Spotlight on four global trusts

The 36 trusts in the global sector deserve consideration by most private investors as long‐term core holdings.

A global remit allows them to adjust regional or sectoral exposure to exploit new opportunities, saving investors the responsibility, expense and potential capital gains tax implications of achieving a similar rebalancing by shifting between more focused funds.

As closed‐ended funds with a specific amount of capital to invest, global trusts can invest long term in less accessible asset classes such as private equity, as , Foreign & Colonial IT and RIT Capital Partners have ‐ to good effect. Furthermore, they can shelter assets in alternatives such as gold or government bonds, as Personal Assets, Ruffer and RIT Capital have.

The global trust sector includes most of the largest investment trusts. Many of these are investment groups' flagships ‐ if not their only trusts ‐ and are therefore entrusted to leading fund managers.

FLAGSHIP OFFERINGS

The biggest trusts trade on negligible dealing spreads, and ongoing charges are generally competitive. The sector average is 0.9 per cent, but ongoing charges at Bankers, , Independent Investment Trust and Scottish Mortgage are below 0.5 per cent.

The sector includes capital growth as well as growth and income specialists, resulting in an average yield of around 1.8 per cent. But 11 of the trusts yield more than 2 per cent.

Their closed‐ended structure has allowed the likes of Alliance, Bankers, and Foreign & Colonial to increase dividends every year for decades. This structure also allows trusts to gear up, which enhances their returns in a rising market, though it can add to the pain in a downturn.

Returns across the sector vary widely. Shares in the highly geared and tightly focused Scottish Mortgage trust almost quadrupled in value over the 10 years to the end of April, whereas seven trusts failed to match the 122 per cent gain in the FTSE All‐Share index, let alone the 155 per cent gain in the MSCI World index.

Poorly performing managers should be held to account, as every trust's board of directors is responsible for adapting its investment approach to make the most of changing opportunities and for demanding a change of personnel if managers persistently underperform (as recently happened at ).

Boards have overseen serial changes at many global trusts; indeed, seven of them have more than 100‐ year histories, with continuing shareholder support over that time.

Most global trusts have made significant adjustments over the past 20 years, and are committed to keeping their discounts down to single figures if not near zero.

To illustrate the main options, we have profiled three trusts that have tackled performance problems by adopting a new approach.

We have also profiled Personal Assets Trust, which has persisted with the multi‐asset, absolute‐return emphasis it shares with the likes of Ruffer Investment Company, BACIT and Cayenne.

WITAN

Witan Investment Trust adopted a multi‐manager approach in 2004 in the belief that no single manager is likely to excel in all markets at all points in the economic cycle.

Initial results were mixed, but net asset value (NAV) total returns have been top quartile since Andrew Bell became chief executive in February 2010 and shifted the whole portfolio to an actively managed approach.

The trust has raised its dividend every year since 1974 and by nearly 50 per cent over five years, and its shares have surged ahead as the discount to NAV has been all but eliminated.

Witan subcontracts more than 90 per cent of its portfolio to 11 external equity managers with various styles and specialisations. Most are based overseas and are employed on sufficiently tight terms to limit ongoing charges ‐ including fees to third‐party managers ‐ to 0.74 per cent last year, or 0.96 per cent including performance fees.

Bell is responsible for manager selection, asset allocation and gearing, which averaged 9 per cent last year. He uses derivatives to adjust regional allocations without disturbing the trust's external managers, and can invest up to 10 per cent in collective vehicles offering exposure to specialist areas such as private equity, insurance and mining.

The UK accounts for 45 per cent of Witan's assets, compared with a sector average of 25 per cent ‐ it subcontracts out to Artemis, Lindsell Train and Heronbridge.

Bell says this is not a big bet on the UK, as the holding includes a lot of global companies and UK‐based specialist funds. It does, however, limit Witan's overseas exposures ‐ the US is the highest at 23 per cent.

Bell warns that, with government bond yields artificially suppressed, there is 'a risk of an unstable correction at some point', but he expects Witan's diverse spread of managers and long list of holdings to help curb volatility.

