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The best multi-asset investment trusts on the market

Well-suited to multi-asset strategies, we identify the leaders in this increasingly popular field.

27th September 2019 15:36

Callum Stokeld from Kepler Trust Intelligence

This content is provided by Kepler Trust Intelligence, an investment trust focused website for private and professional investors. Kepler Trust Intelligence is a third-party supplier and not part of interactive investor. It is provided for information only and does not constitute a personal recommendation.

Material produced by Kepler Trust Intelligence should be considered a marketing communication, and is not independent research.

Investment trusts are particularly suited to multi-asset strategies. Our research identifies the leaders in this increasingly popular field.

Master of all trades: the best multi-asset trusts on the market

Callum Stokeld is an investment trust analyst at Kepler Trust Intelligence.

Investment trusts are particularly suited to multi-asset strategies. Our research identifies the leaders in this increasingly popular field...

The spice of life is variety. [It's also a curry house in Glasgow, now sadly defunct.] Achieving variety by diversifying your assets has been an innate part of human risk management from time immemorial. Why else did the English Plantagenet kings maintain their claim to the French throne for so long? All investors, however, not just medieval royal families, have to consider how best to diversify the risks to which their wealth is exposed – whether they're managing their own money or doing it professionally.

For regulatory as well as theoretical and philosophical reasons, most UK investors actively seek portfolio diversification. Increasingly, as the advice industry becomes ever more regulated, advisers are making use of multi-asset, multi-manager products as a one-stop shop, especially as the asset management industry has become increasingly attuned to the opportunities and benefits of scale they can offer.

Yet at this particular point in time, in an economic and financial environment unlike any we have experienced in the modern era, how exactly to achieve meaningful diversification is an increasingly difficult question.

American economist Harry Markowitz is generally credited with developing and popularising the modern approach to diversification, as part of his doctoral thesis in 1952. Markowitz's 60/40 equity/bond portfolio quickly became a staple of retail investor portfolios, and for many years equity and bond portfolios built around this basic concept have been highly successful for investors.

Over the last thirty years in particular, the risk parity model, pioneered by investor and philanthropist Ray Dalio and his Bridgewater All Weather hedge fund, has achieved enormous success. The targeted aim of this model is a more equal split of realised risk/volatility between asset classes, and it is built on a more sophisticated version of the staple equity/bond approach.

The success of this diversified approach in providing superior returns while also dampening volatility can be seen from the historic returns. The graph below shows returns from a 60/40 portfolio in the US since 2003, rebased monthly. Returns are shown on a log scale to reduce recency bias.

Yet there are signs that the fundamental basis of the traditional equity/bond approach to diversification is breaking down. The risk parity model, like other simpler approaches to stock/bond portfolio management, explicitly assumes an inverse correlation between the returns on bonds and equities.

What's more it also assumes a positive 'carry' on bond holdings to offset any losses in more adverse conditions for fixed income. With over $14 trillion of debt securities globally now offering investors a negative yield – and with equity markets displaying a preference for (within reason) weaker economic data and the implicit monetary easing that goes with it – even Mr Dalio has been forced to question the future effectiveness of the risk parity model.

With investors increasingly turning to specialist and uncorrelated assets in order to achieve greater diversification, we believe closed-ended multi-asset funds deserve greater consideration than they have received to date. There are a number of trusts with highly differentiated approaches which are able to invest in more esoteric and illiquid markets with greater freedom than their open-ended peers. Furthermore, they can also offer the opportunity to pick up assets on a discount to NAV, with consequent potential to boost returns.

Higher conviction

It is notable that the multi-asset investment trust sector contains a number of high conviction plays, where managers use the flexibility of the structure to express punchy economic theses. Ruffer (LSE:RICA), Personal Assets (LSE:PNL) and Capital Gearing (LSE:CGT), for example, all seek to avoid the ravages of inflation.

The managers of these funds hold positions they expect to compound over time with some immediate drawdown risk, but without worrying too much about the effects of NAV drawdown on the investor base over one or two months.

The closed-ended multi-asset universe tends to contain a more absolutist approach to investment objectives, with a greater focus on specific objectives and fewer external hindrances on them.

Yet, conversely, it also tends to enjoy greater asset allocation freedom to enact these principles. This is facilitated in part by having fewer concerns about flows of assets under management, with a fixed capital base often allowing managers to balance longer-term positions, where significant capital appreciation or income generation is anticipated, against short-term market movements.

Managers of closed-ended products will undoubtedly have concerns about position sizing, as mark-to-market pricing moves can have sharp adverse effects on the gross value of positions in volatile markets. But the fixed capital base makes it easier to 'look through' short-term volatility.

Investment strategies are not one-size-fits-all. Open-ended multi-asset vehicles are typically categorised by the level of equity exposure allowed, often supplemented by rules on minimum/maximum levels of exposure to fixed income, and by foreign exchange restrictions.

Most firms sensibly impose further internal restrictions to allow for liquidity should they see significant flows in either direction, thereby limiting exposure to illiquid strategies and asset classes, such as infrastructure.

