24th May 2014
Investment journalist Cherry Reynard discusses this week’s events in the investment trust market.
The AIC published its list of the most consistent investment trusts this week, based on the number of times a fund has returned above the sector average on an annual basis over ten years. Top of the tree were the Standard Life UK Smaller Companies and Dunedin Smaller Companies funds, managed by Harry Nimmo and Ed Beal respectively, which have outperformed in an impressive nine out of ten calendar years, but ten further trusts had managed eight out of ten years.
The research found a correlation between fund manager longevity and performance. Twelve of the top 20 trusts have been managed by the same manager for over ten years, and fifteen have had the same manager for eight years or more. This is likely to be both push and pull: Good managers are allowed to keep their jobs, but the better employers support their managers through more difficult periods.
The Standard Life UK equity team proved it had strength beyond its smaller companies team as it also delivered a strong set of results on the group’s Equity Income trust. For the six months to 31 March, the trust had an NAV return of 11.1%, compared to a rise of 4.8% in the benchmark. The trust, managed by the top-performing duo of Thomas Moore and Karen Robertson, benefited from positions in easyJet, building products supplier Tyman and Howden Joinery. The managers admitted that not holding AstraZeneca had been a drag on relative returns, but investors will probably forgive them.
JPM European Smaller Companies had a strong year as JPMAM’s style came back into vogue. For the 12 months to 31 March, the trust delivered 40.6%, compared to a return of 32.8% from the Company’s benchmark, the Euromoney Smaller European Companies (ex UK) Total Return index. Stock selection and judicious country selection both contributed to returns, as did selected gearing.
JPMAM had a strong six months on its India investment trust as well, which beat its MSCI benchmark, returning 18.7%. Some narrowing of the discount also contributed to returns. However, the group fared less well on its Asian trust, which underperformed its benchmark by around 1%, dropping 1.3%. An overweight position in China, and underweight position in Asean economies hurt relative performance and stock picking couldn’t compensate.
The Biotechnology Growth trust reported a buoyant set of results, but the financial year ended before the dramatic sell-off in biotechnology stocks in April. Over the year to 31 March, the trust’s NAV increased by 34.2% broadly in line with the benchmark index, which rose 34.7%. However, the trust has dipped 16.7% over the last three months. Holdings in Incyte, Illumina, Biogen Idec, Regeneron Pharma and InterMune contributed to performance, but Infinity Pharmaceuticals was a significant drag as it unveiled wider-than-expected losses.
The European Investment trust had a strong half year, as manager Dale Robertson (of Edinburgh Partners) propelled the trust to an NAV rise of 11.5%, compared to a return from the All-World Europe ex UK Index of 7.7%. The trust is positioned to take advantage of normalising economic growth in Europe. However, the group has sold out of some positions where valuations have caught up with reality.
Finally, two income and capital-focused trusts reported results. The JPMorgan Income and Capital Trust generating a return of 18.4% for the year to 28th February, 6.4% ahead of the benchmark, while the F&C Capital & Income returned 3.9% in NAV terms for the half year to 31 March.
Henderson Value trust
Henderson has been at the helm of the Henderson Value Trust, formerly the SVM Global trust, for around a year now. The problem for manager Ian Barrass in re-engineering the portfolio has been that the trust was invested in some esoteric and highly illiquid legacy investment trusts. As he says, his challenge has been “carefully balancing the need to extract value from existing legacy investments with the necessity to take advantage of new opportunities”.
There has, as yet, been no notable turnaround in performance. The NAV has only risen by 1.1% during the six months to 31 March against a gain in its FTSE World Index benchmark of 5.9%. Even one year in, just 27% of the portfolio represents new holdings, an indication of the challenges facing the new managers. That challenge became greater with the departure of Paul Craig for Old Mutual Global Investors, who had supported Barrass on the trust, though James de Bunsen is a capable replacement.
However, there are glimmers of hope for the trust: New investments have outperformed legacy holdings; the managers are also striving to grow the income and increase the annual dividend. Equally, those changes have not yet been reflected in the trust’s discount, which remains at a 17.5% discount to NAV.
The Company is facing a continuation vote in December. Investors will need to be reassured that it is possible to re-engineer the portfolio and move away from legacy holdings. The market should be in its favour, but any sell-off in equities could disrupt the process. Its future is not yet assured.
Fund pick – Nick Greenwood, manager of the Miton Worldwide Opportunities fund
GEIGER COUNTER: “Uranium prices have been in decline for the last eight years having fallen from $140 to $30. The accident at Fukushima in 2011 has exacerbated the slump and led to a hiatus in the nuclear power construction programme in many countries. Furthermore Japan and Germany suspended existing operations.
“Our view is that the emergence of cheap shale oil puts North American manufacturers at a competitive advantage. Therefore other nations will be forced to retain nuclear as part of their core power generation especially in Europe where the stability of gas supplies from Russia is in question. Sentiment towards this sector remains terrible, however this has led to investors overlooking the fact that easily accessible sources of uranium have already been tapped and that newer deposits face substantial geophysical and geopolitical challenges if they are to be extracted.
“The current open market uranium price barely covers the primary cost of production let alone justifying investment in new mines. Given inventories are running down there is likely to be a tipping point in the medium term where the world runs out of the metal. Meanwhile uranium stocks have been thrown out with the bathwater as investors have fled from anything remotely connected to mining.”
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