Thursday, 18th June 2020 08:06 - by David Harbage
Based on feedback to this blog, clearly a lot of investors in collective investment vehicles (like unit or investment trusts) put a lot of faith in individual fund managers – notwithstanding one or two recent high profile disappointments – with perhaps Warren Buffet ‘the sage of Omaha’ being the most lauded. This blog seeks to answer the question, “Who is your favourite or Britain’s most famous fund manager?”
In current times of perhaps unprecedented economic uncertainty, the writer has sought to highlight some of the options available to long term investors seeking to try and ‘add value’ beyond bank or building society deposit rates (which appear set to remain negligible for the foreseeable future). Having an understanding of what one chooses to own and why – effectively gaining an appreciation of what influences, for better or worse, different kinds of asset – makes eminent sense to this author at least, and should help the Do-It-Yourself investor make considered selections.
However, many more of us are content with a “Follow the man” (or woman) approach - and entrusting their wealth to a trusted expert. That could be an independent financial advisor (IFA), essentially relying upon their judgement to make the best selection of investment funds, or perhaps the personal saver will decide themselves to invest in a fund run by a famous fund manager who probably possesses a prominent media profile.
Brokers or IFA research institutions will maintain a close watch on how individual funds are invested and, beyond comparing past performance and annual fund charges - ensuring the objective (growth in capital and income, or capital preservation, would be examples), guideline limitations (minimum or maximum of any one asset type or security allowed) and benchmark (which might be cash, inflation, a pertinent index or the peer group) is similar – will monitor a fund manager’s style (sector and thematic calls, company size preference), the extent to which he or she has discretion, concentration or diversification (risk impact of the number of constituents), liquidity (size of fund, ease of dealing in its constituents), use of gearing (to inflate returns when assets appreciate), use of derivatives (to hedge portfolio risks or benefit from anticipated asset depreciation) and many other factors. After consideration of these, the selection process for the fund research team will incorporate both subjective assessments and quantifiable or measureable factors to determine inherent risk. As an example of the latter, one can calculate information and other ratios to determine how much risk one fund manager is taking as compared to another and by reference to a benchmark index.
Back to the original question of selecting a favourite fund manager or nominating Britain’s most famous money manager. There is not an easy or obvious answer to this, with several funds with equally impressive performance track records investing in different asset types, but this blog will focus on company share (equity) investing managers and try to highlight some of the most famous. The writer’s recent articles featured Katie Potts of Herald investment trust (‘At the crossroads’ 7 May 2020 blog), Alasdair McKinnon of Scottish investment trust (‘A man for all seasons’ 22 May 2020 blog), James Goldstone at Keystone investment trust and Simon Barnard at Smithson investment trust (‘One or two for the optimists’ 1 June 2020). We now wish to add three more well-known and highly regarded fund managers to make a ‘Magnificent Seven’ List of investment trusts
Douglas Brodie is the lead manager of Edinburgh Worldwide investment trust which seeks capital growth from a global portfolio of initially immature entrepreneurial companies, typically with a market worth of less than US$5bn when first investing, that are believed to offer longer term (at least five years) growth potential. While up to 15% of the trust can be invested in unlisted investments, the latest published geographic location of its technology-biased assets reveals a breakdown favouring: North America 59.5%, UK 16.2%, continental Europe 7.7%, Japan 5.3% and China 4.7%.
This £780m fund is priced very close to the underlying worth of its shareholdings (or net asset value, NAV) – akin to an open-ended fund – has an annual charge of 0.75%, features low turnover within its portfolio and boasts very strong relative performance. Net asset value has increased by 243.5% over the 10 years to 30 April, while its benchmark (of MSCI World index to 1 February 2014, and S&P Global Small Cap index since then) delivered 109.5%. Over 1, 3 and 5 years to 30 April 2020, NAV returns for the trust were +11.6%, +94.4% and +135.7% as compared to the benchmark’s respective returns of -11.8%, +0.6% and +34.6%.
Douglas Brodie’s stock selection and sector positioning is not unlike its successful FTSE100 sister fund, Scottish Mortgage investment trust, which is also managed by Baillie Gifford. The portfolio evidences a clear preference for businesses featuring growth potential (with online shopping via Ocado and Tesla’s electric cars featuring within the trust’s top 4 holdings). Although many of these assets seem expensively priced, the post Covid-19 world is likely to experience a pronounced acceleration in the use of the internet and other new technologies – ranging from biotech to IT software – which defines this investment trust.
