Temple Bar, Monks, P2P Global Investments and UK Commercial Property REIT are among a number of trusts that have made way for new additions to the Winterflood Investment Trusts model portfolio.
Winterflood made 12 additions after clearing out 10 trusts from its model portfolio for 2019 following a “disappointing” 2.9 per cent loss last year.
While performance was broadly in line with the FTSE UK Private Investor Balanced index benchmark and 0.6 per cent ahead of the FTSE All Share Equity Investment Instruments index, it has decided better opportunities lie elsewhere in the trust universe.
“Last year was a more volatile period for investors in investment companies, with only approximately one-third of the sector generating positive returns in 2018 as a variety of geopolitical and macroeconomic uncertainties took hold,” Winterflood analysts noted.
The new names for the model portfolio are “broadly characterised as funds managed by proven managers with strong long-term performance records and funds that offer a value opportunity”.
Performance of portfolio vs indices in 2018
Source: Winterflood Investment Trusts
The trusts are expected to outperform their peers over an 18-24 month period, either by narrowing of the discount to net asset value (NAV) or through share price appreciation.
Indeed, eight trusts in the portfolio are trading at double-digit discounts while 11 are trading at premiums compared with six and 13 respectively at the start of last year.
The portfolio is split 30 per cent in UK equity strategies, 35 per cent in international equity trusts, 15 per cent in fixed income, 10 per cent in alternatives and the remaining 5 per cent in property.
Below FE Trustnet highlights the new trusts that have made it into the model portfolio in 2019 and those that have been removed.
UK equity
The most high-profile name leaving the UK equity bucket in 2019 is Temple Bar – the £793.1m equity income trust managed by veteran investor Alastair Mundy – in favour of Troy Income & Growth overseen by FE Alpha Manager Francis Brooke and co-manager Hugo Ure.
“We continue to rate Temple Bar highly and the switch reflects our desire to add a more defensive fund to balance our other UK selections,” the firm’s analysts said.
Troy Income & Growth – which has a zero discount policy admired by Winterflood – delivered a loss of 5.63 per cent last year compared with a fall of 8.94 per cent for the average IT UK Equity Income trust and a 9.47 per cent fall for the benchmark FTSE All Share index.
International equity
There were several changes in the international equity portion of the portfolio. Notably Monks, The Scottish Investment Trust, JP Morgan Global Emerging Markets Income and Biotech Growth Trust exited.
Baillie Gifford’s Monks and The Scottish Investment Trust made way for Janus Henderson Investors’ Bankers and the Artemis-run Mid Wynd International.
Winterflood highlighted the low-cost core global equity exposure offered by Bankers and impressive performance track record.
The trust overseen by long-term manager Alex Crooke has delivered a total return of 239.67 per cent over 10 years compared with a gain of 227.82 per cent for the average IT Global peer and a 139.01 per cent for the benchmark FTSE All Share index.
Performance of trust vs sector & benchmark over 10yrs
Source: FE Analytics
The addition of Mid Wynd International, meanwhile, reflects the thematic approach utilised by managers Alex Illingworth, Rosanna Burcheri and Simon Edelsten, as well as the focus on fundamentals and valuations.
“Given that markets have been driven by momentum for the past couple of years and noting the recent market volatility, we believe that the managers’ focus on valuation is now particularly attractive,” the Winterflood analysts noted.
Elsewhere, the firm switched JP Morgan Global Emerging Markets Income for sister fund JP Morgan Emerging Markets on valuation grounds as the latter currently trades at a significant discount to NAV.
Additionally, Biotech Growth Trust has been dropped in favour a more broader healthcare strategy in Worldwide Healthcare, which Winterflood believes “represents a secular growth opportunity”.
The Biotech Growth Trust, which was added to the portfolio last year, was the least successful trust in the portfolio in 2018 with a share price loss of 19 per cent, driven by its exposure to large-cap stocks and emerging markets.
However, Winterflood has retained exposure to biotechnology – one of the best performing areas the market in recent years – with Worldwide Healthcare allocating around 30 per cent of its portfolio to the sub-sector.
In the private equity portion of the international equity allocation, just one strategy – fund-of-funds ICG Enterprise – has been removed. However, it has expanded its exposure to the sector with two additions to the portfolio.
“In our view the private equity sector is one of the areas of the investment companies sector that offers a value opportunity, with discounts having widened markedly,” Winterflood analysts said.
The two additional private equity strategies added to the model portfolio are the “best-in-class direct private equity fund” HgCapital Trust and Pantheon International, which the firm believes trades on a discount that is hard to justify based on the strength of its balance sheet.
Fixed income
There were two trusts dropped from the fixed income portfolio: P2P Global Investments and SQN Asset Finance Income, with the latter undergoing a significant re-rating. These trusts have been replaced by Fair Oaks Income and Real Estate Credit Investments.
The firm noted that Fair Oaks Income has moved to a 17 per cent yield on a historical basis following a derating during the final quarter of 2018 as sentiment towards the US leveraged loan market has deteriorated.
Meanwhile, Real Estate Credit Investments is currently delivering a 7 per cent yield “through reasonably defensive credit exposure to UK and European real estate markets” with lower correlation to property prices than direct property funds.
Property
In the property segment of the model portfolio there have been two changes with Impact Healthcare REIT and UK Commercial Property REIT making way for Standard Life Investments Property Income and Tritax Big Box REIT.
Standard Life Investments Property Income trust has been managed by Jason Baggaley, whom Winterflood said has demonstrated an ability to add value through asset management “which we believe is particularly important in the current environment where future capital value growth from yield compression is likely to be scarce”.
The shares of Tritax Big Box REIT have been “dramatically de-rated over the last six months” offering “considerable value” given the demand for the large logistics facilities (‘big boxes’).
Alternatives
Finally, there was one addition to the alternatives segment of the model portfolio with John Laing Environmental Assets Group.
The £521.9m trust – managed by Chris Tanner and Chris Holmes – offers exposure to a range of renewable energy technologies, which Winterflood expects to have low correlation with the broader equity market and an attractive inflation-linked dividend target.
Performance of trust vs sector since launch
Source: FE Analytics
Since launch in April 2014, the trust has delivered a 38.15 per cent total return compared with a 41.44 per cent gain for the average IT Infrastructure – Renewable Energy peer, as the above chart shows.