To a lesser extent, Woodford’s £2.5bn Invesco Perpetual Distribution and £3.8bn Monthly Income Plus portfolios will also come under the spotlight. He co-manages these with Paul Read and Paul Causer. However, there is a more pressing issue for shareholders of the manager’s Edinburgh Investment Trust to consider. While forced redemptions can have an adverse effect on the performance of open-ended funds, panic selling has a much more immediate effect on closed-ended funds. Waning demand can cause the discount to widen, which in turn puts pressure on the share price.
In light of yesterday’s announcement, the Edinburgh IT’s premium fell more than 3 percentage points to 3 per cent, and its share price fell almost 5 per cent. The Invesco Perpetual High Income fund, which has almost identical holdings to the Edinburgh IT, was in positive territory.
Performance of trust and fund over 1month
Source: FE Analytics
Investment trust expert Charles Cade warned that Edinburgh IT could face further losses in the near-term, until the board makes a decision on whether Woodford will stay as manager, or if his colleague Mark Barnett or even another asset management firm will take charge.
For those worried about this uncertainty, FE Trustnet looks at alternative trusts with similar characteristics to Woodford’s.
Perpetual Income & Growth IT
"This is the obvious alternative that comes to mind – it is run by Mark Barnett and so has quite a similar style to Woodford’s," said Cade.
"We didn’t rate the Edinburgh trust even before the announcement, because it was on a hefty premium, and preferred Perpetual Income & Growth because it was that bit cheaper."
Barnett’s Perpetual Income & Growth trust is currently trading on a slight premium of around 2 per cent. As Cade states, it has a very similar style to Edinburgh Investment trust and has many of the same holdings, which is hardly surprising given that Woodford is head of equities at Invesco.
The two trusts both have an overweight in tobacco and healthcare and include GlaxoSmithKline, AstraZeneca, British American Tobacco, Imperial Tobacco and Reynolds American in their top-10.
Barnett’s trust is less concentrated, however, and has a higher weighting to UK mid caps, including a top-10 position in Thomas Cook. Perpetual Income & Growth also has more in financials and a smaller overweight in healthcare, which has seen it significantly outperform the Edinburgh IT in recent months.
FE data shows that Perpetual Income & Growth is beating Edinburgh IT, as well as its FTSE All Share benchmark, over one, three and 10 years. Edinburgh IT has the upper hand over five years, but much of this has to do with the fact that its discount narrowed so significantly in the aftermath of Woodford’s appointment in 2008.
Performance of trusts and index over 10yrs
| Name | 1yr | 3yr | 5yr | 10yr |
|---|---|---|---|---|
| Perpetual Income and Growth Investment Trust | 29.34 | 66.15 | 143.56 | 235.77 |
| Edinburgh Investment Tst | 16.32 | 52.29 | 143.73 | 206.06 |
| FTSE All Share | 19.28 | 31.54 | 101.61 | 127.98 |
Source: FE Analytics
At 3.24 per cent, Barnett’s trust has a slightly lower yield than Woodford’s, in part due to the stronger performance of the former in recent months. Perpetual Income & Growth has been consistently less volatile though, with a particularly good record in falling markets.
Barnett – an FE Alpha Manager – has run the four crown-rated trust since 1999. It has ongoing charges of 0.94 per cent, but like the Edinburgh IT, it also has a performance fee. The trust is 11 per cent geared.
City of London IT
Job Curtis has run the five crown-rated City of London IT since 1991, turning it into one of the most reliable and respected equity income trusts in the IT UK Growth & Income sector.
Cade refers to it as a "very straight-forward, traditional" equity income trust, in that it invests in defensive large caps with strong and sustainable yields and predictable earnings. In this way, it is similar to both Edinburgh IT and Perpetual Income & Growth.
Again, Curtis holds many of Woodford’s favourites in his top-10, including the likes of Glaxo and Astra. The one standout difference is a 3.4 per cent position in BP, which is still in recovery mode in the aftermath of the 2010 Gulf of Mexico oil spill.
Financials make up a much larger proportion of assets, at 20.2 per cent, and healthcare has a much smaller position overall.
The £1.1bn City of London trust has far from shot the lights out, but has given investors no surprises. It has comfortably beaten its IT UK Growth & Income sector and benchmark over five and 10 years, but has fallen slightly short over one and three.
Performance of trust and sector over 10yrs
Source: FE Analytics
It tends to perform very strongly in falling markets and protected much better against the downside in 2008, when it lost 15 percentage points less than its benchmark, and 2011, when it actually managed to make money.
