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The investment trusts you can buy, hold and forget about

26 April 2015

FE Trustnet looks at investment trusts where it pays to take a long term view.

By Daniel Lanyon,

Reporter, FE Trustnet

Patience, as we all are told, is a virtue. This is perhaps even truer in investing your money in financial assets than in general life.

Perhaps that is why two firms that are some of the biggest destinations for UK investors’ cash have used the noun so centrally in the marketing.

Neil Woodford has recently launched his Patient Capital investment trust and his old employer Invesco Perpetual are so keen to use Patience as the central moniker of their latest advertising campaign.

It can be very tempting – and to some of us pleasurable – to check how the market has changed the worth of our investments on a daily basis. However, in most cases this can lead to lower returns through either overtrading and running up costs or not taking advantage of the long term strategy in a fund.

Of course there is always the risk of a manager leaving, as Woodford himself did.

For those who are willing to ignore short-term volatility, investment trusts are often touted as an attractive vehicle as, due to their closed-ended structure, managers can take a long-term view on even the most illiquid of areas as they don’t have to worry about potential inflows or outflows.

On top of that, the underlying investors doesn’t have to worry about their trust getting too big – which is often the case in open-ended funds and can lead to underperformance – and therefore can effectively buy, hold and forget about trusts run by high quality managers.  

With that in mind, we take a look at four other investment trusts’ – apart from Woodford’s – to stash in the proverbial attic of your portfolio.

 

Edinburgh Worldwide


This £216m trust is headed by FE Alpha Managers Douglas Brodie, head of Baillie Gifford's Global Discovery team, and John MacDougall as his deputy. The pair took over the fund in January 2014, making their track record on the portfolio relatively short.

It is now in positive territory with a return of 11 per cent but has spent most of the time since Brodie and MacDougall took over the trust, losing money.

Performance of trust, sector and index since January 2014

Source: FE Analytics

 


The trust – like its £3bn Scottish Mortgage stablemate – invests largely in ‘disruptive technology’ which is a major theme in the portfolio but tends to focus on companies with a lower market-cap in the hope they will become much bigger institutions in the future.

It also has a mandate for up to 5 per cent to be invested in unlisted companies due to a belief that unquoted companies will see greater periods of growth in the future.

The trust is currently trading on a discount of 8.3 per cent, after narrowing over the past few months. It has a OCF 0.92 per cent. It is 8 per cent geared.

 

F&C Global Smaller Companies


Peter Ewins has managed this trust for just over decade since which it has returned 297.93 per cent versus and average in the IT Global sector of 140.02 per cent. Top decile numbers over five and 10 year periods.

Performance of trust versus sector since 2005

Source: FE Analytics


It invests in direct equities in the West and in funds for Asia and Japan, with Aberdeen Global Japanese Smaller Companies the largest position at four per cent of the portfolio.

Overall the biggest tilt is to the US, with 40.2 per cent of the portfolio in that country and a further 28.3 per cent in the UK.

It is on a 0.7 per cent discount, has charges of 0.53 per cent and is 6 per cent geared.

 

River & Mercantile UK Micro Cap

 

This portfolio, managed by Philip Rodrigs currently stands at £53m, relatively nimble compared to Woodford’s £800m.

It was launched back in December 2014 since which it has returned about 4 per cent, underperforming the average IT UK Smaller Companies trust - although this is a very short time frame to measure to judiciously.

 

Performance of trust and sector since December 2014

Source: FE Analytics

 

The trust may be a good option for long-term investors as theas the board will instigate compulsory redemption of shareholdings if the NAV were to grow between £110m to £125m – meaning that the manager  always has the liquidity to own his best ideas.

The trust is on a 1.5 per cent premium, and no gearing. It has charges of 0.75 per cent of NAV. A performance fee equal to 15 per cent of how much the trusts NAV outperforms the total return on the benchmark (Numis Smaller Companies plus AIM Index) is payable to the manager.

 


 

Miton UK Micro Cap Trust

Gervais Williams will head up this new this trust when it launches later this year,  focused on companies sub £150m by market capitalisation comprising  typically over 120 when fully invested.

Williams is regarded as one of the best smaller cap managers in the UK market. Over the past decade he has shown significant relative outperformance to his peer group – as the graph below shows.

Performance of manager and peer group over 10yrs

Source: FE Analytics

While the launch of the trust is expected sooner rather later, few details about the type of businesses Williams will target are known.

However, he recently told FE Trustnet he thought the types of Biotech and university spin-out firms that Neil Woodford is well-known to favour were in a bubble and he would be avoiding them.

“We don't get involved in these types of stocks. If they go into a period where they are going to start generating lots of cash and paying a dividend yield, say next year, then we might buy them this year. But generally we not interested when they are having a long period of negative cash flow with only a potential for a big pay-off at the end,” he said.


“With these stocks you might get a fantastic pay off because of a takeover or because they do a big deal with a pharmaceutical company, but it is a bit of a binary event and what we are looking for is much more than hoping to get lucky in the future.”

 

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