearly not averse to relatively high portfolio turnover, reckons several Chinese technology and internet stocks have become compellingly undervalued. He has initiated new positions in giants such as Baidu (NASDAQ:BIDU), Meituan (SEHK:3690) and Alibaba (NYSE:BABA), while adding to existing holdings such as JD.com (SEHK:9618).

The rating of Pacific Horizon’s shares is yet to reflect Snell’s optimism: having traded on a premium to net asset value (NAV) of 7% last October, they currently trade on a circa -7% discount, a level that analysts at stockbroker Numis offers investors an “attractive entry point”.

Continuing with the technology theme, the portfolio’s longstanding specialist choice, Allianz Technology Trust (LSE:ATT), has a new lead manager after veteran Walter Price stepped down in July. Mike Seidenberg is not a ‘new broom’, having been a key member of the five-strong technology team since 2009 and, after 15 years at the helm, Price will be in a supporting role until the end of the year.

The managers have confirmed there will be no change in investment approach, which is characterised by a healthy slug of exposure to mid-sized technology companies such as Broadcom, Crowdstrike and Palo Alto Networks. They feature in the trust’s top 10 alongside more well-known names including Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA).

The trust’s interim results to end-June revealed NAV total returns of 709% over 10 years compared with 520% for the benchmark Dow Jones World Technology index. With this meaningful outperformance in mind, tech fans could view the current discount to NAV of 13% as being attractive.

With a return of 6.6% NB Private Equity Partners (LSE:NBPE) was one of the top performers over the quarter.  In early October the board announced a new share buyback programme, which it views as an attractive use of capital in the current environment. Numis reports that this will be based on the absolute level of discount to NAV as well as the discount relative to the wider peer group, among other factors. At end September the discount to NAV was -34%, but this was based on the end-June portfolio valuation.

Adventurous portfolio had highly contrasting fortunes*

Notes: * Holdings ranked by three-month share price total return performance. RK (rank - reflects quartile ranking among its sector). Not all constituents were members of the portfolios over the time periods stated. Data source: FE Fundinfo, as at 30 September 2022. 

Conservative choices

The small -0.8% loss from the conservative portfolio bettered the FTSE All-Share index, down -3.5%, and just about kept pace with the FTSE All-World, up 1.3%. September was particularly bruising, with the 10 constituents down an average -7.2%.

Disparity in performance from the 10 constituents was not as high as with the adventurous choices. UK equity income choice Finsbury Growth & Income (LSE:FGT) topped the table over the quarter, gaining 5.8%. Fidelity Special Values (LSE:FSV), introduced at the last review as the new UK growth selection, fell to a -8.9%.

The recent performance of Finsbury Growth & Income, managed by Nick Train, comes as some relief after an uncharacteristically poor period in the 18 months to mid-2022.

Following criticism from some quarters earlier in the year that the board appeared less enthusiastic about buying back shares in times of weakness compared with its enthusiasm for issuing them in the good times, FGIT’s full-year results to end October should reveal more about what action the board has taken to address these concerns.

Fidelity Special Values, introduced to the conservative portfolio at the last review, fell by 8.9% over the quarter. Despite this inauspicious start, the trust’s one-year return of -15.8% is the best on offer among trusts in the nine-strong UK All Companies sector as well as being among the top performers over longer time periods.

The trust’s 10% gearing has been a short-term impediment to returns in the current down markets. September was particularly tumultuous: investors generally began the month with cautious optimism before the ‘mini-budget’ sent them running for cover. FSV’s shares were down -9% on the month.

The UK trust has a diversified portfolio of more than 100 large, mid-sized and small stocks spread across cyclical and defensive sectors. That seems to be a pragmatic mix in this challenging economic environment. The shares are currently trading on a discount of -9% to NAV, well below the average of the past five years.

A much bigger discount is available at private equity trust Pantheon International (LSE:PIN). Its current discount to estimated NAV is a whopping -48%, based on its end-June quarterly valuation (the third quarter valuation has not yet been released).

However, analysts at stockbroker noted in late July (when the discount was 46%) that the trust has a long history of providing conservative valuations of its portfolio. They “strongly believe that a high quality, actively managed, globally diversified and mature portfolio, with a strong balance sheet, gives investors a relatively low-risk exposure to the asset class”. Over the past decade the shares have produced an annual average return of 23.6%.

Although private equity trusts can be difficult to value, particularly private equity funds of funds, Pantheon International’s big discount may attract bargain hunters who are prepared to wait for an economic upturn. In recent months the trust has regularly been buying back its shares, which will enhance the NAV and may over time feed through to a narrower share price discount.  

Conservative choices post a small quarterly fall*

Notes: * Holdings ranked by three-month share price total return performance. RK (rank - reflects quartile ranking among its sector). Not all constituents were members of the portfolios over the time periods stated. Data source: FE Fundinfo, as at 30 September 2022. 

More short-lived ‘bear market rallies’ to come  

As is true for equity-focused investors at large, both portfolios face potentially strong headwinds over the next few quarters at least. Can sterling hold onto or continue its recent recovery against other major currencies, particularly the dollar? Will stresses in global government bond markets, particularly UK gilts, abate; and can spill-over risk aversion towards equities be avoided? How ‘sticky’ is inflation in the world’s major economies – and  what will be the speed and magnitude of interest rate rises to counter the rising cost of goods, services and labour?

Markets abhor uncertainty, so heightened volatility will endure while investors at large attempt to anticipate what comes next. I envisage further bouts of short-lived ‘bear market rallies’, but unfortunately stock market returns still look to be tilted towards the downside for now.

Andrew Pitts was editor of Money Observer magazine from 1998 until 2015. Andrew holds shares in Capital Gearing.

Please note all performance figures stated in the copy are to 30 September 2022. Other valuations such as discounts to net asset value (NAV) were as at 7 October.