One of the biggest draws of Job’s trust is its stellar dividend record. It is currently yielding 3.91 per cent, but more impressive is its consistency: the City of London trust has increased its dividend in each of the last 45 years in a row, and currently has very good cover, according to Cade. No investment trust has raised its dividend for more consecutive years.
It has ongoing charges of just 0.44 per cent, making it one of the cheapest investment trusts in the UK. It is on a slight premium of 2.2 per cent and is 7 per cent geared.
Temple Bar IT
Alastair Mundy’s £845m trust is another with an excellent dividend record, having increased it in each of the last 29 years. It is currently yielding 3.1 per cent.
"This is another one of the staple choices, but it does have a very different focus [to Edinburgh]," said Cade.
Mundy is one of the UK’s best-known contrarian managers, meaning that he invests in companies that he believes are under-rated by the market as a whole. This has led him to some very esoteric stocks that are far removed from Woodford’s stable of solid companies.
While Temple Bar IT includes some mainstream options such as Glaxo and BT Group, it also holds Signet Jewelers, Grafton Group and Qinetiq Group in its top-10.
Mundy actively holds cash, which he builds up when he sees a lack of compelling opportunities. He then uses it to buy stocks when value opens up.
His cash weighting is currently 12 per cent, which reflects his wariness over market valuations at present.
Mundy has led the trust to returns of 221.18 per cent over the last decade, putting it close to 100 percentage points ahead of its FTSE All Share benchmark.
Performance of trust and benchmark over 10yrs
Source: FE Analytics
Mundy’s contrarian approach, and particularly his use of cash, means the trust can underperform the index for significant periods; however, its long-term track record makes for very good reading, given that it is ahead of the All Share over one, three and five years.
Temple Bar is not currently geared. It has ongoing charges of 0.51 per cent and is on a slight premium of 1.5 per cent. Mundy has managed it since 2002.
Troy Income & Growth IT
Francis Brooke’s £145m trust is less established than the others on this list, only really coming to prominence since the FE Alpha Manager was appointed in August 2009. He has been very successful since then, not only delivering strong NAV performance, but also raising assets and narrowing the discount. Since then, Troy has installed a discount control mechanism (DCM), which has been effective so far.
"This one is a little more in the style of Woodford in that it’s got more of a defensive focus," said Cade.
Brooke favours capital preservation above all else, attempting – in the manager’s own words – to deliver "above-average returns with below-average volatility over the long-term".
He says he has no problem underperforming during steep-rising markets, as he favours quality, defensive companies with sustainable dividend yields and strong balance sheets. Like Woodford, GlaxoSmithKline, British American Tobacco, Centrica, AstraZeneca and Reynolds American are top-10 holdings. Blue chips such as Vodafone and HSBC also feature prominently.
As the graph below shows, Troy Income & Growth has delivered steady returns since Brooke’s appointment, with particularly strong performance during the 2011 sell-off.
Performance of trust and index since Aug 2009
Source: FE Analytics
Much of the trust’s outperformance is as a result of the narrowing discount during 2010 and 2011; looking purely at NAV performance, Brooke has actually unperformed the All Share since 2008 as a result of his failure to fully capture the upside in the rallying years of 2009 and 2012.
Troy Income & Growth IT is currently yielding 3.6 per cent and is trading bang on NAV. It has ongoing charges of 1.22 per cent.
JP Morgan Claverhouse IT
One factor that unites all the trusts mentioned previously is the fact they are not on a discount. In the £306m JP Morgan Claverhouse IT, investors can get access to a large cap focused equity income trust trading at 6 per cent below its NAV.
While this figure is narrower than its one- and three-year average, its discount has been as low as 1 per cent in the last 12 months, meaning there is currently potential for further upside.
Manager Sarah Emly, who has run the trust since June 2006, invests predominantly in large caps, but holds some atypical names for an equity income portfolio.
Emly places more of an emphasis on growth than most of the trusts mentioned here, with the likes of Prudential and Rio Tinto in her top-10. She even invests in some stocks that are not yet paying a dividend, such as Lloyds.
Claverhouse still has a healthy yield of 3.7 per cent.
Emly’s emphasis on capital growth has helped the trust significantly outperform its FTSE All Share benchmark over the last year, with returns of 36.43 per cent. The 18 per cent gearing has also helped matters.
It is also ahead over three and five years.
Performance of trust and index
| Name | 1yr | 3yr | 5yr | 10yr |
|---|---|---|---|---|
| JJP Morgan Claverhouse IT | 38.59 | 44 | 116.61 | 147.83 |
| FTSE All Share | 19.28 | 31.54 | 101.61 | 127.98 |
Source: FE Analytics
JP Morgan Claverhouse IT has ongoing charges of 0.75 per cent. Emly was joined by co-manager William Meadon in February 2012.
