Andrew Pitts names his conservative selections for the next 12 months, which has resulted in a change to his investment trust pick for Japan.
Andrew Pitts’s trust tips were first introduced by Money Observer more than 20 years ago. Their performance began to be monitored as portfolios in August 2014. In July 2020, Andrew took over monitoring the portfolios. The trust tips are made by Andrew and not interactive investor. There is an editorial update of the portfolios every quarter, and the annual review takes place each July.
As a rule of thumb, constituent trusts will have well-diversified underlying portfolios and invest in established, larger companies. Gearing should be modest at best and many favour capital preservation and/or include a commitment to pay a reasonable dividend.
One change for the exposure to Japan is being made this year.
All the performance and discount figures are to the end of June 2023. The ongoing charge figures can be found on the relevant instrument page on interactive investor. For those that also levy performance fees, these have been stated in the copy.
Conservative portfolio makes a decent fist of tough year
|% share price total return and AIC sector quartile rank after:|
|Name||Sector (no. of members)||3 mths||Rk||6 mths||Rk||1 year||Rk||3 yrs||Rk||5 yrs||Rk|
|Henderson EuroTrust||Europe (7)||0.6||2||9.3||3||24.0||3||18.1||3||40.3||3|
|Finsbury Growth & Income||UK equity income (20)||-0.8||2||5.9||1||18.0||1||13.4||4||20.6||2|
|JPMorgan Japanese†||Japan (6)||4.6||3||7.4||3||16.9||3||-6.9||4||10.1||3|
|JPMorgan American||North America (7)||8.2||1||12.1||1||13.9||1||63.9||1||91.8||1|
|Pantheon International||Private equity (17)||9.2||2||-1.9||3||4.1||3||31.2||4||25.6||3|
|Schroder Asian Total Return||Asia Pacific (6)||-1.6||1||2.3||1||3.8||1||18.1||1||25.3||2|
|Fidelity Special Values||UK all companies (8)||-3.6||3||-5.6||4||1.7||4||48.9||1||8.6||1|
|Bankers IT||Global (13)||-2.4||4||0.2||3||1.5||3||5.2||3||25.0||3|
|JPMorgan Emerging Markets||Global emerging mkts (11)||-4.0||4||-4.1||4||0.8||4||9.0||3||33.4||1|
|Capital Gearing||Flexible investment (21)||-2.8||3||-6.2||3||-7.7||3||5.9||4||19.2||1|
|Conservative portfolio average||0.6||1.9||8.4||17.9||29.5|
Notes: * Holdings ranked by one-year performance. Not all constituents were members of the portfolios over the time periods stated. † Trust is being replaced in this review – see text.Data source: FE Analytics as at 30 June 2023.
Fidelity Special Values (LSE:FSV) retains its place despite a disappointing year that has seen a share price return of just 1.7%. That compares with -7.1% in the year to 30 June 2022 and an outsized gain of 57.6% in 2021.
In the past year the discount to net asset value (NAV) widened from -3.8% to -9.2%, which shows the trust’s portfolio made a return in line with its benchmark, the FTSE All-Share index, up 7.9%.
Manager Alex Wright (since September 2012) was joined by Jonathan Winton in February 2020. They run a diversified portfolio by sector and company size that currently has 81% of the trust’s assets invested in UK companies. Although the Swiss pharmaceuticals group Roche Holding AG (SIX:ROG) is the trust’s largest holding at 4.2% of assets, the managers tend to favour mid-sized and small UK companies that are under-researched and undervalued.
The trust has a market capitalisation of £844 million. The shares yield 3.1% and dividends, paid semi-annually, have increased in each of the past 13 years. Gearing is 7%, which compares with a low of 5% and a high of 21% over the past three years.
UK equity income
With a return of 18% over the year, Finsbury Growth & Income (LSE:FGT) looks to be emerging from a difficult period which prompted manager Nick Train to apologise last year to investors for a prolonged period of poor performance.
Nevertheless, Train has stuck to his core investment beliefs of investing in ‘quality-growth’ stocks for the long term, while also criticising the UK for becoming “a backwater of global equities markets” that has seen pension funds reduce their allocation to domestic companies from 50% to 4% in two decades.
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Like Fidelity Special Values, this trust has 80% of its assets invested in UK stocks, but it has a far more focused portfolio of predominantly large companies. The most recent portfolio update in April showed the top five holdings accounting for more than 50% of assets – headed by RELX (LSE:REL), Diageo (LSE:DGE), London Stock Exchange (LSE:LSEG), Burberry (LSE:BRBY) and Unilever (LSE:ULVR).
The welcome turnaround in the £1.83 billion trust’s fortunes has also seen its discount to NAV narrow from around -8% a year ago to -3.7%. The trust’s comparatively low yield of 2.1% is accounted for by its focus on total return rather than an explicit high dividend yield target. Gearing is negligible, as it nearly always is.
