One-Stop Shopping with Funds of Funds Revealed

investment trust insider Issue 24

Opening the door to investment trusts

One-stop shopping with funds of funds Revealed: the trusts targeted by US bargain hunters Inside the Market: what the pros are buying investment trust insider Issue 24

BAILLIE GIFFORD CHILDREN’S SAVINGS PLAN

SOME OF THE THINGS YOU BUY YOUR CHILDREN HAVE A TENDENCY TO CAUSE UPSET WHEN THEY’RE GONE. BUT WITH A BAILLIE GIFFORD Something that lasts. CHILDREN’S SAVINGS PLAN, YOU COULD GIVE THEM Designed for families wanting to invest for their children, the Baillie Gifford Children’s Savings SOMETHING THAT LASTS. Plan offers a range of Baillie Gifford managed investment trusts including our flagship fund - Scottish Mortgage. Highly accessible with minimum investments from just £25 a month and lump sums from £100, it could become a wonderful gift from parents, grandparents and godparents alike. At Baillie Gifford we like to take a long-term view of investment, seeking out suitable companies from the world’s stock markets which we believe will grow long into the future. With the Baillie Gifford Children’s Savings Plan, childhood fun may turn into memories but they could be thanking you for making them feel magical when they’re starting to build on their dreams in years to come. Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested. Open a Children’s Savings Plan to receive a £10 Amazon gift card*.

For more information call us on 0800 917 2112 or visit www.bgchildsavings.com

Baillie Gifford – long-term investment partners

*For a limited period and new eligible Children’s Savings Plan clients only. Terms & Conditions and minimum investment amounts apply. Please refer to our website or the application pack that we will send you for full details. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Children’s Saving Plan. BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of the investment trusts offered within the Plan. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time. investment trust insider Issue 24

welcome

The rating is over

‘One small step for the Fed, one giant leap for Following the historic, if modest, move in US investors.’ That’s what Federal Reserve chair interest rates the question for investment trust Janet Yellen could have said earlier this month investors is what will happen to their share prices? when the US central bank lifted its funds rate for the first time in nine years. Could their shares fall back to the 8-13% discounts that were Following the historic, if modest, move in US interest rates the common before the financial crisis (and which re-appeared in question for investment trust investors is what will happen to the 2012 eurozone crisis)? their share prices when the Bank of England starts to raise UK That would expose investors to capital losses even if the interest rates? trusts’ dividend income continues to flow. Fortunately, UK During the great interest rate freeze, trusts offering decent interest rates are likely to rise very slowly so any de-rating dividend yields have enjoyed a re-rating. Discounts – the gap could be limited. One thing is certain: if these trusts do revert between investment trust share prices and their underlying net to trading on discounts, the US bargain hunters we report on asset values – have narrowed or been replaced by premiums, in our second feature will be big buyers. when shares stand above NAV. For example, what will be the impact on UK equity income Gavin Lumsden, Editor trusts? Will they lose their allure as interest rates on cash revive? Best Online Journalist 2015, Association of Investment Companies investment trust insider Issue 24

JPMorgan Indian Investment Trust Not all emerging markets are equal.

India is the world’s fastest growing major economy (International 12 MONTH QUARTERLY ROLLING PERFORMANCE AS AT 30 SEPTEMBER 2015 Monetary Fund, 2015). The JPMorgan Indian Investment Trust is the % 2014/15 2013/14 2012/13 2011/12 2010/11 largest Indian trust to focus purely on Indian companies, providing Share Price 12.9 44.4 -17.6 4.4 -23.0 access to India’s long-term growth potential through locally based Net Asset Value 13.9 38.9 -13.7 5.1 -20.9 investment expertise. Benchmark 0.7 37.5 -12.7 3.7 -24.2

Benchmark: MSCI India (in GBP). Source: J.P. Morgan/Morningstar as at 30/09/15. Net of charges and any applicable fees, using The value of investments and any income from them may fall as well capital only Net Asset Values (NAVs) with net dividend (if any) reinvested, in sterling. For details, see the Trust’s latest Report & Accounts. © 2015 Morningstar. All Rights Reserved. Past performance is not a guide to the future. Investment trusts may as rise and investors may not get back the full amount invested. borrow to finance further investment (gearing). The use of gearing will increase the volatility of movements in the Net Asset Value (NAV) per share. This means that a relatively small change, down or up, in the value of a trust’s assets will result in a magnified fall or rise, in the same direction, of the investment trust’s NAV per share. Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems.

Find out more at www.jpmindian.co.uk

This material should not be considered as a recommendation relating to the acquisition or disposal of investments. Investment is subject to documentation which is comprised of the Investment Trust Profiles and Key Features and Terms and Conditions, copies of which can be obtained free of charge from J.P. Morgan Asset Management Marketing Limited. Issued by J.P. Morgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No. 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP. LV-JPM26498 | 07/15 4d03c02a80029983 investment trust insider Issue 24

this issue

Funds of funds Meet the trusts buying other trusts.

