With signs of slowing global growth and stretched equity valuations, it may be a good time to do a bit of shuffling for a more cautious stance.
If leading stock markets maintain an upwards trajectory through the rest of 2018, the Association of Investment Companies’ 10-year performance tables could witness some significant changes.
Trusts such as Scottish Mortgage, Lowland Investments, BlackRock Smaller Companies and Schroder Asia Pacific, which were among the hardest hit in their sectors in the latter stages of the 2007/09 bear market but have recovered strongly under the same managers in the subsequent bull market, could look even more impressive than they do already.
Meanwhile, the likes of Capital Gearing Trust (CGT), Personal Assets Trust (PNL) and Ruffer Investment Company (RICA), which were highly resilient during the crash but have seen their subsequent performance restrained by their increasingly cautious positioning, are likely to look even more lacklustre on a 10-year basis than they currently do over five.
Of course, if markets take a severe knock before the year-end, the tables could be turned. RICA, CGT and PNL’s more defensive approach would be vindicated, and their shareholders grateful for their focus on wealth preservation – although it is noteworthy that Personal Assets’ director Robin Angus is lamenting the difficulty of identifying any safe havens. On the other hand, those who have enjoyed a fantastic run with the more positively managed trusts might be tempted to try and bail out quickly rather than committing themselves to clinging on grimly until the next big upswing.
In deciding whether to jump or stay, readers should bear in mind that equities have invariably recovered from past setbacks, and that the great investors – like Warren Buffett, Sir John Templeton and Anthony Bolton – have done well from keeping their chips on the table. Selling near the top is arguably easier than having the courage to reinvest near the bottom, and markets can recover remarkably rapidly from a seemingly calamitous setback, as happened in early 1975 and in summer 2009.
One solution for those who believe that equities now have more downside than upside could be to raise their exposure to multi-asset trusts with absolute return mandates. If the three trusts mentioned earlier look too cautious, there are alternatives such as RIT Capital Partners (RCP) and Aberdeen Diversified Income & Growth (ADIG), among others.
Lord Rothschild, who dominates the board and shareholder register of RIT Capital Partners, has made no secret of his worries about soaring share prices and his determination to limit any fall in the trust’s NAV. This has been reflected in low equity exposure, averaging just 44 per cent over the course of 2017. Despite this, the trust’s NAV returns over the past five years have kept well ahead of its RPI plus 3 per cent per annum benchmark as well as the FTSE All-Share index, thanks to support from successful investments in hedge funds, private equity, ‘Absolute Returns & Credit’ and deployment of a currency overlay.
Hopefully RCP can justify its current premium rating by extending its 30-year record of participating in 75 per cent of market upside and only 39 per cent of market declines.
Aberdeen Diversified Income & Growth is more of a pig in a poke, as it only moved its mandate to Aberdeen and adopted its multi-asset fund-of-funds remit in February 2017. However, hopes are high that managers Mike Brooks and Tony Foster will be able to extend the success they have achieved in the open-ended format. Equities currently account for around a fifth of the portfolio, fixed income for a quarter, and the balance includes alternatives such as infrastructure, property, asset-backed securities, and insurance-linked securities.
Over the 12 months to end March net asset value total returns were a creditable 5.5 per cent, but they have fallen back a bit since.
A more positive stance
For those wanting to keep more control over their asset allocation, and to maintain a cautiously positive approach to equities, there are a number of trusts which might appeal.
For instance, in the Far East ex Japan sector, it is arguable that Aberdeen Asset Management’s value-oriented approach, with its enduring emphasis on companies with quality management and shareholder-friendly corporate credentials, could come back into its own in a downturn, as it has in the past. Similarly, investors in Fidelity Asian Values (FAS) and Pacific Assets Trust (PAC) could benefit from the cautious approach which has restrained their recent returns.
Alternatively, those who have been impressed by the achievements of Schroder’s Asian trusts might feel more comfortable with Schroder Asian Total Return (ATR) rather than Schroder Asia Pacific Trust. The two trusts have the same benchmark, similar gearing, broadly similarly geographic weightings, and their top 10 holdings both include Samsung Electronics, Tencent, Taiwan Semiconductor, Alibaba Group, AIA Group and HDFC Bank. However, the Total Return trust seeks to achieve a degree of capital preservation through the tactical use of derivatives, and its volatility has been usefully lower than SDP’s despite its more concentrated portfolio.
