28th March 2014 by Cherry Reynard
In the first of a series, investment journalist Cherry Reynard surveys the week in investment trusts, features Baillie Gifford Japan and finds out the trust, one fund selector likes.
It was a busy week for investment trust results, and one in which most developed market fund managers fared well. Henderson Eurotrust reported early in the week with manager Tim Stevenson buoyed by an overweight position in cyclicals. He beat his benchmark by 2.4% in the six months to 31 January with a return of 4.1%. Stevenson sees a better economic situation across the Eurozone, but notes that company earnings continue to be lacklustre.
Smaller companies continue their strong run and the Henderson Smaller Companies fund had another good quarter under Neil Hermon’s stewardship. The trust’s NAV rose 11.73%, compared to just 9.55% for the benchmark. Hermon is optimistic enough to maintain gearing of 9% and the trust’s directors continue to buy the shares.
There was less welcome news for another smaller companies trust, as BlackRock announced Richard Plackett would be taking a six-month sabbatical. Plackett is the highly rated manager of the contracts for difference portfolio (around 30%) of the BlackRock Throgmortan Trust. Ralph Cox will take over in his absence.
It was another story for Asian and emerging market trusts, however. The Aberdeen Asian Income fund was another fund reporting this week, but had a tough year in difficult Asian markets. For the 12 months to 31 December, the company’s NAV fell by 2.55%, trailing the 1.73% increase in the MSCI AC Asia Pacific ex-Japan Index. The premium narrowed from 8.1% to 1.8%, and has subsequently moved to a discount. That said, the trust increased its dividend by an encouraging 10.5%.
The other big trust reporting this week was the JPMorgan Emerging Markets Income trust. The trust also suffered in the emerging market rout and for the six months to 31st January, its NAV dropped 12%. This compared unfavourably with the 8.1% drop in the MSCI EM index. The trust was hurt by its exposure to South Africa (11.5% of the portfolio) and Turkey (4.8% of the portfolio). These countries suffered disproportionately as investors shunned those emerging markets with high current account deficits and therefore greater need for external funding. The trust’s underweight position in South Korea – which proved more defensive, also hurt relative performance.
Nevertheless, the trust still managed to produce a small increase in its dividend, which rose 1% for the year. Equally, a robust discount management policy meant that the discount did not widen significantly and the trust continues to trade at near-NAV.
Featured trust: Baillie Gifford Japan
Baillie Gifford’s ongoing commitment to Japan, at a time when other groups have long abandoned the asset class remains commendable and the depth and experience of the team continues to deliver strong returns. The trust saw net asset value rise 3.8% in the six months to 28 February , compared to a decline of 2% in the Topix.
After a strong year in 2013, Japan has been disappointing for investors in 2014, but the team’s stock picking among mid and small cap growth companies continues to set it ahead of the benchmark. Japan Exchange Group, Iriso Electronics and Toyo Tire were all notable contributors to performance.
The managers remain sufficiently positive to keep net gearing at 14%. They believe signs of inflation are emerging and the impact of the rise in sales tax at 1 April, a key contributor to market pessimism, has been over-stated. Business confidence is improving and management teams, particularly in smaller companies, are increasingly optimistic. Equally, valuations are low and remain attractive.
Tom Becket, chief investment officer, Psigma: “We tend to look at investment trusts as a means to access more illiquid markets. As such, we have recently participated in the Neuberger Berman Global Distressed Debt trust launch. We took 3% of the trust at launch. Banks are being forced to clean up their balance sheets and are selling their ‘problem’ assets at bargain basement valuations. These are once-in-a-lifetime opportunities and the fund aims to capitalise on that.”
Winterflood issued meeting notes on three notable trusts this week. It continues to support the BlackRock Emerging Europe trust, despite the problems in the Ukraine. The group says it is for those investors prepared for potential volatility and comfortable taking a contrarian view: “We believe that BEEP is an attractive play on the region due to its investment team, which we rate highly; its unconstrained investment approach; and its structure, which allows an exit at NAV in 2018.”
The group was equally positive on the Henderson High Income fund: “(It) has a strong long‐term performance record and we rate Alex Crooke highly. The promotion of David Smith to co‐manager at the start of this year is a positive development and, in our view, makes sense from the perspective of succession planning. The fund’s management fee of 0.5% of gross assets is also reasonably low and with a dividend yield of almost 5%, we believe it justifies its premium rating and remains attractive for investors seeking an above average yield from UK equities.”
Finally, Winterflood endorsed the Witan Investment Trust. Previously a relatively stodgy, benchmark-plus trust, it has undergone a renaissance under chief executive Andrew Bell. Winterflood says: “We believe that Witan has come a long way under Andrew Bell’s stewardship. Nine of the eleven external fund managers have been appointed on his watch, reflecting the adoption of more actively managed strategies. This makes sense given the diversified nature of a multi-manager approach and has been reflected in improving performance. In our opinion this increases the fund’s attractiveness and we believe that its discount could tighten further if performance can be sustained. It remains one of our recommendations in the Global sector.”