Investment trust tips: adventurous and conservative picks outperform

by Andrew Pitts from interactive investor |

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The portfolio of adventurous choices returned 11% in the third quarter, while the conservative tips also produced more than double the return from the global benchmark.

Investors looking for diversified exposure to UK and global equities with a smattering of more specialised strategies could do worse than look at the investment trust portfolios that were first introduced in Money Observer several years ago, and which are now continued by interactive investor.

Both the conservative and adventurous portfolios were first measured in a portfolio format in August 2014. The adventurous portfolio has gained 131% over that period and the conservative version is up a respectable 85.8%, especially compared to the “home market” index return from the FTSE All-Share of 16.7%.

“Not fair” for comparison purposes, you might say, which is why the more representative FTSE All World, an index that includes both developed and emerging markets, is the benchmark for both portfolios. The global index has returned 97% since August 2014.

Although the conservative portfolio has failed to match that return, this has to be viewed in the context of the lower risks that its 10 constituent trusts take, especially in comparison to the adventurous portfolio. The latter’s 10 constituents are typically exposed to riskier strategies, smaller companies, have more concentrated portfolios and are more likely to be geared.

That means the adventurous portfolio can be expected to generate higher-octane performance when the going is good – which it has been for most of the past six years since launch – but also to stumble badly when investors move into risk-off mode, such as in the first quarter of this year.

To illustrate the point, the adventurous portfolio fell by nearly 25% amid the Covid-19 tumult in the first quarter, before making up all that lost ground in the second quarter as central banks and governments responded with huge injections of monetary and fiscal support. The conservative portfolio lost less in the first quarter – just under 20% – but its gains in the second quarter were of a similar magnitude.

In essence, the adventurous choices typically produce higher highs than the conservative picks, which conversely show lower losses when markets lose their mojo.

At Money Observer, both portfolios were monitored quarterly, with an annual review taking place in July. interactive investor intends to continue this tradition, with the expectation that we can continue to generate meaningful gains. However, please be aware that investment trusts can be subject to higher short-term volatility than open-ended funds, particularly those that do not pursue tight discount control policies (this is where the investment trust issues and buys back shares with the aim of keep the underlying net asset value per share as close as possible to the actual share price).

However, the closed-ended structure and the ability to gear (to borrow in the expectation of making a higher return than the cost of the loan) can also result in longer-term outperformance than open-ended funds. This structure is particularly beneficial in periods of markets stress, because unlike open-ended funds, investment trusts do not necessarily need to sell underlying holdings to meet redemption requests from investors.

In the annual review three months ago, we noted that smaller companies trusts were the star performers, particularly in the second quarter rebound. That has also been the case in the third quarter of this year, which marks the first review after the annual refresh and rebalancing (all 10 holdings are rebalanced to equal weight within the portfolios at each anniversary).

Adventurers amply rewarded

In the adventurous portfolio, three smaller company specialists registered strong gains over the quarter, helping the 10 holdings to post a benchmark-trouncing aggregate return of 11% over the quarter (FTSE All World, up 3.5%; FTSE All-Share, down 2.9%).

Baillie Gifford Shin Nippon (LSE:BGS) continued its remarkable run, with the shares up 23.4%, and sending it to a small premium to net asset value (NAV) in the process.

Shin Nippon, which translates to new Japan, has a well-diversified portfolio across market sectors, led by industrials, which account for more than a quarter of its assets, followed by consumer discretionary and information technology, which each account for around 18%.

In its recently released half-year report to 31 July, the managers reported that online legal portal Bengo4.com, which is the portfolio’s largest holding at 4.7%, had been the top contributor to performance, followed by M3, Japan’s leading online drugs marketing platform, and online food delivery company Demae-Can.

Although Covid-19 hurt the trust’s holdings in the physical retail, travel and manufacturing sectors, in the half-year period the trust’s net asset value per share rose by 5.4%, compared with an 8.8% fall in the trust’s benchmark. The managers also reported that although disruptive, “the current climate has created numerous growth opportunities for small businesses in Japan seeking to revolutionise outdated business practices and solve structural issues currently facing traditional Japanese companies”.

