ii Super 60 investments

Inclusion of five new investments:

• Ninety One UK Alpha Fund as Core UK Equities option
• Jupiter UK Special Situations Fund as Adventurous UK Equities option
• Jupiter Japan Income Fund as Core Japanese Equities option
• PIMCO Global Investment Grade Credit Fund as Global Bonds Income option
• Blackrock Continental European Income Fund as European Equities Income option

Retention of Crux European Special Situations Fund

Recent performance has underwhelmed, which manager Richard Pease is not accustomed to. Indeed, this is the worst period of performance in Pease's career, and relative performance of the fund is now behind the index and the category average on a 1-year, 3-year and 5-year basis to the end of October 2021.

In 2020, poor relative performance resulted from a number of stock-specific disappointments, in addition to broader market dynamics related to COVID. Pease appears to have been wrong-footed by market dynamics following the outbreak of the pandemic.

Some of the holdings considered to have defensive qualities (such as recurring service revenues) were heavily impacted by COVID, and there were some stock-specific issues that hampered returns (e.g. Just Eat, and a slightly levered German property company - both improving now).

In addition, the strategy is not as exposed to hyper-growth and some deeper value segments of the market, which have driven index returns in 2021. The fund’s bias towards mid-cap companies with high return on capital has benefited investors well since inception but has meant that the portfolio is quiet heavily skewed with significant sector dispersion to the index.

Even more recently, the Chinese technology crackdown has been a drag on performance, and the fund's China holdings (Alibaba, held directly, and Tencent, which is held via Prosus) performed very poorly relative to the Europe ex UK market.

We think short to medium-term performance can be overlooked and believe that over the long run the market will likely reward companies with high ROCE, strong free cash flow generation, and low cyclicality. Pease and Milne have an extensive and strong track record in identifying such companies, and we are reassured by Pease's long-term track record, which remains above the benchmark.

Pease continues to execute as expected on this investment strategy that has served investors well over the long-term, and we would duly expect performance to pick up again. Therefore, we are removing the fund from Under Review.

Retention of Lindsell Train Japanese Equity Fund

The Lindsell Train Japanese Equity fund has to date been classified as a ‘Core’ fund however we believe the fund’s growth style bias and the concentrated nature of the portfolio lead to a return profile that is more volatile than one would expect from a fund with a Core profile. While the fund’s long-term returns have been strong, the duration and magnitude of out-and under performance are not in keeping with that of a Core mandate. To this end we believe that the fund is better suited to the Adventurous Investment Category.

Removal of Liontrust Special Situations Fund

We are removing Liontrust Special Situations fund from the II Super 60 list due to concerns over the strategy size. The fund is one of the largest UK Equity funds in the market but maintains a dedicated allocation to small and mid-cap companies. This means that the fund has to choose between having high ownership of a company or owning smaller portions of more companies. We feel that this means the managers cannot fully express the fund's investment process and that they may end up owning companies in which they have lower conviction just to spread the money. We recognise that the fund has performed well and still believe the process underlying the strategy is strong, but the fund is being removed given the uncertainty that surrounds the fund's liquidity profile.

Removal of CFP SDL UK Buffettology Fund

This strategy was previously Under Review due to concerns about the size of assets that were being accumulated and we have taken the decision to remove it from the Super 60 list. The fund has grown in size over the last 3 years based on strong inflows, and our analysis of the liquidity profile (how quickly the fund could be sold if everyone requested their money back) and ownership (how much of each company they own) suggests that if inflows continue then the strategy could either run into problems or have to change how the fund is run, for example investing in large companies when historically their success has come from smaller companies. We recognise that the strategy has delivered very strong performance but due to the possible risks or uncertainties we have lost confidence that this return profile can be replicated in the future.

Removal of JPMorgan European Income Trust

This strategy was previously Under Review due to the planned merger with the JPM European Growth Trust and is now being removed as it sat in the income bucket which will no longer be the Trust's primary aim. Whilst the merged vehicle will maintain a 4% dividend policy to appeal to income investors the primary objective of the Trust will no longer be the delivery of income and as such we are removing the Trust from the Super 60 list in order to replace it with a purer income seeking strategy.

