Finsbury Growth & Income, Jupiter European Opportunities and Baillie Gifford Japan are among the best stock-picking vehicles in the whole investment trust universe, according to the latest Investment Trust Intelligence research.
Investment Trust Intelligence – a quarterly report published by Kepler Partners – has looked at the investment trusts in the various global equity sectors that generated the most alpha relative to their underlying indices on a consistent basis (for the study they calculated the trust’s alpha generation over one, three, five and 10 years).
The report also used the Jensen’s alpha ratio, which excludes the impact of gearing on returns and gives a “truer picture of the value that the managers have added”.
Also, rather than comparing the trusts’ alpha relative to their stated benchmarks, the report used indices that the portfolios have been most correlated to in order to ensure the alpha is being judged correctly.
Source: Investment Trustnet Intelligence
As the table above shows, the trusts that have made the list are Schroder Oriental Income, Jupiter European Opportunities, F&C Global Smaller Companies, Baillie Gifford Japan and Finsbury Growth & Income.
In this article, FE Trustnet takes a closer look at the five portfolios and Kepler Partners’ William Heathcoat Amory explains why they are a great choice for a long-term investor.
In Europe – Jupiter European Opportunities
FE Alpha Manager Alexander Darwall’s Jupiter European Opportunities trust has been the most consistent alpha generator in the IT Europe index over the longer term, according to the research.
The experienced manager is renowned for his focus on high quality, cash generative companies with reliable earnings and this has meant both his closed and open-ended funds have delivered decent returns across the market cycle.
According to FE Analytics, the trust has been the sector’s best performing portfolio since its launch in November 2000 with returns of 467.2 per cent, beating its FTSE World Europe ex UK benchmark by 375 percentage points in the process.
Performance of trust versus sector since launch
Source: FE Analytics
Jupiter European Opportunities has also beaten its benchmark in 12 out of the last 14 calendar years and is outperforming once again in 2015.
For the purposes of this research, Investment Trust Intelligence used the MSCI Europe index and the portfolio scored the highest out of the five trusts on the list, with an annualised Jensen’s alpha ratio of 8.81 over 10 years.
“Alexander Darwall has delivered stellar returns over the past 15 years at the helm of Jupiter European Opportunities. His independent mindset and approach have meant that he has consistently delivered amongst the highest levels of alpha in the entire investment trust sector,” Heathcoat Amory said.
It is trading on a 2.39 per cent discount to NAV, though, which is possibly as a result of its strong past performance. It has gearing of 9 per cent and ongoing charges (excluding a performance fee) of 1.09 per cent.
In Asia – Schroder Oriental Income
Matthew Dobbs’ Schroder Oriental Income trust has beaten rival portfolios run by the likes of First State and Aberdeen in terms of the consistency of its alpha generation and Heathcoat Amory says it is a good option for investors who want to take tentative steps into the bombed-out Asian market.
“Schroder Oriental is a great all-rounder, offering strong NAV returns over the short, medium and long term, a stable discount and a supportive board, as well as a habit of outperforming in down markets – which could be useful in the current climate – and a chunky, covered yield,” he said.
Dobbs, whose trust has a Jensen’s alpha score of 3.15 relative to the MSCI AC Asia Pacific ex Japan index, looks beyond a stock’s current earnings to identify companies which can maintain or grow their dividends and provide the potential for capital growth.
He launched Schroder Oriental Income in July 2005, over which time it has beaten the index by close to 40 percentage points with its returns of 165.81 per cent.
As Heathcoat Amory points out, most of that outperformance has come during more turbulent market environments. It fell only a third of the amount of the index in 2011, for example, and is outperforming so far in 2015 as well.
The trust, which is trading on a discount of 0.03 per cent, has a yield of 4.75 per cent and decent record of growing its dividend. It isn’t geared and has ongoing charges of 0.89 per cent, though it does charge a performance fee.
