Interactive Investor

Andrew Pitts’ trust tips: UK and Europe strategies stage strong revival

18th January 2023 09:29

by Andrew Pitts from interactive investor

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Performance disparity of more than 40 percentage points between best and worst in the adventurous and conservative portfolios in the final quarter of 2022 serves to illustrate continuing volatility in markets. 

Performance chart neon 600

Decent overall gains for both the adventurous and conservative portfolios in the fourth quarter of 2022 came as some relief in what was a torrid year, particularly for fans of equity-focused investment trusts.

Best in show was a 26.2% bounce from Montanaro European Smaller Companies (LSE:MTE) but, its adventurous compatriot Baillie Gifford US Growth (LSE:USA) ended a shocking year with a whimper, down -16.2% over the quarter.

Returns from benchmark indices for the final three months show marked outperformance by the UK’s FTSE All-Share, up 8.9%, compared with the FTSE All-World index return of 2% in sterling terms.

Neither of the portfolios outshone the FTSE All-Share, although the more cautious conservative portfolio came close, returning 7.2%. The adventurous portfolio gained just half that amount (held back by a few of the out-and-out, growth-focused choices) but both did usefully better than the FTSE All-World index, which to some extent better reflects how the portfolios are constructed (each has 10 trusts equally weighted between regions and strategies).

Short-term improvement not repaired damage

While both portfolios have done comparatively well over the past six months – they are ahead of the benchmark indices – it has not yet been enough to repair the damage wrought in late 2021 and early 2022.

The one-year losses look awful: -27.4% for the adventurous choices against a barely more palatable loss of -16.6% for the conservative choices.

The latter figure is very close to the average share price total return of -16.2% suffered across the investment company and investment trust industry (excluding VCTs) in 2022.

The Association of Investment Companies (AIC) reports that the commodities & natural resources sector performed best over the 12 months with a 24.5% return, followed by leasing (17.3%), and renewable energy infrastructure (6.8%).

The fourth best-performing sector was global equity income (6.1%), which was the best-performing mainstream equity sector over the period. Unfortunately, neither the adventurous nor conservative choices have any exposure to these sectors. The closest is Bankers (LSE:BNKR), a global growth trust that aims to keep its dividends rising in line with annual inflation in the UK.

The conservative choices are not as heavily skewed to ‘growth’ strategies as are members of the adventurous choices. However, as stockbroker Numis points out, investment trusts generally have a growth bias, which led them to significantly underperform markets in most regions in 2022. 

Final quarter puts gloss on poor year

% total return after:Return since 
3 mths6 mths1 yr3 yrs5 yrsAug '14*
IT adventurous portfolio 3.65.8-27.42.420.5121.4
IT conservative portfolio7.26.4-16.610.428.2100.7
Benchmark indices
FTSE All-Share index8.
FTSE All-World index2.03.4-7.823.944.8135.6

Notes: Performance of the portfolios as at 31 December 2022, before deduction of underlying trading charges. *Date when portfolios launched. Data source: FE Analytics.

Conservative choices outpace adventurous picks

As a consequence, hitherto decent longer-term performance – particularly of the adventurous portfolio versus benchmarks – has evaporated, but as the table shows the conservative choices are now well ahead of their racier cousins in all periods monitored up to five years.

I suspect the more cautious approach will continue to serve investors comparatively well, at least through the first half of the year, as ‘buy the dip’ investors persistently get knocked back by entrenched inflation, persistently high and rising interest rates and recession, all of which will continue to weigh on corporate profits. 

Nevertheless, private investors with an eye for bargains and the stomach to withstand potential losses in the short term could do well by drip-feeding money into trusts over the next few months. The UK, Europe and emerging markets are still playing catch-up from a valuation perspective.

Having had a sizeable slug of cash sitting on the sidelines for some time, I am seriously considering sending some of it back into the investing field of play. With some well-managed trusts looking cheap (the average share price discount to net asset value has widened to over 12%) that’s where I will be looking first.