Removal of FTF Martin Currie IF Japan Equity Trust

We are removing the FTF Martin Currie IF Japan Equity fund due to its increased level of risk. Whilst we acknowledge that the fund has delivered excellent long term returns, it has a very strong style bias and invests predominantly in small and mid-cap companies. This means that when markets are strong the fund does a good job of capturing upside but when the tide turns against it, the fund can suffer heavy losses. Consequently the fund's volatility has been much higher than peers and as such it is being removed.

Removal of Marlborough Global Bond Fund

We are removing the Marlborough Global Bond Fund due to the announcement that lead manager Geoff Hitchin will be retiring. Having a stable team and process is a key criteria for us when assessing funds qualitatively as it gives funds the best chance of consistently delivering good returns. As a result of the team change we feel that the fund is no longer a best in class option and are removing it.

CFP SDL UK Buffettology      

In line with our stated methodology, CFP SDL UK Buffettology fund has been put under formal review due to concerns around resource and size of assets. The fund is an adventurous option in our UK equities asset group. 

In regard to resource we have concerns over key person risk as Keith Ashworth-Lord is the sole manager of the fund, plus in June, he took on the responsibility of another fund - Free Spirit - following the departure of Andrew Vaughan. At present, there is no clear succession plan in place, as there is no named deputy manager on CFP SDL UK Buffettology fund. As part of our formal review process, we will assess key person risk. 

The increase in size of the fund is also a concern. When the fund was initially placed on Super 60, at launch of the rated list in January 2019, its assets were at around £600 million. Today, the assets have grown to over £1.7 billion and the average market capitalisation of the companies held in the fund has also grown. In our formal review we will investigate if the size of the fund hinders Ashworth-Lord from having meaningful exposure to small-cap and micro-cap shares, which were a prominent part of the fund when it was placed on Super 60. 

We will make a final decision in the upcoming annual review of the Super 60.

Crux European Special Situations

Crux European Special Situations has been put under formal review due to performance concerns. This is line with our stated methodology. The fund is an adventurous option in our European equities asset group.  

Over one, three and five years the fund has underperformed the MSCI Europe ex UK Index and the Investment Association Europe ex UK sector. 

In-line with our methodology, the review process will include analysis of the fund’s underperformance over the medium term. We will also consider various adventurous options available withing the Europe ex UK Equity sector if we decide to replace the fund on the Super 60 list. 

We will make a final decision in the upcoming annual review of the Super 60.

Inclusion of Wisdom Tree Enhanced Commodity ETF

• Wisdom Tree Enhanced Commodity ETF as Low Cost Specialist option

Inclusion of six new investments

• Vanguard FTSE All-World High Dividend Yield ETF as Low Cost Global Equity Income option
• iShares Global Property Securities Equity Index Fund as Low Cost Property option
• Diverse Income Trust as UK Equity Income Smaller Company option
• Legg Mason IF ClearBridge Global Infrastructure Income as an Alternative Core option
• Capital Gearing Trust as Mixed Assets Core option
• Fidelity Multi Asset Income Fund as Mixed Assets Income option

Removal of SPDR S&P Global Dividend Aristocrats ETF

Following our annual review, we decided to remove the SPDR S&P Global Dividend Aristocrats ETF from the Low Cost Global Equity Income category due to higher risks attached to this strategy. We have taken into account that the fund’s objective is focused on tracking high dividend-yielding companies that have increased or held their dividends for at least 10 years. But the market environment has resulted in higher volatility and larger than expected tracking error. In addition, our peer group analysis revealed there are more attractively priced core strategies with a similar mandate and therefore we felt it would be prudent to pursue opportunities for this category elsewhere. However, it may still be worth considering as a satellite option in a portfolio.

Removal of North American Income Trust

The North American Income Trust lost its place following an extended period of unsatisfactory performance. As part of our annual review we decided to remove North American Income Trust from our Super 60 rated list due to an extended period of unsatisfactory performance. Our in-depth analysis included peer group analysis, portfolio positioning, performance attribution and a risk review of the trust. In addition, we have been actively communicating with the fund’s management team to clarify the reasons why the strategy failed to deliver against its performance objectives. We also acknowledged the fact that the managers’ style has been out of favour for a while and the US as a region is not the typical hunting ground for income seekers. However, we did not find enough evidence of the managers’ decisions and stock picks adding value to the overall performance over the long term. Therefore, we felt it would be prudent to remove the fund from the Super 60 as we have lost our conviction in the trust as a best-in-class option.

