Global: Foreign & Colonial
Foreign & Colonial Investment Trust (FRCL) has picked up well in the three years since it was decided to slash the trust’s UK exposure and delegate equity selection to a variety of regional specialist funds and trusts. Paul Niven was appointed manager in July 2014, and is responsible for strategic and tactical construction as well as manager selection.
The trust was highly commended in this year’s Money Observer Investment Trust awards, and it has continued to make good ground since it became our adventurous global selection last summer.
With over 600 holdings, FRCL looks old-fashioned, but Niven believes its diversified underlying stock selection strategies, including 8 per cent in private equity, should help it withstand short-term market volatility. Only 8 per cent is in the UK, so it should benefit from any sterling weakness, and gearing is currently low as well as relatively low cost.
We have moved the trust from the adventurous to conservative roster.
UK equity: Temple Bar
Last year’s promising recovery in value stocks has given way to a resurgence in growth stocks. However, we expect value to reassert its long-term dominance eventually and that Temple Bar Investment Trust’s (TMPL) long-established manager, Alasdair Mundy, will make the most of it.
Given the trust’s reasonable yield and exceptionally low costs, we are prepared to wait for that to happen, especially as repayment of its most expensive debenture loan stock next December will boost cover for the dividend, which has been raised every year since 1984.
Mundy looks for companies whose shares have fallen steeply, but whose businesses remain sufficiently sound to be able to recover, and he expects further such opportunities to occur as worries over Brexit unsettle the UK economy.
Over the past few years he has done well from backing oil majors and some big supermarkets, but has experienced mixed fortunes with banks, which are his largest sectoral weighting.
Temple Bar’s defensive attributes are bolstered by Mundy’s decision not to deploy any gearing and to invest 3 per cent in precious metals as protection against monetary authorities opting to infl ate away their debt burdens.
Japan: JPMorgan Japanese
JPMorgan Japanese Investment Trust (JFJ) was disappointing over the winter because it missed out on the revival in value-oriented shares.
However, manager Nicholas Weindling says many such stocks which performed well in this period ‘have business models which will impact on their competitiveness in the coming years.’ He is therefore sticking with his preference for companies exhibiting ‘quality and growth characteristics’ even when they are valued on above-average price/earnings ratios.
Weindling is based in Tokyo, where he and his large research team search for overlooked opportunities among medium to smaller companies. However JFJ’s 72 holdings also include larger companies such as Mitsubishi UFJ and Sumitomo Mitsui Financial Group, which have been restored to the portfolio in expectation that interest rates have stopped falling.
Gearing of 13 per cent reflects Weindling’s belief that the Tokyo market is benefiting from stable domestic politics, accelerating global growth and a reasonably priced yen. He adds: ‘The continuing improvement in corporate governance is the single most important structural shift that is happening and may mean the valuation gap versus other markets can start to close.’
Europe: Henderson European Focus
John Bennett, manager of Henderson European Focus Trust (HEFT), believes Europe is in a late-stage bull market, supported by good company earnings, falling unemployment, rising inflationary expectations, and valuations that look reasonable compared to the US and to history.
Bennett has been tilting the trust’s portfolio towards a value approach for well over a year, as many growth stocks looked uncomfortably expensive, and he expects the shares of many less-highly rated companies to do well as European economies strengthen.
HEFT’s relative returns suffered from a resurgence of growth stocks in early 2017, but it has been back on song recently, and its performance since Bennett took charge at end 2010 has been impressive.
It is now our conservative selection rather than our adventurous choice.
Bennett admits he was too slow to reduce his large exposure to healthcare as its scientific attractions were overshadowed by political considerations, and after cutting back he could not resist rebuilding stakes in Roche and Novartis at lower prices.
His big theme is now financials, and more specifically north European retail banks with dominant positions in their domestic markets, which he expects to benefit if interest rates tick up.
His substantial overweight in medium-sized and smaller companies has been a key driver of the trust’s outperformance in recent years.
