The ongoing US/China trade war is bad news for markets, but China’s faltering consumer and overheated property markets could really raise the pressure, writes Andrew Pitts.
The increasing menace of Trump-instigated trade wars is testing the mettle of even the most optimistic investors. Shares in tech bellwethers such as Netflix, Facebook and Twitter fell by 20 per cent or more following guidance on their prospects when second-quarter results were announced in July: the brutal reaction from investors clearly shows that nerves are fraying.
Coupled with rising inflation, interest rates and bond yields (major eurozone countries excepted), not to mention quantitative tightening in the US and Brexit uncertainty in the UK, the overall picture is not one that inspires confidence that mainstream markets will make progress in the short term.
Regular readers will rightly recognise that this is a gloomy tune being played again by yours truly. However, this does not mean my own portfolio has been parked entirely in cash for years, in anticipation of a decent buying opportunity. You may be surprised that, despite my endlessly gloomy prognostications, I do actually invest in some quite risky areas.
So as we approach St Leger’s day, when markets traditionally shake off their summer stupor, I am providing a flavour of my experience of investing in five investment trusts. Each offers something, if not extraordinary, then definitely out of the ordinary.
Originally launched as the Battle Against Cancer Investment Trust (Bacit) in 2012, Syncona has morphed from a novel and overtly wealth preservation- minded vehicle with a small participation in cancer research initiatives, to today’s £1 billion trust with a portfolio dominated by investments in early-stage life sciences ventures.
Having invested in the trust at launch, I have been happy to continue holding it through its transformation, as I hold capital preservation mandates elsewhere via Capital Gearing (CGT), BH Macro (BHMG) and RIT Capital Partners (RCP).
There were opportunities to take profits when the trust’s shares soared to a hefty premium to net asset value. Not one to look a gift horse in the mouth, I cashed in much of the original stake when the shares were trading at a premium of around 30 per cent late last year.
Because the trust does not publish monthly factsheets and only provides quarterly valuations, the premium can appear to be far higher than is the case. Currently (8 August), with the shares trading at 247p, it is estimated at 51 per cent. However, analysts at Numis Securities reckon the premium is half that after adjusting for movements in the listed securities that the trust holds since the last portfolio valuation date on 30 June.
Syncona’s life sciences division is proving highly adept at identifying businesses with promising and effective therapies for a range of diseases and ailments. In the second quarter alone, the portfolio’s value increased by 42 per cent. A key contributor was the June debut on Nasdaq of Autolus, with its shares soaring from $17 to $26. Syncona retains a 33.8 per cent stake in the blood cancer therapy specialist.
Blue Earth Diagnostics, which specialises in prostate cancer imaging, and Nightstar Therapeutics (retinal gene therapy), also contributed to the strong show.
Meaty as the premium undoubtedly is, Numis believes the potential for its unquoted holdings in particular is significant and has a 320p price target on the shares. That would represent a gain of 30 per cent from current levels. But prospective investors should note that high premiums such as this can swiftly evaporate, particularly if the market for initial public offerings in the biotechnology arena turns sour.
This is one of two trusts (along with the aforementioned Bacit) in which I participated in a pre-launch offer. In this instance, I was attracted by the clear, no-nonsense approach to investing that Terry Smith has pursued to such stunningly good effect with the global open-ended fund Fundsmith Equity (which is a ‘bedrock’ holding in my portfolio).
Fundsmith Emerging Equities launched in June 2014 and Smith warned that progress could be slow; this proved to be the case until January 2016, when the shares had fallen to 860p from a £10 launch price. The shares have since risen to more than £13, boosted by very good performance in 2017, while this year the trust has proved to be quite resilient to poor sentiment towards emerging markets.
Investors should not be surprised that since launch the £340 million trust has significantly lagged the benchmark MSCI Emerging & Frontier Markets index, which is dominated by high-flying Chinese internet and technology companies. FEET does not (and will not) invest in such shares, preferring instead a current portfolio of 43 relatively large, established companies (many of them based in India) with low capital intensity, high returns on capital employed and high free cashflow that will benefit from rising domestic consumption in emerging markets.
Although I invest in other Asian and emerging market-focused trusts, sometimes opportunistically, FEET is among a few that I expect to hold for the long term.
