Although often more expensive than their direct rivals, funds of funds are popular vehicles for investors who are looking for a one-stop shop for portfolio diversification.Capital Gearing and Miton Worldwide Growth are two closed-ended funds that invest mostly or entirely in other investment trusts and although Cade says they have two different investment styles, they both work well together over the long-term.
“At one extreme you have the very conservative style of the Capital Gearing trust which is best at capital protection and at the other extreme you have Miton Worldwide Growth, which is buying all sorts of value investments from quite illiquid funds on wide discounts,” Cade (pictured) said.
“Both styles can work – it really depends when you are buying and what your timeframe is.”
Capital Gearing
The £91.5m Capital Gearing trust has been managed by Peter Spiller since 1982, one of the longest tenures of any investment trust manager in the AIC universe. Spiller was joined by co-manager Alastair Laing in January 2011.
The trust invests in different managers to provide broad exposure to a range of asset classes while keeping volatility low.
Cade rates Spiller as one of the best investment trust managers in the business.
“For many years, Spiller has protected investor capital and very much focused on risk-aversion. If you look longer term, he has had an outstanding record through a very conservative mandate,” Cade said.
“It is very much more about protecting capital, buying funds with a clear mandate; that has given very good returns over the long-term, but over the past year it hasn’t worked.”
Over the past 19 years – as far as FE data goes back for this trust – it has returned 575.7 per cent, compared with 350.88 per cent from the IT UK All Companies sector. The FTSE All Share gained 296.48 per cent over this period.
Performance of trust and sector since 1 Aug 1995
Source: FE Analytics
The trust achieved this outperformance with significantly less risk and volatility than both yardsticks.
It has the best figure within its sector for maximum drawdown – a difference between buying at the top and selling at the bottom of the market – since 1 January 1995. It also has the best Sharpe ratio, a measure of risk-adjusted returns.
It holds five other trusts in its top-10: North Atlantic Smaller Companies, M&G High Income, Ecofin Water & Power Opportunities, Aberforth Geared Income and JP Morgan Income & Growth.
The other top holdings are UK and US government debt, including index-linked bonds.
This has meant it has fallen behind its riskier rivals in the post-financial crisis rally.
Over the past five years it has delivered the second lowest returns in its sector and is one of only two trusts to have lost money over the past year.
“Recently it hasn’t done so well and its NAV has flattened due to some of the index-linked parts of the portfolio not performing so well,” Cade said.
However, it is the best performing portfolio in the sector in 2014, benefiting from this year’s sideways market.
It is currently trading on a premium of 2.8 per cent, having traded on a double-digit premium to NAV at times over the past 12 months.
It isn’t geared and has ongoing charges of 1.26 per cent.
Miton Worldwide Growth
Cade says this £46.7m trust, managed by Nick Greenwood since April 2004, is much more focused on value.
“Greenwood will be looking for things trading on extreme discounts where they seem to be undervalued by investors. He might buy an emerging market vehicle trading on a 40 to 50 per cent discount, for example.”
“The manager has a fairly diversified portfolio to mitigate risk but he is buying much higher risk investments – typically where the discount is very wide and there is not always an apparent catalyst for it to narrow.”
“A key feature of investment trusts is to find ones that are currently trading on wide discounts. Typically, you have to be more niche to be able to do that. At the moment it is harder to find value and so managers have to look at more esoteric areas to get that.”
Greenwood’s current largest holdings include several property funds: Macau Property Opportunities, Taliesin Property and Real Estate Investors.
Another more unusual position is the India Capital Growth trust, which at 3.7 per cent is Greenwood’s fifth-largest holding.
Although Cade rates the trust, its long-term performance relative to its sector has been disappointing.
It has returned 54.25 per cent since launch, barely a third of its IT Global sector average and less than its three month Libor plus two per cent benchmark.
Performance of trust vs sector and benchmark since launch
Source: FE Analytics
However, its performance has picked up recently. Our data shows that it has outperformed its sector and benchmark over one year, with returns of 7.49 per cent.
It is currently trading on a discount of 10.7 per cent, which is slightly wider than its one-year average.
Like Capital Gearing, Miton Worldwide Growth isn’t geared. At 1.34 per cent, its ongoing charges are slightly higher than Spiller’s portfolio.
