Investment trust portfolios annual review - adventurous tips

The adventurous trust portfolio has gained 16 per cent over the past year. Here are our new selections

Our annual tips offer an adventurous selection for seven broad categories of equity-oriented investment trusts, as well as for private equity and specialist trusts. 

They also include a tip from each of three investment trust specialists who provide us with valuable research throughout the year.

- Investment trust portfolios annual review - expert tips

Alternative asset categories are covered separately in our annual niche investment trusts tips in the February issue of Money Observer Trust.

The adventurous tips are expected to pull ahead in rising markets. Some focus on smaller companies, which have historically achieved better long-term returns, but can be hit hard in risk-averse markets. Others are strongly growth-oriented or highly geared.

When choosing between well-managed trusts with a similar focus, we prefer those with lower costs and less potential downside in their discount or premium to net asset value (NAV).

The performance of our tips is monitored in a portfolio format and they are updated in each quarterly issue of Money Observer Trust. If any switches are made, these are executed at the same weighting in the portfolio at that time. However, in each annual review the constituents are rebalanced equally.

The adventurous and conservative tips are likely to show at their best in different market conditions, and it is up to investors to decide which to back. The adventurous portfolio performed better over six months and has pulled even further ahead over one year and since launch in 2014. However, the tables could turn if the market slumps.

- Trust tips portfolios annual review - How our 2017/18 selection fared

- Investment trust portfolios annual review - conservative tips

We like to run our winners, so Baillie Gifford Shin Nippon and Allianz Technology keep their places despite their shares trading close to or above NAV. 

Below is the adventurous selection for the coming 12 months. 

UK Equity

Lowland Investments (LWI)

Lowland has struggled recently, partly due to a 1.3 per cent loss on its stake in Conviviality Retail.

Manager James Henderson’s contrarian style sometimes backfires, but his long-term returns have been excellent, and recently appointed co-manager Laura Follis impressive, so it remains our adventurous choice.

Unusually for a UK equity income trust, Lowland has nearly 60 per cent in smaller and mid-sized companies, because Henderson believes smaller businesses can achieve the largest long-term gains.

Industrials and financials account for 60 per cent of the portfolio, with Royal Dutch Shell the largest individual stake at 7.6 per cent. There is minimal exposure to consumer goods and technology.

Gearing is well up at 14 per cent as the managers have been finding more companies combining reasonable valuations with encouraging growth prospects. 

Regrettably, Lowland levies a performance fee, but it has a reasonably demanding three-year hurdle before this can be triggered. 

Dividends for the current year are expected to rise 8.2 per cent, with scope for further increases enhanced by the trust starting to charge 50 per cent of fees and finance costs to capital.

UK Smaller Companies

Rights & Issues Investment Trust (RIII)

Rights & Issues has had a disappointing year but remains our adventurous choice. With 10 stocks accounting for two thirds of its portfolio, it has suffered from poor returns from its big stakes in Scarpa Group and RCP. However, other sizeable holdings such as Hill & Smith, VP and MacFarlane have recently been in good form.

Longstanding manager Simon Knott has a fantastic long-term record, and is sure to be keeping in close contact with all his holdings given his family’s multimillion-pound stake in the trust. The NAV per share is being enhanced by regular buy-backs on double-digit discounts.

Knott’s concern about the effects of Brexit are reflected in the portfolio’s focus on industrial companies with global businesses.


Monks Investment Trust (MNKS)

Monks is our new adventurous choice, despite its premium rating. Like most Baillie Gifford-managed trusts, it is strongly growth-oriented and holds a lot of companies capitalising on technological advances.

However, its management team is committed to maintaining a well-diversified portfolio. To this end, holdings are selected from every continent bar Antarctica and from across four categories which are expected to show at their best at different times. In addition, all holdings are capped at 3 to 4 per cent of the portfolio.

Lead manager Charles Plowden and his two colleagues have worked together since 2005. They have contrasting investment approaches, but must all agree on every purchase.

They have a strong long-term record and all purchased significant stakes in Monks when they took charge in March 2015. The active share is 91 per cent, gearing is around 6 per cent, and ongoing charges are 0.6 per cent.

Global Emerging Markets

JPMorgan Emerging Markets Trust (JMG)

As our adventurous choice since April, this is one of the largest and lowest-cost trusts in the global emerging markets sector and boasts the best NAV total returns over most periods yet trades on a double-digit discount.

Austin Forey, manager since 1994, says his hand has been greatly strengthened by the expansion of JPM’s emerging markets research team in recent years. This has helped him to capitalise on the emergence of China as a rich source of opportunities, and on developments in technology.