He hopes the lower average oil price will generate a growth surprise, and he has negotiated new long‐ term gearing for Witan at an annual interest rate of 3.4 per cent.

FOREIGN & COLONIAL

Foreign & Colonial Investment Trust has been investing in global equities since 1925. It started subcontracting out some of its portfolio in 2003, when it decided to invest 10 per cent of its assets in private equity; US‐based HarbourVest and Pantheon Ventures were given responsibility. Returns over the past 12 years have been ahead of listed stock markets.

Since 2005 the trust's US large company portfolio has been delegated to two US managers, with mixed returns in a market in which it is notoriously difficult to outperform. Japanese exposure was also outsourced for a while.

The trust's performance recovered from a dull run after Paul Niven became manager in July 2014. Niven slashed the UK weighting as part of a strategy to establish a truly global exposure. He also changed the UK fund manager, though he continued to employ a manager from the F&C stable for the UK, as he has in Europe, Asia, Japan and emerging markets.

More importantly, he invested 10 per cent of assets in a new portfolio of externally managed global funds selected by F&C's specialist multi‐manager team, which together with other adjustments means that half the portfolio is now externally managed.

Foreign & Colonial now holds investments in more than 600 quoted companies in 35 countries, as well as geographically diversified private equity exposure. It is hoped that this will keep volatility low.

Gearing is quite high, but cheaper now that an expensive debenture has matured. This should help keep the dividend rising, as it has every year since 1970. Additionally, the trust has lowered its target for discount control from 10 to 7.5 per cent.

JPMORGAN OVERSEAS

JPMorgan Overseas Trust tackled its performance problems in 2008 by adopting a globally integrated 'best ideas' approach. Under manager Jeroen Huysinga, it has worked well on balance, with the trust's NAV returns over the past six years beating its MSCI World index benchmark, despite a nasty setback in 2011.

NAV total returns have been above average for the global sector over one and three years, but the manager's growth orientation is reflected in a below‐average yield.

Also, with the trust having just 82 holdings, its returns have been more volatile than those of Foreign & Colonial and Witan, despite Huysinga's preference for relatively modest gearing.

On the other hand, they have been less volatile than those of Scottish Mortgage, which has a similar approach but focuses on fewer sectors, pays less regard to valuations and has high gearing.

Huysinga is supported by a large global team of JPMorgan analysts. The team looks for companies with significant growth potential, an identifiable catalyst to unlock that potential over 18 months, and attractive valuations.

Huysinga's belief that global growth is comparatively secure is reflected in a relatively high weighting in cyclically sensitive stocks. Meanwhile, his search for value has led to increased investment in Europe and the UK ‐ at the expense of North America ‐ and selective investments in emerging markets. The trust's board is committed to defending a 5 per cent discount to NAV through share buybacks.

PERSONAL ASSETS

Personal Assets Trust aims to protect the value of shareholders' funds over the long term and increase them, in that order. It has historically been cautiously managed.

The trust had less than 70 per cent invested in equities between 2001 and 2007, but still beat the FTSE All‐Share index over most three‐year periods because it outperformed in downturns.

It held up very well in the 2008 crisis, but it has languished in recent years because its board and managers believe most stock market valuations are unjustifiably high and that another crash is inevitable.

It has therefore had less than 50 per cent in equities, with the rest in a mix of gold and cash or near‐cash, including UK and US index‐linked government bonds.

This went badly wrong in the year to April 2014, when its NAV per share fell by 7 per cent. As a result, it lagged the All‐Share index over 1, 3, 5 and 10 years, whereas it had been ahead over all periods a year earlier.

It struggled to match the All‐Share index over the 12 months to 30 April 2015, when it was the worst‐ performing global trust, bar Hansa.

When there is another crash, it should prove exceptionally resilient and be able to invest its cash at bargain prices. But it has a lot of ground to make up and is having to borrow from its capital account to maintain its dividend