Discount hunters: What American bargain hunters are buying Trusts for all weathers Inside the Market looks at what trusts the pros have bought recently. investment trust insider Issue 24

SCOTTISH MORTGAGE INVESTMENT TRUST

SCOTTISH MORTGAGE WAS ORIGINALLY LAUNCHED TO PROVIDE LOANS TO RUBBER GROWERS IN MALAYSIA IN Time just makes it tastier. THE EARLY 20TH CENTURY. Scottish Mortgage Investment Trust believes in investment not speculation. We painstakingly identify those companies that we believe will deliver long-term growth and then we stick with them through thick and thin, providing our investment case remains valid. In fact we like to think of ourselves as ‘owners not renters’, which is why we don’t get side-tracked by short-term share price movements. We give ourselves time to add value by being patient investors in an impatient world. But don’t just take our word for it. Over the last five years Scottish Mortgage has delivered a total return of 104.4%* compared to 48.4%* for the index. And Scottish Mortgage is low-cost with an ongoing charges figure of just 0.48%†. Standardised past performance to 30 September each year*: 2010- 2011- 2012- 2013- 2014- 2011 2012 2013 2014 2015 Scottish Mortgage -1.0% 14.2% 35.9% 27.6% 4.2%

FTSE All-World Index -4.8% 17.3% 18.2% 11.8% 0.6%

Past performance is not a guide to future returns. Scottish Mortgage Investment Trust is managed by Baillie Gifford and is available through our Share Plan and ISA. It is also available through a range of investment platforms. Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested.

For a free-thinking investment approach call 0800 917 2112 or visit www.scottishmortgageit.com Baillie Gifford – long-term investment partners

*Source: Morningstar, share price, total return as at 30.09.15. †Ongoing charges as at 31.03.15. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA. BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of Scottish Mortgage Investment Trust PLC. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time. investment trust insider Issue 24

Funds of funds: one-stop shops or total flops? By Robert St George investment trust insider Issue 24

Funds of Funds: one-stop shops?

re you tired of picking investment save individuals from having to construct Key Points trusts for your ISA and pension? their own diversified portfolios. AIt’s OK to admit it and, besides, There is a price for this service: funds of there’s help at hand in the form of a dozen funds are generally more expensive than ‘Funds of funds’ offer a one-stop shop to investment trusts that invest in other conventional investment trusts, which is not busy investors. By investing in a range of other funds, they provide investors with a investment trusts. surprising as they effectively have a double ready-made and diverse portfolio. Most of these ‘funds of funds’ sit in the layer of costs: their own and the charges of Global or Global Equity Income sectors of the funds they buy. the Association of Investment Companies This probably explains why on average There are around a dozen investment trusts investing in other investment trusts. These (AIC) which you can research on www. returns of funds of funds are not as high ‘trusts of trusts’ are a bit more expensive but theaic.co.uk. However, broker Numis as other Global investment trusts, although less volatile than conventional investment Securities helpfully puts them into their own as our table shows there are some good trusts. sector, which forms the basis of our table at performers. Moreover, funds of funds tend

Analysts say fund of funds managers the end of this feature. to be less volatile, which may comfort are good at two things: spotting when investors who don’t like their investments to investment trusts are trading on cheap What are funds of funds? rise and fall sharply. valuations, and offering access to specialist trusts that would be out of the reach of the Funds of funds act like one-stop shops ordinary investor. for busy investors. By holding a range of Multi-asset trusts different investment trusts and assets they There is a long history to investment trusts investment trust insider Issue 24

Funds of Funds: one-stop shops?

‘I would currently describe the core fund-of-fund strategy as asset because they always need to be able to sell allocation/relative value with the search conducted internationally their holdings and return cash to investors rather than just in the UK.’ Charles Murphy, Panmure Gordon who want to sell.

Four types dabbling in other investment trusts. RIT classes to create broad portfolios. Investing Charles Murphy, an analyst at Panmure Capital Partners (RCP), the popular in other funds is only part of what they do. Gordon, a broker, divides these funds global fund that looks after the wealth of the of funds – or trusts of trusts – into four Rothschild family, has always invested in Pure funds of funds categories: other closed-end funds to widen its range of The real funds of funds are usually totally • those with ‘equity-allocation’ strategies holdings. committed to the single strategy of buying taking advantage of cheap trusts trading More recently, BlackRock Income other funds. They are investment trusts that on wide discounts below net asset value: Strategies (BIST), formerly called British take advantage of their fixed pools of capital eg, World Trust Fund (WTR), F&C Assets, has adopted a similar policy as it to hold the smaller and more illiquid – or Managed Portfolio (income version seeks to protect investors’ capital and offer hard to trade – trusts that open-ended funds FMPI and Growth version FMPG), and an income stream that rises with inflation. cannot reach. JPMorgan Elect (JPE); Strictly speaking, though, these are ‘multi- As with many specialist sectors, open- • those pursuing a ‘sensible’ value asset’ funds, which move across equities, ended investment companies (Oeics) and investment philosophy: eg, Capital private equity, bonds and other asset unit trusts struggle to buy illiquid trusts Gearing (CGT); investment trust insider Issue 24

Funds of Funds: one-stop shops?

‘We are living right now in a very low interest-rate environment, Deep to relative value and as they [rates] go up one would expect both the volatility of In any case, Murphy noted that buying trusts the funds and possibly their discounts to widen.’ on huge discounts has become less of a Sam Banerjee, Westhouse Securities core strategy for funds of funds. ‘With the exception of Milton Worldwide, deep value • those with a deeper value approach: the discounts has come down, so from that hasn’t been a central selling point for a long eg, Miton Worldwide (MWGT); perspective the opportunity has diminished,’ time,’ he said. • and those looking for ‘interesting commented Sam Banerjee, an analyst at ‘I would currently describe the core assets or exposures’ such as Henderson Westhouse Securities. fund-of-fund strategy as asset allocation/ Alternative Strategies (HAST). ‘But we are living right now in a very low relative value with the search conducted The first three all vie to buy other trusts interest-rate environment, and as they go up internationally rather than just in the UK. The at attractive discounts, although the one would expect both the volatility of the underlying thought process is that investors opportunities for exploiting such cheap funds and possibly their discounts to widen.’ are cyclical, as are markets: in different valuations have become limited recently as Banerjee observed too that while parts of the world, and at different times, a more boards market their investment trusts discounts have narrowed in the UK, there is different range of value opportunities present and buy back shares in a bid to mop up still value in trusts listed overseas. ‘The key themselves.’ excess supply. thing is for these trusts to have sufficient But, of course, other trusts are not the ‘Yes, volatility has come down in those bandwidth to be able to look at these only repository of value in markets. ‘Value discounts to some extent and the level of opportunities.’ investors such as British Empire (BTEM) investment trust insider Issue 24

Funds of Funds: one-stop shops?

