Walls, who manages the five crown-rated Unicorn Mastertrust, says that concerns over the US debt ceiling and the possible tapering of QE have the power to derail positive sentiment in the market. He says this could be particularly troubling for investment trusts, which have been pushed on to tight discounts and in some cases premiums.
The manager says this presents a problem for investors in closed-ended funds, as a correction in the market could lead to both widening discounts and a drop in NAV performance. Because of that, he is taking precautionary steps.
"I am trying to build a bit of defence into my portfolio as I don’t want to expose my investors to potential discount downside risk," he explained.
Walls admits that he does not know which way markets will go over the coming months and how investors will react to macroeconomic noise. In his experience, it is best to be more cautious when uncertainty is so high.
"It is very difficult to gage where markets might go," he said.
"We have the issues surrounding the US federal budget as they have to find some kind of resolution. I’d imagine they will fudge it once again, but markets may wobble because of it."
"The question is, what impact will that have? A recent survey showed that most UK investors believe markets will have a correction. However, that does give me comfort as it shows investors are starting to become more wary."
"I am not sure if markets will continue to climb the wall of worry or if there is going to be some sort of correction. When tapering does eventually happen, it isn’t going to be easy, but until then markets could continue to rise," he added.
With that in mind, Walls highlights two of the trusts he has been buying for his fund which should be able to limit the effects of a market sell-off.
Foreign & Colonial Investment Trust
Walls says that Foreign & Colonial Investment Trust is not the sort of thing he would usually buy. However, he says it caught his eye as the board has set itself the objective of keeping a lid on discount volatility and will buy shares if the discount widens past 10 per cent.
"I wouldn’t normally tend to go for a big global growth trust, but I have been buying shares in the Foreign & Colonial Investment Trust at a 10 per cent discount," he said.
"Jeremy Tigue, who runs the trust, is a very good manager and he will be able to provide upside if markets perform well. However, the main reason why I have bought it is because they have the liquidity to step in if the discount widens past 10 per cent."
Having been launched in 1868, the £2bn Foreign & Colonial Investment Trust is the oldest closed-ended fund in existence, with Tigue taking over as manager in January 1997.
According to FE Analytics, over 10 years the Foreign & Colonial Investment Trust has returned 164.9 per cent, beating its benchmark – the FTSE All World index – by more than 30 percentage points.
Performance of trust vs index over 10yrs
Source: FE Analytics
The trust has also beaten the index over one, three and five years, though by a much narrower margin.
Tigue’s portfolio is very much concentrated in developed rather than emerging markets: US and UK equities make up 27.22 per cent and 22.53 per cent of his trust’s assets, respectively.
It is yielding 2.92 per cent.
Foreign & Colonial Investment Trust has gearing of 12 per cent and is currently trading on a 9.83 per cent discount to NAV. It has ongoing charges of 0.56 per cent.
RIT Capital Partners
Walls has also added the £1.9bn RIT Capital Partners trust to his fund as the management team always puts the protection of its shareholders' capital first.
"The trust has recently had a change in management," he said.
"However, the reasons for buying aren’t the same as for the Foreign & Colonial Trust. The reason I have bought RIT is because of its style of investment, as they are keen to protect on the downside. They run a number of currency and market-hedging strategies."
The long-term performance of the RIT Capital Partners trust is compelling, having returned 196.71 per cent over 10 years, which is considerably more than that of its MSCI World index benchmark.
Performance of trust vs index over 10yrs
Source: FE Analytics
However, over the medium-term, investors in the closed-ended fund have been largely disappointed as it has returned less than 20 per cent over three and five years.
RIT Capital Partners invests in both listed and unlisted equities, plus it also holds collective investment vehicles such as specialist and absolute return funds. They management team also takes long and short currency positions within the trust.
For example, they are currently shorting the yen and the euro.
It is trading on an 8.62 per cent discount, which is much wider than its three-year average and is not geared. RIT Capital Partners has ongoing charges of 0.62 per cent.
Peter Walls’ £9m Unicorn Mastertrust is one of the best-performing portfolios in the IMA Flexible Investment sector over the long-, medium- and short-term. It tops the sector rankings table over five years, comes in third over 10 years and is the second-best performer over one and three years.
His fund has an ongoing charges figure (OCF) of 1.61 per cent and requires a minimum investment of £2,500.