Bankers (LSE:BNKR) retains its place in the conservative portfolio despite recent weakness that warrants further examination. One of its chief attractions is its commitment to increase dividends at least in line with UK inflation, which helps to explain why it has a higher weighting to UK stocks than most globally focused trusts at around 17% of assets. It is an Association of Investment Companies (AIC) ‘dividend hero’, having raised its annual payout for 56 consecutive years.
Interim results to 30 April showed its UK portfolio had performed the strongest in relative terms, helping to generate a NAV total return of 8.1%, which compared favourably with the 3.5% return from the FTSE World benchmark index. The board expects that the trust’s total dividend for the year to 30 October will be at least 7% higher than in 2022 and the shares currently yield 2.5%.
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At a share price level, however, the picture looks less attractive, driven by a widening of the share price discount to NAV, which became more pronounced when the trust stopped buying back its own shares in May and June. In the six months to 30 April, the trust bought back nearly £25 million of its own shares at an average discount of 9%. It has recently restarted share buybacks, but the discount today has widened out to 12%.
Analysts at stockbroker Numis note that the trust does not have a formal policy to buy back its shares but reckon at the current discount, shares in the £1.24 billion trust potentially offer value.
The asset allocation is determined by Alex Crooke and Mike Kerley, the latter of whom was appointed deputy manager last year. Crooke has positioned the portfolio to benefit from “better news” in Asia, which he expects to lead the global recovery. Stock selection is delegated to regional portfolio managers at Janus Henderson, which includes the aforementioned duo. Gearing of 7% is close to its three-year high of 9%.
For now, at least, I am resisting the temptation to switch the conservative portfolio’s emerging markets exposure from JPMorgan Emerging Markets Ord (LSE:JMG) to a more defensive holding in the shape of Utilico Emerging Markets Ord (LSE:UEM) (which has previously been a conservative choice).
As with last year’s review, I’m prepared to tolerate an uncharacteristic weak period that has seen shares in this £1.2 billion trust fall behind some of its peers – but most of these superior performers take a more specialised approach in terms of geographic or sectoral exposure.
Managers Austin Forey (since 1994) and John Citron (since 2021) employ a strategy that aims to seek out the best growth opportunities from a global universe of emerging market companies. It has generated returns that have significantly bettered those from the benchmark MSCI Emerging Markets index over one, three, five and 10 years, despite the trust’s portfolio being quite closely correlated to the index itself.
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Compared with the benchmark, the portfolio is 5.3% underweight to China (but that is offset by a similar overweight to Hong Kong) and 6.2% overweight to India. Information technology (5.7%) and consumer staples (11.3%) are notable sector overweights; while energy and materials (-5% each) are notable underweight sector positions compared with the index.
The shares yield 1.35% and trade on a 10% discount. There is no gearing.
Investors have warmed to the investment attractions of Europe in the past year and Henderson EuroTrust (LSE:HNE) has been one of the beneficiaries. Its share price total return of 24% is marginally better than its NAV total return as its discount has narrowed slightly. On a five-year view, however, it remains historically high at -14.1%.
Manager Jamie Ross highlights the trust’s consistent application of a process that aims to identify quality growth companies that are categorised as either “compounders or improvers”. He is size-agnostic but favours mid-sized to large companies and employs a points-ranking framework that helps to determine a company’s position in the portfolio.
Among the £287 million trust’s 44 holdings, Novo Nordisk (XETRA:NOVC), TotalEnergies SE (EURONEXT:TTE), Nestle SA (SIX:NESN), Sanofi (EURONEXT:SAN) and Roche (SIX:ROG) score highly and represent close to 25% of the NAV. The shares yield 2.8% and there is no gearing.
Having been rather critical in last year’s review of JPMorgan Japanese (LSE:JFJ), it’s good to see the shares recover some poise and return 16.9% over the past year, which is broadly in line with the Topix index benchmark. Analysis of annual returns over the past five years, however, show that it’s been three years since the trust meaningfully outperformed, and those gains were more than erased in the 2021-22 period.
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The portfolio is therefore switching its allegiance to Schroder Japan (LSE:SJG) trust, on the grounds that its performance is far less volatile, not to mention superior over the past one, three and five years. In the past year, the shares have gained 21%. The trust also has a decent dividend yield of 2.2% and at 9%, has less gearing than other trusts in the sector.
Manager Masaki Taketsume aims to invest in well-managed, high quality companies in which share prices do not yet reflect their potential.
Schroders has a well-resourced team of local research analysts to support Taketsume, who aims to invest in 60 to 70 small and large companies in a variety of sectors from a universe of more than 3,000.
Shares in the £298 million trust trade at a discount to NAV of -9.6%.
With a gain of 13.9%, JPMorgan American (LSE:JAM) has bounced back to produce another year of solid returns for the conservative portfolio. It combines a growth and value investment approach, with two investment teams aiming to pick shares that represent the best of both worlds.