‘I think they [funds of funds] add value where they offer you a Examples of more esoteric assets are diversified approach to getting a very interesting and eclectic Taliesin Property (TPF), an AIM-listed, mix of assets.’ Charles Tan, Cantor Fitzgerald

have migrated – and did so a long time ago Alternative assets – to predominantly investing in overseas So other than value, funds of investment holding companies,’ Murphy explained. trusts can instead position themselves to Charles Tan, an analyst at Cantor build portfolios of alternative assets that Fitzgerald, added that doing so was not so would otherwise be unavailable to private different from investing in funds. ‘You could investors. argue that a conglomerate is a portfolio of ‘There is probably very little reason many different businesses.’ for these funds of funds to invest large For Tan a value style is not necessarily the quantities of investors’ capital into the greatest appeal of these funds of funds. ‘If liquid, plain vanilla, long-only equity trusts,’ you buy into a fund where the strategy is just argued Tan. ‘I think they add value where to buy something on a wide discount and they offer you a diversified approach to wait for it to narrow, that is perhaps a game getting a very interesting and eclectic mix Berlin property: an example of a best played by the do-it-yourself investor.’ of assets.’ specialist asset class investment trust insider Issue 24

Funds of Funds: one-stop shops?

Jersey-based investment company investing under pressure to own vehicles that aren’t working harder to provide distinct offerings,’ in residential property in Berlin, which is generally available on the London Stock Murphy stated. As examples, he pointed to held by Nick Greenwood, manager of Miton Exchange, or if they are London listed that Advance Frontier and Advance Developing Worldwide; and Toro (TORO), a London- they require specialist knowledge to be Markets, which seek ‘the best managers, listed but euro-denominated fund investing comfortable owning them,’ said Murphy. not just the most accessible ones’. in asset-backed bonds and loans, which is Examples here would be Ceiba held by Ian Barrass and James de Bunsen Investments, a Guernsey-based Cuban at Henderson Alternative Strategies. real estate and hotel developer operating Both investment companies have their in Cuba, which is also held by Henderson attractions, but are generally too small or Alternative Strategies; and the Romanian risky for individual investors. closed-ended fund Fondul Proprietatea held ‘That is where trusts like Miton Worldwide by Advance Frontier Markets (AFMF). add value because they give you access This could also help funds of funds to these smaller, more niche trusts in a overcome a criticism that has long plagued diversified, actively managed way,’ Tan them: that they are too expensive, in effect remarked. levying a double set of fees – one for them An international perspective is important and another for the underlying funds. for funds of funds here too. ‘Portfolio ‘As finance has evolved and investors have Cuba: a ‘frontier market’ that a fund managers providing alternative exposure are become more cost conscious, managers are of funds could buy investment trust insider Issue 24

HFundsow trusts of Funds: use chone-stoparges to shops? boost income

Twelve ready-maUdeK trustsportfol thios:at levythe f chundar ogesf f undsto ca ipnvestital toin gb oostin other yields investment trusts

Amount of fees/ﬁnance charged to capital (%) Premium (- dis- Ongoing annual 80Trusts / Description AIC sector count) to net Bid-offer spread Dividend yield No. holdings charges asset value 70 75 75 BACIT (BACT) 70 70 70Global 70 70 0.24% 5.2% 1% 1.6% 32 67 60British Empire (BTEM) Global 0.91% 65 -13.0%65 65 0.2% 2.5% 53 60 60 50Capital Gearing (CGT) UK All Companies 0.97% 1.1% 1.8% 0.6% 104 50 50 50 Cayenne Trust (merging with F&C) Global 1.92% -0.2% 1.8% 1.7% 39 40 Damille Investments II (DIL2) Not a member 2.27% -16% 4.5% 0% 27 30 F&C Managed Portfolio Growth (FMPG) Global 1.16% 1.2% 2.6% 3.4% 42 20 Global Equity F&C Managed Portfolio Income (FMPI) 1.18% 1.7% 1.5% 4.3% 38 Income 10Henderson Alternative Strategies (HAST) Global 0.94% -23.7% 2.2% 1.4% 61 00 J0PMorgan Elect - Managed Growth (JPE) Global 0.52% -2.5% 1.4% 1.1% 43 Keystone Diverse City of Edinburgh Perpetual Schroder Standard Finsbury JPMorgan Merchants Troy Dunedin Temple F&C Murray Schroder Lowland Fidelity Global Equity London(KIT & S) t LawrenceIncome (LondonLSLI) (EDIN) Income UK Life Equity 0.89%Growth Claverhouse (MRCH)-4.1% Income & Income2.4% Bar Capital4.1% & Income Income 50 (LWI) Special (DIVI) (CTY) & GrowthIncome Growth Income & Income (JCH) Growth Growth (TMPL) Income (MUT) Growth Values (FSV) (PLI) (SDU) (SLET) (FGT) (TIGT) (DIG) (FCI) (SCF) Miton Worldwide Growth (MWGT) Global 1.16% -9.5% 0.3% 0% 61 New Star IT (NSI) Global 0.93% -36.3% 13.7% 0.4% 35

Source: Numis Securities Note: ‘AIC sector’ refers to Association of Investment Companies (theaic.co.uk). ‘Premium / discount’ shows how far the share price is above / below the trust’s net asset value. ‘Bid-offer spread’ shows gap between sell and buy prices of a trust. A big spread indicates an illiquid (hard to trade) investment and makes a Source: Company & Numis Securities research short-term investment more expensive. ‘Dividend yield’ measures the income paid by the trust by expressing its dividend as a percentage of the latest price. Data as of 23/11/15. investment trust insider Issue 24

Funds of Funds: one-stop shops?

