Are management changes paying off? Jennifer Hill scrutinises a trio of popular trusts.
Although it is early days, we have analysed how three investment-trust revamps are faring, and have asked analysts how optimistic they feel about the outlook.
Schroder UK Public Private Trust
When Neil Woodford launched Woodford Patient Capital in April 2015 to invest primarily in unquoted companies it was the most successful investment trust launch at the time, raising £800 million. “Five years on and investors have had their patience severely tested,” says Gavin Haynes, co-founder of Fairview Investing.
Woodford’s lack of experience in private equity contributed to his downfall and the board started looking for a new manager last summer. Schroders took over on 13 December 2019 and the trust was renamed Schroder UK Public Private Trust (LSE:SUPP).
The attractions for Tim Creed and his co-manager Ben Wicks were twofold – the belief that the trust “contained a number of good companies that, with the right help, could be great companies” and that “an investment trust structure is one of the best ways for retail investors to access private companies”. These account for 90% of the portfolio.
Schroders’ private equity, public equity, risk, governance, ESG (environmental, social and governance), operations and data insights teams have been helping portfolio companies and Creed says they are “pleased with the progress”.
The managers raised £7 million from investment disposals in the first quarter. Shareholders who invested at launch are still nursing losses of 70% (as at the time of writing in early September), but Creed believes efforts will help to narrow the discount and grow the net asset value (NAV).
Is it a poisoned chalice or turnaround tale? Much, says Numis analyst Ewan Lovett-Turner, will depend on the success of a small number of large positions – Rutherford Health, Atom Bank and Oxford Nanopore command 15.4%, 14.1% and 13.1% of assets, respectively.
Almost 70% is in healthcare (58.2%) and technology (10.8%) – listed companies in these sectors have powered ahead amid the pandemic, offering “some optimism” to shareholders in the trust, says Pascal Dowling, a partner at investment trust specialist Kepler Trust Intelligence.
The trust’s last published NAV dates to 31 March. Dowling awaits the 30 June figure, expected later this month, on the basis that it will provide a “much clearer, more up-to-date valuation point against which to measure the current share price and work out whether it reflects an opportunity”.
Stifel rates the trust a “buy” for contrarian investors. Further realisations would reduce gearing of 25%, improve sentiment and help to push the discount to 15 to 20% (more typical for the private equity sector) from a current 35%.
Investec retains a “sell” recommendation. The trust is “highly geared, highly illiquid and highly concentrated” – an “ultra high-risk investment”, says analyst Alan Brierley. “To be candid, with high-quality [private equity] propositions like Pantheon (LSE:PIN) and HarbourVest (LSE:HVPE), why bother?”
Edinburgh investment trust
On 11 December 2019, the board of Edinburgh (LSE:EDIN) announced that James de Uphaugh of Majedie Asset Management would replace Invesco’s Mark Barnett after a long period of significant underperformance due to myriad factors – lack of favour for UK equities and the value style employed, brand damage by Barnett being Woodford’s protégé and stock-specific issues. “Barnett had too many car crashes,” says David Liddell, a director of IpsoFacto Investor.
Majedie lacks a high-profile UK retail presence and the appointment surprised analysts. “We can understand the board’s frustration. That said, we were surprised not to see a formal beauty parade,” says Lovett-Turner.
The new managers – Uphaugh supported by Chris Field as deputy, both co-founders of Majedie – boast 65 years’ experience collectively. They took over on 4 March 2020 in the eye of the Covid-19 stock-market storm, giving them ample opportunity to buy good companies at knockdown prices.
Dowling points to Majedie’s investment philosophy being not dissimilar to Invesco’s with an emphasis on fundamental research, a teamwork-based approach and a preference for lower valuations, which leans toward value as an investment style.
Notable changes to the UK equity income trust are the absence of any in-built style bias, higher conviction and a focus on total returns as opposed to income generation. “Growth”, “value” and “recovery” stocks are typically all held in the new portfolio, which comprises 47 stocks compared to 57 when Invesco managed the trust.
“This should help to ensure that the performance any single holding generates has a meaningful effect, though of course that could work in both directions,” says Dowling.
Another differentiating factor is a commitment to considering ESG factors – “responsible capitalism in Majedie parlance”, says Uphaugh. He gives the example of a new position in mining equipment provider Weir (LSE:WEIR): “[It] has some incredible products in terms of reducing water and energy usage in the mining process, in what are very extreme circumstances.”
James Carthew, head of research at QuotedData, points to the trust’s fairly high weightings to mining, oil and defence businesses appearing “at odds” with rigorous ESG integration. The notable absentee is tobacco, a stalwart of the Invesco portfolio.
Liddell’s analysis shows the trust has marginally beaten the FTSE All-Share index since the portfolio transition was complete in late March. Similar outperformance to the annualised 2.6% achieved on the open-ended LF Majedie UK Equity fund since 2006 could see the shares re-rate from a discount above 10% and “compound gains for investors”, says Brierley. Carthew is less convinced: “It is hard to see what is going to capture the imagination of new investors.”
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Alliance Trust’s (LSE:ATST) overhaul has had longer to bear fruit. It adopted a multi-manager approach to global equities in April 2017. “The trust – once a vast, plodding old thing – is a very different animal today,” says Dowling at Kepler.
Nine underlying equity managers are given the freedom to invest without concern for benchmarks, and each runs a focused portfolio of no more than 20 stocks, which results in a high-conviction approach despite the diversity of 175 underlying holdings.
One of the most “appealing consequences” of this “best ideas” approach, according to Dowling, is that the overall portfolio is style agnostic. “The trust has been able to deliver solid returns during phases of the market when very different types of stock have been in the ascendant,” he says.
Alliance Trust kept pace with peers during the first half of 2019, when growth stocks drove performance, but also did well in the second half when there was a shift to value. In the difficult conditions of 2020, the trust has also fared well relative to peers and its benchmark. In the six months to end-August, it generated NAV total returns of 8%, the fifth highest in the 16-strong AIC global sector and 2% higher than the MSCI All Countries World index, its benchmark.
Its longer-term performance is not nearly as compelling. The trust aims to outperform the index by 2% per year over rolling three-year periods but underperformed by 4.9% in the three years to end-August. It is, however, significantly ahead of its closest competitor Witan (LSE:WTAN), returning 19.7% in NAV terms versus 2.5% over that period.
Mark Atkinson, head of marketing and investor relations at Alliance Trust, points to legacy assets acting as a drag on historic NAV performance. Excluding these, he notes that the portfolio has kept pace with the benchmark despite its performance being largely driven by a narrow group of growth stocks in recent years.
“When market performance becomes less concentrated, we expect to deliver significant outperformance, while shielding investors from excessive volatility through the multi-manager approach,” he says.
Monica Tepes, an analyst at finnCap, is yet to be won over: “I find it hard to have strong conviction that consistent outperformance can be achieved by a portfolio that is very diversified not just by number of stocks, but also by fund manager styles.”
Other analysts are more optimistic. Investec’s Brierley says “solid foundations have been put in place” and expects “greater recognition of the [trust’s] key features to be a catalyst for a re-rating” from a discount that is around 10%.
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