Research house Winterflood Investment Trusts has removed 12 names from its model portfolio and added 15 new ones in its latest review, with trusts such as RIT Capital Partners and Baillie Gifford Japan making way.
The investment trust research house doesn’t issue buy, hold or sell ratings, instead recommending trusts that it expects to beat peers over 18 to 24 months through a narrowing of the discount or outperformance of the underlying portfolio.
The ‘best ideas’ are collated into a model portfolio and benchmarked against the FTSE UK Private Investor Balanced index.
While it had a difficult start to 2020, the portfolio made a 9.5 per cent return compared with a 3.6 per cent gain for its composite benchmark.
Source: Winterflood Investment Trusts
Below, Trustnet reveals which old holdings have made way for new ones.
UK equities
The two new UK equity trusts are the £162.7m Aurora Investment Trust – a highly concentrated strategy with a domestic bias, managed by Gary Channon – and Odyssean Investment Trust, a £117.4m small-cap strategy with a private equity approach.
The Winterflood analysts said the Aurora strategy should be a beneficiary of any improvement in investor sentiment towards the UK, while the Odyssean trust is a bet on the managers’ ability to pick up quality companies at attractive valuations.
There were two swaps within the UK equities portion of the model portfolio.
The first was the substitution of the £520.9m Dunedin Income Growth trust – overseen by Ben Ritchie and Georgina Cooper – for sister strategy the £1.2bn Murray Income trust, managed by Charles Luke.
The Winterflood analysts highlighted the “transformational” merger of Murray Income with Perpetual Income & Growth.
“In addition,” the analysts noted, “we see Charles Luke as a natural successor to Job Curtis, the veteran manager of City of London Investment Trust, as the torchbearer for the UK equity income investment trusts that offer dependable and growing dividends.”
Elsewhere, Harry Nimmo’s Standard Life UK Smaller Companies trust has made way for the Henderson Smaller Companies trust, based on the discount opportunity. The latter is currently trading at an 8.2 per cent discount to net asset value (NAV), to the former’s 2.9 per cent, as at 11 January.
The model portfolio continues to hold Fidelity Special Values, Law Debenture, Mercantile Investment Trust and Baillie Gifford UK Growth.
International equities
There were several switches among the model portfolio’s international equities line-up.
In global equities, Winterflood opted for £2.1bn multi-manager strategy Witan instead of Alex Crooke’s £1.5bn Bankers Investment Trust, highlighting the changes made by Witan managers Andrew Bell and James Hart to turn around poor performance. It also continues to hold Martin Currie Global Portfolio and Scottish Mortgage Investment Trust.
In its European allocation, it has opted for TR European Growth over sister strategy Henderson EuroTrust. While performance of the £358.2m Henderson Euro Trust has been strong under manager Jamie Ross, the Winterflood analysts noted the £796.5m TR European Growth trust offers greater exposure to small- and mid-cap stocks. For more mainstream exposure, it continues to hold the £1.4bn Fidelity European trust.
For its Japanese exposure, the research house has decided upon the £1.4bn JP Morgan Japanese trust – overseen by Nicholas Weindling and Miyako Urabe – over the £1.1bn Baillie Gifford Japan trust, managed by Matthew Brett and Praveen Kumar. Although it rates the latter highly, it trades at a considerable premium to NAV (7.2 per cent) compared with the former’s discount (1.1 per cent).
There were two switches to the Asia Pacific equities allocation. The first was the £532.1m Schroder Asian Total Return fund over the £814.3m Asia Dragon Trust, based on the former’s “ability to protect investors’ capital in difficult conditions”.
And in the income segment, it has replaced the £477.4m JPMorgan Asia Growth & Income trust with the £289.9m Invesco Asia Trust, based on its wider discount and new enhanced dividend policy.
Finally, £167.5m Augmentum Fintech was added to the model portfolio – a relatively recently launched trust investing in fast-growing, unlisted financial technology (‘fintech’) companies, managed by Richard Matthews and Tim Levene.
The model portfolio continues to hold JPM Emerging Markets and Templeton Emerging Markets; HarbourVest Global Private Equity and Standard Life Private Equity; and Allianz Technology, BlackRock World Mining and Worldwide Healthcare.
Bonds
In the fixed income segment, two funds were dropped – CVC Credit Partners European Opportunities and TwentyFour Income – in favour of the NB Global Monthly Income Fund.
The new addition is a £233.6m trust undergoing a change in its strategy to invest in a broader range of assets than previously allowed, with the Winterflood analysts highlighting the potential for a re-rating.
Other fixed income strategies in the portfolio include BioPharma Credit, City Merchants High Yield and Henderson Diversified Income.
Property
There were two straight swaps in the property portion of the portfolio, with BMO Commercial Property Trust making way for Standard Life Investments Property Income and Civitas Social Housing replacing Residential Secure Income Reit.
The Winterflood analysts said the £439.1m Standard Life Investments Property Income trust was better placed for the current environment than the £1.2bn BMO Commercial Property Trust, with greater exposure to industrial property and a lower retail allocation. They said any increase in the former’s dividend to pre-Covid levels could lead to a re-rating, while a dividend increase – and re-rating – for the latter trust could take more time.
Although the £236.6m Residential Secure Income trust has an attractive yield and provides exposure to an undersupplied area of social housing, the dividend is uncovered. The £932.2m Civitas Social Housing trust, they believe, offers a prospective 5.1 per cent fully covered yield and looks more sustainable given the inflation-linked leases of properties within the portfolio.
“The fully government-backed nature of the rents and the importance of the accommodation that the fund’s properties provide means that we would expect the income to remain robust,” they said.
The two other property strategies remaining in the portfolio are Tritax EuroBox and TR Property.
Alternatives
Finally, in the alternatives segment there were two changes.
The first was the addition of the £2.3bn Greencoat UK Wind trust, managed by Greencoat Capital’s Laurence Fumagalli and Stephen Lilley, which invests in a portfolio of UK wind farms.
The Winterflood analysts said that although it trades at a wide premium (14 per cent to NAV), the infrastructure strategy still offers an attractive entry point, given the demand for ESG (environmental, social & governance) funds.
“Electricity prices have recovered since their low in March 2020 and this should be positive for the fund,” they said.
The other change in the portfolio was the switching of the £3.6bn RIT Capital Partners with the £595.4m Capital Gearing Trust, which the analysts said had “considerable merits, not just compared with some of its investment trust peers, but also with a range of vehicles that seek to provide investors with steady absolute returns over the long term”.
They continued: “In our view, the fund has undoubtedly been one of the success stories of the sector over the last few years.”
The three other alternative strategies in the portfolio are BBGI Global Infrastructure, BH Macro and Personal Assets.