Interactive Investor

Andrew Pitts’ trust tips: portfolios splutter, but potential bargains emerge

17th January 2022 11:05

Andrew Pitts from interactive investor

Strength from private equity and technology choices were offset by weakness among growth-focused trusts in the last quarter of 2021.

Andrew Pitts’ trust tips were first introduced by Money Observer several years ago. In the summer of 2020, Andrew took over the portfolios. The trust tips are made by Andrew and not interactive investor. There is an editorial update of the portfolios every quarter.

Both the adventurous and conservative tips portfolios produced decent gains in the final quarter of 2021. The 10 conservative choices were marginally ahead by an aggregate 4.6% when compared with a 4.3% gain from the adventurous choices. While those numbers beat the UK FTSE All-Share index uplift of 4.2%, they were behind the return of 6.1% from the FTSE All-World index, which includes returns from developed and emerging markets.

Over a year, however, both portfolios have uncharacteristically fallen behind the benchmarks we measure them against. They have returned just over 12% compared with gains approaching 20% for the benchmark indices. On a three-year view the picture is brighter, as the table below shows. The adventurous portfolio has gained 81.3% (three times the gain of the UK index) and the conservative choices are up 63.7% – on a par with the FTSE All-World gain.

Both portfolios are suggestions for investors looking to achieve diversified exposure to global stock markets with a smattering of more specialised strategies, such as private equity, wealth preservation and technology. The performance of the tips, which first appeared in Money Observer, have been monitored as portfolios since August 2014, with their constituents equally weighted at each annual review. Since then, the adventurous selections have generated outstanding benchmark-beating gains of 204.9% and the conservative options are up 140.8% (before stamp duty and dealing charges).

Respectable quarter but not a great year for the portfolios

  % total return after: Return since 
  3 mths 6 mths 1 yr 3 yrs 5 yrs Aug '14
Conservative portfolio 4.6 7.0 12.5 63.7 87.3 140.8
Adventurous portfolio  4.3 6.4 12.2 81.3 116.9 204.9
Benchmark indices            
FTSE All-Share index 4.2 6.5 18.3 27.2 30.2 54.5
FTSE All-World index 6.1 7.5 19.5 63.4 77.7 155.4

Notes: Performance of the portfolios as at 31 December 2021, before deduction of underlying trading charges. Past performance is not a guide to future performance. Data source: FE Analytics.

In the immediate future it seems likely that the conservative portfolio will outperform the adventurous version. A combination of persistently high inflation, rising interest rates and fully valued markets that do not reflect the worsening growth outlook are likely to weigh more heavily on strategies pursued by some of the adventurous choices.

Adventurous portfolio buoyed by specialists

Some wildly contrasting returns in the fourth quarter contributed to the portfolio’s 4.3%  gain, with exposure to technology and private equity particularly beneficial and offsetting losses from trusts focused on the US, Japan and diversified global markets.

Allianz Technology (LSE:ATT) topped the tables with an outstanding 18.5% uplift. Some of the gloss has come off the £1.3 billion trust’s returns during the first two weeks of 2022 but manager Walter Price remains optimistic. He heads Allianz’s San Francisco-based global technology team and recently stated: “We continue to believe the technology sector can provide some of the best absolute and relative return opportunities in the equity markets –especially for bottom-up stock pickers.”

​​​​ATT’s shares usually trade on a small premium to net asset value (NAV), but recent share price weakness means they are currently trading at a circa 5% discount.

Shares in NB Private Equity Partners (LSE:NBPE) provided the portfolio with its second-largest boost with a 14.6% uplift over the quarter, and raising its gain over the year to 65% – by far the best return among all 20 selections in both portfolios.

Despite this strong show the shares continue to trade at an elevated discount to NAV of 20%. While this is not an uncommon feature among private equity trusts, the discount is considerably above the sector average and looks highly anomalous given NBPE outstanding performance, having returned over 500% over the decade and growing underlying assets to £1.3 billion in the process.

Nearly half of the Neuberger Berman-managed trust’s returns over the year came from direct equity investments, which are spread across around 100 companies. The bulk of these are domiciled in the US but are spread across a variety of sectors.

