Calling time on Baillie Gifford Shin Nippon’s big premium

For this month's Buy, Hold, Sell feature, Tom Bailey speaks to Peter Walls, manager of the Unicorn Mastertrust.

Unicorn Mastertrust is one of the few funds that buys investment trusts. It is ‘all about capital growth,’ says fund manager Peter Walls; ‘we’re not trying to generate income particularly’. Instead, the fund focuses on value investing, targeting trusts trading on a discount.

When selecting which trusts to buy into, Walls says he tries to ‘get exposure to areas promising strong returns in future’. This means his stock picks are typically a bit contrarian.

‘People like to buy things already up, so momentum is exaggerated in the investment trust world,’ he says. ‘What I’m trying to do is recycle capital from situations where it has done well to those where discount value is available.’


Aberforth Smaller Companies (ASL)

A recent buy for the fund has been Aberforth Smaller Companies. This buy perhaps illustrates Walls’s contrarian bent. Owing to the weakness of the pound following the Brexit vote, conventional wisdom suggested the best way to gain exposure to UK companies was to go for larger firms generating their earnings in foreign currencies. Demand for dollar-earning companies helped boost the FTSE 100 index early in 2017.

At the same time, however, there is a ‘perception of heightened risk for UK plc, particularly since the Brexit wobble’, and particularly for domestic-facing smaller firms.

Perhaps reflective of these concerns, Aberforth Smaller Companies is on a discount of more than 13 per cent (as at 11 January). However, as Walls notes, momentum is a pronounced characteristic in the investment trust sector – and trusts which focus on UK small caps, such as Aberforth Smaller Companies, may now be well placed to benefit from it. Walls believes that UK smaller companies are now an attractive bet for value investors and likes Aberforth because of its strong management with a value focus.

Aberforth Smaller Companies was first purchased in January 2017 at 1107p, with additional top-ups in September, October and November.


BlackRock World Mining (BRWM)

Following ‘a dreadful meltdown with the end of the commodity supercycle’, BlackRock World Mining has since recovered strongly. Since Walls first purchased it towards the end of 2015 in anticipation of an upswing, the net asset value of the commodity-focused trust has doubled.

Walls says he continues to hold BlackRock World Mining primarily on the grounds that the global economy is currently on an upward trajectory and that’s good news for commodities. In particular, in 2017, for the first time since the start of the financial crisis and resulting global recession, all major regions experienced economic growth in sync.

On the back of recovering economic growth and commodity prices, the trust has been able to ‘rebuild its dividend stream.’ Its current yield of 3.2 per cent is likely to be maintained and may grow, he believes. Again, this is contingent on the performance of the global economy – and Walls is broadly optimistic about global growth in 2018. ‘The world,’ he says, ‘should see well-coordinated global growth in 2018 and potentially beyond.’

The trust was first purchased in October 2015, but Walls has not topped up the position since early 2016 when it was at its cheapest.


Baillie Gifford Shin Nippon (BGS)

Japan was a hotspot for investors in 2017. Optimism about prime minister Shinzo Abe and his continued commitment to economic reforms – known as Abenomics – helped the country’s markets to surge, while economic growth saw a record streak. The result has been stellar performance from many Japan-focused funds, including the Baillie Gifford Shin Nippon trust, which saw a return of 49.8 per cent in 2017.

But for Walls, this is the time to sell. He is keen to emphasise that his decision to sell Shin Nippon has nothing to do with a lack of faith in the trust’s management team, which he regards as ‘very high quality’; nor is he souring on prospects for the Japanese market.

Instead, he decided to sell as part of his strategy to recycle capital from successful investments into those offering value opportunities. And Shin Nippon has done very well – the trust has seen a cumulative performance of 188.7 per cent over the past three years, roughly the amount of time Walls held it. ‘It’s been storming, to say the least,’ he comments. Now, with the trust on a premium of nearly 10 per cent, it is time to sell and recycle the capital elsewhere. 

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