UK smaller companies: BlackRock Throgmorton
BlackRock’s two UK smaller company trusts have continued to perform strongly – both within the UK smaller companies sector and relative to the majority of mainstream UK equity trusts. Mike Prentis manages the conventional stock portfolios of both, which have over 100 holdings comprised mainly of high quality, cash generative, growth companies which have performed well in different economic conditions.
Although we like both trusts, BlackRock Throgmorton Trust (THRG) remains our conservative choice, because its shares trade at a wider discount to net asset value and has better defensive qualities. One reason for this is that it has substantially less in Aim-listed stocks, which could prove particularly vulnerable in a market setback. Another is that it is geared via a portfolio of long and short contracts for difference.
Asia pacific ex Japan: Invesco Asia
We made Invesco Asia Trust (IAT) our conservative choice in the spring because of its consistently above-average performance in recent years. Manager Ian Hargreaves and his colleagues on Invesco Perpetual’s six-strong Asian team are based in Henley, but meet more than 700 companies a year in their search for well-managed businesses on attractive valuations.
IAT differs from most of its peers by including Australia in its remit. In addition, Hargreaves ventures well down the size spectrum in search of overlooked opportunities and deploys a macroeconomic overlay.
At 16 per cent, India is currently the trust’s largest country overweight position, because he believes it has a good political backdrop and is in the right place in the credit cycle. At 21 per cent, China is its largest underweight position, but maintains long-term commitment to internet companies such as Baidu and NetEase.
Private equity: Standard Life Private Equity
NB Private Equity has been deservedly rerated since it became our defensive private equity choice. But its NAV returns have flattened, its portfolio is immature and it seems timely not to suggest two private equity funds focused predominantly on the US.
We are therefore replacing it with Standard Life Private Equity (SEP), which holds stakes in 43 leading private equity funds, giving it exposure to over 300 mainly mid-market companies. Two thirds of its portfolio is currently in continental Europe, with nearly a fifth in North America and the rest in the UK.
Although the board has removed former geographic and size restrictions, chairman Edmond Warner says ‘the portfolio will remain convictiooriented with a European focus’.
Nearly 40 per cent of SEP’s investments have been held for at least five years, suggesting good prospects for rewarding realisations. It recently cut its charges, raised its dividend and undertook to grow this at least in line with inflation.
Specialist: Capital Gearing
Capital Gearing Trust (CGT) remains our selection for investors who share Peter Spiller’s belief that virtually all asset classes are dangerously overvalued. Spiller and co-manager Alastair Laing have positioned CGT’s portfolio as defensively as possible, and are not worried that last year’s returns lagged behind more optimistically managed trusts.
Instead, they are focused on preserving sufficient funds to restock the portfolio at far lower prices than currently on offer.
With that in mind, nearly two thirds of assets are currently in short-dated UK, US and Swedish government bonds or top-quality corporate bonds, many of which are index-linked. The rest is spread across a diverse selection of securities including absolute return funds, German residential property companies, zero dividend preference shares, gold, and investment trusts which are in liquidation or with guaranteed exits at NAV.
Global emerging markets: Utilico Emerging Markets
The performance of Utilico Emerging Markets (UEM) tends to look dull when emerging stock markets are roaring ahead, as has been the case over the past 12 months.
However, it has more than made up for it in difficult times, pulling well ahead of the MSCI Emerging Markets index over five and 10 years. It also offers an attractive yield, paid quarterly, and is using share buybacks to control its discount. It retains its longstanding place as our conservative choice.
Manager Charles Jillings has made extensive adjustments to the portfolio, raising exposure to Brazil, Argentina, Romania and India at the expense of China, Malaysia, Chile and Thailand. Electricity (mainly power transmission) is up to 24 per cent, and airports and satellites are down.
With many emerging markets delivering growth with low inflation and positive reform policies being implemented in countries such as India, Argentina and Brazil, Jillings has increased the trust’s gearing, but is using derivatives to hedge against a fall in the S&P 500 index.
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