PRIVATE AND CONFIDENTIAL

Long-term investing Investment Trust Model Portfolio

Long-termism shapes our relationships and our investments Long-term investing Introduction

This document outlines our views on investment trusts. It aims to present an example of our model portfolio construction process for clients with best-in-class investment trusts that align with our investment philosophy. A philosophy of conviction, long-term, patient capital, and long-only real investing.

Investment trusts are closed-ended investment vehicles (effectively plc companies) that have a secondary market for their shares via a listing. There are over 300 listed in the UK. Whilst many retail investors continue to see their appeal, investment trusts have become less popular with wealth managers and IFAs. This phenomenon is down to a range of factors, such as: OEICs and UCITS being pushed by sales and marketing teams more to wealth managers and intermediaries, alongside pre-RDR commercial reasons; OEICs as a better structure for increasing firm’s AUM and therefore investment firms’ fees irrespective of performance, and Investment trusts being increasingly seen as an investment backwater, more esoteric and less relevant for client portfolios.

At Binary Capital, our long term and high-conviction philosophy aligns well with several investment trusts. We find several reasons why we feel comfort in investing in investment trusts for clients which we discuss further in this paper.

Active investing for the long term.

At Binary Capital, we are active investors. We look to work closely with you and your team to educate clients around genuine active investment management and the benefits of such style of investing. We are a whole of market service provider working only with best in class fund managers and investment providers. Reasons to include investment trusts in client portfolios We discuss some distinct advantages with using closed-ended investment vehicles as opposed to open-ended vehicles, these include:

Permanent capital Investment trusts are fixed pools of permanent capital and can therefore take a longer-term view on investments. There is a liquid secondary market for the shares, listed on a recognised stock exchange. Closed-ended funds do not suffer from the threat of redemptions by investors unlike their open- ended counterparts. Therefore, have less concern about short-term market movements and can make longer term high conviction investments. This longer-term thinking and permanent capital allocation should have a positive impact on performance.

Investment in unlisted equities The unlisted investment markets are an exciting and growing area of global capital allocation. Many firms are delaying (or not) being listed, instead securing alternative funding through other channels, such as . This has been a persistent trend in capital markets over the past 10 years. At BCIM we would never be comfortable buying a UCITS or OEIC that invests in unlisted securities, neither do we invest directly into private equity funds (they tend to be illiquid, opaque and often expensive). Using investment trusts we can leverage exposure to otherwise inaccessible, unlisted investments opportunities. The investment trust structure provides clients with a liquid vehicle to gain exposure to both liquid and illiquid investment opportunities.

Avoid issue of liquidity traps Further to the point above, larger investment trusts with an active secondary market offer investors intraday liquidity. This removes the risks of a “run on the fund,” such as what happened at Woodford Investment Management in 2019, and other investment firms previously. The share price of an investment trust may trade at a discount or premium to the underlying net asset value (NAV), but the point is, there is liquidity to exit if one needs to exit a position. The reverse is also true, if one needs to purchase a position in an investment trust one can do so via a listed exchange. Liquidity is often undervalued by investors. Liquidity is a factor that is of high importance to us at Binary Capital.

Leverage Managers of investment trusts can borrow to fund investment positions and maximise their conviction in investment ideas (often referred to as ‘gearing’). This offers the potential for greater returns for investors. The investment trust mandate can therefore provide more flexibility in generating enhanced returns for clients.

More independent oversight Investment trusts are listed investment companies consisting of a Chairman, an independent board of directors, and so on. They will hold the investment manager to account, representing the interest of the shareholders to ensure the trusts objectives are always met. If there is sustained under- performance of the investment trust against a pre-determined, relevant benchmark then the board can replace the investment manager or investment house. Essentially there is ongoing independent scrutiny of the investment managers and their investment strategy.

Fees tend to be very competitive Many of the best investment trusts charge relatively low fees for the quality of investment management and overall exposure offered. For example, exposure to private markets without having to pay private equity type fees. Being able to leverage investment ideas without having to pay hedge fund type fees. A bespoke proposition

In the following section we highlight and deconstruct two of our best ideas from the investment trust universe. Following this, we illustrate an example risk managed investment trust model portfolio. A simulated backtest is offered to demonstrate the historic returns potential of such a strategy and other relevant analytics.

What we look for

Alignment with our investment philosophy Considerations when High conviction, growth oriented with a long-term focus. A long-term track record constructing that can demonstrate all of this. Managers that do not focus on benchmarks and model portfolios have an absolute return mindset and philosophy - with naturally a high active share. Investment trusts where we believe • By investing in transparent, long- managers have an edge – leveraging their term focused investment trusts, flexible . we have greater control over the overall asset allocation of a model portfolio – asset class, Experienced team geographic and sector allocations. We look closely at the ‘parent’ company behind the trust. We pay close attention to their track record and the resources • We allocate with top-down asset available to them and their investment allocation in mind but that is not team. Experienced investment managers the driver of the allocation. The that have developed a high level of driver is the investment thesis expertise in their respective style and and strategy of the trust. We asset class focus. allocate more towards managers that we have the highest conviction in. Low fees, transparency and liquidity • We take careful consideration in Lower fees, and fully transparent in their overlap between managers in holdings. We require full visibility on the their holdings. A long-term, underlying holdings of the investment growth, conviction style of trust. investing can be executed by managers differently. We look to Large in size - preferably above £250m hold managers that are non- trust size, and managers that focus on consensus and where we share a large capitalised companies in the main. similar investment philosophy. We require an active secondary market for the investment trusts shares. We need liquidity. term relationship with Alibaba (long term shareholders). Ant has deal of information about 1. The Scottish Mortgage Investment Trust

