The Trusts Shaking a Multi-Decade Headwind EDITOR’S LETTER

Issue 39 / April 2018

PROTECT OR SURVIVE MULTI-COLOURED THE HISTORY BOYS Should you use ONE-STOP SHOP Where to find the trusts for capital Closed-ended oldest investment preservation? multi-manager funds trusts

The trusts shaking a multi-decade headwind EDITOR’S LETTER

Issue 39 / April 2018

PROTECT OR SURVIVE MULTI-COLOURED THE HISTORY BOYS Should you use ONE-STOP SHOP Where to find the trusts for capital Closed-ended oldest investment preservation? multi-manager funds trusts

T WAS PUT TO ME WHEN I FIRST STARTED WORKING IN THE ASSET MANAGEMENT INDUSTRY that an average The trusts shaking a multi-decade headwind I annualised return of 8 per cent could be regarded as a fairly respectable outcome from an equity fund. It came as something of a surprise then, to learn that many investment trusts took out long-term debentures in the 1980s when interest rates were in the double-digits, meaning they had to make the same return from the market just to break even. The good news is that, with much of this debt now maturing, many ISSUE 39 of these trusts are now refinancing at more attractive rates. Holly Black finds out in this issue’s cover story just how much of a tailwind this will prove to be in the coming years. On the subject of historic issues, this month’s sector focus falls on IT Global, home to numerous trusts with a track record of more than 100 CREDITS years. As Adam Lewis discovers, however, there is more to the sector than longevity. Meanwhile, Sam Shaw runs the rule over multi-manager funds in the closed-ended space while I investigate whether investment TRUSTNET MAGAZINE (FORMERLY trusts have a role to play in terms of capital preservation. INVESTAZINE) IS PUBLISHED BY In our regular columns, SAINTS’ James Dow highlights three stocks THE TEAM BEHIND FE TRUSTNET IN SOHO, LONDON. whose capital-light business models should help them deliver long- term earnings growth and The Share Centre’s Sheridan Admans reveals WEBSITE: WWW.TRUSTNET.COM why he is turning to GAM Star MBS Total Return for its diversification EMAIL: [email protected] properties. CONTACTS: Enjoy reading, Anthony Luzio Editor T: 0207 534 7652

Art direction & design Javier Otero W: www.feedingcrows.co.uk

Editorial Gary Jackson Anthony Luzio Editor (FE Trustnet) Editor T: 0207 534 7680 Rob Langston News editor T: 0207 534 7696 Jonathan Jones Senior reporter T: 0207 534 7640 Mai Sardon Reporter T: 0207 534 7625

Sales Richard Fletcher Head of publishing sales T: 0207 534 7662 Richard Casemore Account manager T: 0207 534 7669

Photos supplied by iStock and Photoshot Cover illustration: Javier Otero IN THIS ISSUE

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LOAN SURVIVORS Holly Black finds out how trusts will benefit now that the long-term debt taken out in the era of astronomical interest rates has begun to mature P. 2-5 / WHY THE TIGER ECONOMIES ARE POISED TO POUNCE Henderson Far East Income’s Mike Kerley says local Asian companies are challenging multinational brands and driving growth P. 6-7 / MULTI-COLOURED ONE-STOP SHOP Sam Shaw looks at the wide variety of multi-manager trusts available in the closed-ended space P. 8-10 / GOING OFF-ROAD Monks Investment Trust’s Charles Plowden talks about why the investment case for Fiat Chrysler has little to do with either Fiat or Chrysler P. 12-13 / PROTECT OR SURVIVE? Whether trusts have a role to play in dampening risk depends on what you mean by “risk”, writes Anthony Luzio P. 14-16 / FUND, PENSION, TRUST Baillie Gifford Positive Change, Lindsell Train Global Equity and Allianz Technology Trust find themselves under the spotlight this month P. 18-20 / THE HISTORY BOYS IT Global is home to many trusts that are more than 100 years old – but there is far more to the sector than longevity, writes Adam Lewis P. 22-26 / FLEET OF FOOT SAINTS’ James Dow highlights three stocks whose capital-light business models should help them deliver long-term earnings growth P. 28 / WHAT I BOUGHT LAST The Share Centre’s Sheridan Admans reveals why he is turning to GAM Star MBS Total Return for its diversification propertiesP. 29 YOUR PORTFOLIO LOAN SURVIVORS Much of the long-term debt taken out by trusts in the era of astronomical interest rates has now begun to mature. Holly Black finds out how this will affect performance

HE 1980s IS OFTEN LABELLED BY T FASHIONISTAS as the decade that style forgot. Whether it is shoulder pads, fluorescent tracksuits or the frankly indefensible mullet, photos of anyone demonstrating a faithful adherence to the fashions of the day A DRAG ON RETURNS naturally seem to gravitate towards As a result, many investment the back of the family album. trusts have found themselves Another feature of the 1980s saddled with debt at rates of 10 per strategy can provide a serious – and early 1990s – that many cent or even higher, which seemed uplift to performance, while in a investment trust managers wish good value when it was secured. market downturn it can serve to they could forget about is double- Charles Cade, head of magnify losses. digit interest rates. While just a investment companies research But part of the success of a distant memory for most of us old at Numis Securities, says: “These trust’s gearing strategy will be enough to remember them, many have proved to be a drag on determined by whether it can trusts arranged long-term finance returns in a falling interest outperform the interest rate on during this period when the cost rate environment, but many of its debt – and, for some trusts, this of servicing debt was astronomical these older debt issues are now just got a lot easier. and inflation was climbing. In maturing, allowing the funds to Long-term debt is much cheaper October 1989, for example, the refinance more cheaply.” to service than the short-term Bank of England base rate stood Gearing is a well-publicised variety – this is true for consumers at 14.87 per cent. A decade later advantage of investment trusts. arranging a mortgage or loan, the base rate had fallen to 5.5 per These vehicles are able to borrow for businesses securing finance cent but, even then, few investors money to invest, giving them the and, similarly, for investment could have foreseen just how low opportunity to boost their returns trusts taking on gearing. This it had to go. and income. In good times the is because you are taking a risk

2 trustnet.com / LONG-TERM DEBT / LOAN SURVIVORS that the interest rate you agree according to data from Numis. per cent debenture seemed like upon for that debt will not be City of London has secured a 32- a good idea when the base rate such good value in the future. year £50m arrangement at 2.94 was 13 per cent but, with the While it is a bet that has backfired per cent and Merchants £35m for benefit of hindsight, I’m not spectacularly for a number of 35 years at 2.96 per cent. sure we made sufficient excess investment trusts in the past, More recently, in March, Foreign return to warrant that borrowing many are now taking advantage & Colonial took on £75m in debt decision.” of rock-bottom interest rates to – equivalent to 2.1 per cent of its As a result of maturing debt secure cheap long-term debt. assets – for 30 years at 2.92 per and refinancing, F&C has seen cent. This represents a significant the weighted average cost of its SIGNIFICANT IMPROVEMENT improvement on long-term debt it debt drop from 7.1 per cent at Witan has arranged the longest has taken out in the past. the end of 2013 to just 2.5 per financing agreement at 37 years, Paul Niven, manager of Foreign cent today. The trust currently paying a 2.74 per cent rate & Colonial, says: has £260m of gearing, equivalent on the £30m debt, “An 11.25 to 7.2 per cent of assets. This ranges from £50m at 1.12 per cent due to mature this year, to $80m at 4 per cent maturing next year, with the longest debt – worth £50m – set to mature in 2031. Niven says he is looking for further long- term debt opportunities while rates remain attractive. MILLSTONE The average interest rate paid on borrowings at the City of London Investment Trust currently stands at 8.8 per cent, owing to some legacy debt. One debenture at 10.25 per cent is due to mature in 2020, and another at 8.5 per cent will end in 2021, with manager Job Curtis saying he will be pleased to see the back of them. “They have been a bit of a millstone,” he adds. “I was involved in the decision to take on the 8.5 per cent debenture in 1997 [but] it was the prevailing rate at the time.”