In the UK smaller company sector, it could be similarly argued that Aberforth’s value focus, its avoidance of Aim-quoted stocks and its cautious gearing should help it hold up better in a downturn than a determinedly growth-oriented trust such as Henderson Smaller Companies, which has performed much better during the bull market and which is generally at least 6 per cent geared.
Admirers of BlackRock’s successful UK smaller companies team might prefer BlackRock Throgmorton (THRG) to BR Smaller Companies trust, as the former can use its contracts for difference portfolio to short companies its manager expects to fall and to take the trust up to 30 per cent liquid, whereas the latter has long-term gearing, is expected to keep shareholders’ funds fully invested and does not have shorting facilities.
Although it is in the UK equity income sector, Diverse Income trust (DIVI) might also appeal to cautiously minded believers in the long-term outperformance of UK smaller companies. This is because manager Gervais Williams generally has a very substantial weighting in smaller companies (currently 62 per cent) and has a long history of seeking to protect his portfolios with the use of options. Around 2.4 per cent of DIVI’s portfolio is currently invested in a FTSE 100 put option.
A more mainstream defensive play in the UK equity income sector would be Troy Income & Growth (TIGT). It is managed by Francis Brooke and Hugo Ure, who work at Troy Asset Management alongside Sebastian Lyon, the bearish investment adviser to Personal Assets Trust. TIGT’s predominantly large-cap portfolio is biased towards what it calls ‘ quality companies with defensive characteristics’. The trust is currently 4 per cent liquid, and it has a zero discount control policy.
Those searching for a defensive play in the European sector should consider Henderson European Focus (HEFT), which has a good long-term record but has been held back recently by manager John Bennett’s cautious outlook. This has allowed the more positively managed Henderson EuroTrust to pull ahead of it over three years.
Finally, those interested in a contrasting approach to global equities should compare and contrast Baillie Gifford’s two largest trusts, Scottish Mortgage (SMT) and Monks (MNKS). The former has been outstandingly successful over the past 10 years, thanks to manager James Anderson’s increasingly high-conviction approach. Although its net assets are approaching £7 billion, its portfolio is limited to 75 companies, with the top 10 – headed by Amazon, Tencent, Alibaba, Illumina and Tesla – accounting for 57 per cent.
Anderson and his co-manager Tom Slater have established that just 4 per cent of companies have accounted for most of the wealth created on the US stock market over the last 90 years, so they are trying to identify their current equivalents on a global basis. The common characteristics of these businesses are a large end-market relative to their current size, giving them plenty of scope for growth; a sustainable competitive edge; and above all a visionary founder/manager who is in it for the long term and not too worried about short-term pressures or dividends, so is willing to reinvest most of the company’s cash flow for future growth.
Anderson and Slater have scant regard for sectoral or geographic diversification. They have found the most opportunities in the US and China, and are not too concerned by high valuations, as they expect them to be more than justified over time. They recently expressed optimism regarding their holdings due to the continued rise and development of China, and especially of its world-leading digital economy. However, they warn that the progress of their holdings and of the trust is unlikely to be smooth, and that investors need to share their five- to 10-year perspective.
Monks investment trust is also very growth-oriented, but Spencer Adair, who is one of the highly regarded triumvirate that took charge in March 2015, says: ‘We value diversification highly.’ This has helped to make it much less volatile than SMT and more appealing to cautious investors.
Adair says Monks’ portfolio always comprises at least 100 holdings, which are invariably trimmed back at around 3 to 4 per cent. To ensure the desired diversification, they are drawn from every continent bar Antarctica and from four different ‘patterns of growth’. These are labelled Rapid, Latent, Cyclical and Stalwarts. The latter are steady businesses with deep moats, unlikely to be the star holdings in a bull market but expected to hold up well in a downturn. That means they can then be realised to fund purchases of more exciting companies that have fallen much more steeply, which is why Adair refers to them as a ‘war chest’.
Whereas SMT is always geared, Monks’ gearing can range from plus to minus 15, and is currently around 5 per cent. Ongoing charges are a little higher than on SMT, but fees have been lowered twice over the past three years. Adair says all three managers bought significant shareholdings when they took charge and he has invested his entire pension in it.
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