James Henderson, Harry Nimmo and Douglas Brodie are among the FE Alpha Managers bouncing back from a grim 2014 to smash their peers in 2015 so far, according to research by FE Trustnet.
While fund groups, experts and seasoned investors will all say it is wholly about the long term when it comes to investing, it is very tempting to shore up losses after a bad year’s performance and sell.
However particularly in the active fund world where – you hope – you are buying a manager’s strategy, style and skill, things can go wrong for a whole host of reasons. When this happens to a ‘star’ manager who is usually associated with outperformance, it can be hard to follow the buy-and-hold mantra.
In the case of the managers mentioned in this article – who are all FE Alpha Managers – their trusts had a shocking 2014 but have since bounced back to outperformance.
Take for instance James Henderson (pictured), manager of the Lowland Investment Company since 1990. The manager has beaten the FTSE All Share in nine of the past ten full calendar years and significantly outperformed in seven of the nine years, being top decile in most of them.
Performance of trust, sector over 10yrs
Source: FE Analytics
The manager had a shocker of a 2014, however, and the trust finished 23rd of 24 other trusts in its sector. Part of this fall was a movement down in Lowland’s share price of around 4.1 per cent, but total losses were exacerbated to almost 9 per cent thanks to a movement in NAV.
Winterflood Securities head of research Simon Elliott says Henderson is one of the most highly regarded fund managers in the investment trust universe.
“His long‐term track record with Lowland is excellent, outperforming over the longer term through a contrarian, value‐orientated approach that has historically shown a bias for mid‐cap companies. The fund has one of the strongest long‐term performance records in the UK Equity Income sector,” he said.
“However, there are periods when his investment approach underperforms. Last year was one such occasion as the fund’s exposure to mid and small caps as well as a high weighting to industrials proved a headwind.”
He also says Henderson makes full use of gearing, having about 15 per cent leverage this year. This can amplify losses in difficult periods, but boasts performance when times are good.
The Edinburgh Worldwide investment trust is another portfolio that took a battering in 2014 only to bounce back strongly this year.
Headed by Douglas Brodie since the start of 2014, the trust lost 3.08 per cent in 2014 compared to an IT Global sector average return of 7.37 per cent.
However, thanks in part to a narrowing of its discount, it has returned a whopping 23.99 per cent this year with the trust’s more recent rally taking it into positive territory since Brodie took over.
Almost all of this is due to the movement of the underlying shares and not to a change in its discount. It is currently on a 4.3 per cent discount.
It is ahead of the IT Global sector average, although it is a touch behind the gain in the MSCI World Small Cap index.
Performance of trust and sector since January 2014
Source: FE Analytics
The trust’s management team – Brodie is lead manager and John MacDougall is co-manager – has a relatively short tenure on the fund but have a greater track record running an open-ended Baillie Gifford Global Discovery fund since 2011.
Kieran Drake, analyst at Winterflood Securities, says the pair are looking to identify “the large-cap companies of the future” especially in the more volatile technology, healthcare and biotechnology often where companies have a ‘disruptive’ goal within an industry. He says this does add a higher level of risk to the trust.
“Douglas Brodie has generated a strong performance record with this strategy through his equivalent open‐ended fund [the Baillie Gifford Global Discovery fund],” Drake said.
Harry Nimmo, manager of the Standard Life Investments UK Smaller Companies trust since 2003, has also gained ground this year after finishing in the second worst spot of the IT UK Smaller Companies sector last year.
The manager has one of the best long-term track records of any smaller companies manager.
Performance of trust, sector and index since January 2003
Source: FE Analytics
But several large positions saw his judgment put into question last year with the likes of Ocado and ASOS – both major positons for Nimmo – losing a huge amount, as well as a broadly aggressive sell-off in small-cap stocks after Federal Reserve chair Janet Yellen hinted that interest rates could rise sooner than expected.
However, investment trust broker Numis recently told FE Trustnet investors should look again at the unloved trust as it is currently sitting on a an attractive 7.6 per cent discount.
“We believe it is positive that the manager is sticking to his investment process and the fund has recovered strongly after previous periods of underperformance, such as in 2008,” Numis said.