trustnet.com 3 While there is the option to 10 per cent, so locking in long-term offload this legacy debt earlier, in debt seemed like a good idea.” most instances the costs involved After refinancing in January, the outweigh the benefits, so trusts average debt cost for the trust fell often bide their time instead. from 8.5 to 6.1 per cent. He hopes However, expensive historical that as the drag of the debt starts debt, which has been a hindrance to wear off, the trust’s discount in an environment of falling (currently around 4 per cent) interest rates, has not put boards will narrow and earnings per off from tying into longer-term share will also benefit. Not arrangements. Curtis says that all trusts have seen their while City of London has access price-to-NAV suffer as a to short-term lending facilities result of their finance from banks, he doesn’t like to be arrangements, and City dependent on them. “The moment of London has been at when you want money is the time a steady premium for that banks tend to be least willing some years. to lend it,” he explains. Gergel adds: “[The Cade adds: “With hindsight, it debt] has been a was obviously a mistake to take frustration but we’re out long-term debt at double- now at an interesting digit rates, but we were in a very and exciting stage different environment at the time. where it can be turned Few would have predicted the into a benefit. When we collapse in rates in recent years.” arrange new debt now, He believes a better strategy there is definitely a feeling is for trusts to use gearing on a of the longer the better.” more flexible, opportunistic basis Arranging new debt can rather than tying themselves into be relatively swift. Once the long-term debt. “Nevertheless,” he board has made the decision adds, “there is now an argument to issue debt and the relevant for boards to consider taking documents are created, the offer For out long-term, fixed-rate debt at is made to a handful of insurance trusts that are current levels to protect against companies and similar businesses yet to lock in debt at ultra-low possible future interest-rate rises.” whereupon pricing, terms and rates, time could be running out duration are agreed. The whole with the next interest-rate hike A COMPLICATED EQUATION process can take around six weeks, expected to take place as early Merchants has one more tranche after which the deal is announced as May. Some boards may be of legacy debt left to mature in to the market. hesitant to secure such long-term 2023, having taken it out in the Investment trusts can often secure agreements after being badly 1980s at more than 11 per cent some of the best rates available burned in the past, while others – this is another case where the because, with a long history, they may have to weigh up the cost idea of getting rid of the debt early are seen as a reliable issuer. Gergel benefits of getting out of their doesn’t stack up, a decision which explains: “The great thing about existing arrangements early. involves a “complicated equation trusts is they’re viewed as very secure Annabel Brodie-Smith, with many moving parts”. investment vehicles and are highly communications director at the AIC, Manager Simon Gergel says: sought after by these companies says: “The trend around gearing has “Interest rates at the time were in who are trying to manage their changed and trusts now tend to take double digits and inflation was near long-term liabilities.” on a relatively small amount of “The great thing about trusts is they’re viewed as very secure investment vehicles and are highly sought after by these companies who are trying to manage their long‐term liabilities”

4 trustnet.com / LONG-TERM DEBT /

long-term debt, and that’s partly because they’ve learnt the lessons of the past. Interest rates are low at the moment, however, so locking in long-term debt is more attractive.” A LOW HURDLE Locking in long-term debt at a rate of less than 3 per cent certainly seems like the right thing to do – it is a fraction of what trusts have paid in the past and even with markets looking fully valued it appears to be an easy hurdle to beat. However, if there is one lesson we can learn from the 1980s, it is this – even the mullet seemed like a good idea at the time.

LONG-TERM DEBT ISSUES IN RECENT YEARS

Fund Date # Value % of net assets # Maturity Interest rate

Foreign & Colonial IT Mar-18 £75m 2.10% 30yrs 2.92% JPM Global Growth & Inc Jan-18 £30m 7.20% 30yrs 2.93% JPM Claverhouse # Mar-20 £30m 7.20% 25yrs 3.22% Merchants Dec-17 £35m 6.20% 35yrs 2.96% Murray Income Nov-17 £40m 7.00% 10yrs 2.51% British Empire Nov-17 €20m 1.90% 20yrs 2.93% City of London Nov-17 £50m 3.60% 32yrs 2.94% Witan Nov-17 £30m 1.60% 37yrs 2.74% Temple Bar Oct-17 £25m 2.70% 30yrs 2.99% BlackRock SmCos May-17 £25m 3.80% 20yrs 2.74% Scottish Mortgage # Sep-20 £20m 0.40% 24yrs 3.65% Scottish Mortgage Apr-17 £45m/£30m/£30m 2.20% 25/27/30yrs 3.05/3.3/3.12% Lowland Jan-17 £30m 7.80% 20yrs 3.15% Foreign & Colonial IT Jun-16 £25m/£50m 2.70% 12/15yrs 2.80/3.16% Henderson Smaller Cos May-16 £30m 5.60% 20yrs 3.33% TR Property Feb-16 €50m/£15m 3.7/1.5% 10/15yrs 1.92/3.59% British Empire Jan-16 £30m/€30m 7.50% 20yrs 3.80% Dunedin Income Growth Dec-15 £30m 7.80% 30yrs 3.99% Law Debenture Sep-15 £75m 14.20% 30yrs 3.77% JPMorgan European Aug-15 €50m 12.20% 20yrs 2.69% Foreign & Colonial IT Jul-15 £50m in € 1.80% 7yrs 1.69% Henderson High Income Jul-15 £20m 10.80% 19yrs 3.67% Bankers IT May-15 £50m 7.60% 20yrs 3.68% RIT Capital Partners May-15 £151m 6.30% 16yrs* 3.45%* Witan Apr-15 £54m/£21m 3.8/1.5% 30/20yrs 3.47/3.29% Alliance Trust Jun-14 £100m 3.50% 15yrs 4.28% Perpetual Income & Growth Mar-14 £60m 6.40% 15yrs 4.37% City of London Dec-13 £35m 3.10% 15yrs 4.53% Temple Bar Sep-13 £50m 7.00% 15yrs 4.05%

#Ordered by date when debt was arranged (Scottish Mortgage and JPM Claverhouse have fixed debt for a future date) /* Weighted average

Source: Numis Securities Research trustnet.com 5 WHY THE TIGER ECONOMIES ARE POISED TO POUNCE

Henderson Far East Income’s Mike Kerley discusses how local Asian companies are challenging multinational brands and driving growth across the region

