Global equity trusts such as British Empire and JPMorgan Global Income & Growth sit alongside offerings concentrating on Europe, Japan and frontier markets in being added to the model portfolio run by Winterflood Investment Trusts.
In a recent article, we looked at four UK equity trusts – Finsbury Growth & Income, Dunedin Income Growth, BlackRock Smaller Companies and River & Mercantile UK Micro Cap – that were added to the portfolio at the start of 2017.
However, Winterflood has also brought in five trusts that search for opportunities outside of the domestic market and in this article we take a closer look at them.
First up is this £795.4m trust, which has been managed by Joe Bauernfreund for less than six months. However, the analysts at Winterflood argue that this is one of the attractions of the investment trust.
The trust aims to exploit valuation anomalies in specific areas of the market and Winterflood says that the “specialist, fundamental research” carried out by Asset Value Investors, where Bauernfreund is chief investment officer, is well suited to this approach.
Performance of trust vs sector and index under Bauernfreund
Source: FE Analytics
“Under the management of Joe Bauernfreund, who became lead manager in October 2015, the fund has retained its value discipline but moved to a higher conviction approach and there is now a far greater emphasis on ‘key events’ that will lead to discount tightening. In addition, modest gearing is now deployed in contrast to a cash weighting of 10 per cent to 15 per cent maintained under the previous manager,” Winterflood noted.
“These changes have resulted in a marked pick-up in performance and, since Bauernfreund was appointed sole manager, the fund’s NAV is up 49 per cent on a total return basis compared with 35 per cent for its benchmark, the MSCI AC World ex US index. In addition, British Empire is the best performing fund in the Global peer group over the last 12 months.”
British Empire Trust has ongoing charges of 0.90 per cent, is trading on a 10.7 per cent discount to net asset value and yields 1.8 per cent. It is 6 per cent geared.
JPMorgan Global Growth & Income
Managed by Jeroen Huysinga since September 2009, this £346.7m trust resides in the AIC’s Global Equity Income sector. Under Huysinga, the trust has made a total return of 194.33 per cent, which is ahead of the MSCI AC World index and its average peer.
Performance of trust vs sector and index under Huysinga
Source: FE Analytics
Winterflood says the trust benefits from a well-designed investment process that makes use of the input of around 80 global research analysts to cover an investable universe of more than 2,400 stocks. The manager focuses on valuation, the potential for significant profit growth and evidence that there will a catalyst for this on a 12- to 18-month time horizon.
Last year, the trust brought in a commitment to pay out 4 per cent of NAV through quarterly dividends, which would give it an “attractive” prospective yield of approximately 3.5 per cent based on the current share price.
“The fund is trading on a discount of 7 per cent, which is notably wider than the Global Equity Income peer group average of 1 per cent,” Winterflood said. “Although the fund’s discount has tightened since the new dividend policy was introduced, we believe that once payments are made under the new policy there could be further tightening. We therefore believe that the current discount offers value, with downside discount risk limited by the board’s ‘aim of maintaining an average discount of around 5 per cent’.”
JPMorgan Global Growth & Income has ongoing charges of 0.64 per cent, is 5 per cent geared and is yielding 2.4 per cent.
This £477m trust resides in the European Smaller Companies peer group and is managed by Ollie Beckett. Winterflood has added the fund to its model portfolio thanks to Beckett’s strong track record and its higher-than-average discount.
Performance of trust vs sector and index under Beckett
Source: FE Analytics
“We believe the fund’s current discount of 16per cent offers value compared to its long-term average,” the analysts said. “In our opinion, TR European Growth is well-positioned to benefit from a recovery in Europe due to its genuine small-cap exposure, with the closed-ended structure allowing the manager to take longer term investment decisions, and a relatively high level of gearing.”
Beckett’s bottom-up approach favours quality business, although the manager points out that this allows for some flexibility as the perception of exactly what is ‘quality’ can change over time. He tends to focus on stocks that the market has the wrong perception of and where there is the potential for this to change in time.
Although there is a bias towards growth in the portfolio, Winterflood points out that the trust has more exposure to value stocks than many of its peers as the manager believes they are best placed to outperform at this point in the economic cycle.
TR European Growth has ongoing charges of 0.78 per cent but does levy a performance fee, is 21 per cent geared and yields 1.1 per cent.
Sarah Whitley’s £459.6m trust has established a strong long-term track record in the Japan Equities peer group, with its 159.16 per cent total return over 10 years outperforming the sector average and Topix index by a wide margin.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
“Baillie Gifford Japan is the stand‐out performer within the Japan sector, having developed an enviable performance record through an unconstrained investment approach,” Winterflood said.
“The closed‐ended structure has also allowed the fund’s manager, Sarah Whitley, to deploy gearing and increase the fund’s weighting to small-cap companies. Both of these have proven to be positive factors over recent years.”
The trust has a bias towards the small- and mid-cap parts of the Japanese equity market and, like many Baillie Gifford portfolios, tends to have low turnover. Holdings of the trust tend to fit into themes such as ‘internet everywhere’, ‘global industrialisation’ and ‘franchise value creation’.
Baillie Gifford Japan has ongoing charges of 0.88 per cent, is trading on 2 per cent discount to NAV and is 14 per cent geared.
BlackRock Frontiers
Winterflood says it is impressed by the performance of this £226m trust, which is managed by Sam Vecht and Emily Fletcher, since its launch in December 2010. Over that time, its total return has been 54.12 per cent, ranking it first in the Global Emerging Markets Equities sector.
Performance of trust vs sector and index since launch
Source: FE Analytics
Vecht and Fletcher combine bottom-up and top-down analysis when researching companies. They tend to concentrate cash flows and prefer businesses with credible management teams; furthermore, they have to hold a positive view on the country where a stock is based and its currency in order to invest.
As its name suggests, the trust invests in frontier markets – which are developing markets that are generally considered to be too small to be classed as an emerging market. For example, the portfolio’s largest weightings are to Argentina, Romania, Pakistan, Bangladesh and Vietnam.
“We believe that BlackRock Frontiers is an attractive alternative to mainstream emerging market funds,” Winterflood said. “In our view, a strong case can be made for investing in frontier markets, which are uncorrelated with broader emerging markets and tend to be home to under-researched companies. Given the illiquidity in the underlying markets, we also believe that the investment trust structure is suited to the asset class.”
BlackRock Frontiers has ongoing charges of 1.37 per cent and charges a performance fee. It is trading on a 0.8 per cent premium, is 9 per cent geared and yields 3.7 per cent.