On the other hand, multi-asset investment trusts tend to operate with a determined return profile outcome. In these cases asset allocation is a function of how the manager best perceives their ability to generate this profile from the likely available returns from different assets, and is not designed for relative outperformance within regulatory constraints.

For example, the Ruffer Investment Company seeks to achieve a capital and income return of twice the Bank of England base rate; in doing so, they can hold assets likely to prove vulnerable to short-term price volatility (such as Japanese shares) but also have significant flexibility to allocate funds to alternative strategies in order to achieve portfolio ballast.

Access to diverse underlying strategies

There is a body of evidence suggesting that early-stage products, with lower levels of assets under management, have a greater tendency to outperform – with greater degrees of outperformance – than more established funds.

And while an inverse correlation between the price of bonds and equities persists, the traditional model of diversification with bonds and equities is probably still appropriate, particularly within a standard industry risk framework. However, asset markets have displayed significant fluidity over the course of history, and it is dangerous to consider the current environment to be a permanent steady state.

So, in recognition that bonds are currently expensive relative to historical norms – and that in times of stress bonds and equities sometimes move together – many investors are turning to alternatives to fixed income. These include sectors as diverse as music royalties (Hipgnosis Songs (LSE:SONG)), aircraft leasing (Doric Nimrod leasing funds), infrastructure (3i Infrastructure (LSE:3IN)) and property.

Some of these sectors, such as commercial property, are already relatively well-established asset classes. Others, however, are relatively new forms of securitisation. And while the operating business case is often familiar and well understood, there is rarely any precedent for predicting the behaviour of these securities in different market conditions.

The fact that volatility is increasingly regulatory shorthand for risk can make these alternative assets more challenging to hold for investors in open-ended products seeking to understand how their portfolio will behave in the short-term in different market environments.

Closed-ended managers often wish to understand this too, and if they believe they have a good understanding of how the price of a security will trade, they may be more inclined to hold a greater weighting in it, which they will look to trade more actively.

However, where the managers have a strong conviction in the underlying business, they have greater flexibility to overlook short-term share price fluctuations; resting assured that ultimately they will be able to collect their cash flows without being concerned about their capital pool diminishing as a result of outflows, and thus necessitating asset sales.

The Henderson Alternative Strategies Trust for example, looks to make full use of its trust structure in this regard, often taking small, exploratory stakes in innovative and new products where the managers have faith in the underlying operating model, but where there is a limited track record of the security’s performance in different market environments.

Liquidity

The recent travails of some open-ended products with regard to liquidity (most notably the LF Woodford Equity Income fund, and open-ended commercial property funds in 2016) have thrown into sharp relief the importance of an appropriate structure to match the liquidity profile of the assets in which the fund is invested. When open-ended products have inflows, liquidity is easily manageable.

But should these flows reverse, managers can find themselves forced to exit their more liquid positions in order to match the flows, causing a concomitant rise in their level of exposure to less liquid assets. Should this process reach critical mass, they will either be forced to temporarily suspend trading, or to accept large discounts on the sale of some less liquid assets.

A closed-ended structure does not avoid this risk entirely. If there is a severe market correction, for example, the equity holdings of the trust may sell off sharply; probably even more sharply than the recorded drawdown in less liquid assets, which is reported only periodically for NAV purposes. Yet, crucially, the closed-ended structure puts the choice in the hands of the manager; if they are forced to accept a discount to dispose of an illiquid asset, they can reasonably judge whether this adverse event is outweighed by the increased upside potential offered elsewhere.

Furthermore, without the regulatory strictures on equity and bond exposure which apply to most open-ended multi-asset products, the managers will also not be forced to liquidate positions solely to meet regulatory criteria.

A good illustration of this feature is the gold exposure of the Personal Assets Trust. Where previously the managers had held relatively liquid ETC products for their gold exposure, they have for several years opted to hold physical gold bullion instead.

They made this decision to switch after ascertaining that the cost of safe storage was lower than the management fees being incurred on exchange-traded products.

As a structural position within the portfolio, the managers are happy to maintain this exposure, and can manage their risk position without concern about the need to sell the holding unless they are satisfied with the price offered. By contrast, in their open-ended sister product, they have opted to retain the readily liquid ETC exposure rather than switching to physical bullion.

This investment approach also allows managers to build higher conviction positions where they believe there is a compelling case to do so. As an example, the Miton Global Opportunities (LSE:MIGO) is able to hold a 7.1% position in Alpha Real Trust (LSE:ARTL), where the managers believe there is significant upside and a clear path to value realisation.

However, a significant proportion of the Alpha Real Trust is held by the management team, who often undertake significant buyback activity.

Over time this further reduces the number of shares trading on a daily basis. Miton run a very similar open-ended equivalent to MIGO, but while internal risk management ensures that they are still able to access opportunities such as Alpha Real, they also have to acknowledge the liquidity risk it represents, and consequently the holding is much smaller (3.7% in the open-ended Miton Worldwide Opportunities fund, as against 7.1% in MIGO).