FTER SEVEN YEARS market share of world-produced the forefront of this change, and OF FLAT EARNINGS goods is so high it can’t gain any for the first time ever, we believe A GROWTH, the Asian more market share. As of May China will spend more on research market is showing last year, Chinese companies and development (R&D) this year signs of life again. The accounted for more than 25% of than the US and within five years Tiger Economies are waking up the global manufacturing industry, we think it may spend more than and are on the prowl, led by a while the country was the leading the EU and US put together (see resurgent China. producer of 220 of the world’s 500 chart). This is a huge shift and it’s Asian stocks, excluding Japan, major industrial products. (Source: in new areas, like electric vehicles, outperformed the world in 2017 Ministry of Commerce of the renewable energy, healthcare, and many analysts believe the People’s Republic of China, May 25, artificial intelligence and virtual region is likely to continue its 2017). reality – things we will embrace growth story through 2018 and In terms of growth, where does in years to come and that have the into 2019, but of course analyst China go from here? Firstly, we potential to become part of our forecasts are by no means a think local brands will gradually day-to-day lives. guarantee of performance. eat into the market share of Our belief that China will lead Asia has historically been geared multinationals in local markets. Asia’s cutting-edge growth story into whatever the rest of the world The next growth leg of Asia will stems from the increasing number has been doing because it was then come from increasing the of patents filed from the country, making products and selling them value of the goods they sell to the and across the Asian continent. to the rest of the world. The region rest of the world. Of course, filing patents does has done very well out of this but not necessarily equal growth or we think this story is at an end. CHINA’S GROWTH STORY economic success. But as you Firstly, low-cost labour is not Historically, Asia has generally can see in the chart, China is low-cost anymore – especially in been associated with low-cost producing more robotics on an China, where wage growth has manufacturing and consumer annual basis than South Korea been quite rapid. Secondly, Asia’s goods. That’s changing. China is at and the US put together, and

6 trustnet.com / JANUS HENDERSON /

we believe the efficiency of its video surveillance company The US President’s protectionist manufacturing over time will Hikvision has grown to become policies are a more immediate continue to improve. the largest CCTV hardware concern. His decision to impose a So, what does all this mean provider in the world – although 25% tariff on steel imports and a for investors? Historically, Asian not many of us would recognise 10% tariff on aluminium imports growth has been accessible for the name. might cause some nervousness in investors via Western firms selling A more familiar brand, perhaps, the markets with talk of a ‘trade goods into the region – think is Alibaba: founded in 1999 as an war’ doing the rounds. From China’s HSBC, Louis Vuitton and BMW, for e-commerce platform, it has grown perspective, however, exports have example. into a $480 billion organisation become less and less important to That’s probably not the way with a success story similar to US the national economy, dropping as we can look at it going forward. rival Amazon. a percentage of the country’s GDP Local companies are targeting from 37% to 19.6% in the 10 years the market share of global brands ECONOMIC AND POLITICAL between 2006 and 2016. as the quality of their goods and HEADWINDS In our view, we think this all services improves. Of course, the region’s growth is points towards sustained growth in The next step for local brands is still vulnerable to economic and Asia, and that local companies will to be competitive internationally. political risks. The war of words facilitate this growth, rather than How many Chinese brands are between the leaders of North Korea Western brands selling goods into we going to start seeing in our and the US are a cause for concern, Asia. We believe there is significant shops? Some brands already have but recent developments have earnings growth potential for local a sizeable presence in Western given us some encouragement that Asian brands and we hope this will markets. For example, Chinese the situation is improving. be matched by dividend growth.

MOVING UP THE VALUE CHAIN Innovation - a clear driver of growth

Gross domestic spending on Number of patents filed (000’s) Research & Development *2000-2015 (US$ 000’s)

700 60 China China EU Germany 600 US 50 UK

500 40 400 30 300

US $ (000’s) 20 200 10

100 (000’s) filed Number of patents

0 0

20002001200220032004200520062007200820092010201120122013201420152016201720182019 1999200020012002200320042005200620072008200920102011201220132014201520162017201820192020

Please note that this is a forecast. Actual future government spending on research and development and the number of patents filed from these countries may differ considerably.

The information in this article does not qualify as an investment recommendation. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.Prospective investors should be aware of the risks of investing in shares listed on emerging markets, which may be more volatile than more developed stock markets. Changes in the rates of exchange between currencies may cause your investment/the income to go down or up. Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. trustnet.com 7 YOUR PORTFOLIO

MULTI-COLOURED ONE-STOP SHOP

Sam Shaw takes a closer-look at the wide variety of multi-manager trusts available in the closed-ended space

ULTI-MANAGER For example, funds of trusts funds rather than construct their PRODUCTS COME have to cope with heightened own diverse portfolio. M IN ALL SHAPES governance where the Yet he says this theory is AND SIZES. When overarching vehicle is itself contradicted somewhat when applied to the closed- closed-ended. Open-ended multi-manager funds are made up ended space, the scope broadens managers tend to have more of investment trusts, which are even further: funds of investment of a “free rein” in not having to often regarded as more volatile. trusts, investment trusts of report to a board every quarter “When you bring in trusts – investment trusts or private – notwithstanding internal and because of the discount/premium equity, trusts investing in external legal and compliance – you are bringing risk back in collectives and direct stipulations. because in rising markets you are investments, and multi-managers going to do better, the discounts running segregated mandates. SECURITY CHARACTERISTICS will close and the trust will Many benefits of the traditional Senior analyst at Hargreaves move to a premium. The flipside open-ended multi-manager Lansdown Laith Khalaf says happens when markets fall. You sector – namely diversification that in his experience, multi- then have to consider gearing, through a single holding (the manager investors tend to place which amplifies that effect.” “one-stop shop”) and outsourcing greater emphasis on “security” Peter Hewitt runs the F&C the portfolio construction – still characteristics: these are often Managed Portfolio Trust (MPT), apply, but other characteristics high net-worth clients who prefer which is about to celebrate its also come into play. to hold a couple of multi-manager 10-year anniversary. Constructed

8 trustnet.com YOUR PORTFOLIO / MULTI-MANAGER TRUSTS /

MULTI-COLOURED ONE-STOP SHOP

as a two-part portfolio – one part focusing on income and the other “Funds of trusts have to cope with focusing on growth – but under one corporate structure, Hewitt heightened governance where the is able to “cross-subsidise” the level of income in one fund with overarching vehicle is itself closed- another, balancing out the capital growth in both. This allows him ended” to maintain a more consistent dividend payment without or £20m of a trust and you can’t do “If the market backdrop changes, having to take on unnecessary that with all trusts, so you have to we don’t want to become forced risks to do so. be more selective and patient.” sellers, we want those decisions to With liquidity a defining be ours rather than end up skewing THE TRADE-OFF characteristic of investment trusts, a portfolio because we’ve had to sell Hewitt says that as a result of it makes them a natural home for 50 per cent of our holdings to meet gearing, most closed-ended funds alternative assets. This is what the redemptions. So we find that daily outperform their open-ended Henderson Alternative Strategies dealing is a comfort to investors.” counterparts over the long- Trust (HAST) seeks to profit from So while HAST is designed to term, but the trade-off from a by investing in closed-ended take advantage of the more illiquid multi-manager’s point of view is vehicles in the more esoteric areas nature of non-traditional assets, liquidity. He cited the experience of the market. Manager James giving investors a door to otherwise of his open-ended peers Gary de Bunsen, who also runs open- less accessible areas of the market, Potter and Robert Burdett, whose ended multi-manager portfolios de Bunsen is mindful not to invest F&C MM Navigator Distribution at Janus Henderson, says the main solely in illiquid assets. fund has £1.2bn in AUM. difference between the structures “Investors don’t necessarily “[Due to their size], Gary and is the extent to which you are want that and you are likely Rob will likely want to buy £50m forced to prioritise liquidity. to attract a discount at the