Fund of funds’ performance: total shareholder returns over three years

-10 Damille Henderson Capital British New Miton BACIT London F&C Cayenne F&C JPMorgan Fund Global FTSE MSCI Investments Alternative Gearing Empire Star IT Worldwide & Managed Trust Managed Elect - of Growth All World II Strategies Growth St Lawrence Portfolio Portfolio Managed fund sector Share Income Growth Growth average (exc FoF)

Source: Numis Securities. As of 23/11/15 investment trust insider Issue 24

Funds of Funds: one-stop shops?

Fund of fund share prices are less volatile than other Global trusts and stock markets

0 Miton Cayenne Henderson JPMorgan New Star BACIT British F&C F&C Damille London Capital Fund of Global FTSE MSCI Worldwide Trust Alternative Elect - IT Empire Managed Managed Investments & Gearing fund Growth All Share World Growth Strategies Managed Portfolio Portfolio II St Lawrence average (exc FoF) Growth Growth Income

Source: Numis Securities. Measure of volatility over three years. As of 23/11/15. investment trust insider Issue 24

JPMorgan Japanese Investment Trust A new dawn for investors in Japan.

Japan is the world’s third largest economy (International Monetary 12 MONTH QUARTERLY ROLLING PERFORMANCE AS AT 30 SEPTEMBER 2015 Fund, 2014) and with the Japanese stock market reaching a 15 year % 2014/15 2013/14 2012/13 2011/12 2010/11 high (Nikkei 225 Index, June 2015) and dividend payments at record Share Price 19.4 -7.4 57.9 -5.4 5.9 levels (Nikkei Asian Review, April 2015), it’s a new dawn for investors Net Asset Value 14.7 -4.4 45.9 -2.1 4.2 in Japan. The JPMorgan Japanese Investment Trust has over 40 years Benchmark 6.0 1.0 30.3 -5.3 2.8 on-the-ground investment experience. Be guided by an old hand. Benchmark: Topix 1st Section. Source: J.P. Morgan/Morningstar as at 30/09/15. Net of charges and any applicable fees, using capital only Net Asset Values (NAVs) with net dividend (if any) reinvested, in sterling. For details, see the Trust’s latest Report & Accounts. © 2015 Morningstar. All Rights Reserved. Past performance is not a guide to the future. Investment trusts may The value of investments and any income from them may fall as well borrow to finance further investment (gearing). The use of gearing will increase the volatility of movements in the Net Asset Value (NAV) per share. This means that a relatively small change, down or up, in the value of a trust’s assets will result in a as rise and investors may not get back the full amount invested. magnified fall or rise, in the same direction, of the investment trust’s NAV per share.

Find out more at www.jpmjapanese.co.uk

What American bargain hunters are buying By Gavin Lumsden investment trust insider Issue 24

What American bargain hunters are buying

his month we look at the activities By building positions in trusts when they Key Points of three of the investment trust are unloved, or out of favour, they hope sector’s most prolific bargain to benefit when the shares come back in Three of the most active investors in T investment trusts are US-based ‘discount hunters: 1607 Capital Partners, Lazard fashion and a re-rating narrows the discount hunters’ 1607 Capital Partners, Lazard Asset Management and Wells Capital – or gap between the share price and the Asset Management and Wells Capital Management. trust’s NAV. Management. These value investors keep a low profile These are not activists like Elliott Capital,

These companies exploit movements in despite taking big positions in dozens the US hedge fund that defeated the board the discount, which is the gap between an of UK investment trusts and investment of Alliance Trust (ATST) in a thrilling investment trust’s share price and its net companies on behalf of their investors. corporate battle this year. asset value (NAV). They buy investment trusts when their shares are cheap in the All three are largely based in the US, Elliott used a 14% stake, built patiently hope that the discount will narrow and they evidence that Britain’s closed-end fund over several years, to force the poorly will get a good return on their money. sector has followers across the world. performing global fund into a series of Although they don’t talk about their U-turns, including the demotion of its chief Investors who like this ‘value’ strategy can investments, these firms are worth following executive Katherine Garrett-Cox. follow what these firms do. We highlight five as they’re masters of the art of buying That’s not the style of these quieter of their most recent positions as well as the biggest investment trust holdings they have trusts when their shares are cheap and investors, who will cause no outward signs some times spent years building. trading below net asset value (or what their of commotion even when they also become portfolios are really worth). a trust’s largest investor. investment trust insider Issue 24

What American bargain hunters are buying

Nevertheless, the appearance of any of The discount hunters can be long-term investors as they pursue this trio on share registers strikes fear into their strategy, but they’re not particularly loyal. Boards and fund the hearts of investment trust directors and managers know they will back anybody – or anything – that gets managers. them a return on their investment.’