Its current top 10 holdings, which account for 34% of assets, serves to illustrate the approach, with Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and NVIDIA (NASDAQ:NVDA) prominent growth-focused holdings, alongside value-oriented companies such as Berkshire Hathaway (NYSE:BRK.B), Loews (NYSE:L) and Martin Marietta (NYSE:MLM).
Over the past three and five years the trust’s annualised total return has commendably beaten the benchmark S&P 500 index at both the share price and NAV level.
Shares in the £1.4 billion trust yield 1% and trade on a relatively tight discount of -3.6%. Gearing of 5% compares with a three-year high of 10%.
Asia Pacific ex Japan
Only two trusts - Pacific Assets (LSE:PAC) and Invesco Asia (LSE:IAT) - among 11 constituents of the Asia Pacific and Asia Pacific Equity Income sectors have beaten the conservative portfolio’s stake in Schroder Asian Total Return (LSE:ATR) over the past year, which is up 3.8%.
“You can’t dine off relative returns, and in Asia we believe the benchmark indices are a poor reflection of the overall investment opportunities. The priority of the company is to make money, while providing an element of capital preservation in a volatile asset class.” That is the view of co-managers Robin Parbrook & King Fuei Lee, who have largely achieved that aim, while delivering annualised returns of more than 11% since 2013.
The managers of the £421.5 million trust invest in between 40 and 70 companies across the region. They also use derivatives to offer a degree of capital preservation and to take advantage of market anomalies from time to time.
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The shares have an appealing dividend yield of around 3% with average dividend growth over five years of 18%. Gearing is 6%, which compares with a high of 13% and a low of 4% over three years.
In addition to its yearly ongoing charges figure (OCF) there’s a 10% performance fee payable for returns in excess of 7%, when these are above the benchmark index return (subject to a high water mark), but capped at 1.25% of net assets.
Shares in Pantheon International (LSE:PIN) continue to trade at an abnormally wide discount to assets of 44% compared with the last valuation point for the bulk of the company’s assets at the end of the first quarter. Put another way, the estimated NAV per share on 1 July was 432.9p, compared with a share price of 255p.
As a well-managed trust that primarily invests in a range of other private equity vehicles, Pantheon International is widely viewed as one of the lower-risk options in the 17-strong sector. At a share price level, it has returned 3.8% over the past year, recovering from a loss of -18% recorded at the last annual review. At the NAV level, however, the performance remains impressive, with the shares generating an 85.7% return over five years, compared with just 25.6% from the shares.
Although private equity investments are not for the faint-hearted, the current discount to NAV on this trust – which has persisted for the past year – continues to offer a compelling route into the sector.
The trust has a market capitalisation of £1.35 billion, and is ungeared. A 5% performance fee is payable should the NAV rise by more than 10% (subject to a high water mark) each year.
Surprised and disappointed would surely be the reaction from shareholders in Capital Gearing (LSE:CGT) in reaction to its recent performance.
Over the past year, shares in the £1.15 billion trust are down -7.7%, which is highly unusual for a trust that invests with capital preservation in mind, while aiming to grow shareholders’ real wealth over time. The NAV total return looks a little better at -3.4%, but over the past year the shares have fallen from a small premium to a small discount, now -1.9%.
Despite this performance blip, Capital Gearing retains its place in the conservative portfolio. The trust has a virtually impeccable record of growing its assets. Over the past 41 years to 31 March, the NAV has been down in only two of those years. In the five years to 30 June, the annualised return on the portfolio has been 4.4%, compared with 3.8% for the MSCI UK index.
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According to data from FE Analytics, Capital Gearing has the best ‘drawdown’ profile among any of the 20 trusts in the conservative and adventurous portfolios – with the shares down a maximum -10.7% throughout a turbulent three-year period. By way of contrast, shareholders in Baillie Gifford US Growth (LSE:USA) have experienced a maximum loss of -61.3%.
Peter Spiller has managed the £1.16 billion trust for more than four decades, assisted by Alastair Laing and Chris Clothier since 2011 and 2015 respectively. Although the managers see pockets of value appearing in the closed-ended company universe as discounts to NAV widen, they believe that investors – particularly in the US – are excessively optimistic on prospects.
Clothier points to the rising cost of servicing the corporate debt that ballooned in the prolonged low interest rate environment that followed the global financial crisis. Eventually, he says, that will have a negative impact on corporate earnings.
The trust continues to have the bulk of its assets invested in fixed-interest securities, predominantly UK and US inflation-linked government bonds.
The shares currently deliver a small dividend yield of 1.3%, and there is no gearing.
Andrew Pitts was editor of Money Observer from 1998 to 2015.
Data sources: FE Analytics, AIC/Morningstar, company documents. All data refers to 30 June unless stated (some portfolio weightings quoted in the article are as at 31 May).
As part of a diversified portfolio, Andrew Pitts holds shares in Baillie Gifford Shin Nippon, Bankers, Capital Gearing, Dunedin Income Growth, Fidelity Special Values, JPMorgan Japanese, Mobius, Monks, Pacific Horizon and Schroder Asian Total Return.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.