Many private client investors will be familiar with Nick Train who, along with Michael Lindsell, co-founded the portfolio management business Lindsell Train (LT) in April 2000. Nick Train manages Finsbury Growth & Income investment trust which invests in UK equities with the objective of achieving capital and income growth, and providing a return in excess of the FTSE All Share index. The investment policy is based on a very concentrated (the ten largest holdings equate to 83.7% of the portfolio, which currently has only 24 constituents), a ‘bottom-up’ (driven by company-specific research, rather than a global macro-economic perspective) stock selection process, with a focus on durable, cash generative businesses that are under-priced on LT’s valuation analysis. While UK equity focused, the trust can invest up to a maximum of 20% of its portfolio in quoted companies on overseas bourses and invest up to 15% in other closed ended investment companies.
The performance track record of this fund has been impressive, consistently beating its benchmark over 1, 3 and 5 years: to 31 May 2020, NAV returns have been -4.2%, +19.5% and +47.9%, as compared to the FTSE All Share’s -11.2%, -8% and +16.5% respectively. Nick Train’s selections feature a mix of those with regular, subscription-type revenues (such as London Stock Exchange 12.3% of the portfolio, RELX 10.7%, Schroders 7.3%, Hargreaves Lansdowne 6.3%, Sage 6%) and beloved or essential consumer brands (notably Unilever 10%, Diageo 9.9%, Mondelez – think Cadbury – 9%, Burberry 6.4% and Heineken 5.1%). In addition, another characteristic of the trust’s portfolio is balance sheet strength with 27% of its worth featuring financially ungeared firms (with no net debt).
Rather like Douglas Brodie’s Edinburgh Worldwide, there is significant investor appetite for the shares of Finsbury Growth & Income investment trust - which means that the price rarely falls to a discount to net asset value. At the time of writing, the shares are valued (more akin to an open-ended investment collective, than a closed-ended investment trust) at a 1% premium to NAV. Clearly Nick Train’s followers believe that his focus on high quality companies means that they – and therefore this £1.8bn trust (which, incidentally, has ongoing annual charges of 0.7%) will survive the imminent recession and ultimately thrive.
The third fund manager who merits closer inspection is Gervais Williams who, along with Martin Turner, manages the Diverse Income investment trust. Providing something of a contrast with the two previously mentioned growth-focused funds, this trust’s objective is to provide an attractive level of dividends coupled with capital growth over the long term. Gervais Williams has a multi cap universe, (as opposed to being limited to only larger or smaller companies), from which he selects stocks with more resilient balance sheets. The former is evident from the current mix within the portfolio: by size, FTSE100 stocks account for 26.4% of the total, the FTSE250 index constituents 15.7%, FTSE Small Cap 12.1%, FTSE AIM listed 32%, with 8.7% in Cash as at 30 April.
Moreover, the portfolio has a bias towards defensive businesses (noting that gold miners Highland and Centamin are the two largest positions at 2.3% each), and also the fund manager deliberately owns a number of likely beneficiaries of an economic downturn (1.7% is invested in the insolvency practice FRP Advisory, only listed on the stock exchange this March, is a top 10 holding). As further evidence of Gervais Williams’ theme-driven selection, he owns all three of the spread betting companies (including 2.2% in CMC Markets and 1.8% in IG Group) in anticipation of these firms benefitting from heightened market volatility. Unlike Nick Train’s fund, Diverse Income does not possess a concentrated portfolio, but rather a lower risk-reward one (in terms of the potential failure of an individual constituent to negatively impact the trust’s returns) via a diversified, currently 129, stock portfolio.
This £325m investment trust charges an annual management fee of 0.9%, pays a quarterly dividend (which currently equates to an annual 4.5% income yield) and the shares are currently priced on a 9% discount to the worth of the portfolio’s underlying holdings. This seems harsh when compared to their historic relationship to asset value, (a discount closer to 4% has applied) and, interestingly, an annual redemption opportunity (at NAV, less expense) is in place to minimise the share price’s discount.
For ease of reference, as the reader may wish to compare the other four members of our ‘Magnificent Seven’, we include amplified comments on Herald, Scottish, Keystone and Smithson investment trusts here:
Herald investment trust will appeal to investors who take the view that possessing strong technology has great appeal in a world which may be moving ever more towards internet-facilitated business. Certainly the tech-rich NASDAQ index, which has outperformed other American equity in the year to date, suggests so. The £850m fund combines a focus on smaller companies (typically worth less than US$2bn) in technology, communications and multimedia across the world, but with a clear bias towards the UK (48.2% of the portfolio as at 29 May) where the manager believes more attractively valued opportunities reside) and North America 25.6%. Managed by Katie Potts since 1994 and charging 1% per annum, Herald has outperformed its peer group over the last 1 and 5 years – producing NAV returns of 11.9% and 95.4% respectively, if lagging the US$-based Russell 2000 Technology index – and currently the investment trust’s shares are priced on an attractive 18.5% discount to its portfolio’s worth.