trustnet.com 9 / MULTI-MANAGER TRUSTS /

overarching trust level if investors think that the valuations of The traditional buyer of an the underlying assets are not completely fresh and up to date.” investment trust used to be the old Witan is an example of a multi- manager trust that appoints private client stockbroker, which segregated mandates to its have – in many cases – grown into underlying investment managers. Khalaf says this could bring costs huge chains down as you aren’t buying a typical fund with associated charges. The negotiating power, however, will Greenwood adds: “We have there are fewer of these vehicles come down to scale, so a smaller a situation where the natural available in the closed-ended multi-manager trust may lend itself buyer is gone but there are still space, there is a greater variety in better to a mandated set-up. sufficient sellers to drive the share the ones to choose from. It is worth price down and create a very large remembering though that if you SECOND-GUESSING discount, which is what we are buy a trust that specialises in a Nick Greenwood, whose Miton looking to exploit.” certain area, you shouldn’t regard it Global Opportunities trust of It is difficult, then, to generalise as a one-stop shop – no matter how investment trusts has more of a about multi-manager trusts. While many underlying holdings it has. value focus, notes net asset value (NAV) is more “subjective” than in an open-ended fund. “We are different from an open- PERFORMANCE OF TRUSTS OVER 10YRS ended equity fund because we recognise the value now and do 250% Henderson Alternative Strategies Trust (-30.25%) not try to second-guess what might 200% happen in the future,” he says. Witan Investment Trust (197.04%) 150% The trust aims to extract value Miton Global Opportunities (102.73%) from the discount opportunities 100% present due to the changing nature of the audience. The traditional 50% buyer of an investment trust 0% used to be the old private client stockbroker, which have – in many -50% cases – consolidated and grown -100% into huge chains. As such, their Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct size prevents them from investing Apr08 Apr09 Apr10 Apr11 Apr12 Apr13 Apr14 Apr15 Apr16 Apr17 Apr18 in smaller trusts. Source: FE Analytics

10 trustnet.com

GOING OFF-ROAD

Charles Plowden, manager of the Monks Investment Trust, talks about why the investment case for Fiat Chrysler has very little to do with either Fiat or Chrysler

ONCE PROUD when FCA spun off Ferrari in proven, professional executive who ITALIAN CAR October 2015 in a successful New successfully managed companies in A COMPANY with a York listing. Monks enjoyed the the Exor stable. history of turbulent rise in the Ferrari share price and Marchionne’s great strength labour relations, and an sold its stake in April 2017. The is that he is an outsider in the American automobile giant that financial crisis then handed Fiat car industry. As a result, he recently filed for bankruptcy a rare opportunity that would questions everything. He sees protection. On the face of it, the transform its fortunes. When much duplication in the industry. investment case for Fiat Chrysler Chrysler went bankrupt in 2009, He wants to avoid wasting Automobiles (FCA) looks dire. But Fiat purchased a sizeable stake in money and time on marginal this would be missing the point. the US company then gradually differentiation, believing that the It’s not about either Fiat or acquired other shares and differentiation and value is not in Chrysler. It’s about SUVs, in completed the acquisition in 2014. the engine, it’s in the brand – the particular Jeep, and a deft This transformed Fiat from being look and feel of the vehicle. management team that has turned a small European car company to Marchionne’s desire for around the company’s fortunes. a global player with a significant consolidation drove Fiat’s risky FCA is a classic latent growth North American presence. purchase of Chrysler, a once great stock with a mismatch between the Baillie Gifford had good American company that was company’s low valuation and its relationships with FCA’s core haemorrhaging sales and cash. His potential. When Monks purchased management team of John five-year turnaround plan for Fiat FCA shares in March 2015, we Elkann (chairman) and Sergio Chrysler involved spending billions believed it could move quickly Marchionne (chief executive). of dollars on new models, stripping from large losses to sustainable Elkann is the grandson of Gianni out costs and revitalising the brands. profits. It also owned Ferrari, a Agnelli, the suave European Many investors ran for the hills. super-premium brand, which was industrialist who ran Fiat in its However, FCA has defied sceptics unrecognised. This was shown pomp. And Marchionne is the and done almost everything it said

12 trustnet.com / BAILLIE GIFFORD /

ANNUAL PAST PERFORMANCE TO 31 DECEMBER EACH YEAR (%)

31/12/12 - 31/12/13 31/12/13 - 31/12/14 31/12/14 - 31/12/15 31/12/15 - 31/12/16 31/12/16 - 31/12/17 Share price 25.8 3.2 8.9 33.8 35

Source: Morningstar. Share price, total return. All data as at 28 February 2018 unless otherwise stated. Past performance is not a guide to future returns. it would do. The two big challenges software. This trend will accelerate for Fiat were continual industrial “It’s not about with the move to electric vehicles. unrest from its heavily unionised Maybe the biggest question workforce, and selling cars that either Fiat or concerns Marchionne, who will people didn’t want to buy. Instead retire in 2019. Whoever takes over of closing some large factories, Chrysler. It’s will inherit minimal debts, a young FCA started making higher value model range and one of the world’s Jeeps for export, avoiding industrial about SUVs, strongest brands. action, costly redundancies and in particular The biggest risk in buying pension pay-offs. In 2009, Jeeps were Chrysler was macro. If the produced in four US plants. This is Jeep” economy had turned, the company now 10 plants in six countries. would have been vulnerable. But it Jeep production has risen from didn’t. FCA’s five-year turnaround 338,000 in 2009 to 1.4 million in and pick-up divisions remain plan is in its final year – the capital 2016, with a 2 million target for seriously under-appreciated. expenditure has been made, profits 2018. The other star performer has The FCA group was valued at are growing and its brands are been the pick-up truck maker Ram, €22 billion in December 2017. more established. The growth which sold 545,851 vehicles in 2016. However, at the same time in profits will give the company Along with Dodge, they dominate Goldman Sachs estimated that Jeep ammunition to pay down debts FCA’s North American business, alone was worth €22 billion and and potentially return money to which accounts for five-sixths of the Ram an additional €13 billion. shareholders. company’s operating profits. When As always, success is not assured. Elkann and Marchionne did not Fiat bought Chrysler, these brands The SUV market is becoming invent a business. They rescued were almost exclusive to North increasingly crowded with and revitalised two businesses. America. Now, about one-third of newcomers such as Jaguar, BMW FCA is not about Fiat or Chrysler. If Jeep’s sales are outside America. and Audi. Over the long term more the company was called Jeep Ram, SUV sales have benefited from of the industry’s value is shifting it would be clear what you were low oil prices and low interest from car manufacturers to their owning and why – a collection of rates. We believe the market will suppliers, particularly the research premium car brands with global grow further, and that FCA’s SUV and development, and lucrative growth potential. 

