Interactive Investor

How I pick investment trusts – and the ones I'm never selling

23rd December 2022 08:23

by Sam Benstead from interactive investor

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Peter Hewitt, who manages two investment trusts made up of investment trusts for Columbia Threadneedle, explains how he runs his portfolios, including how many trusts to own and how to interpret discounts. He also explains his biggest trades of 2022, including his latest thinking on Scottish Mortgage (LSE:SMT), and reveals the trusts that he will never completely sell out of.

Sam Benstead, deputy collectives editor, interactive investor:Hello, our guest today is Peter Hewitt, manager of the CT Global Managed Portfolio Trust, which is an investment trust of investment trusts and comes in both income and growth versions. Peter, thank you for coming into the studio.It's great to have you here. Can you please explain to me what the differences are between the growth and the income trusts and how you put together a portfolio of investment trusts?

Peter Hewitt manager of the CT Global Managed Portfolio Trust: There is a growth portfolio and an income portfolio within the one trust. So, they are separate. They do have one or two things in common, which I'll come on to explain later. But, they are quite separate. The growth portfolio is focused on capital growth. It doesn't pay a dividend. So, it's capital only, whereas the income portfolio does. It's got a yield of around about 5.5%. And it aims to give you the income, growing income, but also some capital growth as well. So hopefully, a decent total return, is the objective and in both cases, the benchmark is the FTSE All-Share index. So, that gives you a bit of a guide as to how we're measured.

Sam Benstead: How are the different portfolios managed and how many investment trusts are you investing in?

Peter Hewitt: Both are about 40 stocks at the moment, growth is 41 and income 39, or something. I'm afraid there's no real science behind that. It's just that that's about as many as I can keep tabs on and meet, visit and analyse. I also think I don't want to own 100. I think [if] you start proliferating lots of trusts, [there are] very small positions at the bottom of the portfolio. Similarly, I don't want just eight or 10 trusts, I think that could be too much concentration. So, I think 40,[and] if you think about it, that should be each portfolio size [at] about 2.5%, [but] it's not. Some of the top 10 are up at 4% or 5%. Some of the smaller ones, at 1%/1.5% ,but I've got none that are really small holdings, so 40 in each roughly.

Sam Benstead: And how do you pick investment trusts? You've been doing this for a long time, what are the tricks of the trade?

Peter Hewitt: Well, to be honest, there's no real tricks of the trade. I'm afraid, a lot of it is just graft. And so, for example, in all the investment companies that I've got holdings in, I pay quite a lot of attention to the annual report and the interim report. Also, factsheets or commentaries that managers may put out.

But, the annual report is important, it carries a lot of useful information, both from the chairman and the manager, and you'll get the whole portfolio. You can also look at the balance sheet. If it's geared, what's the nature of the debt, the duration, the cost and fees, how are they charged? How they allocated? What's the revenue reserve? It could be important for dividend-orientated trusts and a host of other things. So, that is something that anybody could do, but I obviously spend quite a bit of time doing that.

One of the of key advantages of being what you might say an institutional investor in trusts, is that I do get access to the fund manager. I try and meet them all, and face to face, once a year, sometimes more often, if there's important things going on. So, for example, yesterday I saw the manager of Temple Bar (LSE:TMPL), which is a UK equity income trust, that I took a shareholding in back in February when I first met the manager. So that was a top-up meeting. A lot has changed in the UK equity market since then. Has their portfolio changed? What's their views, etc? And from that, when you do a lot of manager meetings, you can glean some important information. Obviously, what's the investment style? I mean, are they changing it? Have there been big changes in the portfolio? There's a whole series of questions that you can ask, that are quite useful and help me come to a conclusion. Should I still be holding it? Should I be considering selling it? Or if it's a trust I don't hold shares in, is it one that we potentially should [hold]? So, that's the sort stuff, that's your day job, really.

Sam Benstead: And do you pay much attention a trust’s discount? This is where you can buy a portfolio for less than its net asset value as something that you think is maybe an attractive entry point if you see a large discount open up.

Peter Hewitt: Yes, it is. And it is an important factor to look at with trusts. But, it's one of the important factors, Sam. It's not the most important. By far, the most important is how the assets will perform over the longer term. And if you can kind of form a view of that, that's what really generates the performance. A discount? I mean, I like to buy a good trust with an experienced fund manager, investing in an interesting area at a discount. But if the discount is just narrow or maybe it's trading at par, that is about its asset value. That won't put me off buying it. If I like the investment story and the individual fund manager is going to generate some interesting returns. So, a discount or a premium are factors, but it's not the dominant factor.

