6th June 2014
A drop in management fees, change in mandate and new manager characterised an otherwise relatively quiet week for investment trusts. All provided a good indication that despite benign markets, investments trusts are still operating in a competitive marketplace and need to keep pace with industry changes and – perhaps most importantly – keep their shareholders sweet.
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Cuts to management fees are becoming a necessity in some sectors. The largest emerging markets investment trust, the Templeton Emerging Markets trust run by Mark Mobius, announced that it will be reducing the fees from 1.2% to 1.1% from July. Trust performance has been unexciting over the past three years and the management need to ensure it remains on investors’ radars.
There were more drastic changes to the Martin Currie Pacific trust. The trust plans to ditch its ‘Asia inc. Japan’ mandate, after it had become increasingly clear that investors preferred to manage their Japan exposure separately. It will now have an unconstrained mandate, but will exclude Japan and Australasia.
The board will be hoping that the new mandate, if approved, can turn round performance. In the thirteen months to 31 March, the net asset value fell by 10.7% and the share price by 8.8% compared with a fall of 5% in the benchmark. The latter part of the financial year was particularly disappointing with the trust falling 4.3% over the seven months to the end of March, compared to a small rise of 0.6% in the benchmark.
There was also change at the helm of the J.P.Morgan Mid Cap trust, where Georgina Brittain, joint fund manager since March 2012, will take over as lead manager from William Meadon. Meadon will be standing down following the trust’s AGM on 28th October 2014, having managed the company since May 2009. Brittain will be assisted by Katen Patel who joined the group in April 2013.
Elsewhere, the Perpetual Income and Growth Investment trust (PIGIT), run by Invesco Perpetual’s new head of UK equities Mark Barnett, showed an impressive performance for the year to 31 March. The trust rose 18.8%, 10% ahead of the FTSE All Share benchmark. Nevertheless, strong performance is not enough to stop fee scrutiny and the board said it was in discussions over the trust’s fee arrangements.
Performance was boosted by the group’s holding in Thomas Cook, and also from its high weighting to the pharmaceutical sector. The holdings in the fixed line telecoms sector also performed well over the period. The downside was the trust’s weighting in utilities, where ongoing political debate over retail electricity prices continued to dull share price growth at SSE and Centrica.
Barnett remains relatively sceptical about the prospects for the UK stock market: “2014 to date has seen the UK equity market struggle to find a convincing direction. Despite the well publicised improvements in economic growth in the UK and US economies, the current valuation of the market represents a level which reflects this optimism and which may struggle to be maintained if the pace of earnings growth does not accelerate….the recent earnings season was notable for the number of profit warnings from large corporates.” Nevertheless, he says there remain some pockets of value within the UK equity market.
Trust in focus: Personal Assets
Personal Assets, run by Sebastian Lyon at Troy Asset Management, has given itself the ambitious target of capital preservation in all market conditions. In previous years, it has achieved this with aplomb and the long-term track record of the trust remains strong. However, it has been a miserable year for the trust with the NAV falling 5.1% for the 12 months to April at a time when the FTSE All Share rose 6.8%.
The environment was never likely to suit Lyon’s style: He has a long-stated preference for ‘compounders’ – companies that generate high and sustainable returns on invested capital – and in 2013, the market showed a marked preference for racier opportunities.
However, there were other problems: the trust held a large weighting in index-linked bonds, which suffered alongside conventional bonds. Gold, a significant position in the portfolio, suffered its biggest sell-off since the crisis in 2008, falling 19% in sterling terms.
Nevertheless, Lyon believes it is not the time to shift weightings. He says: “We not ‘gold bugs’, committed to holding bullion for ever. But we believe that the preconditions for a secular bull market in gold remain in place.”
Equally his view of the economic climate remains resolutely negative: “We are in the midst of an extraordinary and unprecedented monetary experiment which is unlikely to end well. More than five years after the financial crisis, interest rates remain at emergency levels (in the case of the UK, at a 300 year low) and there is little sign of an appreciable increase any time soon. Stock markets are back at their all-time highs (in nominal terms, at least), but valuations are overstretched and vulnerable…The disconnect between the economy and the stock market has become ever wider. Those piling into equities today may well be locking in very low prospective returns with commensurate high volatility and downside risk.”
For those who agree with him, this may be the opportunity to buy the trust at lower valuations.
Fund pick – Peter Lowman, chief investment officer, Investment Quorum
“Julie Dean has taken over the mandate of the Schroder UK Growth trust. It is run in parallel with the very successful UK OEIC. The open-ended fund is pretty chunky and Schroders has taken the decision to close it. The trust remains at a small discount to NAV and so we believe is the best place to get access to her expertise.”
Morningstar – Martin Currie Pacific
Jackie Beard, director of closed-end fund research, Morningstar UK, has placed the Morningstar Analyst Rating for the Martin Currie Pacific fund ‘Under Review’ following proposed changes to the mandate. She adds: “The fund was previously rated Neutral. The proposed changes include changing the mandate from Asia inc-Japan to ex-Japan, and managing the fund in an absolute return, unconstrained approach. Shareholders are due to vote on this proposal in early July, at which point we will reassess our stance according to the outcome of that vote. If successful, it will result in a considerable change to the portfolio’s composition.”
Charles Stanley Direct – Baillie Gifford Japan Trust
The broker has added the Baillie Gifford Japan Trust to its Foundation Fundlist. Head of investment research Ben Yearsley says the investment company likes the trust’s long-term investment horizon with the average stock holding period 8.6 years. “It is a rare example of patient investing, and testament to the managers’ philosophy of identifying the right companies and sticking with them,” speaking to trade site Fundweb.
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