Cade says that finding value in the current investment trust market is becoming increasingly difficult as discounts have narrowed across the board over recent years.While the discount on the £1.4bn Caledonia IT has come in from 22 per cent to 13 per cent this year, Cade and his team still think it looks attractive as its management team has simplified its investment approach.
“We have been recommending Caledonia for some time now and although the discount has come in, the changes the team have made to the portfolio have made the strategy a lot clearer,” Cade explained.
“It has a much lower risk profile than some of the other global portfolios like Scottish Mortgage, but we like the fact that the management are now a lot more on top of its holdings and that the portfolio is well diversified.”
“It differs from others in the sector as the management try to make real money over the long-term and aren’t worried about what the index is doing. It is run far more like a family business in that respect.”
He added: “There is a risk that the discount could widen a little following the recent strong run, but we believe it is now a far more attractive vehicle for long-term investors.”
Caledonia IT has historically traded on a wider discount to others in the sector due to the fact it has a large single-majority shareholder in the Cayzer family.
A period of relatively poor returns from 2007 to 2009 also contributed to its wide discount. Our data shows that the trust has underperformed against its IT Global Sector and FTSE All Share benchmark over seven and five years.
However, its management team saw a massive overhaul in the summer of 2010, and Will Wyatt, who had previously worked on the trust’s investment team, took over as chief executive. Since then, the performance of the trust has gradually picked up.
Caledonia is now the third best performing portfolio in the sector over 12 months, with returns of 18.49 per cent, beating its benchmark by 12 percentage points.
Performance of trust vs sector and index over 1yr
Source: FE Analytics
Cade says that while a narrowing discount is one of the main reasons for that outperformance, the plaudits should go to the trust’s new management team.
“One of the best performing global funds this year has been Caledonia Investments, helped by a disposal of two unquoted investments [Oval and Amber Chemical], which added 2.6 per cent to NAV,” he explained.
“This has acted as a catalyst for the discount to narrow from over 20 per cent, but it remains wide relative to its peers at 13 per cent. We attended the fund’s recent investor day and were impressed by the changes to the investment team and approach that have been implemented since Will Wyatt took over as CEO in mid-2010.”
“The portfolio is now far more focused, with four clearly defined pools: quoted equities, unquoteds, funds and income and growth.”
Our data shows that two-thirds of the portfolio is split between listed equities and unquoted businesses, with the remainder split between collective funds and “income and growth” plays.
It is a genuinely global portfolio, despite its FTSE All Share benchmark. The management team currently holds 55 per cent in the UK, 18 per cent in Europe, 15 per cent in North America and 11 per cent Asia.
Caledonia IT is not geared and has ongoing charges of 1.03 per cent.
The trust is one of the few closed-ended funds that Cade and his team are currently recommending on the grounds of a wide discount.
“At present, there are few trading recommendations, reflecting the lack of value across the sector,” Cade said.
Although he still rates many trusts in the global sector, Cade says that a number of portfolios are ripe for profit-taking.
One example is the £1.5bn Witan Investment Trust. According to FE Analytics, it has returned 45.49 per cent over three years, more than doubling the gains of the IT Global sector.
Performance of trust vs sector over 3yrs
Source: FE Analytics
A narrowing discount has been the major contributing factor to that outperformance, as the trust’s NAV alone has returned 21.03 per cent over that time.
“We have been recommending Witan, a fund that has been transformed since Andrew Bell took over as CEO in February 2010, with a move to a more active, high-conviction multi-manager approach without exposure to index trackers,” Cade explained.
“We continue to believe Witan is an attractive long-term investment, but its discount has narrowed from 10 per cent to 1 per cent.”
“As a result, we believe there is greater value elsewhere in the sector.”
Although Cade still likes the trust and Bell’s approach, he says that as the portfolio is 10 per cent geared, it would likely be susceptible to a possible near-term market correction. As FE Trustnet recently highlighted, many experts are preparing for such an event.
Because of this, Cade says now is a good time for investors to solidify some of their strong gains. The Witan Investment Trust has ongoing charges, plus a performance fee, of 1.15 per cent.