IMPORTANT INFORMATION AND RISK FACTORS This article is issued by Baillie Gifford & Co Limited and does not in any way constitute investment advice. All information is sourced from Baillie Gifford & Co and is current unless otherwise stated. The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions. This article contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested. The trust invests in overseas securities. Changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up. The trust invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment. This information has been issued and approved by Baillie Gifford & Co Limited which is authorised and regulated by the Financial Conduct Authority (FCA). The Monks Investment Trust is not authorised or regulated by the FCA. trustnet.com 13 YOUR PORTFOLIO

PROTECT OR SURVIVE?

The question of whether investment companies have a role to play in reducing risk depends entirely on what you mean by “risk”, writes Anthony Luzio

HEN ANALYSTS However, the ability to gear Coombs, head of multi-asset TALK ABOUT THE also counts against them investments at Rathbones, says W MANY ADVANTAGES when markets fall, amplifying it depends on what you mean OF INVESTMENT losses, and while the ability to by “risk”. “The thing about TRUSTS, capital preservation consistently raise the dividend investment trusts is they are not tends to come a long way down provides some respite during forced sellers of assets in the way the list. Being able to gear means times of market weakness, this open-ended funds are when the these vehicles tend to outperform is more than outweighed in the market is weak because they don’t funds over the long term, while short term by discount volatility. get the redemptions,” he explains. the ability to hold back income So should these factors “Will you get more volatility? Yes earned has led to a trend of automatically preclude investors you will, if your discount widens. increasing dividends every year from using trusts for dampening But in small caps, for example, over multi-decade periods. risk? Not necessarily. David if the market is weak you aren’t

14 trustnet.com / CAPITAL PRESERVATION /

[GARS] tried to replicate a hedge- fund type strategy and arguably failed, that is why it has been haemorrhaging money.” At just under £20bn in size, Standard Life GARS is still the fifth-largest fund in the IA universe – but it used to be the biggest. Despite its aim to provide a positive return in all market conditions, it is down 3.8 per cent over the past three years while the FTSE All Share is up 18.09 per cent. “I think what is quite handy in the closed-ended space is that In the 20th century, exchange often they get more flexibility,” Jaffe continues, “so even in terms controls, high inflation and of straight-up equity investment trusts, some of the Fidelity ones high tax rates meant equities have the ability to use derivatives and go short to reduce their were the only game in town overall market exposure. Some funds might be able to do this forced to sell the stock into an HAEMORRHAGING MONEY in the open-ended space, but it illiquid market where there are Many investors’ first port of call makes more sense in the closed- only sellers, not buyers, which isn’t when looking to preserve capital ended space where they don’t a great place to be. So you won’t in the open-ended space is an have to meet daily fund flows, suffer the permanent loss of capital. absolute return fund. However, particularly if it is a smaller fund.” “I would argue capital Cantor Fitzgerald investment preservation is definitely companies analyst Markuz THE DATA enhanced in an investment trust, Jaffe says the problem here is There isn’t an investment trust but volatility is ironically greater.” that a large proportion of these equivalent of the IA Targeted As a result, Coombs does not strategies have by and large Absolute Return sector. However, use investment trusts specifically disappointed – with the issue of looking at a straight-up comparison to suppress risk in his multi-asset illiquidity again coming into play. between the open- and closed- portfolios, but says he would use “A fund can only buy a certain ended versions of the Flexible these products – and never open- group of assets that have an Investment sector, it may come as ended funds – to gain exposure expected return,” he explains. a surprise to some investors that to less liquid areas such as small “Some funds such as Standard Life the latter has fared better under caps, for example. Global Absolute Return Strategies a variety of capital preservation trustnet.com 15 / CAPITAL PRESERVATION /

metrics over the past decade, Spiller knows plenty about including maximum drawdown, capital preservation, with his downside capture and volatility. “Capital trust losing money in just one of This has come at the expense of the past 10 calendar years. His significant underperformance in preservation preferred asset for this strategy terms of total return. has long been index-linked Among the most successful is enhanced in government bonds, currently names in this sector for preserving an investment making up 38 per cent of his capital are Personal Assets Trust portfolio, although he has sold and Ruffer Investment Company. trust, but down the UK variety in favour of Both of these use discount control US TIPS over the past 12 months. mechanisms, which sees them buy volatility is back shares if the discount falls to LOOKING FORWARD a certain level, containing losses. ironically Investment companies are always The disadvantage here is these can likely to be more volatile than also limit upside potential for new greater” funds in the short term. The issue investors hoping to buy in on the with the latter is that with bonds cheap and have led some critics because in the 20th century looking expensive, managers to point out you may as well just equities produced fabulous focused on capital preservation hold an open-ended fund. returns, around 6 per cent above are being forced to look at inflation,” he says. alternative assets – which often CUTTING THE BONDS However, he warns conditions expose the shortcomings of the One anomaly of the closed-ended now are “far less propitious than open-ended structure in times of universe – and perhaps another then” adding that both equities market stress. reason why investors tend to and bonds are now at the opposite Whatever else you can say overlook it for capital preservation end of the value scale. about investment trusts is that, – is the lack of vehicles focused on “Capital preservation looks with the first one celebrating its fixed income. more important until the prices 150th birthday this year, they Peter Spiller, manager of the of financial assets that have been have proved more than capable of Capital Gearing Trust, says inflated by QE return to more withstanding anything the market investment companies held ‘normal’ levels,” he explains. has had to throw at them. plenty of bonds in the 19th century. In the 20th century, however, exchange controls (restrictions on the movement PERFORMANCE OF SECTORS (%) of currency between countries), high inflation and high rates of tax meant “equities were the only Name 1yr 3yrs 5yrs 10yrs game in town”. IA Flexible Investment 2.36 16.64 36.15 71.15 “This flexibility perhaps suggests that active management IT Flexible Investment 4.19 25.85 34.23 43.4 worked effectively. It was also good news for investors Source: FE Analytics

16 trustnet.com THE MONKS INVESTMENT TRUST PLC

MONKS HAS OVER £1.6BN IN NET ASSETS UNDER MANAGEMENT, WHILE ITS ONGOING CHARGE IS A MODEST 0.59%*.

THE CENTRE OF YOUR PORTFOLIO.

Monks Investment Trust, we believe, could be a core investment for anyone seeking long term growth. It is managed according to Baillie Gifford’s £33bn Global Alpha strategy. As a result, Monks takes a highly active approach to investment and its portfolio looks nothing like the index. The managers group their holdings into four different growth categories – stalwart, rapid, cyclical and latent. This allows for excellent diversiﬁcation and offers the chance to unearth some of the more interesting companies listed on global stock markets.

Please remember that changing stock market conditions and currency exchange rates will affect the value of the investment in the fund and any income from it. Investors may not get back the amount invested. If in doubt, please seek ﬁnancial advice.