The Scottish Mortgage Investment Trust (SMIT) provides "China is now home to an entrepreneurial clients with an opportunity to gain active exposure to high fury that leads to the creation of great growth public and private companies at a low fee of just individual businesses." 0.37%. The managers take a bottom-up, stock picking approach with a high conviction style (the top 30 holdings Co-PM, James Anderson account for around 80% of total assets).

Sector: Financial Services SMITs long-term growth focus has exposure that will benefit Position: £210m (c.2.0%) from the converging narratives of technology and healthcare. The rapid advancements in availability and scope of data Ant Financial Services Group is the sister analytics has the potential to transform the healthcare sector company of the ecommerce giant Alibaba and over the next decade and beyond. SMITs managers have was established in 2014. They are the sole operator of Ali Pay; an online payment service identified quality investments opportunities aligned with this launched in 2004 which has evolved into the growth story. They are not only invested in global gene world’s largest payments and lifestyle platform. sequencing company Illumina but also in private companies Based on their previous funding round are such as Grail, Tempus Labs & HeartFlow. worth an estimated $150bn. As a result of the long-term relationship Scottish Mortgage had built with Alibaba, they were able to invest in the Ordinarily, industry leading private companies would have private company in the early stages. At the time undertaken an . However, as capital is of writing, Ant Financial is seeking a dual listing more freely available and less commoditised, privately on the Hong Kong and Shanghai stock markets thereby potentially providing such a private managed firms can seek out patient capital to help with their holding an uplift. overall business objectives. As a result, such companies are not subject to the whims of quarterly shareholder Sector: Technology & Healthcare scrutiny allowing them to focus on managing, investing and Position: £137m (c.1.1%) growing their business for the long-term without the distraction of short-term market ‘noise’ around their share Tempus Labs has utilised its technological background to create the world’s largest price. SMIT are well positioned to take advantage of this trend database of clinical, molecular, treatment and and can allocate up to 25% of the trust in such future growth outcome data, including over 2 million cancer opportunities. patients’ medical records. This vast data library is primarily aimed at oncologists for the treatment of cancer patients. It is a SMIT continues to make strategic investment decisions revolutionary tool, informing physicians making founded on the belief that the global economy will continue to real time data-driven decisions. In addition, the shift resources further towards Asia. There is strong fiscal molecular testing arm providing genetic testing support to enable China to become a leader in emerging of tumors so physicians can prescribe precision therapies when time is of the essence. technologies for example, R&D investments in quantum Reputable researchers forecast that the total technologies (which can feed into the advancement of artificial addressable market has the potential to reach intelligence, nanotechnology, big data and cloud computing) $180bn by 2026 where Tempus have a at 10X more than the US. Currently, 22% of the trust is definitive competitive advantage. invested in China and they have a solid track record of long- standing successful investments; the now technology giant Sector: Synthetic Biology Position: £163m (c.1.8%) Alibaba has provided annualised return of 41.9% since the initial unlisted purchase during 2012. Ginkgo Bioworks was founded in 2008 and are a synthetic biology company that combine cell Digitalisation is sweeping through the Chinese economy at a engineering with machine learning in the development of biological products. Utilizing a rapid rate growing from 15% of GDP in 2008 to 36% in 2019, combination of data analytics and automated and it is home to one third of all emerging and digital technology they can re-purpose genomes in the technology unicorns. This has led to the emergence of discovery of a diverse range of new organisms innovative digital companies such as Bytedance Ltd. (media & including artificial meat, alternative dairy products and therapeutics. They are leaders in data) and Meituan (delivers over 20 million meals per day their field and part of the CNBC Disruptor 50 compared to 500 thousand for US based-peer Grubhub). The Index with a material valuation reaching $4.7bn scale of the Chinese market has driven such companies' rapid in their Series F funding round. The global bio- expansions, dominance and profitability. The trust has economy has been forecasted to reach up to £600bn by 2024 with investment requirements borrowed over £1.5billion to further invest in companies’ the reaching between 1.3% - 2.6% of global GDP. managers have conviction in - enhancing shareholder returns SMIT initially purchased in 2016 and benefited if invested in the right sectors and companies. from an annualized return of 67.4% since then.