Not hostile to wind down a trust and get their money feature on funds of funds. That’s because, although they’ll never go back at net assets minus costs (which is The trust is managed by Lazard’s ‘hostile’, they’re not above leaning on trust invariably higher than the level at which they discounted assets team, based in New boards to mount share buy-backs or tender bought). York and London, which looks for catalysts offers that could give them a profitable exit. So who are these shadowy figures of the The discount hunters can be long-term investment trust world and where are they investors as they pursue their strategy, investing? but they’re not particularly loyal. Boards and fund managers know they will back Lazard Asset Management anybody – or anything – that gets them a This firm’s interest in investment trusts is return on their investment. They cannot be best exemplified by – but not confined relied upon in a shareholder continuation to – the World Trust Fund (WTF), vote, for example. an investment trust investing in other Katherine Garrett-Cox of Alliance Given a chance, their instinct would be investment trusts, which we saw in our first Trust lost a battle with Elliott Capital investment trust insider Issue 24

What American bargain hunters are buying

‘Stake building by this trio is a clear sign that an investment Investment manager JPMorgan Asset trust is cheap and that it possibly needs to either Management knows about Lazard as the reconsider its investment strategy or market itself more latter also owns nearly a quarter of both its actively to investors.’ Japan Smaller Companies (JPS) and Emerging Markets (JMG) trusts, meaning or events to unlock the hidden potential of the 178% gain from its benchmark, the companies. MSCI World Healthcare index, the trust’s Discount hunting does not always shares stand 10% below net asset value involve investing in poor-quality investment (NAV). trusts as Lazard’s stake in International Lazard’s second biggest holding is a 25% Biotechnology Trust (IBT) shows. stake in India Capital Growth (IGC) which Lazard owns 26% of the trust – its largest it has rapidly expanded from a 4% position position in percentage terms (see first at the start of last year. Over three years table) – which announcements to the stock the trust has delivered a 49% total return market reveal it has steadily accumulated compared with 24% from the Bombay since 2006. Sensex index. Nevertheless, this small AIM- Despite having generated a 275% total listed investment company is overlooked Lazard likes International return over the past 10 years and beating and trades on an 18% discount. Biotechnology Trust investment trust insider Issue 24

What American bargain hunters are buying

‘Investment group Schroders will be concerned to see behalf of a range of charitable organisations, 1607 Capital Partners taking a growing interest in its UK companies, pension funds and wealthy Growth investment trust.’ individuals. It has a system of picking target trusts it would have to be consulted on any after its manager left (see first feature). that assesses their relative value, historical decisions about their future. It is also a potential thorn in the side of performance and the macro-economic fund management giant Fidelity, with 10% factors affecting returns. Wells Capital Management stakes in both the Fidelity Japanese Appropriately enough, this leading discount Founded in 1996, this investment adviser Values (FJV) and Fidelity Asian Values hunter’s biggest stake is an 18% holding in and hedge fund manager is a wholly owned (FAS) investment trusts. Lazard’s World Trust Fund. This represents subsidiary of San Francisco-based Wells It has recently appeared with a 6% holding double value for the firm: it holds a portfolio Fargo Bank. It has a team in its private in Marwyn Value Investors (MRWN), of undervalued investment trusts and its own client business dedicated to investing in UK which is a good indication that the 16% shares trade at an 11% discount to NAV. investment trusts and ‘closed-end’ funds – discount in the specialist smaller companies JPMorgan is also aware of its work too those with a limited number of shares – in fund probably has further to narrow. with four of its trusts – European Growth the US and around the world. (JETG), European Income (JETI), Its largest position in percentage terms is a 1607 Capital Partners Japanese (JFJ) and Japan Smaller 20% stake in Cayenne Trust (TCT), a small Founded eight years ago in Glen Allen, Companies (JPS) – appearing in 1607’s fund of funds that merged with a rival fund Virginia, 1607 invests in closed-end funds on top 10 (see table three). investment trust insider Issue 24

What American bargain hunters are buying

Five new targets a new holding of 7.93 million shares, a stake invest money the trust has borrowed but Stake building by this trio is a clear sign of 3.7%, to make it Monks’ second largest left in cash. If these measures improve that an investment trust is cheap and that shareholder. performance, the shares could get a kicker it possibly needs to either reconsider its Wells remained the £1 billion trust’s biggest from a narrowing in the discount. investment strategy or market itself more shareholder though, adding around 300,000 actively to investors. shares to take its total to 8.6 million or 4% of If, like our US bargain hunters, you believe the trust. Meanwhile, Lazard topped up its that buying trusts on a big discount can be small position to 1.6% of the fund’s shares, a profitable long-term strategy, you’ll be according to data from Thomson Reuters. interested to see five of their more recent All this could be significant as the trust’s positions. shares trade 12% below NAV, having lost some of their shine after a change in Monks (MNKS) manager in April. All three discount hunters swooped on The trust is now run by Charles Plowden, this underperforming Baillie Gifford global a Citywire A-rated fund manager, whose fund simultaneously in the summer, filing ‘global alpha’ team successfully runs over increases in their holdings with the London £20 billion of pension funds. Plowden Stock Exchange on 27 July. recently revealed plans to run Monks as Monks has been repositioned as a 1607 made the biggest splash, disclosing Baillie Gifford’s ‘best ideas’ fund and to ‘best ideas’ fund investment trust insider Issue 24

What American bargain hunters are buying

British Empire (BTEM) November. Wells Capital is the fourth this fund of ‘alternative’ funds to just over The trio have gathered in strength at this largest shareholder with just over 5% 21% last month. This keeps the pressure global fund of funds (see first feature) or 6.75 million shares, having bought 2 on managers Ian Barrass and James de which is also under new management and million more in October. Lazard ranks third Bunsen, who have battled to clean up trying to move on from a lengthy period of on the share register, having topped up its the portfolio since Henderson won the poor performance. holding in the summer to 6.85 million or management contract in 2013. In total the discount hunters own 5.13%. The managers claim performance is over 17% of British Empire, whose new Interest in the trust is spreading. Aviva improving, but this has been a difficult manager, Joe Bauernfreund, is pruning its Investors, the fund management arm of year to prove the point and the shares holdings in undervalued investment trusts the pension and investment group, is the have fallen nearly 12% in the past 12 and family-owned holding companies, most recent buyer, emerging with a 3.46% months on a steep discount of 19% believing that a more focused portfolio will position. Meanwhile, private investors below NAV. generate better returns. continue to dabble in the shares with Value investors are licking their chops. With its own shares trading 12% below stock brokers Brewin Dolphin and Alliance In October Wells Capital Management NAV, British Empire is an obvious target Trust seeing their stakes rise to 6.36% advanced its position to over 5%, for our trio. and 5% respectively. although in August another big investor 1607 Capital Partners is the biggest in investment trusts, City of London shareholder with a 7.26% stake, having Henderson Alternative Strategies Investment Group, reduced its holding to added 1.78 million shares in early 1607 Capital Partners raised its holding in just over 8% with a small sale of shares. investment trust insider Issue 24