If you’re looking for a fund to shine at the centre of your portfolio, call 0800 917 2112 or visit www.monksinvestmenttrust.co.uk A Key Information Document is available by contacting us. Long-term investment partners

*Ongoing charges as at 30.04.17. All other data as at 31.12.17. Your call may be recorded for training or monitoring purposes. Monks Investment Trust PLC is available through the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA, which are managed by Baillie Gifford Savings Management Limited (BGSM). BGSM is an afﬁliate of Baillie Gifford & Co Limited, which is the manager and secretary of Monks Investment Trust PLC. IN FOCUS

Fund BAILLIE GIFFORD POSITIVE CHANGE The fund has quadrupled the IA Global sector’s gains since launch, but its short track record makes it difficult to draw any conclusions about management skill

NVESTORS OFTEN WAIT developed Asia Pacific region. adding that the company has an FOR A FUND to demonstrate Its four main areas of interest immaculate pedigree of recruiting, at least a three-year track are centred around social inclusion training and promoting talent. Irecord before buying in and, on the and education; environment and Another factor is the strong surface, this makes a lot of sense. resource needs; healthcare and environmental, social and However, while you are waiting quality of life; and bottom of the governance (ESG) stance the fund for a fund manager to prove they pyramid (addressing the needs of takes, which should help to focus it can deliver the returns and stick to the world’s poorest populations). on a better quality of company. the process they promised, you can The fund is managed by Julia The Downing manager claimed miss out on some impressive gains. Angeles, Kate Fox, Kirsty Gibson, that drilling deeper into a Although there is more risk Lee Qian, Thomas Coutts and Will company in a bid to understand its associated with backing new Sutcliffe. credentials in terms of ethos and fund launches, there is also Neil Shillito, fund manager at responsibility pays dividends over more potential for growth as a Downing, described Baillie Gifford the long term. smaller volume of assets allows Positive Change as the most While there is no guarantee the managers to invest in a wider intriguing fund launch of last year and Baillie Gifford Positive Change will range of stocks. “one for investors to keep an eye on” be a top performer over the long This could be the case with Baillie – even if they have not yet bought in. term, given the firm’s reputation Gifford Positive Change, which He said this is partly because and consistency it has a better launched in January last year. The parent company Baillie Gifford chance than many of its peers. fund is the best performer in the IA still has all the characteristics “If I were betting on the 3.30 at Global sector since then with gains of a boutique, despite its size. By Newmarket and had the choice of of 45.2 per cent compared with this, he means it hires managers the thrice winner favourite or the 8.98 per cent from its peer group that are talented, disciplined donkey with a broken leg in the composite and 7.54 per cent from and aligned with shareholders, outside stall…” Shillito finished. the MSCI AC World index. The £24.4m fund invests in 25 to 50 stocks that offer products the management team believes PERFORMANCE OF FUND VS SECTOR can have a positive impact on the AND INDEX SINCE LAUNCH world. 60% Geographically, the portfolio has Baillie Gifford Positive Change (45.20%) a relatively even split with 36.6 per 50% MSCI AC World (7.54%) IA Global (8.98%) cent in the US, 30.2 per cent in 40% Europe, 19.8 per cent in emerging markets and 11.9 per cent in the 30% 20% FILE MANAGERS: Julia Angeles, Kate 10% Fox, Kirsty Gibson, Lee Qian, 0% Thomas Coutts & Will Sutcliffe LAUNCHED: 03/01/2017 -10% FUND SIZE: £24.4m Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Feb Mar Apr OCF: 0.6% Jan17 Jan18 FE CROWN RATING: N/A Source: FE Analytics

18 trustnet.com / FUND, PENSION, TRUST /

Pension LINDSELL TRAIN GLOBAL EQUITY This fund is one of its sector’s best short- and medium-term performers in terms of both total return and suppressing volatility

LOBAL EQUITY FUNDS fund was launched in March 2011 critics argue that, after such a ARE OFTEN USED AS after seeing a surge in popularity strong run, the areas favoured by MAINSTAYS in long-term among investors following the the fund are likely to come under Gportfolios such as pension pots as global financial crisis. Reflecting pressure and underperform. investors search for diversification this, Lindsell Train Global Equity Commenting on this in the away from home shores and the posted a total return of 211.57 per second half of 2017, Lindsell said: growth opportunities offered by cent between inception and the “Obviously in the short term, re- the likes of the US and emerging end of March 2018 – making it ratings and swings in valuation markets. One standout performer the third best performer in the IA will impact short-term returns in this space is the £4bn Lindsell Global sector. It has also beaten – sometimes favourably for us Train Global Equity fund. its benchmark by close to 100 and sometimes less so. However, Managed by Michael Lindsell, percentage points over this period. in the long run, our belief is that Nick Train and James Bullock, Furthermore, FE Analytics data companies such as these can the fund has a long-term focus shows that the fund has posted outperform even when purchased that rarely sees it invest in new top-decile returns over one, at meaningful premiums to the companies or sell existing ones three and five years to the end wider market. while their investment case of March. It has also been one of “In a much-cited speech given remains intact. The managers the sector’s best performers in several years ago, Warren Buffett’s like firms with excellent brands, terms of Sharpe ratio, annualised partner Charlie Munger stated strong franchises and unique volatility and maximum drawdown that ‘over the long term, it’s hard market positions; they also insist since launch. for a stock to earn a much better their holdings are conservatively This performance profile has return than the business which financed and are capable of left the fund with strong ratings: underlies its earnings’. We feel producing a high and stable it holds five FE Crowns while inclined to agree and look to invest return on capital. Lindsell and Train are both FE in only those with sound long-term The fund has a concentrated Alpha Managers. However, some underlying prospects.”  portfolio of around 25 holdings, including Unilever, Diageo, Heineken Holdings, Nintendo and London Stock Exchange. As these PERFORMANCE OF FUND VS SECTOR names suggest, the fund has a AND INDEX SINCE LAUNCH 250% bias towards consumer staples, Lindsell Train Global Equity (211.57%) information technology and MSCI World (114.13%) consumer discretionary. 200% IA Global (84.95%) These defensive sectors have 150% enjoyed a strong run since the 100% FILE MANAGERS: Michael Lindsell, 50% Nick Train & James Bullock LAUNCHED: 16/03/2011 0% FUND SIZE: £4bn OCF: 0.74% -50% FE CROWN RATING: Oct Oct Oct Oct Oct Oct Oct Apr11 Apr12 Apr13 Apr14 Apr15 Apr16 Apr17

Source: FE Analytics trustnet.com 19 / FUND, PENSION, TRUST /

Trust ALLIANZ TECHNOLOGY TRUST This trust has made more than 400 per cent over the past decade, but manager Walter Price says there is still value to be found in tech

HE GROWING IMPORTANCE and you have both demand and the manager pointed out that OF TECHNOLOGY in almost supply coming together to meet it,” valuations – even in more T every aspect of daily life he explained. consumer-focused companies – are has driven numerous stocks in “I think the result is that we’re justified given the cashflows and this sector to ever greater heights. embarking on a very favourable strong earnings growth potential. Much of the growth seen in global period for enterprise technology, He added there are areas such markets in the past five years [which] is going to last for another as cloud computing – where data has been driven by the FAANGs – decade. It’s not like a one-year is stored, managed and processed Facebook, Amazon, Apple, Netflix [trend], it’s going to last for a long online – and artificial intelligence and Alphabet (Google) – in the US period of time.” (AI) that are developing and have and the BATs – Baidu, Alibaba and While FAANGs such as the opportunity to improve upon Tencent – in emerging markets. Amazon and Netflix feature in existing processes. Walter Price, manager of the the trust’s top-10 holdings, so Many of the companies focused Allianz Technology Trust, said do a significant number of “as a on these sectors are small caps the runaway success of these service” companies, such as cloud and just 24.7 per cent of the Allianz companies in recent years has led computing and some internet firms. Technology Trust is invested in many investors to ask: “What is the The strong performance of stocks with a market capitalisation encore? Where does technology go technology in recent years may lead of more than $100bn. Price also from here?” new investors to worry they are late has a large weighting to North He said the answer is that ageing to the party. “There’s a tendency American stocks, which represent demographics and the need for in the big run in technology and 89.1 per cent of the portfolio. greater productivity are likely to value creation on the consumer The trust has made 476.19 drive the next phase of growth in side to say ‘oh, it’s over’, ‘should per cent over the past 10 years, the sector. I be selling?’ and ‘valuations are compared with 381.39 per cent As such, Price has been hunting too high’,” said Price. However, from its sector average. among enterprise technology names – which serve organisations rather than individuals – for the stocks set to drive the market over the next PERFORMANCE OF TRUST VS SECTOR OVER 10YRS generation. He said this “fourth 500% industrial revolution” is likely to be Allianz Technology Trust (476.19%) funded by increased spending on 400% IT Tech, Media & Telecomm (381.39%) investment as industry struggles to meet a shortfall in labour. 300% “You have the capability of new products that enable productivity 200%

