Core and satellite investment trust portfolios: one year on

A year after three investment experts suggested a core and satellite portfolio for investors with different risk appetites, Jennifer Hill returns to review performance, and ask the experts whether they would make any changes.

Last May’s feature on core and satellite portfolios for cautious, balanced and adventurous investors looks to have been successful and good guidance. Despite markets going into freefall amid mounting investor panic about the coronavirus epidemic, all three have ended the year in the black.

The cautious portfolio was the top performer with a gain of 6.5% in the 12 months to end February. That is as expected given that it is the lowest risk and has the most ballast to withstand severe stock market volatility.

The balanced portfolio trod water with a 0.33% gain. This is also in line with expectations given its balance between risk-on funds that benefited from the strong growth in stock markets last year and defensive funds that helped to stem losses during the market sell-off.

We would have been unsurprised if the adventurous portfolio had been in the red, but it was up 3.5%, having benefited from a recovery in UK property stocks that boosted its holding in TR Property (TRY) and a strong run for Scottish Mortgage (SMT), Britain’s biggest investment trust, which has bucked the market rout due to the astute stockpicking of its managers.

We return to our three portfolio selectors for an update on their selections and to ask if they would make any changes to take advantage of current dangers and opportunities.

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Cautious portfolio

A 6.5% gain for our cautious portfolio was no mean feat given that the MSCI AC World index rose 7.2% and the FTSE All-Share lost 2% during the year to end February. “A cautious portfolio is unlikely to outperform rises in global equity markets,” says Winterflood Securities research analyst Emma Bird, who selected the holdings.

February’s coronavirus-related market slide knocked more than 8% off the portfolio, which gained 14.6% in the 11 months to end-January. Two trusts lost value over the year having fallen significantly amid the sell-off – core pick Perpetual Income & Growth (PLI) was down 9% and satellite play Schroder Asian Total Return (ATR) lost 5%. The latter suffered from discount widening with its shares moving from a 1% premium at the start of 2020 to a 5% discount two months later.

UK mid-cap trust Mercantile (MRC) led the core portfolio with a 21% jump having experienced a considerable re-rating in the final quarter of 2019 as the UK election result dispelled Brexit uncertainty. TR Property topped the satellite portfolio with an 18% gain having continued its “impressive track record of consistent growth”, says Bird.

She suggests three changes to the portfolio – one to the core and two to the satellite portfolio. Among core picks, she is swapping Perpetual Income & Growth for Dunedin Income Growth (DIG). The former has a poor performance record in recent years, while the latter has seen a marked pick-up in relative performance and is now one of the best performers in the UK equity income sector.

“It has been repositioned over the last three years under the new management team, shifting away from higher-yielding stocks towards companies that can grow their dividend,” she says.

Among satellite trusts, she is switching from JPMorgan Emerging Markets (JMG) to JPMorgan Global Emerging Markets Income (JEMI) and from JLEN Environmental Assets (JLEN) to HICL Infrastructure (HICL).

She believes an emphasis on good-quality companies paying attractive dividends will see JPMorgan Global Emerging Markets Income outperform over the longer term, while HICL Infrastructure is more attractive on valuation grounds following a strong run for JLEN Environmental Assets, whose shares rose 11% over the year. “HICL has a strong performance record with low correlation to equity markets,” she adds.

Cautious portfolio

Investment trust  
Bankers 10%
Troy Income & Growth 10%
Personal Assets 10%
Dunedin Income Growth 8%
JP Morgan America 8%
Fidelity European Values 8%
Mercantile 7%
City Merchants High Yield 7%
TwentyFour Income 7%
Schroder Asian Total Return 5%
JPMorgan Emerging Mkts Inc 5%
Worldwide Healthcare 5%
TR Property 5%
HICL Infrastructure 5%


Balanced portfolio

The balanced portfolio had made 11.1% at the 11-month mark but ended the year just in the black with a 0.33% gain.

Four of its constituents finished in negative territory – Pacific Assets (PAC) in its satellite portfolio (-14.5%), and Fidelity Special Values (FSV)(-8%), Murray International (MYI) (-7%) and RIT Capital Partners (RCP)(-6%) in its core portfolio. Patrick Thomas, the investment director of Canaccord Genuity Wealth Management who constructed the portfolio, is sanguine.