Conservative choices have a less rocky ride*

% share price total return and AIC sector quartile rank after:
NameSector (no. of members)3 mthsRk6 mthsRk1 yearRk3 yrsRk5 yrsRk
Henderson EuroTrust Europe (7)18.7113.52-12.5213.1317.13
Fidelity Special ValuesUK all companies (8)18.317.82-5.018.6123.51
JPMorgan Emerging MarketsGlobal emerging mkts (10)8.825.13-13.436.8232.81
Pantheon International Private equity (20)7.926.12-22.641.0339.63
JPMorgan Japanese Japan (7)5.438.93-30.542.629.61
Finsbury Growth & Income UK equity income (23)5.4411.41-6.03-0.2320.51
Bankers ITGlobal (14)3.921.34-17.836.0225.23
Capital Gearing Flexible investment (29)3.32-1.62-4.2214.9128.81
Schroder Asian Total Return Asia Pacific (6)2.931.52-17.5417.4223.13
JPMorgan American North America (9)-1.741.53-9.9346.7279.82
Conservative portfolio 7.26.4-16.610.428.2

Conservative portfolio

A return to form from Henderson EuroTrust (LSE:HNE) saw its shares leap by 18.7% over the quarter, with Fidelity Special Values (LSE:FSV) not far behind, up 18.3%, both of which helped the portfolio to a decent 7.2% uplift from the 10 constituents. 

Like its smaller company-focused cousin in the adventurous portfolio, Henderson EuroTrust has a clear bias towards quality growth (companies with expected superior profitability) stocks. In a year in which ‘value’ (shares which trade at relatively cheap valuations compared with their earnings) has been in the ascendent, manager Jamie Ross admits 2022 was a challenging year for the trust.

Ross reckoned he had the balance of the portfolio about right going into 2023, despite setbacks from Roche (SIX:ROG) and Sanofi SA (EURONEXT:SAN), two pharmaceuticals giants that feature in the top 10 holdings. Of the 40-odd stocks he holds, financials (22% of the portfolio), healthcare (15.6%) and industrials (12.4%) are the largest sector exposures.

Fidelity Special Values managers Alex Wright and Jonathan Winton are also keen on financial and industrial companies, with the former clearly expected to benefit from the new era of global rising interest rates.

The £911 million trust had 30% of assets invested in financial companies towards the end of last year compared with its FTSE All-Share benchmark index weight of 22.1%, with five such companies featuring in the top 10 holdings, led by insurer Aviva (LSE:AV.) and banking group NatWest (LSE:NWG). Among industrial companies, Serco (LSE:SRP) is the trust’s largest holding, with the sector representing 20.9% of assets compared with just 10.8% for the index.

As the managers recently pointed out: “After years of being relatively unloved, the UK market started 2022 looking good value, and now looks even cheaper.” Despite recent strong performance the trust’s shares trade on an appealing discount to NAV of -7%.

Elsewhere, there were superior returns compared with respective peer groups from JPMorgan Emerging Markets (LSE:JMG), private equity specialist Pantheon International (LSE:PIN), global pick Bankers (LSE:BNKR) and the capital preservation-minded Capital Gearing (LSE:CGT).

The portfolio’s UK equity income pick, Finsbury Growth & Income (LSE:FGT), has had a choppy year to say the least, which is not surprising considering that the top 10 holdings in the £1.8 billion trust represent more than 80% of assets.

Despite a poor period of performance which has seen the trust fall to a small loss over the past three years, manager Nick Train clearly has faith in his ability to steer the trust back to previous glories. He has purchased another 477,000 shares in the trust since the end of last May, taking his holding to 2.3% of issued share capital. At a closing price of 856p on Thursday 12 January, Train’s holding was worth £41 million (plus change).

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Adventurous tips

The performance table shows a near-mirror image of the third quarter, with European and UK laggards leaping to the top of the table in the fourth quarter, at the expense of the portfolio’s overtly growth-focused trusts.

Top contributors to the portfolio’s 3.6% gain over the last three months of 2022 were Montanaro European Smaller Companies (LSE:MTE) (share price total return 26.2%), UK smaller companies specialist BlackRock Throgmorton Trust (LSE:THRG) (up 15.8%) and Dunedin Income Growth (LSE:DIG) (up 11.8%).