However, it was stablemate Baillie Gifford US Growth (LSE:USA) – which was added to the portfolio at the annual review in July – that scooped top honours in the most recent quarter, with the shares up 24.1%, and powered by a large holding in electric auto manufacturer Tesla (NASDAQ:TSLA) (13.7% of the portfolio at the end of August), along with sizeable stakes in Amazon.com (NASDAQ:AMZN) (7.7%), online retailers Shopify (NYSE:SHOP) (7.6%) and Wayfair (NYSE:W) (5.7%).

In essence, the trust is continuing the good work laid out in its annual results to 31 May, which highlighted a share price and NAV return that was three times that of the S&P 500 index return of 15%. The results statement also highlighted that the impact of Covid-19 was more beneficial than detrimental to most of its holdings, 17 of which are unlisted, and accounting for 12% of assets.

Whereas Shin Nippon currently employs gearing of 8%, which has boosted its recent performance, Baillie Gifford US Growth does not, although it can gear up to 10% of assets.

Elsewhere, the quality growth investment aims pursued by Montanaro European Smaller Companies (LSE:MTE) saw the trust rise by 18% over the quarter, contributing to a stunning rebound of close to 60% over six months. Unlike the Baillie Gifford pair, the shares still trade on a modest discount to NAV of 3% and the trust is modestly geared at 6% of shareholders’ funds.

Monatanaro points out that, unlike Europe’s large companies, the huge universe of smaller companies is under-researched, which presents the managers with opportunities to find investments that pass its two-stage process: first they must be ‘good businesses’, which must then pass what the managers term “stringent quality and ESG checklists”.  Environmental, social and governance aspects have been part of the firm’s investment process for many years.

Adventurous portfolio stalwart Allianz Technology (LSE:ATT) posted another strong performance, up 11.3% over the quarter, with the five-year record now an eye-catching 348%.

The other new entrant to the adventurous portfolio in the annual review was NB Private Equity Partners (LSE:NBPE), which made a respectable 7.3% return over three months. It invests in the debt and equity of a diversified range of private companies, and its shares are trading at a 29% discount to net assets, which were valued on 31 August. An added sweetener is the 4.7% yield, which is funded partly from capital.

Further down the list, first-quartile (those in the top 25%) performances against sector peers were recorded by JPMorgan Asia Growth & Income (LSE:JAGI), (up 7.3%), Templeton Emerging Markets (LSE:TEM) (6.7%) and global trust Monks (LSE:MNKS) (6.7%). Only Dunedin Income Growth (LSE:DIG), in common with most other trusts in the UK Equity income sector, failed to produce a positive return. It was down 3.2% over the quarter.

  AIC sector % return (with income reinvested) and sector quartile ranked after:                  
    3 mths Rank 6 mths Rk 1 year Rk 3 yrs Rk 5 yrs Rk
Adventurous trust choices                      
Baillie Gifford US Growth North America 24.1 1 85.9 1 101.5 1        
Baillie Gifford Shin Nippon Japanese Smaller Cos 23.4 1 68.8 1 30.8 2 61.1 1 222.9 1
Montanaro European Smaller Cos European Smaller Cos 18.0 2 60.2 2 38.2 1 77.8 1 185.4 1
Allianz Technology Technology & Media 11.3 2 47.8 2 58.1 1 139.7 1 347.8 1
Standard Life UK Smaller Cos UK Smaller Cos 10.0 1 21.8 2 11.7 1 20.9 1 77.6 1
NB Private Equity Partners Private Equity 7.3 2 45.6 1 -10.6 3 10.3 3 61.5 3
JPMorgan Asia Growth & Income Asia Pacific Income 7.3 1 31.0 1 22.3 1 39.7 1 148.7 1
Templeton Emerging Markets Global Emerging Mkts 6.7 1 28.4 1 8.1 1 18.8 2 129.2 1
Monks Global 6.7 1 38.7 1 24.9 1 60.5 1 200.0 1
Dunedin Income Growth UK Equity Income -3.2 3 6.6 3 -4.9 1 10.6 1 39.3 1
Adventurous portfolio return   11.0   37.5   18.0   34.0   112.4  
                       
FTSE All World index   3.3   23.5   5.2   27.2   90.8  
FTSE All Share index   -2.9   7.0   -16.6   -9.3   18.6  

Notes: Holdings ranked by three-month performance. * Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 1 October 2020. 