What American bargain hunters are buying

Fidelity China Special Situations (FCSS) Nevertheless, the trust’s discount has to 10% from 5% in March. In the past two Lazard Asset Management bought 5.3 widened during the wild swings in Shanghai years the shares have de-rated, moving million more shares in this high-profile and the shares stand 11% below NAV, from ‘par’ – or zero discount – to stand investment trust in early October, taking its having stood at a premium after the launch. 10% below NAV. This compares with total to 55.8 million or just over 10% of the That’s given an opening for Lazard to lift its the average 2% discount in its sector. fund. holding, although with Fidelity owning more However, if Matthews, a former Citywire FCSS was launched in 2010 by fund than a third of the shares the risk of it losing AAA-rated fund manager, can rediscover manager guru Anthony Bolton, the former control of the fund appears remote. the fund’s mojo, this could also come to be manager of Fidelity’s flagship Special seen as a bargain. Situations fund and Fidelity Special Schroder UK Growth (SDU) Values (FSV) investment trust, who Investment group Schroders will be came back from retirement to have a go concerned to see 1607 Capital Partners at investing in the world’s second largest taking a growing interest in its UK Growth economy. investment trust, which manager Philip In April last year Bolton handed the baton Matthews is trying to stabilise after a to Dale Nicholls who has proved an adept succession of manager changes damaged manager, steering the £760 million fund performance. through the subsequent boom, bust and The Virginia-based value investor last Joe Bauernfreund making British bounce back in China’s stock market. month disclosed it had doubled its stake Empire more focused investment trust insider Issue 24

What American bargain hunters are buying

Lazard Asset Management’s top 10 investment trusts (ranked by % stake)

Target No. shares (m) Value ($m) Stake (%) Last announcement Discount to NAV (%) International Biotechnology Trust (IBT) 10.42 71.72 26.24 29-Sep 11 India Capital Growth (IGC) 18.9 17.13 25.2 04-Nov 19 JPMorgan Japan Smaller Companies (JPS) 11.54 37.41 24.64 15-Dec 15 Advance Developing Markets (ADMF) 12.51 89.44 24 20-May 12 JPMorgan Emerging Markets (JMG) 30.64 255.56 23.85 04-Nov 10 Prospect Japan (PJF) 21.3 21.93 23 29-May 22 Aberdeen New Thai (ANW) 4.43 24.37 22.14 24-Aug 17 World Trust Fund (WTF) 8.8 35.83 21.74 17-Jul 13 Macau Property Opportunities (MPO) 16.39 53.8 21.44 30-Jun 33 New India Investment Trust (NII) 12.2 63.6 20.66 31-Mar 9

Source: Thomson Reuters, November 2015 investment trust insider Issue 24

What American bargain hunters are buying

Wells Capital Management’s top 10 investment trusts (ranked by % stake)

Target No. shares (m) Value ($m) Stake (%) Last announcement Current discount % Cayenne Trust (TCT) 4.67 11.4 20 16-Oct n/a merged Fidelity Japanese Values (FJV) 17.45 23 15.3 05-Jun 15 Fidelity Asian Values (FAS) 6.95 22.65 10.3 30-Sep 13 European Investment Trust (EUT) 4.27 54.89 10.16 20-May 8 Witan Pacific (WPC) 5.35 20.8 8.12 31-Mar 14 JPMorgan European (JETG) 6.38 23.94 7.49 02-Jun 7 Invesco Asia Trust (IAT) 6 18.88 7 31-May 11 World Trust Fund (WTR) 2.65 10.81 6.56 17-Jul 13 Montanaro European Smaller Companies (MTE) 1 8.21 6 04-Jun 13 Marwyn Value Investors (MVI) 3.38 10.95 5.97 23-Nov 17

Source: Thomson Reuters, November 2015 investment trust insider Issue 24

What American bargain hunters are buying

1607 Capital Partners’ top 10 investment trusts (ranked by % stake)

Target No. shares (m) Value ($m) Stake (%) Last announcement Current discount % World Trust Fund (WTR) 9.26 35.57 28.3 20-Nov 13 JPMorgan European Growth (JETG) 18.28 68.88 21.44 02-Apr 7 Henderson Alternative Strategies (HAST) 9 30.36 21 03-Nov 20 Prospect Japan Fund (PJF) 18.59 17.94 20.1 23-Sep 22 JPMorgan European Income (JETI) 14.35 30.17 17.97 02-Apr 2 Aberdeen UK Tracker Trust (AUKT) 17.16 80.56 16.99 18-Nov 5 JPMorgan Japanese (JFJ) 24.1 100.2 14.94 03-Aug 12 Fidelity Japanese Values (FJV) 13.61 16.33 11.92 24-Sep 15 JPMorgan Japan Smaller Companies Trust (JPS) 4.91 19.13 10.47 22-May 15 Schroder UK Growth (SDU) 16.43 38.72 10.23 12-Nov 11

Source: Thomson Reuters, November 2015 investment trust insider Issue 24

Inside the Market: special times, unusual situations By Robert St George investment trust insider Issue 24

