With the macro backdrop challenging once again, specialist trusts look well placed to provide resilience and add diversification to equity-heavy portfolios.
It was a difficult year for global stockmarkets, so it was good to see the majority of our annual niche investment company selections achieving positive share price total returns, in some cases despite flagging ratings.
Our niche selections should be seen as complementary to the predominantly equity-focused conservative and adventurous investment trust selections, which we update every quarter (see this article for the latest tips update). They are likely to underperform the equity-oriented selections when markets are rising, but they will hopefully continue to prove relatively resilient in difficult times.
A number of them focus on areas such as property, unquoted companies and infrastructure concessions, which are so illiquid that they are far better suited to closed- than open-ended funds. Family-controlled trusts derive their appeal from their boards’ commitment to an exceptionally long-term approach, while venture capital trusts are interesting because of the special tax treatment they benefit from.
Investors often have priorities that are highly individual to them. Youthful contributors to a pension, for example, are likely to favour long-term capital-only returns, whereas retirees are likely be more interested in income than capital growth. We have therefore categorised our selections according to their investment objectives.
Long-term total returns
Family trusts: The attraction of family-controlled trusts is their multi-generational approach, which typically involves investing for the long term, guarding against downside risks, controlling costs and targeting a progressive dividend to keep the wider family happy. Caledonia Investments (CLDN), which is 35% owned by the Cayzer family, ticks all these boxes.
With Cayzer scion and lead shareholder Will Wyatt in charge, the trust has been meeting its strategic aims, which are to deliver returns of retail price index inflation plus 3-5% over the medium term, outperform the FTSE All-Share index over 10 years, pay an increasing annual dividend (as it has done for the past 51 years) and manage risk to avoid permanent loss of capital. Despite this, its shares trade on a discount of 20%.
The discount can be partly attributed to the Cayzers’ large stake, which inhibits share buybacks, and partly to the trust’s sizeable exposure to private equity, which tends to trade at a wider discount than quoted equities do. However, Caledonia has being doing well from its patient and supportive approach to unquoted stocks, and in theory they could hold up relatively well in a bear market.
Caledonia’s 36% exposure to the UK is higher than most global trusts and could provide a useful uplift when Brexit is finally sorted. Wyatt puts a lot of emphasis on investing in companies with significant market positions and strong balance sheets, and has been cautious of valuations for some time. He looks well placed to steer his ship through rough waters.
Total returns with an attractive income
Property: We like to run our winners, and Picton Property Income (PCTN) has achieved well-above-average NAV total returns in the UK diversified commercial property sector since it was first selected as a niche investment trust pick two years ago.
Despite this, its shares have recently slipped to a sizeable discount, which looks good value for investors who like the security of investing in property. Moreover, it has an attractive yield of more than 4%.
One of Picton’s strengths is its management's total commitment to the trust – there are no other assets to distract them. Under chief executive Michael Morris, the portfolio has been concentrated down to 49 assets. It has a 44% exposure to industrials, where it has been doing well; nearly 35% in of offices; and, thankfully, just 20% in retail, where vacancies rose last year.
This was partly due to tenants being forced into company voluntary arrangements and partly to a Picton-initiated move to secure vacant possession of the trust’s large Covent Garden property to allow extensive refurbishment prior to re-letting or sale. Despite this, overall occupancy remained above average at 94% and numbered around 350 tenants in all. Picton’s income stream is not too vulnerable to individual upsets.
Given the weakening outlook, the trust did well to sell two properties for good prices in the first half of 2018 and pay off some of its more expensive debt. This reduced its loan-to-value ratio to 25%. The company’s recent move to Reit status is expected to result in cost and tax savings, which should bolster returns through what could prove a tricky phase.
Speciality property: Supermarket Income Reit: (SUPR) joined our roster last year and keeps its place, as it focuses on a property sector that should prove relatively resilient, regardless of the fate of the wider UK economy. It invests in freehold and long-lease properties that are let on ‘fully repairing and insuring’ terms to the largest supermarket operators with upward-only, index-linked rental uplifts (collared at 0% and capped at 4-5%). To date, it has acquired six of these ‘omnichannel’ supermarkets, which are let to Tesco, Sainsbury’s and Morrisons on 19-year average unexpired lease terms.
Supermarket Income is managed by Steve Windsor and Ben Green at Altrato Capital, which has structured and executed more than £3.5 billion of supermarket sales and leasebacks over the past decade.
To qualify for consideration, assets must be in highly populated residential areas with strong transport links, and their operators must already be fulfilling the last mile of grocery home delivery and/or click and collect.
Additional attractions may include the potential for short-term gains through active management, such as the installation of green energy, or long-term gains via a change of use, such as redevelopment into residential property.
The managers target stable long-term, inflation-linked income as well as potential for capital gains. Both managers have substantial family shareholdings in the trust. Dividends are paid quarterly and are forecast to rise to 5.6p for the year to the end of September 2019.
Direct/fund of funds private equity: ICG Enterprise (ICGT) has made promising progress since its management team moved from Graphite Capital to ICG in February 2016. Its portfolio has been performing well: its NAV total return was 8% in the first half of 2018, thanks to strong profit growth across its largest holdings and realisations covering 14% of its portfolio at an average of 31% uplift to carrying value (an accounting measure of value).
Meanwhile, ICG has been steadily shifting the balance of its portfolio from third-party private equity funds to high-conviction directly managed investments, which now account for 44% of the trust’s portfolio. Additions of the latter have helped lift the trust’s North America exposure from 14% three years ago to 24%, against a medium-term target of 30-40%. Over the same period, UK exposure fell from 45% to 32%, while exposure to Europe held steady at 40%.
The management team, led by Emma Osborne, is keen to keep ICG fully invested across the cycle, so it has forward commitments of £394 million due to be drawn over the next four to five years. Against this, it has cash of £72 million and undrawn bank facilities of £177 million. In addition, more than a third of the portfolio has been held since 2014 or earlier, so it should be ripening up for sales.
Osborne is cautious about the outlook, so investments have focused mainly on high-quality defensive businesses with non-cyclical growth drivers such as firms in the education and healthcare sectors. ICG targets a minimum dividend of 20p a year, paid quarterly and partly funded, as necessary, from capital. With its discount out to the low 20s, it keeps its place.