FILE 100% Walter Price MANAGER: 0% LAUNCHED: 1995 PREMIUM/DISCOUNT: -1.4% -100% OCF: 1.0% FE CROWN RATING: Oct Oct Oct Oct Oct Oct Oct Oct Oct Oct Apr08 Apr09 Apr10 Apr11 Apr12 Apr13 Apr14 Apr15 Apr16 Apr17 Apr18

Source: FE Analytics

20 trustnet.com

IN FOCUS

THE HISTORY BOYS

IT Global is home to numerous trusts with a track record of more than 100 years – but there is far more to the sector than longevity, writes Adam Lewis

OME TO A TOTAL OF Global features several other £27BN OF ASSETS, vehicles – Bankers, British Empire H IT Global is by far the and Scottish Investment Trust – largest sector in the that were launched in the 1880s, closed-ended universe. while the £6.1bn Scottish Mortgage With investors generally and £1.9bn Witan trusts are relative shunning UK equities in 2017, saplings with both opening for thanks largely to political business in 1909. uncertainties surrounding Brexit, Over this time, these trusts both open- and closed-ended have witnessed two World Wars, global funds have proved popular the Great Depression, Black hunting grounds. Monday in 1987, the global However, while the open-ended financial crisis of 2008 and, most sector has at times struggled to improbably of all, England’s beat the MSCI World, its closed- World Cup victory in 1966. It is ended counterpart has excelled. this history of not only investing Not only has it outperformed the throughout – but also surviving index over one, three, five and – so many market cycles that 10 years, it has also significantly helps to explain the broad appeal outperformed IA Global over of these trusts. But what other every one of these periods. factors lie behind the popularity Over the past decade, for example, of this behemoth sector? the IT Global sector is up 146.95 per Adrian Lowcock, investment cent compared with 110.86 per cent director at Architas, says the from IA Global and 89.02 per cent obvious benefit for closed-ended from the MSCI World. global funds is their ability to gear, which gives them a significant TIME ON THEIR SIDE advantage during rising markets. The trusts in the closed-ended At the same time, being closed- sector certainly have experience on ended means the fund managers their side. Aside from the 150-year- do not have to worry about inflows old Foreign & Colonial trust, IT and outflows.

22 trustnet.com / SECTOR PROFILE /

trustnet.com 23 / SECTOR PROFILE /

“For me, IT Global is the one PERFORMANCE OF SECTORS VS INDEX investment trust sector where the history of these funds makes a 1yr (%) 3yr (%) 5yr (%) 10yr (%) difference,” says Lowcock. “You are IA Global 2.66 27.54 57.44 110.86 investing in the trusts, not just the managers, which is rare. Having IT Global 13.03 47.12 81.64 146.95 a disciplined dividend policy also MSCI AC World 11.23 23.76 64.25 89.02 helps their long-term focus and I am not surprised, given these Source: FE Analytics factors, they have outperformed the open-ended sector.” TOP OF THE PILE Sitting top of the pile over three “For me, IT Global is the one and five years with returns investment trust sector where of 153.4 and 264.8 per cent is Lindsell Train IT, managed by the history of these funds makes Nick Train. However, the trust is currently trading at a 37.2 per a significant difference. You are cent premium to net asset value (NAV), meaning new investors are investing in the trusts, not just the likely to find better opportunities elsewhere – especially with managers” the sector trading at an average discount of 3 per cent. from retail investors, and this at the AIC, says the lowering of “In this instance, investors may could lead to a further narrowing charges across the sector has also wish to look to the unit trust to get of its discount (which was 3 per boosted its appeal. access to Train’s investment style, cent at 28 March). Downside risk “Since the start of 2013, one- because while they may be missing is limited by the fund’s policy to third of funds in the sector have out on the effects of gearing, they defend a 7.5 per cent discount.” cut their fees,” she says. “When are not paying such a huge price to “Its size and fee structure means you add this to the fact they can get invested,” he adds. its ongoing charges (0.79 per cent) gear, have the freedom to invest Winterflood Investment are competitive, particularly given in areas such as private equity Trusts holds three IT Global they include a look-through to fees and have a board of independent funds in its model portfolio: on its private equity investments.” directors, you can see why Foreign & Colonial, Monks and Regarding fees, Annabel Brodie- investors treat the sector as a one- Scottish Mortgage. While it has Smith, communications director stop shop.” recommended the Baillie Gifford- managed duo of Monks and Scottish Mortgage for some time now, it added the F&C trust in January this year at the expense of Law Debenture, which was launched in 1889. “Foreign & Colonial is an attractive ‘one-stop’ global equities savings product,” explains Innes Urquhart, a research analyst at Winterflood. “It makes good use of the closed-ended structure through its allocation to private equity and the active use of gearing.” Urquhart adds that the trust is also likely to benefit from the publicity and attention generated by its 150-year anniversary. “We think this could increase demand for its shares, particularly

24 trustnet.com

/ SECTOR PROFILE /

PERFORMANCE OF TRUSTS OVER 10YRS

400% Independent Investment Trust (373.36%)

200% Scottish Mortgage Investment Trust (334.74%)