In the UK – Finsbury Growth & Income
FE Alpha Manager Nick Train is renowned for the consistency of his outperformance over the medium term, as his focus on high quality large multinational companies as well as a significant weightings to small and mid-caps with strong franchises has meant his Finsbury Growth & Income trusts has continuously kept ahead of the FTSE All Share.
According to FE Analytics, the trust has beaten its benchmark in 12 out of the last 14 years and nine out of the last 10 years.
All told, it means that since Train took charge of the portfolio in December 2000 it has been the third best performing IT UK Equity Income trust with returns of 330.81 per cent. The FTSE All Share, on the other hand, has made 89.14 per cent over that time.
Performance of trust versus sector and index under Train
Source: FE Analytics
The reason it has made this list, though, is because of Train’s stock-picking abilities. The report shows that his average Jensen’s alpha relative to the FTSE All Share over one, three, five and 10 years has been 9.4 – the highest score in the sector.
While concerns have been raised about the valuations in parts of Train’s portfolios, Heathcoat Amory says UK investors shouldn’t go too far wrong if they were to buy the manager.
“What you buy when you invest in Finsbury Growth & Income is exposure to a high conviction, stock-picking strategy which – if the tide is not flowing in the right direction – may not perform as well as its peers,” he said.
“That said, given the state of global markets, we think using a proven alpha-generating stock-picker to enhance returns on a diversified broader portfolio is a sensible option and Nick is the man for the job.”
Finsbury Growth & Income implements a strict discount control policy which means shares usually trade at or around NAV. Its yield and ongoing charges are 2.91 per cent and 0.82 per cent, respectively.
In Japan – Baillie Gifford Japan
Many FE Trustnet studies have highlighted how active managers in the Japan sector have tended to struggle relative to the underlying market, but Sarah Whitley has certainly been an exception to the rule.
FE data shows her Baillie Gifford Japan has beaten its TSE Topix benchmark over one, three, five, 10, 15 and 20 years. The trust has beaten the index in four out of the past five calendar years, meaning it has been the IT Japan’s best performing portfolio over the last half a decade.
Investment Trust Intelligence used the MSCI Japan index to calculate Baillie Gifford Japan’s alpha generation and, on average over one, three, five and 10 years, its score has been 5.2.
“Baillie Gifford Japan is, in our view, an excellent route to exposure to Japanese equities,” Heathcoat Amory said.
“The trust has an experienced management team, locked in by a sensible bonus structure, with proven experience of stock selection based on an intense focus on company meetings and analysis of fundamentals.”
Whitley tends to ignore the macro and has a bottom-up approach whereby a company has to meet at least one of her five criteria to make it into the portfolio. While the trust has roughly 50 per cent in large and mega-caps, the manager also has a significant weighting to domestically-orientated smaller companies.
Baillie Gifford Japan is trading on a 2.8 per cent premium, though. It is geared at 15 per cent and has ongoing charges of 0.89 per cent.
In the global sector – F&C Global Smaller Companies
Like in Japan, FE Trustnet has found on a number of occasions that the ‘average’ global fund tends to struggle against its benchmark – which seems odd given they can literally look across the whole world for opportunities.
However, by taking a very different approach, the F&C Global Smaller Companies trust has managed to buck the trend.
Given its focus on small-caps, it will come as little surprise that the trust has considerably outperformed the IT Global sector over the longer term. However, Peter Ewins’ portfolio has beaten the MSCI World Small Cap index over one, three, five and 10 years, having outperformed in seven out of the last 10 calendar years.
Performance of trust versus index over 10yrs
Source: FE Analytics
It has had a Jensen’s alpha score of 2.77 over 10 years and Heathcoat Amory says it is very interesting offering for investors who want to diversify their portfolio.
“F&C Global Smaller Companies is a proven alpha generator which has performed well in a variety of market cycles, offering exposure to global equities with a slightly racier feel than the usual mega-cap focused offerings that operate in the sector,” he said.
Again, though, it is trading on a 2 per cent premium. It’s geared at 5 per cent and has low ongoing charges of 0.54 per cent, but it does have a performance fee.