Tech, media and telecoms companies represent close to a quarter of assets, with exposure to industrials/industrial tech, commerce/e-commerce, business and financial services accounting for the bulk of the remainder.

NBPE has recently announced a 15% increase on its last dividend paid in August, which equates to an attractive 3.4% annual yield. On the back of its strong performance and expectations of further progress in the year ahead, stockbroker Stifel has maintained its ‘buy’ rating on the shares.

Several other trusts produced solid performance numbers over the quarter. Montanaro European Smaller Companies (LSE:MTE) consolidated its longer term gains with a 9.9% uplift and JPMorgan Asia Growth & Income (LSE:JAGI) rode higher on the back of improved appetite for its shares, which rose by 7.8% although the NAV return was marginally negative. That put some gloss on a one-year loss of -3.6%, much of which can be attributed to the trust’s exposure to out-of-favour China, where 34% of its portfolio is invested.

The adventurous portfolio’s holdings in three overtly growth-focused trusts managed by Baillie Gifford propped up the performance tables over the quarter and were also among the worst on a one-year view.

Shares in Baillie Gifford Shin Nippon (LSE:BGS), which invests in Japanese smaller companies, dropped by -10.7%, compounding a -17.2% loss for the year. Its performance at the NAV level has not been as poor: at the start of 2021 the shares were trading at a near 10% premium to NAV. Currently they are trading at a near 3% discount to NAV so investors could regard this as a good time to grab a ‘bargain’ in a trust with an outstanding long-term record.

The gloss has also come off the previously high-octane Baillie Gifford US Growth (LSE:USA), with the shares down -1.7% over the quarter and -4.7% over a year, in stark contrast to the strong show of JPMorgan American (LSE:JAM), which is in the conservative portfolio (see review below). Nevertheless, on a three-year view, USA shares are up 189%, and with the shares now trading on a 7% discount compared with a 12% premium in early January, investors who share Baillie Gifford’s growth-focused philosophy might consider hopping on the escalator below ground floor level.

Shares in the £3.2 billion global trust Monks (LSE:MNKS) have also suffered an unusually poor period, down 1.2% over the quarter and up just 1.2% over the year. Again, this is a glaring contrast to conservative cousin Bankers (LSE:BNKR), which rebounded strongly in the fourth quarter. As with other BG-managed trusts, Monks is prone to periods of underperformance, but the generally growth-focused approach has resulted in very strong longer-term outperformance of benchmark indices.

How the adventurous constituents fared in the fourth quarter*

    % share price total return and AIC sector quartile rank after:  
Adventurous choices 3 mths Rk 6 mths Rk 1 year Rk 3 yrs Rk 5 yrs Rk
Allianz Technology (LSE:ATT) 18.5 1 19.7 1 18.7 1 188.9 1 330.3 1
NB Private Equity Partners (LSE:NBPE) 14.6 2 35.2 1 65.0 1 108.1 1 131.0 2
Montanaro European Smaller Companies (LSE:MTE) 9.9 1 28.2 1 33.4 1 173.9 1 273.3 1
JPMorgan Asia Growth & Income (LSE:JAGI) 7.8 1 -9.6 4 -3.6 4 53.6 1 103.9 1
Mobius (LSE:MMIT) 3.4 1 6.9 1 41.9 1 63.8 1    
Dunedin Income Growth (LSE:DIG) 1.2 3 5.4 2 16.9 2 59.0 1 68.6 1
Henderson Smaller Companies (LSE:HSL) 0.7 2 0.8 3 19.1 3 73.1 2 110.8 2
Monks (LSE:MNKS) -1.2 3 0.3 3 1.2 4 90.3 1 144.8 1
Baillie Gifford US Growth (LSE:USA) -1.7 4 -11.4 4 -4.7 4 189.1 1    
Baillie Gifford Shin Nippon (LSE:BGS)  -10.7 4 -3.9 4 -17.2 4 35.6 3 91.0 1
Adventurous portfolio  4.3   6.4   12.2   81.3   116.9  

Notes: *Holdings ranked by three-month performance. RK is quartile ranking for the trust's sector.Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 31 December 2021. Past performance is not a guide to future performance.

