Fidelity Special Values, Finsbury Growth & Income and Rights & Issues are three UK equity investment trusts that have consistently sat towards the top of their respective peer groups on a range of return and risk measures, according to FE Trustnet research.
Our annual series compares funds on their cumulative five-year returns up to the end of 2018, the individual returns of 2018, 2017 and 2016, annualised volatility, alpha generation, Sharpe ratio, maximum drawdown, and upside and downside capture relative to the sector average. Each fund is scored on the average decile ranking for these 10 metrics.
While we are currently working our way through the Investment Association sectors, we have also turned our attention to the closed-ended space and here we review the members of the IT UK All Companies, IT UK Equity Income and IT UK Smaller Companies peer groups.
Performance of trust vs sector and index over 5yrs to end of 2018
Source: FE Analytics
We start with the IT UK All Companies sector and the trust that came in first place with an average decile ranking of 3.3 is Fidelity Special Values. Its 35.96 per cent five-year total return puts it in the third decile and it is in the sector’s top three deciles when it comes to alpha generation, volatility, Sharpe ratio, maximum drawdown and downside capture.
The £659m trust is headed up by FE Alpha Manager Alex Wright and is a multi-cap portfolio with a clear bias towards value/contrarian stocks. Wright aims to own companies that are undervalued by the market, although they must have limited downside risk (such as healthy balance sheets.) and a catalyst for positive change.
Analysts at FundCalibre said: “Although his approach often puts him on the opposite side of consensus, Wright is a patient investor and is prepared to wait for his stocks to deliver. Alex is an experienced manager and has a good track record. We see no reason why he will not continue to achieve these results.”
In second place is Crystal Amber, which is the IT UK All Companies sector’s best performing member over the five years in question after making 49.11 per cent. However, its average decile ranking of 4 was brought down by the fact it is one of the sector’s most volatile member and has its third-highest maximum drawdown.
The £199.5m trust, which is managed by Richard Bernstein, has an activist investment process and invests mainly in UK small- and mid-caps. This approach examines a company both ‘as it is’ and ‘as it could be’, before engaging with management to help maximise shareholder value.
In the latest annual report, Bernstein noted that the outlook for UK equities is clouded by issues such as Brexit and political uncertainty. However, he added: “We believe that the fund is both defensively and securely positioned, with its focus on special situation and strategic holdings, which are ultimately less dependent upon macroeconomic developments and more upon a combination of self-help and active engagement.”
James Goldstone’s Invesco Perpetual Select UK Equity trust came in third place with 4.2 average decile ranking. This is largely down to it having the IT UK All Companies sector’s lowest volatility and maximum drawdown, as well as its second lowest downside capture; its 29.15 per cent five-year return is mid-table.
Turning to the IT UK Equity Income sector and Finsbury Growth & Income won first place in this research with an average decile ranking of 1.8. The £1.4bn trust made 61.34 per cent over the five years to the end of 2018 (the sector’s highest total return) and is in the top decile for alpha, Sharpe ratio, maximum drawdown and upside capture.
Performance of trust vs sector and index over 5yrs to end of 2018
Source: FE Analytics
It is run by FE Alpha Manager Nick Train, who is known for his very long-term, low-turnover approach. Train focuses on companies that have been resilient over various cycles and exhibit steady earnings growth over the long term.
Analysts at Kepler Trust Intelligence said: “Nick recognises that over the past 18 years the trust has underperformed during periods of rising interest rates, rising inflation and accelerating economic growth. In this environment, value and cyclical stocks, which the trust doesn’t hold, tend to be the stronger performers.
“However, the past two years have seen strong returns for Finsbury Growth & Income, while Rio Tinto, a very cyclical stock, has doubled in price. In our view, this shows that the trust can continue to perform strongly in periods that one might not expect it to.”
In second place is BMO Capital & Income, which has been managed by Julian Cane for more than 20 years, with an average decile ranking of 3.1. It is in the top three deciles for five-year total returns, alpha, maximum drawdown and Sharpe ratio.
The £315.6m trust is one of the Association of Investment Companies’ ‘dividend heroes’ after increasing its dividend every year for the last 25 years. The dividend has grown at more than twice the rate of inflation.
In third place in the IT UK Equity Income sector is Troy Income & Growth with its 3.1 average decile ranking. Run by FE Alpha Manager Francis Brooke and Hugo Ure, the trust tends to focus on quality blue-chip companies, often with a defensive bias, as the managers’ main priority is avoiding a permanent loss of capital.
Finally, the IT UK Smaller Companies sector is topped by Rights & Issues in this research. The £176.4m trust, which has been managed by Simon Knott since 1984, has an average decile ranking of 2.7 and made a top decile 126.84 per cent over the five years under review.
Rights & Issues has a value approach and a very concentrated portfolio – the vast majority of its assets are held within its 10 largest positions.
Performance of trust vs sector and index over 5yrs to end of 2018
Source: FE Analytics
Kepler analysts said: “Simon is a traditional value-investor who takes a long-term, low-turnover approach and tends to focus at the very bottom end of the market cap spectrum. His main aim is to buy companies with strong balance sheets, attractive dividend yields and are trading a discount to what he deems to the business’ intrinsic value.”
Jonathan Brown’s Invesco Perpetual UK Smaller Companies trust came in second place with its 3.1 average decile ranking and 70.05 per cent five-year return. It’s among the top of its peer group for measures such as volatility, maximum drawdown and Sharpe ratio.
BlackRock Throgmorton came in third with a score of 4. Managed by Mike Prentis and Dan Whitestone, this trust has a clear focus on quality and growth stocks. Unlike its peers, it also has a CFD (contracts for difference) portfolio and the ability to run a short book.