Interactive Investor

Ian Cowie: the UK investment trust I bought for my ‘forever fund’

29th April 2021 15:52

Ian Cowie from interactive investor

Our columnist has snapped up a trust that invests in domestically focused shares including Pets at Home.

Never mind, for a moment, all the noise about who paid for Boris and Carrie's kitchen because something far more interesting is cooking in the City of London. British investment trusts are bouncing back strongly after years of being shunned since the Brexit vote.

That fateful ballot on June 23 2016 dented international investors’ confidence in the AIC’s UK All Companies sector, but one-year returns have now caught up with the North America sector. Both delivered a remarkable 61% over the last year. UK trusts also beat Europe and Japan average performances of 37% and 53% respectively over the same period, according to Morningstar.

True, we continue to lag behind the American and Japanese averages over the last five years, and our relative returns against all three global rivals remain dire over the last decade. But by the time Britain’s bounce-back can be seen in the medium to long-term statistics, it will be too late for buyers to benefit.

Fortune often favours the brave and teases the timid. Despite all the obvious risks of stock market investment, you have to be in it to win it.

For example, it is early days yet but I am glad I invested in JPMorgan Mid Cap (LSE:JMF) at 1,165p per share in mid-March when pessimism had pushed its discount to net asset value (NAV) out to 12% and pumped its dividend yield up to 2.6%. For a UK All Companies trust with such an interesting portfolio of underlying assets - including some shares I had looked at closely but foolishly failed to buy - that felt like a bargain to me.

Fortunately, Mr Market seems to be coming round to share my optimism with JMF currently trading at 1390p, slashing the discount to 2.7% and squeezing the yield down to 2.1%. With this trust’s top 10 holdings including the cult toy-maker Games Workshop (LSE:GAW), the specialist magazine publisher Future (LSE:FUTR), the self-descriptive Pets at Home (LSE:PETS) and the homeware retailer Dunelm (LSE:DNLM), I think there might be further to go.

As an investor whose priority is preparing to live off the income from my share portfolio, I was also impressed by JMF’s joint fund managers’ Georgina Brittain and Katen Patel - who have been at the helm since 2012 and 2013 respectively - achievement in raising dividend payouts by an average of 8.1% per annum over the last five years. If that rate of ascent is sustained - which is not guaranteed - shareholders’ income would double in less than nine years. 

Three UK All Companies investment trusts have done even better than JMF in terms of total returns over the last year. Henderson Opportunities (LSE:HOT) shot the lights out with 115%, Artemis Alpha Trust (LSE:ATS) came second with 82% and Fidelity Special Values (LSE:FSV) delivered 74%. Their dividend yields are 1.7%, 1.2% and 2.1% respectively.

All three remain reasonably priced with HOT and ATS trading at discounts of 1.4% and 6.8% respectively, while FSV’s modest premium of 1.9% reflects rising confidence about the outlook for the UK.

Better still, there is no need to take my word for this. The investment bank Goldman Sachs was the latest to become bullish about Britain this week when it predicted our gross domestic product (GDP) - a measure of economic output - would ‘rebound strongly’ and rise more rapidly than America’s over the next year.

A spokesman for the Wall Street bank explained: “The UK economy is rebounding sharply from the Covid crisis. The April purchasing managers’ index (PMI) - an indication of confidence - was much stronger than expected in the UK, with the services PMI moving strongly further into expansionary territory.

Given recent upward revisions to real GDP, our 2021 forecast is now at a striking 7.8% for 2021, above our expectations for the US.”

No, I wouldn't want to lean too heavily on the forecast of a firm famously described as “a vampire squid wrapped around the face of humanity”. But the key thing here is that you can’t accuse the New York-based bean counters of being prejudiced by patriotism.

An even more fundamental point is that the fears of Remoaners - like me - that Brexit would be very bad news for our economy have proved wrong to date. So, alongside UK All Companies’ investment trusts’ average dividend yield of 2.1% - which is substantially higher than income paid to most investors in America, Europe or Japan – today’s current depressed valuation of UK equities offers bargains for the brave.

Never mind the politics; investors should keep an eye on the economics. Whatever we think of the Boris and Carrie show, British shares are priced to go.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in JPMorgan MidCap (LSE: JMF) as part of a diversified global portfolio of investment trusts and other shares.

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.

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