Tips update: volatility prompts changes to cautious and adventurous portfolios

The challenging final quarter of 2018 for equity markets has prompted Fiona Hamilton to make two changes to our annual portfolios at the halfway stage.

There were few hiding places for equity investors in the last quarter of 2018, with US, Japanese, European and UK markets all suffering double-digit setbacks, while Asia ex Japan and emerging markets were also in the red, if less severely so.

Many specialist sectors were also hit, notably technology, with the Dow Jones Global Technology index down 15%. This hurt a number of our adventurous trusts, as did the fact that in most regions smaller companies were harder hit than large ­firms – the UK’s Alternative Investment Market plunged by more than 20%.

With more than half of our selections suffering double-digit setbacks, it was some comfort that on average our conservative choices held up a little better than both the FTSE All Share index and their adventurous counterparts over a challenging three months.

Pockets of resilience

Our two emerging market trusts proved the most resilient. Utilico Emerging Markets Trust (UEM) delivered a 5.3% share price total return and JPMorgan Emerging Markets Investment Trust (JMG) a 1.4% gain. These trusts have also been the top performers over the past six months. The Utilico trust bene­ ted from robust returns in Brazil and South America generally. Its emphasis on essential services tends to stand it in good stead during hard times. The JPMorgan trust’s manager, Austin Forey, is highly experienced and has formidable research support. Moreover, the trust has been favouring the Brazilian stockmarket.

Our ultra-conservative choice, Capital Gearing (CGT), only just lost ground over the quarter and remains in positive territory over one year. Its objectives are to preserve shareholders’ real worth and achieve absolute total returns over the medium to longer term. In recent years it has lagged most equity-oriented trusts, as longstanding lead manager and shareholder Peter Spiller has been wary of equity valuations, but its caution has paid off in the downturn.

It was a relief to see our conservative global choice, F&C Investment Trust (FCIT), perform in line with the MSCI World index and disappointing to see Monks Investment Trust (MNKS) fall behind. Like most Baillie Gifford trusts, Monks has suffered from market misgivings about many formerly highly rated growth shares, but its managers’ determination to maintain a widely diversi­fied portfolio meant it suffered less than several other Baillie Gifford trusts, including Japan smaller companies specialist Baillie Gifford Shin Nippon (BGS). This trust is one of our star performers and remains well ahead of every other Japan trust over three, ­five and 10 years.

Edinburgh Dragon (EFM) held its ground over the quarter, with its manager’s emphasis on quality ­ rms standing it in good stead. Its NAV total returns have been among the best in its sector over the past six months and its discount has been supported by expectations of a tender for 30% of its shares at a 2% discount to NAV in late January.

Tough going

Our UK and European picks all had a hard time, with Lowland (LWI) proving particularly disappointing. Manager James Henderson’s contrarian style and substantial exposure to medium and smaller companies could pay off handsomely if the UK market picks up, especially as the trust is 12% geared, but the deep value approach of Temple Bar (TMPL), our other UK choice, could also work well in that scenario. We are therefore replacing Lowland with Troy Income and Growth Trust (TIGT).

Troy has no gearing, just 27% of its portfolio is in smaller or medium-sized ­firms, and its zero discount policy should keep its share price close to NAV. Its managers’ cautious approach has served shareholders well over the past six months and that will hopefully continue if UK markets remain under pressure.

In Europe we suggest replacing Henderson European Focus (HEFT) with Fidelity European Values (FEV), a more cautiously managed trust, in case markets fall further. It has a better one-, three- and five-year record but trades on a wider discount. Manager Sam Morse favours large ­firms that are growing their dividends and have strong balance sheets. As a result, FEV can look dull in soaring markets, but it looks a relatively safe way to invest in Europe in uncertain times.

A table showing how half of the trust tips suffered double-digit falls in Q4 2018


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