‘Core’ trusts in the global sector have gained traction by broadening their scope in the past decade.
In investing, as in life, it is good to hope for the best but prepare for the worst. So with the outlook for most asset classes and currencies looking exceptionally uncertain, it is encouraging that 11 of the 20 most-viewed trusts on the Association of Investment Companies’ website in the first half of 2019 were globally diversified.
Global trusts make a great place to hunker down for a high-risk period. In many cases their ongoing costs have been pared down to less than 0.5%, and most are run by highly experienced managers supported by extensive in-house resources. Those managers can respond to developments by moving assets between regions and sectors tax-free, and in some cases diversify in a minor way into bonds, property or unlisted securities.
The attractions of global trusts have been boosted over the past decade by a variety of developments, including a widespread reduction in ‘home bias’ by UK investors in favour of a more genuinely global approach.
Ten years ago UK holdings accounted for more than 40% of the portfolios of trusts such as Alliance Trust (ATST), Bankers Investment Trust (BNKR), Martin Currie Global Portfolio (MNP), Scottish American (SCAM) and JPM Overseas. The latter has moved furthest, having cut its UK exposure to 7% and increased its following by changing its name to JPM Global Growth & Income (JPGI); it now pays a much higher dividend. The dividend is financed largely from capital, which allows the trust’s managers to maintain the total return approach that has helped them outperform the MSCI AC World Index over five and 10 years.
Of the other trusts mentioned, Scottish American has responded positively to the elevation of James Dow and Toby Ross to co-manager level in August 2017, and Martin Currie Global Portfolio has picked up dramatically since Zehrid Osmani was put in sole charge last October. However, one swallow does not a summer make, and Osmani needs to prove that by focusing MNP’s portfolio on 25-40 companies “at the forefront of multi-decade investment themes”, he can continue to beat the pack.
Mid Wynd International (MWY) has also performed strongly this year; in the five years since it moved its mandate from Baillie Gifford to Artemis, its net asset value (NAV) total returns have been well ahead of the MSCI AC World Index and among the best in the global sector. Its trio of managers, one of whom owns more than 5% of the shares, keep the portfolio well-diversified, with no holdings exceeding 2.5%. The managers move between market sectors, industries and market caps as opportunities dictate. Current themes include healthcare costs, emerging market consumers and online services. MWY keeps its discount very tight, which should mitigate the downside in a major market setback.
Mid Wynd’s departure appeared to prompt Baillie Gifford’s March 2015 decision to replace Monks’ struggling manager, lest it too moved its mandate. Headed by the firm’s joint senior partner, Charles Plowden, the new three-man team has restored the trust to the upper echelon of the three-year rankings. Monks (MNKS) has a high-conviction, growth-oriented portfolio. However, no holding exceeds 4%, and it is notably more geographically and sectorally diversified than its giant sister trust, Scottish Mortgage Investment Trust (SMT).
SMT’s geographic distribution is exceptionally concentrated, with 53% in US-quoted companies, around a fifth in China, almost nothing in the UK and the balance mainly in the eurozone. James Anderson, who has managed the trust since 2000, has adopted an increasingly high-conviction portfolio that focuses on companies with exponential long-term growth potential, and he holds them regardless of soaring valuations.
At the end of May, longstanding stakes in Amazon, Illumina, Tencent, Alibaba Group and Tesla accounted for a third of SMT’s gross assets, while a fifth was in 42 unlisted securities – a feature that has proved very rewarding to date.
SMT has achieved fantastic returns over the past five and 10 years. But those sharing Anderson’s long-term horizon must be prepared for rough times along the way. The trust’s NAV plunged by 42% in 2008, and it was again among the worst-hit global trusts in last year’s second-half sell-off.
Other managers who are sticking to their convictions come what may but have been markedly less successful in recent years include Alasdair McKinnon at Scottish Investment Trust (SCIN) and Bruce Stout at Murray International (MYI).
McKinnon took charge of SCIN in 2014 and concentrated the portfolio down to 50 or so unfashionable companies he and his team consider to be undervalued and ripe for improvement. He believes this will serve the portfolio well when sentiment is less positive, so it is encouraging that SCIN held up relatively well in last year’s sell-off.
Bruce Stout has managed Murray International since 2004. He did well in the noughties, but has subsequently suffered from being wary of most developed markets because of their addiction to debt, their vanishing policy options and, most recently, escalating global protectionist rhetoric. Against that, he is a long-term believer in the attractions of Asia ex Japan and emerging markets, which account for more than half of MYI’s portfolio. Stout’s “diversified defensive strategy” has produced competitive NAV returns over the past year, and MYI’s attractive 4.5% yield is comfortably covered by revenues.
Performance has picked up sharply in 2019 so far
|Share price (p)||Discount (%)||Yield (%)||UK exposure (%)||NAV total returns (%) over:|
|6 mths to end Dec 2018||7 mths to end July 2019||I yr||3 yrs|
|JPM Global Growth & Income||349||2.6||4.8(Q)||7||-10.2||23.4||7.8||46.5|
|Martin Currie Global Portfolio||309||2.3||1.4(Q)||10||-6.2||31||17.7||56.3|
|Mid Wynd International||596||3.3||0.9(S)||7||-6.6||26.7||15||54.2|
|Scottish Investment Trust||842||-9.7||2.6(Q)||30||-12.9||16||-1.7||31.3|
|MSCI AC World index||-5.8||15.2||10.3||45|
|FTSE All Share index||-11||21.2||1.3||27|
Notes: NAV = net asset value. (Q) = dividends paid quarterly. (S) = dividends paid semi-annually. Source: Numis Securities, as at the end of July 2019
Global investment trust choices for risk-averse investors
All global trusts strive to be seen as core holdings that are suitable for locking away capital to accumulate in a Sipp, Isa or children’s savings scheme. However, risk-averse investors might prefer a global trust that incorporates a mix of managers and is therefore less likely than the majority of global trusts to be badly wrong-footed.
Witan has 10 external managers, each responsible for investing in between 15 and 70 equities, and 11% in specialist investment firms. The result is a portfolio of more than 300 holdings. Among the managers are three UK specialists, so 28% is invested in the UK, which has undermined Witan’s three-year NAV returns. However, its 10-year returns remain well ahead of the MSCI AC World index. Added attractions include its progressive quarterly dividends and active discount controls.
Witan’s manager selection is run by chief executive Andrew Bell, who also decides the trust’s gearing and can use index futures to make tactical adjustments to asset allocation.
Alliance Trust, which adopted its multi-manager mandate in 2016, has since stuck with its panel of eight managers, each of which invests in their 20 highest-conviction ideas. It has around 200 holdings, with 15% in the UK. The trust has pulled ahead of the MSCI AC World index over three years, but it yields less than Witan and only defends a 5% discount.
F&C Investment Trust (FCIT) has a slightly better three-year return. It has a much larger and more diversified portfolio entrusted to an actively managed mix of internal and external equity managers. Its UK exposure is 10%. Unusually, it has 6% in private equity.
Bankers Investment Trust has a similar number of holdings to ATST, but lower costs, a more geographically balanced portfolio and even better three-year NAV total returns than FCIT, despite its unfashionable value bias. Its seven regional portfolios are entrusted to Janus Henderson’s experts in each area, with manager Alex Crooke overseeing asset allocation and gearing.
Investors who want an even more defensive approach should turn to the flexible investment sector, where quoted equity weightings are typically much lower. But remember, this tends to limit the upside as well as the downside potential.