We asked our readers which trusts they were considering for their ISA, and it was a completely mixed bag. Most are still backing equities but with a more cautious tilt, looking at uncorrelated trusts like the NB Distressed Debt IT and the contrarian Temple Bar IT.
The highly volatile Scottish Mortgage Investment trust, managed by Baillie Gifford’s James Anderson and Tom Slater, was also a popular choice, and property is also coming back in vogue, with the F&C Commercial Property IT featuring prominently.
Here, Numis’s Charles Cade and Cantor Fiztgerald’s Charles Tan reveal what they think of the trusts in question.
NB Distressed Debt IT
A number of our readers are considering picking up the Neuberger Berman Distressed Debt trust which aims to deliver returns buy buying into distressed and special situation credit-related investments.
Charles Cade, head of investment trust research at Numis, says the asset class is an interesting one, pointing out that the NB trust is particularly popular in the institutional space.
However, he cautions that the portfolio is niche and is dollar-denominated so UK retail investors should be sure they understand what they’re buying – especially given the high charges on the trust.
The trust is extremely expensive, with ongoing charges of 5.23 per cent, and that’s not including the performance fee. Cade adds performance hasn’t been as strong as many expected.
“The trust has not lived up to expectations at launch, but it’s done ok. The team have a good track record and as they realise investments you’d hope to get uplift,” he said.
Cade says the team has perhaps found it more difficult to find opportunity in the distressed debt market as they expected, but still sees it as a good diversification play.
The trust, which sits in the IT Debt sector, is up 3.9 per cent since launch. It has a very low correlation to its peers, performing particularly well in the past 12 months.
Performance of trust vs sector since launch
Source: FE Analytics
The trust is trading on a nominal discount of 1.1 per cent.
Scottish Mortgage IT
The Scottish Mortgage Investment Trust is trading on a slight discount of 1.14 per cent, narrower than both its one year average of 1.89 per cent and three year average of 5.16 per cent.
It’s had strong performance over the short, medium and long term, more than doubling the returns of the IT Global sector and FTSE All World index over the last decade.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
Cade says the trust is very concentrated, and is likely to be more volatile than most other global funds because of James Anderson’s long-term, buy and hold views. That said, he thinks it’s a good option for an investor with a long-term time horizon, especially if you want exposure to the tech sector.
Cantor Fitzgerald’s Charles Tan also rates the manager, but questions how sustainable the trust’s returns will be going forward with such a high exposure to the tech sector – a factor which has contributed to recent outperformance.
“Investors shouldn’t be rushing in just because the one year figure looks good,” he said.
Tan says the trust is one to wait on. He warns the signs are growing that a market correction is on the horizon and he thinks Scottish Mortgage is a good one to pick up after a fall.
FE data shows the trust tends to underperform in down markets, as shown by its 44.77 per cent loss in 2008. Over the same 12 months period, the FTSE All World index was down 19.36 per cent.
Anderson rebounded strongly in 2009 however, picking up 52.87 per cent while the index gained just 21.24 per cent.
The same thing happened in 2011 when the trust fell 15.15 per cent. The index lost less than half, but then when markets rebounded in 2012 Anderson made 30.05 per cent – more than twice as much as the index.
Scottish Mortgage has ongoing charges of 0.51 per cent.
Temple Bar IT
Tan thinks that contrarian investor Alastair Mundy’s Temple Bar IT is more attractive in the immediate future, as the manager’s cautious views mean it’s likely to come through a market correction strongly.
“It’s the perfect diversifier to something like Scottish Mortgage,” he said. “Everything the manager says makes sense. We’ve seen the market march higher but with little divergence between sectors and within sectors.”
“Because of a lack of divergence, investors are pushing up equities without regard to quality. [According to Mundy] it’s an indicator of a bubble or a sharp correction going forward.”
“The manager goes through periods of underperformance because he is so contrarian but over 10 years he’s up there with the best,” Tan added.
Temple Bar has lagged the market over the last year as equities have been on the rise, but over the last decade it has returned nearly 100 percentage points more than both the IT UK Equity Income sector and FTSE All Share index.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust has managed to deliver fairly steady returns year-on-year, but importantly it does protect better on the downside than others in the sector. It shed less than half as much as its peers in 2008 and managed a positive return in the down year of 2011 as well.
Temple Bar has ongoing charges of 0.48 per cent.
F&C Commercial Property IT
Investors are turning en masse back to property, as shown by the latest IMA fund flow statistics for May. Open-ended property funds saw the highest net retail sales since December 2009.
Though there were a number of trusts our readers were considering to get exposure to property, the most popular was the F&C Commercial Property trust, run by Richard Kirby.
Cade says the F&C trust is a high quality portfolio, but says investors are currently paying up for that quality. The trust is trading on a premium of 11.65 per cent, though this is narrower than its one year average of 15.69 per cent.
Still, Cade says he is positive on property as an asset class and thinks it can continue to perform well.
Tan is less optimistic however, and says one of the main reasons an investor would buy a trust like F&C Commercial Property is for income. He points out the current dividend is only 56 per cent covered, which means the trust is paying out more per share than it actually brings in.
“My concern is the sustainability of the dividend,” he said. “If no money came in from tomorrow onwards, the trust could afford to pay the dividend for only a year and a half,” he said.
He points on that the UK Commercial Property Trust slashed its dividend by 30 per cent in March and is now one of the lowest yielders in the sector – not good news for investors depending on these investments for a reliable income stream.
The F&C Commercial Property Trust is currently yielding 4.99 per cent. Though it has lagged its peers over the last year, it is up 110.99 per cent over five years. The IT Property Direct UK sector has made 90.86 per cent over the same period.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
The trust is more expensive than Scottish Mortgage or Temple Bar, with ongoing charges of 1 per cent.
FE Trustnet analysed the open-ended funds that are most popular with our readers in an article earlier today.