Retention of JP Morgan European Income Trust (income shares)

In line with our stated methodology, the income shares of JP Morgan European Income Trust were put under formal review on 26 November 2020 due to performance concerns. Our formal review included analysis of the trust’s portfolio positioning and outlook as well as sector and peer group assessment. As the trust is an income rated option, we also paid attention to the sustainability of future dividend payments. We have been actively communicating with the manager on various aspects including management changes, which has resulted in additional focused resource. In addition, we have been assessing the investment process. The trust’s management team has been increasing their focus on capital growth, which allows for lower yielding stocks to be held. In turn, this gives more flexibility to the portfolio, which should provide additional resilience over the longer term. Following analysis of portfolio attribution, we found that during the Covid-19 crisis stock selection has helped to mitigate underperformance to some degree. In terms of sustainability of dividends, although the trust has seen a significant amount of dividend cuts within the portfolio recently, there have been no cuts to the interim dividend in the Covid-19 crisis to date and the managers are confident the trust is generating enough income to continue to pay dividends. Therefore, we decided to maintain our rating and remove the trust from under formal review.

JP Morgan European Income Trust (income shares)

We decided to put the income shares of JP Morgan European Income Trust under formal review due to an extended period of unsatisfactory performance. In-line with our methodology, the review process will include analysis of the trust’s portfolio positioning and outlook as well as sector and peer group assessment. We will also communicate with the fund managers and try to establish whether the problems are more down to the individual strategy or are more market-related in nature. In addition, as this is an income rated option, we will also pay attention on the sustainability of future dividend payments.

BMO Commercial Property Investment Trust

In line with our stated methodology, BMO Commercial Property Trust was put under formal review on 22 July 2020 due to continued uncertainty around income payments and its persistently wide share price discount to net asset value. Our formal review included performance and risk analysis, portfolio positioning and robustness of the investment process. We have also been actively communicating with the manager on various additional aspects including the strength of the balance sheet, stability of the prospective yield and discount management.

The trust offers diversified exposure to UK property with a bias towards prime properties which would normally be seen as defensive and serve as a core holding. The trust maintains relatively high retail exposure and is underweight industrial exposure versus peers which has materially impacted the performance record over recent years. The retail sector has been undergoing structural changes and has been affected the most by Covid-19 lockdowns. As a result, the trust has fallen onto one of the widest discounts in the sector, currently close to 40% which potentially represents a significant margin of safety as the trust’s retail exposure is primarily in the most prime locations such as London and South East.

Following the market shock earlier this year, the trust continued its recovery and has significantly improved its short-term return profile, while long-term numbers remain strong. The manager has demonstrated willingness to re-introduce full dividend distributions when conditions improve and believe that the portfolio is well positioned to begin its recovery once the restrictions surrounding Covid-19 are lifted. With rent collections continuing to improve, the trust recently reintroduced dividends at 50% of the previous level before suspension in April. The current dividend yield of more than 4% is still attractive. Therefore, we decided to maintain our rating and remove the trust from under formal review.

Schroder Income

We removed the Schroder Income Fund from our Super 60 rated list due to an extended period of unsatisfactory performance. The decision was made in line with our stated methodology and after conducting an in-depth review of the fund’s portfolio, process, drivers for return and fund flows. We acknowledged that the strategy’s investment style has been out of favour, which further contributed to its poor return profile. However, we would have expected stronger stock selection over the short and long-term and better risk-adjusted returns over the long-term. In addition, there have been consistent outflows from the fund so far this year which led to a significant reduction in its size.

Utilico Emerging Markets Trust

In line with our stated methodology, Utilico Emerging Markets Investment Trust was put under formal review on 5 August 2020 due to performance concerns.

Our formal review included performance and risk analysis, portfolio positioning and robustness of the investment process. We have also been actively communicating with the manager on various additional aspects including the shape of the capital reserves, stability of the prospective yield and discount management. Our findings led us to the conclusion that the trust has clearly managed to provide capital protection features over the long term, while offering one of the most attractive yields in the sector. Following the market shock earlier this year, the trust continues its recovery and has significantly improved its short-term return profile, while long-term numbers remain strong. Last but not least, the managers were very open and transparent in discussing major performance detractors and their outlook for the trust has provided all the information we required to retain our conviction. Therefore, we decided to maintain our rating and remove the trust from under formal review.