With infrastructure becoming an increasingly popular way for investors to access reliable income streams, the closed-ended structure can also facilitate greater exposure to what are relatively illiquid assets: the JPMorgan Multi-Asset (LSE:MATE) for example, allocates around 12% of NAV to infrastructure. The managers of this trust noted that the trust structure, with its attendant ability to access less liquid opportunities, was seen as a relative advantage to similar open-ended products.

Gearing and its implications

Gearing is generally considered a structural advantage of investment trusts, and offers managers in the closed-ended structure the ability to worry less in general about cash drag when bullish. Should buying opportunities arise from shorter-term market volatility, they have debt facilities they can access as opposed to needing to sell another holding to finance the purchase.

Furthermore, by investing in trust products that are themselves geared, managers can maintain more upside exposure even if they are more cautious on the tactical outlook and wish to hold cash. We spoke recently with Peter Hewitt who runs the BMO Managed Portfolio Growth (LSE:BMPG), which offers both Growth and Income share classes.

He noted that, whilst he did not have any gearing on the Growth portfolio he managed, many of the underlying equity managers would have. Thus, while he himself may be holding 12% cash, his risk exposure to equity markets is not necessarily diminished.

His top holding (Monks (LSE:MNKS)), for example, is itself 6% geared. Accordingly, his 4.3% position is effectively a 4.56% position. This also holds true for other diversifying positions in the portfolio: for example RIT Capital Partners, which is 11% geared at present, thus from a 3% position becomes a 3.33% risk exposure.

Research evidence suggests that elevated beta does not effectively provide superior long-term returns, contrary to the capital asset pricing model (CAPM). However, it is axiomatic that allowing managers to run, say, 110% exposure to a rising market should ensure they outperform. If risk is spread appropriately, an innately leveraged portfolio should offer advantages, accentuated if the leverage facilities are then used appropriately themselves.

Yield

Tangential to liquidity and gearing is the ability to generate superior yield through the use of leverage, along with greater exposure to higher yielding illiquid products.

Certainly investment trust issuance has been heavily weighted towards alternative sources of returns. However, the attractive yield profiles of many of these alternative products can subsequently work against liquidity, with many investors choosing to buy and hold due to the attractive dividend streams.

In effect, the access provided by an open-ended product necessitates a decision between yield and liquidity. Closed-ended products, by contrast, can take advantage of the additional yield opportunity.

The ability to access leverage can also been used to boost income streams. While there is currently no gearing in place on it, the BMO Managed Portfolio Income (LSE:BMPI) has often accessed debt facilities to boost yield generation. The trust is able to borrow at a lower rate than it can generate from what the manager considers to be well-covered, reliable dividend streams.

Kepler Partners is a third-party supplier and not part of interactive investor. Neither Kepler Partners or interactive investor will be responsible for any losses that may be incurred as a result of a trading idea. 
 

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.

Important Information

Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only, and is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.

This report has been issued by Kepler Partners LLP solely for information purposes only and the views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. If you are unclear about any of the information on this website or its suitability for you, please contact your financial or tax adviser, or an independent financial or tax adviser before making any investment or financial decisions.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. Persons who access this information are required to inform themselves and to comply with any such restrictions. In particular, this website is exclusively for non-US Persons. The information in this website is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of US Persons.

This is a marketing document, should be considered non-independent research and is subject to the rules in COBS 12.3 relating to such research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research.
No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.

This is not an official confirmation of terms and is not to be taken as advice to take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.

Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm's internal rules. A copy of the firm's conflict of interest policy is available on request.

Past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that Independent financial advice should be taken before entering into any financial transaction.

PLEASE SEE ALSO OUR TERMS AND CONDITIONS

Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.

Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority.

Kepler Partners is a third-party supplier and not part of interactive investor. Neither Kepler Partners or interactive investor will be responsible for any losses that may be incurred as a result of a trading idea. 
 
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.

Important Information

Kepler Partners is not authorised to make recommendations to Retail Clients. This report is based on factual information only, and is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.

This report has been issued by Kepler Partners LLP solely for information purposes only and the views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment. If you are unclear about any of the information on this website or its suitability for you, please contact your financial or tax adviser, or an independent financial or tax adviser before making any investment or financial decisions.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. Persons who access this information are required to inform themselves and to comply with any such restrictions. In particular, this website is exclusively for non-US Persons. The information in this website is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of US Persons.

This is a marketing document, should be considered non-independent research and is subject to the rules in COBS 12.3 relating to such research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research.

No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.

This is not an official confirmation of terms and is not to be taken as advice to take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.

Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm's internal rules. A copy of the firm's conflict of interest policy is available on request.

Past performance is not necessarily a guide to the future. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that Independent financial advice should be taken before entering into any financial transaction.

PLEASE SEE ALSO OUR TERMS AND CONDITIONS

Kepler Partners LLP is a limited liability partnership registered in England and Wales at 9/10 Savile Row, London W1S 3PF with registered number OC334771.

Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority.

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.