China/Hong Kong is JMG’s largest country weighting, followed by India, South Africa, Brazil and Taiwan. Financials and information technology are the dominant sectors. In a sign of caution, gearing is down to zero. 

Forey says investors in emerging markets should benefit from growing economies, attractive demographics, great scope to improve productivity and plenty of entrepreneurial activity, but warns that ‘bumps in the road are inevitable’.

Asia Pacific Ex Japan

Schroder AsiaPacific Fund (SDP)

This trust remains our adventurous choice, as it has achieved consistently top quartile results within its sector yet trades on a wide discount. Longstanding manager Matthew Dobbs is supported by more than 40 locally based company analysts.

He remains excited about the choice of promising companies in a region which accounts for nearly half the world’s population, is very diverse in terms of GDP per head, and is growing consistently faster than Western economies due to ‘hard work, high savings rates, innovation and generally pretty strong institutional structures.’

China and Hong Kong account for nearly half SDP’s portfolio, and over a third is invested in technology stocks. We expect the trust to continue to flourish as long as Asia continues to shrug off geopolitical tensions and, as Dobbs says, ‘the era of generally free and open trade is not nearing an inglorious and painful end’.


Baillie Gifford Shin Nippon (BGS)

This remains our adventurous choice, despite its premium rating. Praveen Kumar has maintained the trust’s exceptionally strong performance during his two and a half years in sole charge, and we like to run our winners.

BGS focuses on very small Japanese companies with big long-term prospects, many of which receive little, if any, research coverage. Kumar says many Japanese companies are poorly run and consequently there are plenty of opportunities for entrepreneurs who are prepared to launch disruptive businesses. 

He particularly favours those companies that are targeting large, inexorably growing end markets, such as electric vehicle adoption.

BGS is not benchmark-aware (its active share is over 90 per cent), turnover is low and ongoing charges are below 1 per cent. Active gearing is close to 10 per cent.


JPMorgan European Smaller Companies Trust (JESC)

JSEC replaces TR European Growth Trust (TRG) because it invests further up the size scale and is therefore less vulnerable to a potential flight from very small, higher-risk companies. On the other hand, its focus on companies capitalised at less than £5 billion means it should still benefit from the long-term outperformance of medium to smaller companies.

Its gearing is slightly lower than TRG’s and it has no performance fee.

Under longstanding manager Francesco Conti and co-manager Edward Greaves, JESC is very actively managed, and has been more successful than TRG in making recent adjustments to its portfolio, notably in trimming exposure to pro-cyclical sectors such as industrial engineering companies and automobiles and parts while markets were still strong.

They also reduced exposure to Italy before and after its recent elections. Conti says industrial engineering continues to be an overweight position.

He hopes that the bull market has further to run, but warns that growth in Europe’s export-oriented economy could be badly derailed by a trade war.

Private Equity

Pantheon International (PIN)

PIN is also a fund of funds but is more diversified. North America accounts for 54 per cent of its underlying portfolio, with 28 per cent in Europe, 12 per cent in Asia and emerging markets and 6 per cent global.

Some 30 per cent is in large/ mega MBOs and 30 per cent in small/mid cap MBOs, 17 per cent is in growth-oriented deals, 10 per cent in special situations and 7 per cent in venture capital. From a sectoral perspective, nearly a quarter of PIN’s portfolio is in information technology, with a similar exposure to consumers, 14 per cent in healthcare, and 11 per cent each in financials, industrials and energy.

Its portfolio is more mature than SLPE’s, with 54 per cent invested in funds formed at least fi ve years ago. But on the downside, it has a performance fee, in addition to a similar basic charge and fees on its underlying holdings.

It has no yield, and its discount has narrowed since its redeemable and ordinary shares were merged. It remains our adventurous choice.


Allianz Technology Trust

Impressive returns have been rewarded with a premium rating, leaving more downside than upside on the discount front. However, San Francisco-based manager Walter Price is upbeat about the ongoing wave of innovation in the sector, so it remains our adventurous choice.

Around 85 per cent of the portfolio is in US companies, which are benefiting from corporation tax cuts and the strong economy. Companies closely involved in cloud computing account for 40 per cent of the portfolio and have been meeting or exceeding expectations. Security companies are doing well as businesses wake up to the severity of the security threat.

Price believes artificial intelligence (AI) has massive potential in sectors such as autonomous driving, and is excited about the potential for technology to revolutionise healthcare and improve productivity.

He is, however, becoming more selective, consolidating exposure into companies with the best solutions and clear paths to strong cash flow.


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