Inside the Market: special times, unusual situations

his month we look at how professional Cayenne board to wind up the trust, leading Key Points investors have bought into a diverse to its recent merger with F&C Managed Trange of investment trusts offering Portfolio. specialist exposure to distressed debt and Hart then joined Witan, which in the past We look at four recent investment trust reinsurance as well as more mainstream decade has revived under a ‘manager of purchases by professional investors to see if there are any ideas for private investors. areas like technology stocks and Japan. managers’ strategy that sees chief executive Andrew Bell oversee a range of external fund Witan buys NB Distressed Debt managers that have been appointed to run Witan (WTAN), the popular global If investors in Witan (WTAN) wondered what portions of Witan’s portfolio. investment trust, has topped up a position in NB Distressed Debt (NBDD), a specialist the arrival of James Hart as an investment Witan continues to own direct positions in fund that is winding up while wealth director earlier this year would mean for the companies and other funds, however, and manager Rathbone has bought in to two popular global investment trust, its recent it is here where the latest transaction shows leading Japan investment trusts. purchase of shares in NB Distressed Debt Hart making a contribution. (NBDD) will give them some idea. In late October Witan bought shares worth

Stock broker Charles Stanley has increased Hart quit in February as co-manager of The another £640,000 in NB Distressed Debt, its holding in Allianz Technology Trust (ATT) Cayenne Trust, a small fund of funds that which invests in bonds trading at a fraction of and investment manager Architas responds we saw in our first feature. His decision, and their true value. to a cash call from CATCo Reinsurance. Opportunities (CAT). that of the other co-manager, not to work The £42 million investment company offers on the trust beyond 2016, prompted the three share classes, and Witan owns the investment trust insider Issue 24

Inside the Market: special times, unusual situations

‘The number one consideration is whether we think the money than via the external managers that we we put to work can be better used by other managers or in employ, the number one consideration is special situations that we identify.’ whether we think the money we put to work James Hart, Witan investment trust can be better used by other managers or in special situations that we identify. ‘This is one of those special situations smallest of them: the ordinary share class, at a 5% discount or wider to NAV. that we’ve identified and we’re happy that which is in liquidation mode as a result of ‘We’ve done some back-of-the-envelope it should give us returns ahead of all but the disappointing performance. Over the five calculations and we think that the portfolio, years since launch its portfolio has grown as and when it gets realised over the next 18 24%, but the total return to shareholders months, will probably be worth more than the has been under 7% as a result of the trust NAV is valued at today.’ falling to a discount to its own net asset value The current share price is $1.16, with an (NAV). estimated NAV of $1.21. Hart believed this This leaves Witan with just over 5% of the could be 20-25 cents too conservative. ordinary share class, making it one of its 25 ‘We think there are some pretty good largest positions. returns available and they are not really Hart explained what Witan was doing. ‘The correlated to equity markets,’ said Hart. James Hart looks to buy low, sell rationale is very straightforward. We’re buying ‘When Witan invests on its own behalf rather high investment trust insider Issue 24

Inside the Market: special times, unusual situations

‘Our investment case for Japan is not predicated on the Julian Chillingworth, chief investment officer success of Abenomics but the new focus on return on equity in at Rathbone Investment Management, said corporate boardrooms.’ the firm was keeping faith in Japan, whose Julian Chillingworth, Rathbone Investment Management stock market has been revitalised by the stimulative policies of prime minister Shinzo Abe. most bullish equity markets over the next 18 same month. Nicholas Weindling manages Recently, however, there has been investor months to two years.’ the trust. He has a Citywire AA rating for disappointment after the Bank of Japan JPM Japan, an open-ended fund he also elected not to extend its huge quantitative Rathbones buys Japan trusts runs. Rathbone Investment Management has Both trusts trade on discounts with shares increased its exposure to Japan with the in JP Morgan Japanese 11% below NAV purchase of two investment trusts. and Schroder Japan Growth standing 7% The group opened a position in Schroder under net asset value. Each is geared with Japan Growth (SJG), managed by Andrew borrowed money accounting for 11% and Rose, buying a 5% stake worth around £9.3 30% respectively of the trusts’ assets. Both million in late October. portfolios have outperformed the Japanese It also ploughed nearly £23 million buying stock market with superior NAV growth over Prime Minister Abe kick started 5% of JP Morgan Japanese (JFJ) in the one, three and five years. Japan’s recovery investment trust insider Issue 24

Inside the Market: special times, unusual situations

‘That was some of the most shareholder-friendly activity I’ve ‘Therefore, we believe the second- come across and it gave us confidence in CATCo’s ability to round effects – a rerating of valuations as convey honestly the opportunity it is seeing in the market.’ households reposition into equities and Solomon Nevins, Architas foreign portfolio flows increase – have further to run.’ easing – or ‘money printing’ – programme in the form of a reduction in the effective Adding to Allianz Technology after lowering its forecasts for economic corporate tax rate by 3.3% over two years, In late October wealth manager Charles growth and inflation. starting in April 2016. Stanley increased its stake in Allianz Chillingworth said: ‘Our investment case ‘Profit margins have climbed to a 20- Technology (ATT) by buying another for Japan is not predicated on the success year high, but they are not elevated by £240,000 shares when they traded on of “Abenomics” but the new focus on return international standards,’ he observed. a discount of 5.5% below NAV. That left on equity in corporate boardrooms, the ‘Margin improvement has driven returns on it owning 5% of the trust on behalf of its scope for shareholder distributions, and equities to similar highs, but they could go investors, although it trimmed that position the likelihood of increased institutional and considerably higher if leverage and asset slightly last month. household ownership on domestic equities,’ turnover improve, which should follow suit. Although Allianz Technology Trust has he explained. Furthermore, buyback announcements are outperformed Polar Capital Technology An additional fillip for Japanese equities, steadily increasing and there is momentum (PCT) – the only other constituent of according to Chillingworth, should come behind dividend growth. the tech, media & telecom sector – over investment trust insider Issue 24