Removal of Templeton Emerging Markets Smaller Companies

We removed the Templeton Emerging Markets Smaller Companies Fund from our Super 60 rated list due to unsatisfactory performance. The decision was made in line with our stated methodology and after conducting a formal detailed review of the fund and meeting the team. Our analysis, which included a review of the asset class and the whole sector as well as peer group assessment, showed that the fund has been struggling to deliver against its objective and the category average. Therefore, we believe the fund is no longer suitable to be an endorsed option.

Inclusion of Mobius Investment Trust

We added Mobius Investment Trust to our Super 60 rated list as an Emerging Markets Adventurous option. Following our stated methodology, we have conducted in-depth quantitative analysis on the trust and the sector and met the manager before making our final decision.

Although the strategy has a relatively short but successful performance profile, the managers have an exceptional long-term track record in delivering above-market returns previously leading a number of specialist emerging and frontier market mandates at Franklin Templeton. In addition to providing diversification benefits and great scope for growth through a well-defined process, the team has been very open and transparent on the company structure and how they closely align their interest with those of their investors, which further helped us to build strong conviction in the trust.

BlackRock Frontiers Investment Trust

The BlackRock Frontiers Investment Trust was included in the ii Super 60 list of rated funds as an Adventurous option within the Emerging Markets category. On 7 September 2020, the Investment Selection Committee removed the BlackRock Frontiers Trust from our Super 60 rated list. The decision was made in line with our stated methodology and after conducting a formal in-depth review of the trust, which included asset class, sector and peer group analysis as well as meeting the manager and the team. We acknowledge this area of the market has been struggling, but believe that due to an extended period of unsatisfactory performance the trust is no longer suitable to be an endorsed option for our customers.

Inclusion of Morgan Stanley Global Brands Equity Income fund

This is the first new addition since the launch of the Super 60. In-line with our stated methodology, we have conducted rigorous quantitative analysis on the fund and met the investment team before making our final decision. The fund, which is featured as the ‘Income’ option in the Global Equity Income category, showed exceptional qualities in terms of investment process, performance and capital protection, income generation, strength of the team, transparency, and value for money. All this helped us to build conviction in the fund during our due diligence process.

Removal of Artemis Global Income fund

This decision has been made in-line with our stated methodology and after conducting a formal in-depth review of the fund. That included sector and peer group analysis as well as meeting the manager and the team. The manager’s investment style has contributed to the fund’s comparatively disappointing performance against peers, but more recently this has also been compounded by some poor stock selection decisions.

Reclassification of Murray International

The decision to reclassify Murray International from Global Equity Income/ Income to Global Equity Income/ Adventurous is in-line with our stated methodology. We have conducted a careful review of the risks associated with the trust, including the style of the manager and portfolio positioning as well as assessment of the sector. In conclusion, we maintain our conviction in the manager and his process. The risk re-categorisation was needed due to the current, post sell-off market environment and the possibility of longer recovery periods for value investing .

Merian North American Equity fund

In line with our stated methodology, Merian North American Equity fund was put under formal review on 25 February 2020 following the announcement that Merian has been acquired by Jupiter and a co-manager of the fund will be leaving the business.

Interactive investor’s selection team has been closely monitoring the situation and speaking to Merian to gain a better understanding of what changes, if any, are likely to take place after the acquisition, that could impact the fund’s team structure, philosophy or process. The details confirmed with Merian are relatively high level, and we are comfortable that the key fund managers are well committed and incentivised which should encourage team stability and continuity of the investment process under Jupiter’s corporate umbrella. As a result, the fund is no longer under formal review, and it will remain on our Super 60 list.

LF Lindsell Train UK Equity fund

In line with our stated methodology, Lindsell Train UK Equity was put under formal review on 29 November 2019 after being downgraded by two independent external agencies. Given its highly concentrated nature, we wanted to reassure ourselves that there had been no deterioration in liquidity.

The interactive investor selection team conducted extensive analysis on the liquidity, capacity and concentration of Lindsell Train UK Equity, and spoke to the fund manager at length. The key outcome is that our investment selection committee is comfortable with the liquidity of the fund, it has been removed from being under formal review, and it will remain on our Super 60 list. The majority of the holdings are large, liquid companies with diversified revenue streams. In terms of capacity, there is plenty of room for further growth without compromising the mandate. The fund has always had a concentrated, high conviction approach but has a low turnover and long-term successful track record.