More and more industry experts are becoming increasingly sceptical about the immediate outlook for risk assets, with many of them stock-piling cash in order to protect investors against a possible correction and also so they can enter the market after prices have fallen.
One such example is Walls (pictured), who currently holds close to 16 per cent of his portfolio in cash.
Walls will normally only buy closed-ended funds if they are trading on a decent discount to NAV. This strategy has worked in the past; his fund has been the second best performing portfolio in the IMA Flexible Investment sector since its launch in December 2001, with returns of 209.66 per cent. Performance of fund versus sector since December 2001
Source: FE Analytics
However, as he told FE Trustnet earlier this week, he is finding very few genuine discount opportunities at the moment as the sector, in general, has performed very well.
“I must say, I’d prefer it [the cash weighting] to be lower, but nothing in particular is standing out as good value at the moment,” he said.
“I also don’t really want to advertise to people that I have it, but at the same time do investors want me to buy something that I don’t think is particularly good value.”
“While I have done well over the long to medium term, my Achilles heel is falling markets and I’m conscious of that.”
“However, so far this year the fund has outperformed because of the cash and because I have been using larger, more liquid, trusts.”
“I trawl through the ratings, speak to the brokers and try to stimulate ideas everyday but at the moment I’m finding it difficult to identify good quality opportunities.”
However, the manager is quick to point out that his decision to leave money un-invested isn’t due to a lack of quality managers, it’s just that prices are high.
With that in mind, we asked Walls to highlight the top-quality trusts he would want to use his cash to buy, if their discounts were to widen in the event of a correction.
Scottish Mortgage
Although it he describes it as “mainstream” portfolio, Walls is a big fan of Anderson’s Scottish Mortgage Investment Trust and he says it is one he would want to buy, if only it wasn’t trading on a narrow 1.76 per cent discount to NAV.
Its current discount is much tighter than its one and three year average, according to the AIC, and it has traded as wide as a 7 per cent discount over the past 12 months.
It is one of the most well-known and oldest investment trusts available to investors, having been launched way back in 1909.
Anderson himself took on the mandate in April 2000 and, according to FE Analytics, it has returned 176.82 per cent over that time and has comfortably beaten the IT Global sector in the process.
Performance of trust versus sector since April 2000
Source: FE Analytics
It has also significantly outperformed both the sector and its benchmark – the FTSE All World index – over rolling one, three, five, seven and 10 year periods.
Those returns have been consistent as well, as Anderson’s trust has outperformed its benchmark eight of the last 10 discrete calendar years.
As a recent FE Trustnet article highlighted, those exceptions were the falling markets of 2008 and 2011.
Scottish Mortgage can be hit when sentiment turns more negative as not only is it a concentrated portfolio – the top 10 holdings make up close to half the portfolios AUM – but Anderson is also willing to make punchy calls within the trust.
For instance, the manager is big on tech, with the likes of Amazon, Tencent, Google, Apple and Baidu all featuring in his top 10 holdings, and this positioning has hurt performance as the sector fell considerably earlier this year.
He currently holds 36.7 per cent in North America, 39.5 per cent in Europe, 19 per cent in Asia Pacific and just 0.7 per cent in Japan; a region the manager doesn’t feel offers very good value.
It’s currently geared at 10 per cent and its ongoing charges figure (OCF) is 0.51 per cent.
Jupiter European Opportunities
FE Alpha Manager Alexander Darwall’s Jupiter European Opportunities trust has always been held in high regard and normally trades at quite a tight discount to NAV.
However, it is currently trading on a 0.8 per cent premium and therefore doesn’t fall into Walls’ investable universe, but he says it is one he would certainly like to snap up if its discount were to widen for any reason.
The manager’s admiration of the trust is understandable. Darwall, who also runs the £2.4bn open-ended Jupiter European fund, launched the trust in November 2000.
According to FE Analytics, over that time it has been the best performing portfolio in the IT Europe sector with returns of 372.01 per cent beating its benchmark – the FTSE World Europe ex UK index – by more than 275 percentage points.
Performance of trust versus sector and index since November 2000
Source: FE Analytics
The trust has also comfortably outperformed the sector and index over rolling three, five, seven and 10 year periods.
Like Anderson’s Scottish Mortgage trust, Jupiter European Opps has a very consistent track record. Our data shows that it has outperformed its benchmark in 11 out of the 13 calendar years since its launch.
One of the years it underperformed was during the crash of 2008, where it, uncharacteristically, fell twice as far as the sector and index with its losses of more than 40 per cent.
It also underperformed in 2013, which has led to the trust’s bottom quartile returns over a cumulative 12 month period.
However, that underperformance could well have been driven by Darwall’s focus on northern Europe and his preference for quality companies with high visibility of earnings; as peripheral Europe and more cyclical stocks have led the market.
Darwall currently holds 21 per cent of his trust in the UK, 19 per cent in Germany and 17 per cent with southern Europe making up a very small percentage of the portfolio.
Like Scottish Mortgage, it is also very concentrated. The manager holds 66 per cent of his portfolio in his top 10 and his two largest individual holdigns, Novo Nordisk and Wirecard, making up close to 18 per cent of his assets.
Jupiter European Opps has gearing of 11 per cent and its OCF is 1.13 per cent.
