Despite Blighty’s recent outperformance, there are potential bargains among UK equity investment trusts.
Patriotism is sometimes said to be the last refuge of scoundrels but investors whose priority is income with capital preservation have good reason to consider 'buying British'.
Extreme uncertainty about the future is souring the appeal of 'jam tomorrow' stocks and making those that pay us something today seem even more appetising than they were yesterday. Dreams of capital gains can disappear in a puff of smoke - or a bit of bad news from far away - but dividend income pays us to be patient.
Yes, I know I have been saying that for years - because this investor's main aim is to fund retirement, rather than try to shoot the lights out with short-term gains - but it is nice to watch the crowd beginning to catch up. In fact, it is more than 'nice' because we can see it reflected in rising valuations.
For example, British shares - which tend to place a high importance on paying dividends - have coped with fears of war much better than overseas rivals. To be specific (prior to the market open this morning), even after Russian tanks rolled into Ukraine this week, the FTSE 100 index is up 13% over the last year, compared to America's blue-chip benchmark, the Dow Jones Industrial, which is up 8%, and New York’s technology index. The Nasdaq is barely positive at 0.1% over the same period.
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Despite Blighty’s recent outperformance, investment trusts in the UK All Companies sector trade at an average discount to net asset value (NAV) of 6.2%. In contrast, the average discount across all corporate members of the Association of Investment Companies (AIC) is just 4% lower than NAV.
What about total returns? Aurora (LSE:ARR), a £198 million investment trust managed by shrewd stock picker Gary Channon, leads the AIC UK All Companies sector over the last year with an impressive 25%. Looking under the bonnet, ARR has an eclectic mix of assets led by Frasers Group (LSE:FRAS) - which owns Sports Direct and House of Fraser among other retailers - then its own holding company, Castelnau Group, followed by more familiar names such as easyJet (LSE:EZJ), Barratt Developments (LSE:BDEV) and Ryanair (EURONEXT:RYA).
Well, if this week’s end of Covid lockdown means we do start travelling again, both those airlines offer plenty of scope for further recovery. You certainly can’t accuse Channon of covertly hugging an index.
Second in this sector over the last year is Fidelity Special Values (LSE:FSV), a £1.1 billion giant, managed by Alex Wright and Jonathan Winton, which has rewarded shareholders with a total return of 24%. Its biggest single asset is the Fidelity Institutional Liquidity Fund (sterling), which might disappoint shareholders hoping for more ambitious asset allocation or reassure those who like a manager who can keep some of his powder dry for opportunities in future. FSV’s other big holdings include the insurer Legal & General (LSE:LGEN), oil and gas giant Shell (LSE:SHEL) and another insurer Aviva (LSE:AV.).
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Third and - to be candid - rather a long way behind, stands JPMorgan Mid Cap (LSE:JMF) with total assets of £338 million, managed by Katen Patel and Georgina Brittain, where shareholders - including your humble correspondent - are only around 4% wealthier than we were a year ago. But I remain hopeful about the medium to long-term outlook for underlying assets including the specialist publisher Future (LSE:FUTR), household goods retailer Dunelm (LSE:DNLM) and the self-descriptive Pets at Home (LSE:PETS); all three being beneficiaries of more people spending more time at home.
This triumvirate of leading UK All Companies investment trusts deliver initially modest dividend yields of 0.22%, 2.25% and 2.63% respectively. However, while ARR shareholders’ annual income has collapsed by 32% over the last five years, FSV’s has soared by nearly 13% and JMF’s has risen by more than 7%. If the latter rate of ascent is sustained - which is not guaranteed - shareholders’ income would double in a decade.
The problem remains disappointing medium to long-term performance by British shares. To return to where we began, the Nasdaq remains 132% higher than it was five years ago, while the Dow delivered 64% and the Footsie lagged far behind with a modest total return of just 4% over the same period.
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Meanwhile, investment trusts in the UK All Companies sector generated average total returns of 46% over the last five years and 3.6% over the last 12 months with a current yield of 2.3%. For comparison, investment trusts in the UK Equity Income sector delivered total returns of 33% and 15% over the same periods with an average yield of 3.7%.
The latter sector’s average discount to NAV of 1.8% is less than compelling for this bargain-hunter. I don’t currently hold any investment trusts in this sector because my wish to avoid its historical reliance on tobacco was what got me buying individual companies’ shares in the first place.
Never mind the past, or this former addict’s peculiar aversion to the tobacco racket. Investors seeking healthy returns and an equity-based safe haven from Russia's military assault on Ukraine could do a lot worse than ‘buy British’.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
Ian Cowie is a shareholder in JP Morgan Mid Cap (JMF) as part of a globally diversified portfolio of investment trusts and other shares.
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