Although I have dipped in and out of Edinburgh Investment Trust over the years, I have generally maintained a holding. I added to this in March when the shares were 625p, attracted by the historically wide discount to net asset value and a dividend yield of more than 4 per cent.
Having traded close to par value for several years, in 2017 sentiment to the £1.4 billion trust started to turn markedly sour, and the shares fell steadily to a 10 per cent discount. They remain at around that level, but the contrarian in me has so far been rewarded by a gain in the share price to 700p.
Previously managed by Neil Woodford when he was head of UK equities at Invesco Perpetual, Edinburgh has been run by his successor, Mark Barnett, since January 2014. Like Woodford, Barnett has a clear investment process and philosophy, but he has underperformed the UK market for more than two years.
However, a longer-term view puts Barnett’s high-conviction approach in a kinder light. For example, since Barnett started managing the similarly positioned Perpetual Income & Growth trust in 2000, he has outperformed the UK equity market by an annualised 5.3 per cent.
Stockbroker Canaccord Genuity also noted in June that since taking over EDIN he has bettered the return from the FTSE All-Share index (albeit marginally) and that the trust has been by far the best choice among other funds he manages (the aforementioned Perpetual Income & Growth and the open-ended Invesco Perpetual High Income and Income funds). It also has lower ongoing charges (0.57 per cent) and a superior dividend yield.
Indeed, the progressive dividend policy is one of the trust’s chief attractions. Over the past five years, annualised dividend growth has been 3.1 per cent, compared with annualised inflation of 2.3 per cent.
Since Canaccord’s bullish analysis in June, EDIN shares have been treading water, However, for those prepared to buy into the idea that a Brexit discount has been indiscriminately applied to the UK stock market, particularly domestically focused businesses, Edinburgh remains the ‘significant contrarian opportunity’ that Canaccord claims.
One of my most successful investments, with gains of more than 220 per cent, Baillie Gifford Shin Nippon rocketed in 2016 and 2017. Its phenomenal success (it is far and away the best-performing Japanese fund or trust over three and five years) has not gone unnoticed. Despite the trust’s efforts to rein in the premium by issuing regular dollops of new shares, they rose to a premium of around 15 per cent in April. A few months earlier, with shares trading at a premium of more than 10 per cent, I decided to take profits and sold the bulk of the holding.
However, with shares in the £520 million trust now trading at a less-elevated premium of around 5 per cent, I am looking for the right time to reinvest some of the sale proceeds and will be keeping a close eye on the share price compared with net asset value (the premium did briefly fall to around par in early June).
The literal translation of Shin Nippon is ‘New Japan’, and BGS’s manager, Praveen Kumar, excels in unearthing undiscovered or under-researched companies that are successfully breaking into the markets of hidebound old Japan, as well as in backing smaller companies engaged in innovative areas such as robotics and healthcare.
Another bedrock holding. I invested in Capital Gearing in 2014 after the trust’s premium to NAV, which had approached 20 per cent in 2013, fell to a small discount. The capital preservation-oriented trust has since taken steps to limit volatility in its discount/premium and has regularly been issuing new shares to satisfy demand, more than doubling in size in the process. Since investing at around £33, the shares have risen to around £41, with mid-2016 marking a turning point in CGT’s fortunes.
Peter Spiller, lead manager of the trust since its launch in 1982, has persevered with his extremely pessimistic outlook for several years now. He only invests in equities (nearly always via other investment trusts) when he clearly sees value and the potential for decent upside.
The trust’s 13 per cent weighting to equities (compared with 35 per cent in various index-linked government bonds, 20 per cent in preference shares and corporate bonds, and 17 per cent in property) clearly indicates that his outlook remains biased towards conserving capital.
CGT satisfies cautious investors’ needs over the long term in several respects. Since 2000 its annualised return has been 8.6 per cent, compared with the MSCI UK total return of 4.4 per cent. The maximum loss from the shares in any time span over that period has been 9 per cent, compared with 41.3 per cent for the index.
The trust should therefore continue to be something of a comfort blanket to investors who, like me, are more fearful than cheerful.
The author was editor of Money Observer from 1998 to 2015.