While risk-on equity fund holdings such as Impax Environmental Markets (IEM), Monks (MNKS) and Smithson (SSON) benefited from strong stock markets in 2019 (gaining 14%, 9% and 3% respectively over the year), holdings in Personal Assets Trust (PNL) (+5%) and Civitas Social Housing (CSH) (+1.4%) provided a much-needed defensive element during the “aggressive” market behaviour of 2020.

Thomas is making no changes to the portfolio. He considered swapping Monks for Baillie Gifford stablemate Scottish Mortgage – selling the former at a 3.3% premium and buying the latter at a 5% discount – but decided against it.

“Monks is less concentrated than Scottish Mortgage – definitely advantageous when markets are bumpy,” he says.

For Thomas, the most attractive thing about the portfolio is that “it’s a very eclectic bunch of funds that are doing very different things”. “Around 27% of its portfolio is in consumer defensive stocks, healthcare and utilities – three very defensive areas of the market, which bodes well during periods of volatility.”

It has a good slug in absolute return strategies through Personal Assets and RIT Capital Partners. “They tend to underperform on the upside but are very important when markets are wobbly,” says Thomas. “That’s because they are among the few options that allow investment trust investors to get exposure to high-quality fixed income – that’s the way to really defend a portfolio against volatility.”

Balanced portfolio

Investment trust  
Finsbury Growth & Income 16%
Fidelity Special Values 16%
Personal Assets 9%
RIT Capital Partners 9%
Monks 9%
Murray International 8%
Smithson 8%
Pacific Assets 9%
Impax Environmental Mkts  8%
Civitas Social Housing 8%


Adventurous portfolio

The adventurous portfolio, compiled by Chris Salih, a research analyst at Fund-Calibre, was going great guns until global stock markets finally capitulated to worries over coronavirus in mid-February.

Having been up 20% 11 months along, it finished the year up 3.5%. Two trusts posted double-digit returns – satellite choice TR Property, which primarily invests in property company shares in the UK and Europe, and core pick Scottish Mortgage, the global growth goliath with a focus on technological innovation.

TR Property rose 18% as central banks remained accommodative and low interest rates reduced the cost of borrowing and supported property asset values. The post-election euphoria and ‘Boris bounce’ in the UK and a 6% rise in Swedish house prices in 2019 also boded well.

Scottish Mortgage was up 15%, boosted by shrewd stock-picking by managers James Anderson and Tom Slater. Most notably electric vehicle manufacturer Tesla displaced Amazon as the trust’s largest holding, accounting for more than 10% of its £9.5 billion assets at the end of January. Tesla shares have risen four-fold from 254p in October to 938p in February.

A double-digit loss arose in both the core and satellite portfolios – Schroder Oriental Income (SOI), down almost 11%, and Baillie Gifford Shin Nippon (BGS), down almost 20%.

“Shin Nippon has felt the brunt of Japan’s exposure to the coronavirus and slowing growth – more so than the Fidelity China Special Situations (FCSS) trust [up almost 1%],” says Salih.

“Schroder Oriental Income has also been hit in the short term but remains a good core Asian equity vehicle.”

As a long-term proposition, he is “happy with the portfolio as it stands”, adding “I like all the trusts within it.”

One to particularly watch this year given the forthcoming US presidential election is satellite fund Polar Capital Global Healthcare (PCGH). “Drug pricing and healthcare tend to be big campaign themes, but the need for vaccines – such a public subject at the moment – may change the scenario a little,” adds Salih.

Adventurous portfolio

Investment trust  
City of London 30%
Scottish Mortgage 20%
Jupiter European Opportunities 12%
Schroder Oriental Income 8%
Baillie Gifford Shin Nippon 7.5%
Fidelity China Special Situations 7.5%
Polar Capital Global Healthcare 7.5%
TR Property 7.5%


Dialling down risk in retirement

The asset mix should change in retirement to dial down risk and reflect an income focus. For cautious investors, Bird recommends increasing exposure to fixed income and multi-asset constituents (City Merchants High Yield, TwentyFour Income and Personal Assets) and tilting equity exposure towards the more diversified trusts (Troy Income & Growth and Bankers).

For balanced investors, Thomas suggests adding to specialist property play Civitas Social Housing, which yields 5.5% and is trading at a near 10% discount to net asset value.

In the adventurous portfolio, Salih recommends reducing the satellite portion by replacing Baillie Gifford Shin Nippon and Fidelity China Special Situations with Murray International, a global equity income trust.

Please note the performance figures for the portfolios were recorded before the worst of the slump in global markets

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