Katie Potts’ portfolio is particularly diversified in stock-specific terms, with the top 10 holdings accounting for just 19.5% of the total worth of the trust – featuring GB Group 3.2%, Diploma 2.4%, PegaSystems 2.1% and Future 2% as the four biggest exposures - which compares with her technology-investing peer Douglas Brodie’s fund where the largest 10 constituents amount to 35.3% of the total. Prior to much of the domestic corporate sector deciding to cancel dividends because of Covid-19 uncertainty, Herald shares offered an income yield of 3.5%. While this might be perceived as owning a slightly lower quality portfolio of technology assets than the previously mentioned Edinburgh Worldwide investment trust, this is probably reflected in the share price - which stands on a big discount to underlying asset worth, as compared to the shares of the trust managed by Douglas Brodie which is valued at a small premium to NAV.
Herald investment trust is undoubtedly a potential beneficiary of higher demand for technology in a world where remote working is increasing, but we also searched for an investment portfolio that captures industry sectors and areas of the market which are sustainable in a protracted global slowdown. This led us to Scottish investment trust which, managed by Alasdair McKinnon and his team. The £610m trust’s objective is to provide investors, over the longer term, with above-average returns through a diversified portfolio of international equities and to achieve dividend growth ahead of UK inflation. Assets are chosen on a ‘bottom up’ company stock specific perspective, rather than being driven by ‘top down’ macro-economic or thematic views, and a contrarian (as compared to fund manager consensus) style often seemingly results. The trust’s current dividend yield equates to 3.1%, it has a relatively low annual charge of 0.58% and the NAV has produced total returns of -1%, +31.6% and +119.9% over the past 1, 5 and 10 years to 29 May 2020.
The current industry sector mix of the portfolio has a clear defensive, low economically-sensitive ‘persona’ which should appeal to the more cautious investor who wishes to avoid less reliable cyclical earnings. As at 31 May, a breakdown of the trust’s portfolio showed that Healthcare accounted for 16% of total worth, via the likes of Pfizer, Roche, Gilead Sciences and GlaxoSmithkline being in its top 10 holdings, Consumer staples (also 16%) with Japan Tobacco and Pepsico notable positions, Communication services (14%) via China Mobile and BT, and Utilities (8%) in the form of United Utilities featuring heavily.
In addition to this bias towards the more resilient industries, the three biggest holdings in Scottish investment trust’s portfolio are amongst the world’s largest gold miners: US based Newmont, Barrick Gold (Canada) and Newcrest Mining (Australia). The prospect of appreciation in the price of the precious metal prompted the fund manager to increase exposure over the past six months - from 14% to 20% of the trust’s total worth. Gold has risen by 20% to date this year, but the immediate prospect of deflation, low interest rates, weak economic activity and rising money supply suggests the all-time high price of US$1,900 per ounce in 2011 could be challenged.
In geographic terms, the breakdown of assets reveals North American listed companies account for 34%, UK 15%, continental Europe 13%, Asia Pacific 11% and Japan 8% of the portfolio’s total worth. The shares are currently trading on an undemanding 11% discount to their net asset worth – which compares with its peer group of global equity investing investment trusts’ average discount of 5%. If Alasdair McKinnon’s conservative positioning of the portfolio proves to be correct, there is a real prospect of Scottish investment trust shares’ relative performance progressing – via both the NAV performance and a tightening in the discount.
Keystone investment trust invests primarily in UK listed businesses and its shares are priced on a relatively high 18% discount to the company’s underlying asset worth (NAV). A breakdown of the portfolio, as at 30 April, shows 40% in FTSE100 index constituents, 17% in medium sized FTSE250 firms, 23% in smaller UK listed businesses and 14% in companies listed on international bourses. To put some personality on this, the top ten exposures were: Barrick Gold 5.8%, British American Tobacco 4.8%, Tesco 4.1%, Barclays and BP 4% each, US gold miner Newmont 3.8%, utility SSE 3.6%, Babcock International 3.4%, Next 3% and JD Sports Fashion 2.7%. Studying the overall portfolio by business activity, it has an economically-sensitive leaning with consumer services accounting for 22.4% of the total, financials 20.3%, basic materials 16.2%, industrials 13.2% and consumer goods 13.1%. Accordingly a swifter economic recovery than most predict would provide a boost to this trust; by contrast with its pro-cyclical exposure, the trust is underweight (versus its FTSE All Share index benchmark) in the healthcare sector, at 2.3%, and technology exposure is just 0.5%.