Bankers’ bounce best of conservative choices

Global selection Bankers (LSE:BNKR) topped the 10 trusts in the conservative portfolio with a welcome 12% bounce-back in the fourth quarter, so ended the year with a 13.6% gain. It is a solid choice for investors seeking growth from global developed markets and a growing yield – BNKR has raised its dividend for 54 consecutive years and aims for dividend growth greater than UK inflation. That will be more challenging, should inflation become more entrenched, but its record through earlier periods of high inflation, coupled with reserves that cover 1.35 years of last year’s payout, are good reasons to believe it is up to the task.

JPMorgan American (LSE:JAM) continued the strong performance from earlier in 2021, with a 11.6% gain in the fourth quarter helping to cement a 34.3% uplift for the year. The blended value and growth strategies pursued by £1.5 billion JAM resulted in meaningful outperformance of the S&P 500 last year and it is also slightly ahead of the index over three and five years.

Similar numbers apply to Pantheon International (LSE:PIN), with the £1.8 billion private equity fund of funds also gaining 11.6% and just over 34% for the year. Although the shares trade on an estimated discount of 21%, this is not unusual for the sector and rarely has PIN’s discount fallen below 15% over the past five years.

Finsbury Growth & Income (LSE:FGT), the portfolio’s UK equity income selection, made a decent start for the portfolio since being introduced at the last review (in October) in favour of Troy Income & Growth (LSE:TIGT). The shares gained 5.8%, just 1.1% percentage points below its total return for the year, and an early sign of repaying the faith placed in manager Nick Train’s ability to get the trust’s performance back into the upper echelons.

Other constituents of the conservative portfolio performed broadly in line with expectations, aside from Henderson EuroTrust (LSE:HNE). Over longer time periods of three and five years its focus on large to medium-sized companies that are perceived to be undervalued relative to prospects has generated decent returns above the benchmark FTSE World Europe ex UK Index.

However, its recent returns have been pretty flat, particularly when compared with similar trusts such as BlackRock Greater Europe (LSE:BRGE) and Fidelity European (LSE:FEV), which was a previous member of this portfolio. A change may be in the offing should HNE’s relative and absolute performance fail to pick up.

How the conservative constituents fared in the fourth quarter*

  % share price total return and AIC sector quartile rank after:
Conservative choices 3 mths Rk 6 mths Rk 1 year Rk 3 yrs Rk 5 yrs Rk
Bankers (LSE:BNKR) 12.0 1 8.9 1 13.6 2 67.4 2 96.2 2
JPMorgan American (LSE:JAM) 11.6 1 17.9 1 34.3 1 99.8 2 121.9 1
Pantheon International (LSE:PIN) 11.6 2 24.4 2 34.1 3 70.6 3 93.9 3
Finsbury Growth & Income (LSE:FGT) 5.8 1 4.1 2 6.9 4 29.3 2 55.7 1
BlackRock Throgmorton (LSE:THRG) 3.2 1 5.6 2 29.0 1 133.8 1 204.3 1
Capital Gearing (LSE:CGT) 2.2 2 5.6 1 10.8 3 30.6 2 42.2 2
Schroder Asian Total Return (LSE:ATR) 1.6 3 0.8 2 4.9 2 60.9 1 114.6 1
Henderson EuroTrust (LSE:HNE) 0.1 4 -0.6 4 0.5 4 60.1 3 74.2 2
JPMorgan Emerging Markets (LSE:JMG) -0.3 2 -3.7 3 -1.3 3 55.7 1 98.4 1
JPMorgan Japanese (LSE:JFJ) -1.7 1 6.7 1 -8.3 4 82.4 1 112.6 1
Conservative portfolio 4.6   7.0   12.5   63.7   87.3  

Notes: * Holdings ranked by three-month performance. RK is quartile ranking for the trust's sector.Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 31 December 2021. Past performance is not a guide to future performance..

Andrew Pitts was editor of Money Observer magazine from 1998 until 2015.

Andrew Pitts holds shares in Capital Gearing trust. Past performance figures were recorded as at 31 December 2021 but current information, including discounts, was taken on 12 and 13 January.

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