Trusts managed by Lindsell Train’s Nick Train, Aberdeen’s Ben Ritchie, BlackRock’s Mike Prentis and River & Mercantile’s Philip Rodrigs have just been introduced to the model portfolio managed by Winterflood.
Winterflood’s portfolio focuses on trusts that either are headed up by proven managers with strong long-term performance records or those that offer a value opportunity, often following a management change.
The broker has recently added four UK investment trusts to its portfolio. In the following article, we take a look at those that have made the grade and why.
The first of two additions from the UK equity income sector is this £970.9m trust, which has been managed by FE Alpha Manager Nick Train since December 2000.
Winterflood highlights the “extremely impressive” track record built up by Train: since he took over, the trust has made a 410.45 per cent total return. This ranks the fund third in the AIC’s UK Equity Income sector and is almost 290 percentage points higher than the FTSE All Share’s gain over the same period.
Performance of trust vs sector and index under Train
Source: FE Analytics
“The manager’s high conviction approach has led to a concentrated portfolio, which differs considerably from the benchmark,” Winterflood said.
“While this will lead to performance that is significantly different to that of its benchmark, we believe that the approach of long-term investment in companies with strong brands and pricing power in an inflationary environment will allow it to continue to outperform.”
The portfolio’s top holding is RELX, followed by Diageo, Unilever, London Stock Exchange, Burberry Group and Sage. Some 45.4 per cent of the portfolio is held in consumer goods companies, with 23.3 per cent in financials, 22.1 per cent in consumer services and 9.2 per cent in technology.
Finsbury Growth & Income is trading on 0.3 per cent premium to net asset value (NAV), yields 2 per cent and is 3 per cent geared, according to figures from the Association of Investment Companies. It has ongoing charges of 0.74 per cent.
Winterflood’s second UK equity income pick is the £376.7m Dunedin Income Growth Investment Trust, run by the pan-European equity team at Aberdeen; Ben Ritchie is the lead manager. The trust is currently trading on a 10.1 per cent discount to NAV, which the broker highlights as being attractive.
“While its performance record is not the strongest in its peer group, it offers mainstream, large-cap exposure to UK equities and has a yield of 4.6 per cent, one of the highest in the subsector. Its dividend has been increased in 32 of the last 36 years,” Winterflood said.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
As the chart above shows, the trust has underperformed its average peer and the FTSE All Share by a wide margin over the past five years but it is the sector’s second best performer over one year after making 20.51 per cent.
Winterflood added: “We believe that if Dunedin Income Growth’s pick‐up in performance over the last 12 months can be maintained, there is scope for its discount to tighten materially.”
As noted, the trust has a high weighting to UK large-caps with GlaxoSmithKline, Royal Dutch Shell, British American Tobacco, HSBC and Prudential being its top five holdings; only three of its top 20 holdings are not in the FTSE 100. The portfolio’s largest sector weighting is to financials at 28.4 per cent of assets, followed by oil & gas and consumer goods.
Dunedin Income Growth has ongoing charges of 0.64 per cent and is 14 per cent geared.
This £463.2m fund, which is headed up by Mike Prentis, is highlighted by Winterflood for its “impressive” track record and attractive discount.
BlackRock Smaller Companies has outperformed its Numis Smaller Companies ex ITs benchmark in each of its 13 past financial years in NAV terms. When it comes to total return, it has also performed well against the sector and index; over 10 years, its 206.64 per cent total return is considerably above its average peer and benchmark.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
“In common with its peers, the fund's discount widened in 2016, bringing it more in‐line with its longer‐term average. We believe that the current discount of 17 per cent represents an attractive entry point and offers value relative to a number of peers,” Winterflood said.
Prentis focuses on companies that have five sustainable growth characteristics: strong management, strong market position, sound balance sheet, cash generative and a track record of growth. key themes include advantaged cash flow compounders, growth businesses with highly predictable revenues, innovation and high potential micro‐caps.
The top holdings are veterinary business CVS Group, direct marketer 4imprint Group, rubber-based product manufacturer Avon Rubber, construction product manufacturer Hill & Smith and veterinary pharmaceutical firm Dechra Pharmaceuticals. Its biggest sector weightings are to industrials, consumer services and financials.
BlackRock Smaller Companies has ongoing charges of 0.69 per cent (but levies a performance fee), is 7 per cent geared and yields 1.8 per cent.
River & Mercantile UK Micro Cap
The final UK addition to Winterflood’s model portfolio is the £89.1m River & Mercantile UK Micro Cap trust, which only launched in December 2014. It is headed up by Philip Rodrigs, who has a strong track record in small-cap investing at River & Mercantile and Investec.
Performance of trust vs sector since launch
Source: FE Analytics
“We believe that a closed‐ended fund is the appropriate structure to take advantage of the illiquidity discount for UK micro caps. However, the fund has been structured in order to return capital to shareholders once assets have increased beyond £100m. This is a unique feature and should allow the fund to pursue its focused approach to micro-cap companies and alleviate size creep,” the broker said.
“In our view River & Mercantile UK Micro Cap offers a significant value opportunity at present as its discount of 9 per cent is notably wider than both its 12-month average (3 per cent) and the discount of its closest peer.”
The above chart shows that the fund has underperformed the average AIC UK Smaller Companies trust since launch. However, the trust is trading on a wide discount and on NAV terms it has been much stronger, making 45.69 per cent.
The top holding is mobile advertising technology company Taptica, followed by emerging gold producer Shanta Gold, robotic process automation software developer Blue Prism, data firm D4t4 Solutions and computer games industry services provider Keywords Studios. As suggested by its biggest holdings, the portfolio’s largest overweight is to technology.
River & Mercantile UK Micro Cap has ongoing charges of 1.36 per cent (plus a performance fee) and is not geared.