Conservative choices steam along nicely

Three new members entered the portfolio at July’s annual review, with Schroder Asian Total Return (LSE:ATR) the standout performer over the quarter, returning 16.2%.

Managers Robin Parbrook and King Fuei Lee focus mainly on stock selection, but the total return objective is enhanced by employing quantitative models to determine whether downside protection is required via derivatives. They say: “Our primary goal for investors is to make money while avoiding large losses, not relative performance.” That is reassuring, but it should be noted that although the trust has very strong short and long-term comparative performance against its peers, the net asset value fell by 19% during the global market downturn in February and March, on a par with the conservative portfolio in aggregate.

The two other new additions, private equity fund of funds Pantheon International (LSE:PIN) and Henderson EuroTrust (LSE:HNE), both performed respectively well over the quarter, returning 7.5% and 3.7%.

Three investment trusts managed by JPMorgan filled the top performance spots after Schroder’s Asian Total Return vehicle, led by JPMorgan Japanese (LSE:JFJ). Manager Nicholas Weindling is building a strong following, as evidenced by the trust’s £990 million market capitalisation. Despite posting very strong returns – 14.4% over the quarter and 41% over one year, the shares can still be bought at a decent 8% discount to NAV. The manager’s confidence is evidenced by current gearing of 16%, which is close to the three-year high of 22% (the trust has also been ungeared over the period).

Next up is another portfolio stalwart in JPMorgan Emerging Markets (LSE:JMG), although it has appeared in both portfolios over the years. It is a core Super 60 choice for this asset class, and returned a highly respectable 8.9% over the quarter, marginally higher than the performance of the adventurous selection, Templeton Emerging Markets.

JPMorgan American (LSE:JAM) returned 7.6% over the quarter, tracking the performance of the US large company universe that most of its portfolio is focused on.

Other members of the conservative portfolio managed to post solid if unspectacular performance, but all produced returns that put the trusts in the second quartile of their respective sectors (ahead of the median fund in the sector), which is reassuring, as is the fact that over all periods up to a year, the portfolio is beating the benchmark FTSE All World index, and is only marginally behind over three years.

  AIC sector % return (with income reinvested) and sector quartile ranked after:                  
    3 mths Rank 6 mths Rk 1 year Rk 3 yrs Rk 5 yrs Rk
Conservative trust choices                      
Schroder Asian Total Return Asia Pacific 16.2 2 40.8 1 20.1 2 36.8 2 160.5 1
JPMorgan Japanese Japan 14.4 1 63.8 1 41.9 1 72.3 1 154.4 1
JP Morgan Emerging Markets Global Emerging Mkts 8.9 1 32.3 1 11.2 1 37.2 1 122.0 1
JPMorgan American North America 7.6 1 34.2 2 9.4 1 40.8 1 114.7 1
Pantheon International Private Equity 7.5 2 24.4 2 -9.9 3 12.1 3 60.5 3
BlackRock Throgmorton UK Smaller Cos 5.1 2 27.4 1 4.4 1 40.1 1 96.4 1
Henderson EuroTrust Europe 3.7 2 30.6 2 13.0 2 21.3 2 69.5 2
Bankers Global 2.8 2 20.6 2 9.1 2 31.6 2 91.8 2
Capital Gearing Flexible Investment 2.5 2 8.9 3 4.9 1 17.7 1 42.9 2
Troy Income & Growth UK Equity Income -1.5 2 3.4 4 -11.6 2 3.3 1 23.2 1
Conservative portfolio return   6.9   26.5   6.4   24.9   71.5  
                       
FTSE All World index   3.3   23.5   5.2   27.2   90.8  
FTSE All Share index   -2.9   7.0   -16.6   -9.3   18.6  

Notes: Holdings ranked by three-month performance. * Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 1 October 2020. 

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.

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