Foreign & Colonial Investment Trust (179.59%) Brodie-Smith notes that while 200% gearing has driven performance in the past, the average level now 100% stands at just 4 per cent. Majedie Trust has the highest level at 11 per 0% cent of assets, followed by Foreign & Colonial at 8 per cent and Witan at 6 per cent. -100% CLAIM TO FAME Apr08 Apr09 Apr10 Apr11 Apr12 Apr13 Apr14 Apr15 Apr16 Apr17 “The investment trust industry Source: FE Analytics has a great claim to fame – it literally invented the concept of the collective investment vehicle,” notes Simon Moore, a senior The birthday boy investment manager at Seven FOREIGN & COLONIAL Investment Management (7IM). “It’s a great story to tell, and while THE YEAR WAS 1868, VICTORIA WAS ON THE THRONE, Benjamin Disraeli was prime there is comfort to be taken in minister and Andrew Johnson became the second US president to be impeached. At something that has been around the same time, Foreign & Colonial set out to raise £1m in a new collective investment the block a number of times, we are scheme known as the investment trust. Fast-forward 150 years, today it sits on assets living in the here and now.” just shy of £3.5bn and is regarded as a “one-stop” global savings equity product. It As a result, Moore says that had exposure to 459 holdings as at 30 January, with its largest position in the US at 49 per cent of assets, followed by Europe ex UK at 20 per cent and emerging markets at while trusts have tangible benefits, 13 per cent. It has just 5 per cent in the UK, which Winterflood notes is a significant he prefers to look at funds across fall from the 34 per cent held at the end of 2012. the entire collective investment universe and picks out those he considers to be the best in class. New kid on the block “When it comes to managers, we INDEPENDENT INVESTMENT TRUST do like to see a long track record, but a couple of market cycles – WHILE MUCH OF THE CURRENT BUZZ IN THE INVESTMENT TRUST UNIVERSE maybe 10 to 20 years – will suffice, concerns its long history, the fund sitting top of the rankings in the IT Global sector and less so if a fund manager over one year is a relative newcomer. Max Ward, formerly of Scottish Mortgage, has is known to us from previous headed up the self-managed Independent Investment Trust since launch in 2000. incarnations. There are times This “best ideas” vehicle of just under 30 stocks has delivered a 67.92 per cent return over the past 12 months and is also close to the top of the rankings over when we will favour investment three and five years, even though its portfolio is mostly made up of stocks listed in trusts and in the global space we the out-of-favour UK. like Witan, Scottish Mortgage and Murray International.” “But equally we like open-ended What’s in a name? funds such as Fundsmith Equity SCOTTISH MORTGAGE and Lindsell Train Global Equity. In terms of the latter, we actively A CENTURY BEFORE THE 2007 GLOBAL FINANCIAL CRISIS, Scottish Mortgage was prefer this fund over its investment launched just after another catastrophe – the “bank panic” of 1907. Moore points out trust sister given its current that while Scottish Mortgage’s name still harks back to its Baillie Gifford origins, its whopping premium. It really is a holdings today mean it could not be more different, dominated by tech giants such case of assessing each fund on its as Amazon, Tencent, Alibaba and Facebook. Moore says this means it is not for the faint hearted, adding: “Scottis Mortgage remains a fund run on high conviction, with own merits – don’t be blinkered by meaningful stakes in some exciting high-growth companies. The investment trust the structure. It is what is under the has also been able to increase its dividend for each of the last 34 years, making it an bonnet that counts.”  AIC Dividend Hero.”

26 trustnet.com THE MONKS INVESTMENT TRUST PLC

MONKS HAS OVER £1.6BN IN NET ASSETS UNDER MANAGEMENT, WHILE ITS ONGOING CHARGE IS A MODEST 0.59%*.

THE CENTRE OF YOUR PORTFOLIO.

FLEET of FOOT

SAINTS’ James Dow highlights three stocks whose capital-light business models should help them deliver consistent earnings growth over the long term

FUNDAMENTAL TENSION EXISTS IN An investor seeking long-term income growth MANY COMPANIES between dividends can tilt the universe substantially in their favour by A and growth. Most obviously this occurs in recognising this tension. Fortunately, not all companies business models that require large require large capital investments to grow. By focusing investments of capital to increase on businesses that are naturally capital-light, investors production. Oil producers are the classic example: the increase the probability of enjoying both profit and natural decline rate of oil fields forces managers of these dividend growth from their holdings. Here are three companies to reinvest a large chunk of profits every year long-standing investments in SAINTS that follow this just to keep their output flat, let alone grow. core philosophy.

US-BASED SOFTWARE WOLTERS KLUWER’S WE WERE FIRST ATTRACTED TO BUSINESS CH ROBINSON CHIEF EXECUTIVE NANCY TEA AND BISCUIT MAKER AVI matches companies that need to MCKINSTRY has done a terrific by its cash-generative model and ship freight with small trucking job of transforming this publishing consistent dividend growth, but firms across the US. Growth in business to focus on providing fretted about the outlook for South network volume occasionally digital information. The company Africa where it is based. The profit requires the company to build data is now looking for methods to and dividend have compounded centres, but servers are cheap, as is improve its products, such as upwards since then despite cost land in rural Minnesota where it UpToDate, which helps doctors pressure from the rand and there is based. The capital-light business use the latest medical research is a good chance it will deliver model has allowed it to increase to diagnose diseases. This should income growth for years to come. cash returns to shareholders while help it raise revenues and earnings AVI’s management knows the local investing for growth and it has without large capital investments market inside-out and is always raised its dividend in every year and it recently announced an 8 per finding methods of expanding the since it listed in 1997. cent increase in its dividend. business in a disciplined manner.

28 trustnet.com

WHAT I BOUGHT LAST

GAM Star MBS Total Return

The Share Centre’s Sheridan Admans says mortgage-backed securities provide significant diversification opportunities, despite their unfavourable reputation

OR SOME TIME NOW I HAVE up since their collapse and an improvement BEEN SEARCHING FOR in housing affordability. F ASSETS that deliver high MBSs still have an unfavourable risk-adjusted returns but with a reputation due to the role sub-prime played low correlation to the rest of the in the financial crisis and while some of market. Assets that provide ample liquidity, those risks have faded, others remain. These duration flexibility and exposure to US include mortgage holders defaulting in growth in areas where active management can large numbers or property values falling really add value. significantly, as a result of mismanagement I have therefore introduced GAM Star of the US economy, and the return to a softer MBS Total Return to our TC Share Centre regulatory environment. Another major Multi Manager Cautious fund, as its threat is prepayment risk, which is the early management team’s extensive experience payment of the loan on the mortgage, not should allow it to successfully navigate the dissimilar to a callable bond. current interest-rate cycle. The GAM team has enormous experience Mortgage-backed securities, or MBSs of evaluating and understanding the as they are more commonly known, impact of interest rate changes, credit risk were unfamiliar to UK investors until and mortgage prepayment behaviour. It the financial crisis. While the asset class has managed three US interest-rate cycles, remains unpopular, it provides significant including the peak of 5.25 per cent in 2006 opportunities that are hard to overlook and the historic low of 0.25 per cent in 2008, when constructing a diversified portfolio. and has delivered positive returns since 2002. MBSs represent approximately 24 per cent The managers currently have duration of the US fixed income market. It is possible of 1.24 years in their portfolio and can flex to obtain a significantly higher yield from between -3 per cent and +3 per cent. The MBSs than that offered by US treasuries average coupon in the portfolio is 2.96 per with similar maturities, including higher cent with the average life of the mortgages it quality agency and non-agency bonds. holds at around 4.5 years. Agency refers to government-supported issuers of mortgages such as Freddie Mac and Fannie Mae which guarantee mortgages. Non-agency issuers are those that are not guaranteed. Arguably higher yields come with little or no additional risk from holding positions in both Freddie Mac and Fannie Mae. The MBS market is highly liquid with approximately $200bn traded daily and it has a size of around $8trn. The US housing market has been recovering since falling from its peak in 2008 and has seen homeowner vacancy rates fall significantly, single-family housing under construction move below its long-run Sheridan Admans is an investment manager at average, homeownership rates start to pick The Share Centre trustnet.com 29 MAY PREVIEW Going green

The next issue of Trustnet Magazine will look at all aspects of ethical investing. We will reveal why a focus on environmental, social and governance (ESG) issues is no longer the preserve of eco-warriors but is now regarded as a fundamental component of any long-term investment process.

We will also look at some of the most attractive opportunities in areas such as clean technology and renewable energy and name the best funds and trusts for playing these themes.