Sam Benstead: And did you spot any opportunities regarding discounts this year? Trust discounts have widened a lot. Did you see any opportunity to pounce and pick up shares that you've always wanted to get your hands on?

Peter Hewitt: Well, yes, I mean, for most of this year I've been a buyer of UK trusts. I try and build a bit of a framework of my thoughts on markets, inflation, interest rate, bond yields, all of that. I'm part of the multi-asset team at Columbia Threadneedle, and they have big macro meetings. So, how attractive is Japan, America, whatever? And the UK stock market is valued quite attractively, just now. In fact really since the Brexit referendum in 2016, it’s been de-rating, against most other markets and that's now got to quite an extreme stage. So, there's some good value there.

And I have been gradually picking up UK trusts over this year, those orientated more towards the FTSE 100, which have done quite well. Those with a mid and small-cap bias have not done as well, because the mid-cap index is down about 25%, as is the Nasdaq in the US and many European stock markets as well. The FTSE 100 is flat to slightly down and that's courtesy of, I'm going to say, 12 or 15, maybe 20 mega-cap companies that everybody knows and loves. BP (LSE:BP.), Shell (LSE:SHEL), some of the banks, pharmaceuticals, and they've actually performed quite well for differing reasons and so the index looks like it's doing OK. But the rest of the UK market and to be honest with you, the economy, has not been doing that well. But that's been the area I've been gradually building up.

Sam Benstead: And which trusts have you been buying to access those big UK stocks?

Peter Hewitt: Well, in the growth portfolio, I've been buying Fidelity Special Values (LSE:FSV), which I think is an interesting all-cap fund. It's performed quite well. I’ve been adding to Law Debenture (LSE:LWDB) and Lowland (LSE:LWI). They are two holdings that I have in growth and income. They've both got good dividend yields, which are rising. But I think they've got some quite good capital upside as well.

Others in the growth portfolio I've been buying have been Aurora (LSE:ARR), Henderson Opportunities (LSE:HOT) and one or two other UK trusts. In the income portfolio, I've been adding to City of London (LSE:CTY), I've bought holdings in Temple Bar and also Merchants Trust (LSE:MRCH), and that's been funded by some overseas trusts I've been lightening up on. And I would say it's partially worked, but that's been the area I've been adding to this year so far.

Sam Benstead: Are there any trusts that you held for a very long time in the portfolio that you like to own, regardless of the macroeconomic conditions and you just love the manager and the asset class perhaps?

Peter Hewitt: Yes is the answer. And I think this comes on to quite an important point that I want to make. Yes, we listed in April 2008, and there's a number of trusts I bought in the first week that I still hold, and a lot of them I didn't buy or sell for a very long time. Theses tend to be ones that are focused on what I would call secular growth opportunities. So, typically a technology trust, Scottish Mortgage (LSE:SMT) [is the] best known, some of the healthcare trusts as well. And I think over the long run, they will deliver some interesting returns, and they have done. In the past year, they have been not so good. And Scottish Mortgage is down 50% from its peak really since last autumn, I would say. And that's due to a change in market circumstances.

So, what have I done? I've kind of top-sliced a third, a half, of these positions. I still hold all these trusts Allianz Technology (LSE:ATT), Biotech Growth (LSE:BIOG), Polar Capital Technology (LSE:PCT), they're just further down the portfolio. And, Sam, I wanted to see, in the case of Scottish Mortgage, which is the best-known trust, and it's down a lot this year. Scottish Mortgage is roughly seven times the book cost in the portfolio and OK, that's over 14 years. You had a fantastic decade, but these types of trusts, I think are the trusts to hold on to for the long term, you will make many times your original investment, whereas with some of the more value-orientated vehicles, you're just never going to get that type of return. They can perform well, maybe for a year or two years, but they're not invested in long-term growth companies. So, it's just worthwhile, from a fund management viewpoint, it's important for me not to say goodbye to these trusts because they're run by good managers, and they've got great long-term prospects.

Sam Benstead: Peter, thank you very much for coming in.

Peter Hewitt: Thank you.

Sam Benstead: And that's all we have time for. You can check out more Insider Interviews on our YouTube channel where you can like, comment, and subscribe. See you next time.


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