The Montanaro trust pursues a “quality growth” strategy and invests in around 50 continental European companies that have a median market capitalisation of just over £2 billion. This strategy has included a strong focus on environmental, social and governance (ESG) factors for many years. It results in a forecast return on equity from the trust’s portfolio holdings of 15.1% for 2023, with earnings per share growth of 10.1% and a negative debt to equity ratio (-1%).

Despite the performance uplift in the fourth quarter, shares in the £261 million trust were down -38% over the year, but are up 23% over three years and a commendable 72.4% over five. As at time of writing (8 January), shares trade at a -8% discount to net asset value (NAV).

Dunedin Income Growth shares a strong focus on sustainable and responsible considerations. The £445 million trust ranks among the best performers in the 22-strong UK equity income sector over three and five years, although lags a little over one year. Over the past two years, the trust’s shares have traded close to NAV, with a discount of around -1%.

Of its 33 holdings, AstraZeneca (LSE:AZN), Unilever (LSE:ULVR), TotalEnergies (LSE:TTE), Diageo (LSE:DGE), RELX (LSE:REL) and SSE (LSE:SSE) accounted for 42% of assets at the year end.

Its annual dividend yield of 4.6% (paid quarterly) is underpinned by revenue reserves that amount to over a year of the previous year’s total dividend, which has grown by an average annual rate of 2% over the past five years.

Dunedin Income Growth was the third-best performer amongst adventurous constituents, with BlackRock Throgmorton taking second. The welcome 15.8% bounce in the fourth quarter of 2022 for the latter, which is a UK smaller companies specialist, did little to improve its comparative performance over the past year. But it is notable that investors appear to be keeping the faith, as the shares trade at a miserly -3.6% discount to NAV, compared with an average -11% for the 24-strong UK smaller companies sector.

The longer-term record for the £617 million trust is surely something to behold, with an average annual return of more than 23% over 10 years, which is unmatched by AIC-member trusts in this sector. 

Elsewhere, Spencer Adair and Malcolm MacColl of the Baillie Gifford-managed global growth-focused Monks (LSE:MNKS) have been engaged in a “proactive and ruthless portfolio-weeding exercise” of the £2.25 billion trust, with a close focus on holdings that demonstrate “superior resilience, quality and growth characteristics”.

The trust’s interim report (to 31 October) also revealed that it has since received £173 million in assets, following the liquidation of The Independent Investment Trust, from investors who elected to rollover their shares into Monks. 

Monks' shares trade at an historically elevated -10% discount to NAV and the trust has gearing of just under 8%, slightly higher than Baillie Gifford US Growth (LSE:USA), the portfolio’s worst performer over the quarter (-16.2%) and the year (-52.8%).

Adventurous tips soar – and stumble*

% share price total return and AIC sector quartile rank after:
NameSector (no. of members)3 mthsRk6 mthsRk1 yearRk3 yrsRk5 yrsRk
Montanaro European Smaller CosEuropean sm cos (4)26.2113.51-38.0423.0272.41
BlackRock ThrogmortonUK smaller cos (25)15.829.11-38.34-10.2334.71
Dunedin Income Growth UK equity income (23)11.829.22-6.4413.5140.71
Mobius ITGlobal emerging mkts (10)9.6115.71-12.3258.71
NB Private Equity Partners Private equity (20)3.6310.41-9.7249.7187.31
Pacific Horizon Asia Pacific (6)0.24-4.04-32.5478.4186.61
Baillie Gifford Shin Nippon Japanese smaller cos (6)-0.648.22-30.54-14.53-13.74
Monks ITGlobal (14)-2.542.03-31.03-0.8325.13
Allianz Technology Technology & media (4)-5.631.02-40.4427.5179.61
Baillie Gifford US GrowthNorth America (9)-16.24-1.54-52.845.04
IT adventurous portfolio 3.65.8-27.42.420.5

Notes: * Holdings ranked by three-month performance. Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 31 December 2022.

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

Please note discounts to net asset value (NAV) and yields refer to prices as at 8 January 2022 unless otherwise stated.

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.

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