In an article earlier today, Hewitt – who manages the F&C Managed Income and Managed Growth Portfolios – told FE Trustnet that investors can no longer build a portfolio of closed-ended funds on finding wide discounts as bargains are harder to come by these days due to implementation of RDR.
Instead, he says the focus should be on finding quality managers with repeatable and consistent processes because the returns gained from a tightening discount “pale into insignificance” compared to the returns gained by strong NAV performance.
In the article, he revealed his five tips to become a successful investment trust investor; all of which has helped him to considerably outperform his benchmark and peers over recent years.
Performance of trusts versus index over 5yrs
Source: FE Analytics
Here, Hewitt highlights three managers that he would always want to hold, even if their trusts are trading on tight discounts or even premiums, because they have repeatable and consistent approaches, are experienced, have a strong team behind them and have superb track-records.
“The key thing is asset performance,” Hewitt (pictured) said. “It sounds dead obvious, but it is quite hard to find managers that consistently perform. When you do, these are the ones that should form core parts of a portfolio.”
James Henderson & Lowland Investment Company
The first manager on the list is James Henderson, who has run his Lowland Investment Company since January 1990.
“He has generated fantastic returns over the years. If I was underweight his trust, I would be buying as much as I could but Lowland already makes up quite a lot of my portfolio,” Hewitt said.
“The trust ticks all the boxes, in my opinion. Henderson is very experienced, has a great track record and generated superb asset growth.”
Our data on the trust goes back to January 1995. According to FE Analytics, over that time it has returned 587.87 per cent, beating its benchmark – the FTSE All Share – by more than 280 percentage points.
Performance of trust versus index since Jan 1995
Source: FE Analytics
The trust has also comfortably beaten the index and posted top quartile returns in the IT UK Equity Income sector over three, five, seven and 10 year periods.
Lowland is a genuine multi-cap portfolio as Henderson is happy to hold FTSE 100 stocks such as Royal Dutch Shell, Rio Tinto and GlaxoSmithKline alongside AIM stocks and university start-ups, as he told FE Trustnet last week.
His relatively high weighting to mid and small caps has hurt performance this year as they have sold-off as investors have rotated their portfolios to safer areas of the market.
The trust is down 6 per cent year to date, but a major reason for that has been its widening discount. It means, however, that the trust is trading on a 3.23 per cent discount NAV and Hewitt thinks this is a very attractive buying opportunity.
Lowland yields 2.5 per cent and has gearing of 13 per cent. Its ongoing charges are 0.9 per cent including a performance fee.
Alexander Darwall & Jupiter European Opportunities
Hewitt is also a big fan of FE Alpha Manager Alexander Darwall, who launched his five crown-rated Jupiter European Opportunities trust in November 2000.
“It is trading around NAV at the moment, but I would say it is a buy because Darwall is a great stock-picker who has delivered great performance,” Hewitt said. “This is the sort of trust you want to own over the long-term. If you were to buy it now, in three or four years’ time you will be thinking, Christ, look at that, Darwall is top of the pops.”
Our data shows that Jupiter European Opps has returned 353.88 per cent since its launch, while the IT Europe sector and its FTSE World Europe ex UK benchmark have returned 164.33 per cent and 92.41 per cent, respectively.
Performance of trust versus sector and index since Nov 2000
Source: FE Analytics
Darwall has beaten the index in eight out of the last 10 calendar years, the exceptions being in the crash year of 2008 and in last year’s bull market.
One of the major reasons why his trust slightly underperformed in 2013 is because the manager tends to focus on quality companies, with strong balance sheets and reliable earnings while it was poorer quality areas of the market that led the recovery.
It means, however, that the trust is trading on a 2 per cent discount which is wider than its one year average.
Jupiter European Opps differs from others in the sector as Darwall holds a significant chunk, currently 25 per cent, of his trust in the UK; with FTSE-listed stocks such as Provident Financial, Experian and Johnson Matthey featuring in his top 10.
It has gearing of 11 per cent and its ongoing charges are 1.13 per cent.
Mark Barnett & Perpetual Income & Growth The final name on the list is FE Alpha Manager Mark Barnett, who has been in the press a lot recently as he has taken over Neil Woodford’s multi-billion pound open-ended income funds following the star manager’s departure from Invesco Perpetual.
Though Barnett (pictured) has a huge amount on his plate at the moment, Hewitt says he would always hold his Perpetual Income & Growth Investment Trust.
“The trust is trading on a wee discount so I would say this is a buy,” he said.
“Barnett’s approach is completely different to Henderson’s because he is a bit more defensive. He concentrates on cash-flow which translates into dividends. It is an approach which has worked, because his performance has been very good.”
Barnett was handed the Perpetual Income & Growth trust in August 1999. According to FE Analytics, it has returned a hefty 405.75 per cent over that time and has nearly quadrupled the FTSE All Share’s return in the process.
Performance of trust versus sector and index since Aug 1999
Source: FE Analytics
The closed-ended fund has also been top quartile and beaten the index over three, five, seven and 10 year periods.
While Hewitt says Barnett has a consistent and repeatable process, experience, a strong team around him and a fantastic track-record, he understands why some would question his focus now that he runs seven portfolios following Woodford’s departure.
However, the manager says he isn’t too worried about that because all the portfolios have a similar mandate and Invesco Perpetual have been very accommodative to their new head of UK equities.
Perpetual Income & Growth is predominantly a FTSE 350 portfolio, but Barnett also holds 10 per cent of his trust in overseas stocks and around 8 per cent in the FTSE Small Cap index.
It is trading on a 3.26 per cent discount, which is wide than its one and three year average. It has gearing of 15 per cent and ongoing charges, plus a performance fee, are 1.85 per cent.
