History suggests that now should be an ideal time for investors to drip-feed money into equities – and our medal winners are a great advertisement for the benefits of regular investing. Fiona Hamilton profiles trusts with top five-year returns.
The winners of our investment trust monthly savings medals ended the five years to the end of January in fine fettle. Those who invested £50 every month during the period gained up to 80% on their £3,000 stake.
The subsequent coronavirus-induced turmoil reversed much of those gains. However, past bear markets, no matter how severe, now look like blips along a multi-decade upward trajectory for US and UK equity indices. What’s more, those indices have proved they can quickly recover from setbacks.
Be ready for a reset
If governments and central banks continue to take strong action, the public behaves sensibly, and there are breakthroughs in the development of a vaccine for the Sars-CoV-2 virus and treatments for Covid-19 infection, shares in firms that survive the shakeout could pick up strongly before 2020 is out.
The message from history is: don’t panic. Don’t sell shares in which you retain long-term confidence just because others, who may need to raise money, are dumping them. Instead, if you can afford it, keep topping up your investment trust holdings while discounts are wide. A commitment to keep buying through good and bad times is what makes regular saving work.
The top performer in our regular savings awards over the past five years – and the only trust to claim the gold medal for its category, UK growth, for the second year running – is BlackRock Throgmorton (THRG). It invests for growth in small to medium-sized UK companies, using short and long contracts for difference to boost returns. Sister trust BlackRock Smaller Companies (BSC), which uses gearing, has won the bronze medal. Eleven of the top 12 contenders in this sector were small to medium-sized company specialists. UK smaller company trusts once traded regularly at double-digit discounts to net asset value, so many trust-watchers were surprised last year when trusts such as THRG moved to a premium. This reaction was arguably irrational, as smaller company indices in almost all countries have outperformed larger company indices over the long run.
Outperformance has averaged 3.7% a year over the past two decades in the UK, and 4.2% worldwide, according to Paul Marsh at London Business School. In the short run, however, smaller companies can be volatile and suffer badly in a downturn, as they have this spring.
Stick or twist?
The UK income category medal winners are the weakest cohort for the second year running. Dunedin Income Growth (DIG), which wins the gold medal, and Murray Income (MUT), which claims silver, are both managed by Aberdeen Standard Investments. They favour firms with experienced management teams, sound business models and robust balance sheets that generate strong and predictable cash flows. Both trusts have cut back on higher-yielding stocks in favour of firms with superior dividend growth prospects, and they have diversified their sources of income by reducing FTSE 100 exposure to around 50%. MUT’s five-year NAV total returns were better than DIG’s , but DIG wins gold this year because investors could buy its shares at a near-20% discount for about half the period under review.
The second-highest returns for regular savers over the five years were achieved in the global generalist category by Manchester & London (MNL), which targets capital appreciation along with a reasonable level of income from a globally diversified portfolio. Managed since 2000 by Mark Sheppard at M&L Investment Management, its market capitalisation at the end of January 2015 only just exceeded the £50 million lower limit for inclusion in these awards.
At that juncture it was attracting so little interest that its shares traded at a discount of more than 20% for much of 2016 and early 2017. Thereafter, with NAV returns surging, the discount narrowed rapidly and then hovered between nil and 10% as the NAV fell back in late 2018, before pulling strongly ahead again.
MLN’s equity portfolio is like that of Scottish Mortgage in that it is highly concentrated, predominantly in large US and Chinese tech rms. But, unlike SMT, MNL does not have a substantial exposure to unquoted shares, while around a quarter of its portfolio is invested in futures and options that contributed to resilient returns through much of the March sell-off.
“It took a virus to remind us that supply chains built around human labour costs and environmental arbitrage are a legacy construct, compared with human-proximity, robot-operated, dark factories operating on solar, wind and stored off-peak energy,” Sheppard remarked in March. “Let us hope we learn from the virus.”
Scottish Mortgage (SMT) and Monks (MNKS) claimed the silver and bronze awards respectively in the global generalist category. SMT achieved higher NAV total returns than MLN over the five years to the end of January, but regular investors would have achieved less spectacular compound returns, because SMT shares rarely traded at a discount. In practice, however, the differential would have been narrower because SMT trades on a much tighter bid/offer spread.
In the three other overseas categories, the medal winners include trusts from three regions. This indicates that bottom-up share selection is as important as top-down asset allocation.
The most competitive returns were achieved in the overseas smaller companies category. The gold, silver and bronze winners all outperformed the gold winners in the overseas developed markets and the developing markets categories, highlighting the rewards to be reaped from investing in small firms, despite their volatility.
Gold medal winner Montanaro European Smaller Companies (MTE) focuses on high-quality firms with strong balance sheets. MTE’s chairman, Richard Curling, says: “Balance sheets mean everything in a crash and MTE’s holdings have much stronger balance sheets than the average company in their sectors, as well as better growth prospects.”
In the developing markets category, JPMorgan’s formidable worldwide spread of local analysts proved its worth. JPMorgan Asia Growth & Income (JAGI) claimed silver and JPMorgan Emerging Markets (JMG) bronze. Gold goes to Baring Emerging Europe (BEE).
BlackRock, another well-resourced investment house, did well in the developed markets category, where BlackRock Greater Europe (BRGE) claimed silver and BlackRock North American Income (BRNA) bronze. Fidelity Japan (FJV) claimed gold .
To sum up, keep faith in the future of equities and follow the example of investing gurus such as Sir John Templeton, who believed in “avoiding the herd” and buying “when there is blood in the streets”; or Nathan Mayer Rothschild, founder of the Rothschild dynasty, who advised investors to “buy on the sound of cannons, sell on the sound of trumpets”.
Regular savings (Medals for Monthly Money) awards
A combination of different sectors is taken into consideration for each of these awards. The methodology is based on share price total return for monthly savings of £50 over five years. Contenders must have had a minimum £50 million market capitalisation at the start of the review period on 31 January 2015.
Our 2020 Trust Medal Winners
Value of £50 invested monthly for five years to 31 January 2020
To see a larger version of this table, please click here
Note: Total investment over five years is £3,000. Source: Association of Investment Companies