After a strong year for equity markets in 2019, there’s a shortage of trusts available at knocked-down prices, but contrarian investor David Liddell has spotted three potential openings.
As usual, going into the new year there are a wide range of views as to potential market outcomes; but also as usual, if there is a consensus, it can be taken to be “more of the same”, if a little less so.
BlackRock, as the largest investment manager in the world, may be seen as fairly representative of the market view. On that front, they expect growth to edge higher in 2020, leaving them modestly positive on equities. Within equities, they favour Japan and emerging markets, but are neutral on the US and give Europe the thumbs down.
Equity markets had a strong 2019; even the lagging UK market ended the year strongly after the general election. The FTSE All-Share posted a total return of 19.2% in 2019 and this was the weakest performance of the main developed equity markets. Where can one find at least relative value now?
Fortunately, investment trusts provide a method through discounts of buying exposure “on the cheap”. For our first choice, we return to a familiar theme where we find assets listed in Europe are able to be purchased at a discount to their global competitors. JP Morgan European Income (JETI) is on a discount of 13.6% (as at 8 January), considerably higher than most of its peers. Yet, the top five holdings from the latest factsheet, Roche, Novartis, Allianz ,Sanofi and Unilever, are all global businesses, with considerably more sales outside Europe than in.
The three healthcare companies of Roche, Sanofi and Novartis have European sales of only circa 20%, 27% and 37%, respectively; Unilever has 76% of its sales outside Europe, while even German insurer and fund manager Allianz has more revenue in the rest of the world than in Europe. So placing a discount on these businesses versus other global stocks just because they are listed in Europe does not make much sense.
Elsewhere, is there more mileage in the rotation from growth to value? If so, it may be possible to buy up some “cheaper” growth assets over the coming months. We have already seen Finsbury Growth & Income (FGT) underperform over the last four months: since end of August 2019 the price is down 8% compared to a gain of 5% in the FTSE All-Share.
The price has moved from a small premium to a small discount, a very rare occurrence over the last five years. This does not yet make the trust cheap – the underlying holdings are just those sort of “defensive” growth assets that the market has loved more or less ever since the financial crisis – the top five being LSE, RELX, Diageo, Unilever and Burberry – but it is one to put on the radar. Bear in mind that FGT’s board has a policy of buying back shares if its discount hits 5%.
The long-term performance of FGT is, of course, excellent and it holds some interesting assets. We are watching Unilever’s yield as a proxy for defensive growth assets as a whole: if that hits 3.5%-plus, which it would at a price of around £37.50, some 12% below the price at the time of writing, we might get interested. Of course we may never get there.
Finally, a contrarian response to the general bullishness is to go more defensive. Ruffer Investment Company (RICA) has roughly 50% of its assets in defensive holdings: gilts, index-linked government bonds (UK and international), cash and gold. The top five equity holdings are Disney, Lloyds Banking Group, Tesco, Sony and Royal Bank of Scotland.
The shares currently trade at a 4% discount and have had a satisfactorily poor performance versus equities, but this is unsurprising given the asset allocation and objective of the company to achieve a positive total annual return of at least twice the Bank of England rate. Its five-year net asset value return is just 9.1%.
David Liddell is a director of IpsoFacto Investor.