The fund manager, James Goldstone, has a bias to Value-oriented businesses – as he seeks to meet the trust’s objective of growth in capital primarily from UK investments - favouring companies with strong balance sheets and those with high barriers to entry (strong competitive or ‘moat’ positions) with the ability to sustain and grow their market share. Keystone currently offers an income yield of 4.6% although its ability to maintain an impressive track record of dividend growth might be tested this year. However, like most investment trusts, they have not paid out all of the income as they received it, but rather make a reserve for future possibly leaner dividend years (as 2020 and 2021 are likely to be).
Ongoing annual charges (at 0.54% of assets under management) are relatively low for an investment trust of this size (£210m AUM), but activating a performance fee could take such expense to 1.5% per annum. However, the prospect of the share price’s discount to NAV tightening towards its longer term average or the UK equity peer group’s average rating versus NAV, could add a further 5% or 10% return respectively to the underlying portfolio’s performance.
The final investment which features within our ‘Magnificent Seven’ is one that screens the world’s stock markets and in particular companies with a market worth of between £500m and £15bn in search of long term growth: Smithson investment trust, as it seeks to beat the MSCI World Small Cap index. Successfully launched in October 2018 via the cachet of Terry Smith (who founded and manages the highly successful £20bn open-ended Fundsmith Equity fund, which specialises in larger international quality growth stocks), this investment trust is managed by Simon Barnard and has grown rapidly via new issuance to be worth £1.7bn, with its shares currently priced at a 2% premium to NAV. While returns can only be assessed over this short period of time, the fund manager’s record is impressive: from inception to 30 April 2020, NAV has risen by 28.5% as compared to the benchmark’s negative production of 4.7%. The fund even managed to achieve a positive return of 2.3% in the first four months of 2020, versus the MSCI World Small Cap’s -14.8%.
Akin to Fundsmith Equity and not dissimilar from Warren Buffet’s investing approach, the Smithson investment trust seeks to invest in a concentrated portfolio of between 25 and 40 company stocks, chosen for their growth and quality attributes in expectation of long term retention. The portfolio favours growth businesses, biased towards technology (36% of total worth), industrials (25%) and healthcare (18%) - also featuring a geographic bias to US listed firms 42%, UK 22% and continental Europe 20%. Of the 31 constituent stocks (average market worth £8bn), some will be familiar domestic names: the online residential portal Rightmove is the largest holding at 5.2% and AIM listed Fevertree Drinks, best known for its upmarket tonics, was a relatively recent purchase and is now a top 10 constituent at 4.2%.
The trust’s portfolio produces a yield of just 0.7%, has yet to distribute income and its ongoing annual charge amounts to 1%. By contrast with Keystone investment trust where an investor is buying £100 worth of assets for £82 (based on the shares’ current discount to NAV), a purchase of Smithson investment trust shares today is the equivalent of buying an OEIC collective – that is paying a price much closer to the underlying worth of its portfolio’s shares. Clearly, one has to decide how much faith to put in the fund manager’s ability to outperform, as a discount to NAV would be likely to emerge if relative performance were to deteriorate.
Time prevents commenting further and justifying the selection of a favourite fund manager – that will have to wait the next blog. In the meantime, each of these ‘Magnificent Seven’ appears capable of performing well, both in today’s particularly uncertain market conditions and over the appropriate longer term. Some will be driven by superior NAV performance – notably Edinburgh Worldwide, Finsbury Growth & Income and Smithson investment trusts – others by an upward re-rating (as the share prices rises faster than the underlying portfolio’s worth – that is the current discount or gap between the share price and the higher NAV closes). Keystone and, especially Herald investment trust should benefit from such a move. Finally, Diverse Income and Scottish investment trusts appear particularly well-positioned to withstand a protracted economic downturn and could see a mix of both a re-rating (as discount tightens) and outperformance of their respective benchmarks and peers
Finally, it should be reiterated that the author is not making specific investment recommendations – but would rather encourage the reader to carry out their own investigation into prospective stock exchange investments, and consider the above mentioned trusts by reference to their appropriateness to their own personal circumstances, individual objectives and appetite for risk-reward.
The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.
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