Scottish Mortgage Investment Trust data sources: Factsheets and Portfolio Valuation (30.05.2020), Bloomberg, Allied Market Research, Pitchbook Data, Global Market Insights, MDPI & Merics.org, ‘China’s Digital Rise’ (Accessed 27.07.2020), 2. Personal Assets Trust

Personal Assets Trust (PAT) is different. When compared against alternative investment trusts and open-ended investment funds it has a very broad mandate. It is not restricted by a specific geographic, sector or asset class investment mandate. It is an independent investment trust previously managed in-house, now with external investment managers, Troy IM’s Sebastian Lyon. The managers are focused on the preservation of private investors personal wealth; to protect and increase (in that order) the value of shareholders funds over the long term. Monthly Returns of PAT and Equity Indices Sebastian Lyon takes a conservative approach focusing on reducing the downside risk during times of uncertainty designed to deliver consistent absolute returns in a low volatile manner. When comparing the monthly returns of PAT to the FTSE All-Share (their all equity Benchmark), FTSE 100 and S&P 500 (right) we can see the drawdowns during times of uncertainty and indeed the volatility of returns across the 10 yr. period are significantly lower.

Personal Assets Trust’s investment strategy is a great example of the flexibility investment trusts can provide and the permanent capital model. The trust has less than 30 positions and the freedom to seek out high conviction investment positions. Since the trust’s inception date in 1990, their equity allocation has ranged between 80% - 30% of total assets (currently 45%) – evidence of such flexibility. PAT’s investment managers target those companies that can provide long-term sustainable growth, have low levels of debt and that provide consistent, strong cash flows – not cyclical stocks. This has led to an allocation towards companies within the consumer staples sector such as Coca-Cola, Nestle, Procter & Gamble, Microsoft, etc. making up 33% of the total portfolio.

PAT’s consistency of returns and reduced volatility provides justification for their cautious asset allocation. As mentioned, the trust’s flexibility facilitates adjustments in asset allocations to gold, U.K. & U.S. government bonds and cash. In recent years, increased allocation into longer duration U.S. TIPS have been used as a highly liquid hedge against real interest rates moving more negatively and Index linked guilts long term expectation of inflation as global consequential growing inflation expectations. Combining this with an increased cash balance and debt has increased over the past decade and expanded as a result reduced allocation to U.K. T-Bills, provided the liquidity to invest in somewhat discounted equities of COVID. Their view is countries will try to deleverage through during the market sell off in 2020 (increasing the equity allocation from 30% - 45%). inflation. But with a relatively short duration risk. Furthermore, the trust has somewhat unconventionally maintained a high conviction in gold of around 10% since inception. This acts as the ‘safe haven’ asset during uncertain times adding to the stability of performance and a further inflationary hedge. The trust does not benchmark to an index the normal amendments positioning for the future sense of the word. It seeks returns where such returns exist. However, the trusts 20yr. total returns of 116% against the 8.74% of the FTSE All Share Index (benchmark) demonstrates the flexibility and absolute return mindset of the management of the fund.

Asset Allocation as a proportion of NAV Vs. Share Price Balanced Investment Trust Model Portfolio

Top five holdings Asset Allocation iShares Core £Corp Bond UCITS ETF Fixed Income 29% 15% (Dist) GBP Equity 62% SPDR Bloomberg Barclays Sterling 14% Corporate Bond UCITS ETF (Dist) Property 3% Baillie Gifford US Growth Trust 14% Gold 3% Cash 3% Scottish Mortgage Investment Trust 14%

Finsbury Income and Growth 10% Underlying OCF: 0.53%

Backtested Performance vs. Composite Benchmark (30.06.2010 – 30.06.2020)

1 yr. 5 yr. Performance (as of 30.06.2020) 1 yr. Return 5 yr. Return Volatility Volatility

BCIM Balanced Investment Trust +22.58 +105.82 19.30 11.43 Model Portfolio (%) BCIM Balanced +6.07 +60.46 16.42 10.84 Composite Benchmark (%)

Disclaimer: • This is a backtest of the BCIM Investment Trust Model Portfolio against a composite benchmark: Equity allocation is MSCI ACWI Index, Fixed Income allocation is Markit iBoxx GBP Liquid Corporates Large Cap Index. It does not represent a track record. • Backtest shown gross of AMC fees. AMC fees typically 0.75%. • Backtest performance is based on a fixed weight portfolio. • Backtested performance should not be used as a representation of actual performance and as a result should be used as a guide only. Disclaimer

The Information in this document is not intended to influence you in making any investment decisions and should not be considered as advice or a recommendation to invest. Any Information may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors and relevant offering material. Any investment decisions must be based upon an investor's specific financial situation and investment objectives and should be based solely on the information in the relevant offering memorandum. Income from an investment may fluctuate and the price or value of any financial instruments referenced in this document may rise or fall. Past performance is not necessarily indicative of future results.​ Source of data: Bloomberg, Binary Capital IM.

We assume no responsibility or liability for the correctness, accuracy, timeliness or completeness of the Information. We do not accept any responsibility to update the Information. Any views, opinions or assumptions may be subject to change without notice.​

Binary Capital Investment Management Ltd is incorporated in England under company number 06692644, registered office, 25 Green Street, Mayfair, London, W1K 7AX.​ Binary Capital is a trading name of Binary Capital Investment Management Ltd.

Binary Capital Investment Management Ltd is authorised and regulated by the UK Financial Conduct Authority (reference number 507900). Principal place of business: 25 Green Street, Mayfair, London, W1K 7AX.