Inside the Market: special times, unusual situations

three and five years in both NAV and total For Peters the downsides to Allianz Architas applauds CATCo shareholder returns, it has tended to languish Technology are that it is ‘relatively small and Solomon Nevins of Architas, an on a wider discount than its rival. The gap expensive’ – with total assets of £171 million investment manager within the AXA between Allianz’s share price and the NAV of and ongoing charges of 1.21%, versus group, bought into a recent share its investments has been 5% on average in equivalent figures of £823 million and 1.08% issue from CATCo Reinsurance the past year compared with Polar’s 1.8%. for Polar – but he described himself as a Opportunities (CAT), an investment The Allianz fund is run by Walter Price while ‘happy holder’ of the Allianz trust. company that specialises in providing Ben Rogoff heads the team in charge of Polar ‘Its long-term track record justifies our long- capital to reinsurers. Capital Technology. term preference for it,’ he said. Reinsurers are insurers to insurers, ‘One of the problems is that the managers Charles Stanley has both Allianz Technology providing back-up cover to risks, such of other trusts are more enthusiastic and and Polar Capital Technology on its as natural disasters like hurricanes and better presenters on the asset class,’ said recommended list, but not any open-ended earthquakes, that they do not want to Stephen Peters, co-head of collectives technology funds. take on by themselves. They get paid a research at Charles Stanley. ‘However, Allianz Technology employs an active share of the premiums received by the that masks the fact the manager enjoys discount management policy, buying back primary insurer. the benefit of being in California, is less shares if the discount becomes greater than Nevins backed the C-share issue, which index aware than open and closed-ended 7%. Over the past 12 months, it has used increased CATCo’s market value to £236 peers and his experience is, to me at least, this authority to buy back shares worth million, partly because of its strong record invaluable.’ £231,000. of handing back capital to shareholders investment trust insider Issue 24

Inside the Market: special times, unusual situations

– including 10% of its capitalisation at the ‘My initial reaction when I heard CATCo and Markel-Gayner Asset Management, start of this year. claiming to be able to maintain its returns the investment arm of a large US insurance ‘We were pretty impressed with that,’ said despite the fact that catastrophe bonds have group. Nevins. ‘Asset management companies are seen their yields decline so much was that it CATCo is listed on the London Stock quite keen to grow their asset base as much was simply taking on a riskier portfolio,’ said Exchange but the fund is domiciled in as possible on the basis that they have a Nevins. Bermuda, home to a large insurance market. permanent source of capital from which to However, CATCo has hedged out its Its shares have generated a total return of harvest fees. exposure to riskier assets and structured its 80% in the past three years, ahead of 64% ‘That was some of the most shareholder- portfolio to minimise losses. ‘If anything the growth in the underlying portfolio. friendly activity I’ve come across and it gave riskiness of the portfolio appears to have us confidence in CATCo’s ability to convey been declining,’ he said. honestly the opportunity it is seeing in the Architas snapped up a stake worth $2.9 market.’ million (£1.9 million) in the C-share issue, in CATCo’s fundraising has come at a addition to its existing holding worth $19 time when many industry experts have million (£12.6 million), meaning it now owns voiced fears of margin compression in the 4.9% of the fund. reinsurance market, which is struggling to Other organisations to have backed digest a glut of cash following heavy inflows CATCo’s C-share issue – which raised a total CATCo’s payouts impressed and limited payouts. of $88.4 million (£58.7 million) – include M&G investors investment trust insider Issue 24

Inside the Market: special times, unusual situations

NB Distressed Debt(NBDD) could provide a good return as it winds up, says witan

NBDD total shareholder return (what investors get) % NBDD net asset value total return (what fund manager is generating) % FTSE World 80

-10 2010 2011 2012 2013 2014 2015

Source: Lipper, 30/10/15 investment trust insider Issue 24

Inside the Market: special times, unusual situations

Schroder Japan Growth (SJG) could benefit from a more shareholder friendly culture

SJG total shareholder return (what investors get) % SJG net asset value total return (what fund manager is generating) % MSCI Japan 120

100

-20 2010 2011 2012 2013 2014 2015

Source: Lipper, 30/10/15 investment trust insider Issue 24

Inside the Market: special times, unusual situations

The manager of Allianz Technology Trust (ATT) is well placed in California

ATT total shareholder return (what investors get) % ATT net asset value total return (what the fund manager is generating) % FTSE World 120

100

-20 2010 2011 2012 2013 2014 2015

Source: Lipper, 30/10/15 investment trust insider Issue 24

Inside the Market: special times, unusual situations

CATCo Reinsurance Opportunities (CAT) looks for returns in catastrophe insurance

CAT total shareholder return (what investor gets) % CAT net asset value total return (what fund manager is generating) % FTSE World 80

-10

-20 2010 2011 2012 2013 2014 2015

Source: Lipper, 30/10/15 investment trust insider Issue 24

THE TEAM EMAIL TELEPHONE

Next issue: Editor Gavin Lumsden [email protected] 020 7840 2256

2015: we review the winners and Digital Graphic Designer Deepti Miller [email protected] 020 7840 5150 losers from the year just gone and Head of Creative Robert McColgan [email protected] 020 7840 2461 assess the lessons we learned about Production Alex Watson [email protected] 020 7840 2473 investment trusts. Picture Desk Manager Ufuoma Akpotaire [email protected] 020 7840 5114 Digital Sales Manager Jessica Ryan [email protected] 020 7840 5121

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