Scottish Mortgage, Finsbury Growth & Income and Perpetual Income & Growth are the three favoured investment trusts with discretionary fund managers (DFMs), according to a recent survey.
Investment Trust Intelligence, a journal published by Kepler Partners, asked 72 discretionary fund managers and expert fund selectors to name the individual trust they rated most highly overall.
According to the poll, the three most popular have a degree of commonality as they all pursue a ‘benchmark agnostic’ investment strategy – meaning they hold companies solely because the managers believe they are attractive rather than paying attention to the stock’s position within an index.
William Heathcoat Amory, founding partner of Kepler Partners, says it comes as little surprise that Scottish Mortgage, Finsbury Growth & Income and Perpetual Income & Growth have proved to be so popular given the quality of their managers.
“Given that these trusts pay no attention to the benchmark, and are focused on long-term growth prospects of the companies in which they invest, it’s easy to see why DFMs would use them as a core holding for their retail clients – especially at this point, when the outlook for equity markets is so uncertain,” Heathcoat Amory said.
“Although these trusts can be volatile over shorter periods, and may underperform the market during periods of positive momentum, they are aligned with the interests of individual private investors – who want to put money aside for the future and see it grow in real terms.”
With that in mind, we take a closer look at the three trusts which have proven the standout favourites with DFMs.
Scottish Mortgage IT
First up is the Scottish Mortgage Investment Trust, which is headed by veteran fund manager James Anderson, as more than a third of the DFMs polled said it was the best investment trust available to UK investors.
The trust sits in the IT Global sector and has historically offered investors exposure to high growth areas of the market such as the technology sector and emerging markets. It is also very concentrated, with Anderson holding 49.30 per cent of his total assets in his top 10.
Anderson took charge of the portfolio in April 2000 and, according to FE Analytics, it has been a top quartile performer in the sector over that time with returns of 272.78 per cent. As a point of comparison, the MSCI AC World index has returned close to 200 percentage points less than the trust.
Performance of trust versus sector and index since April 2000
Source: FE Analytics
Scottish Mortgage is also top decile and has beaten its FTSE All World benchmark over one, three, five and 10-year periods and has beaten the index in eight out of the last 10 calendar years.
The trust has tended to fall harder during more turbulent market conditions and that is shown by the fact that it has had a maximum drawdown, which measures the most an investor would have lost if they bought and sold at the worst possible times, more than 30 percentage points greater than that of its benchmark over the past 10 years.
Nevertheless, it has been top quartile for its alpha generation relative to its benchmark, information ratio and risk-adjusted returns as measured by its Sharpe ratio.
Given its past returns, its shares are normally highly sought after. However, its current 2.3 per cent premium is much more expensive than its one and three-year average. Scottish Mortgage has 10 per cent gearing and ongoing charges of 0.5 per cent.
Finsbury Growth & Income IT
The second most popular trust is FE Alpha Manager Nick Train’s Finsbury Growth & Income IT.
Train is renowned for his high-conviction approach to the UK equity market and his focus on top quality companies with reliable earnings and strong franchises. The manager holds 66 per cent of his assets in his top 10 holdings, including 9.1 per cent in Unilever, 7.6 per cent in Diageo and 7.3 per cent in Reed Elsevier.
He is also renowned for his consistent outperformance over the long term.
Our data shows the trust has beaten its FTSE All Share benchmark in nine out of the last 10 years, the only exception being 2007 when shares in Finsbury fell 10 per cent.
It means the closed-ended fund has topped the IT UK Equity Income sector over a rolling 10-year period with returns of 228.29 per cent, more than doubling the returns of its benchmark in the process. The trust is the second best performer in the sector over one, three and five years.
Finsbury Growth & Income has also topped the sector for its risk-adjusted returns over that time and has generated the second highest amount of alpha relative to its benchmark and the second lowest annualised volatility.
It currently yields 2 per cent and has increased its dividend in each of the last 10 years, except during the crash year of 2008.
Trust’s dividend history
Source: Frostrow Capital LLP
Finsbury Growth & Income is currently trading on a slight premium, but the board is renowned for its strict buy back policy. It is geared at 4 per cent and has ongoing charges of 0.82 per cent.
Perpetual Income & Growth
The third most popular closed-ended fund with DFMs is Perpetual Income & Growth, which is headed up by FE Alpha Manager Mark Barnett.
Barnett has been in the headlines a lot over the past two years as he was handed the unenviable task of replacing star manager Neil Woodford on Invesco Perpetual’s flagship and multi-billion-pound High Income and Income funds – as FE Trustnet recently highlighted, this is a task he is so far succeeding in.
However, Barnett has learnt his trade as manager of this investment trust as he has been at the helm since August 1999.
Like Woodford, Barnett focuses on defensive companies which he thinks are mispriced and can deliver superior earnings growth. He is also renowned for his often contrarian calls within his portfolios.
According to FE Analytics, Perpetual Income & Growth has returned 487.82 per cent since Barnett has been in charge while the IT UK Equity Income sector and the FTSE All Share have returned 177.72 per cent and 117.90 per cent, respectively.
Performance of trust versus sector and index since Aug 1999
Source: FE Analytics
The trust is outperforming the sector and index over one, three, five and 10 years and has beaten its benchmark in each of the last five calendar years.
The trust has also never cut its pay-out since Barnett has been manager as investors were paid a dividend of 4.3p per share in 1999 and that has steadily increased to a dividend of 11.1p last year. The trust currently yields 3.3 per cent.
Perpetual Income & Growth has gearing of 15 per cent and ongoing charges of 0.93 per cent, excluding a performance fee.
