The NAV of global funds has underperformed the MSCI World over the last three years as a result of unfavourable regional biases such as being overweight Asia and emerging markets, according to Numis Securities.
2015 saw a marked divergence between developed and emerging markets, as collapsing commodity prices and the China slowdown had far less of a severe impact on Western, oil-importing regions.
Performance of indices in 2015
Source: FE Analytics
The broker’s research team, however, says that NAV performance of global funds compared to the MSCI AC World index, which of course includes emerging markets, has been strong, with many discounts narrowing due to strong retail demand.
“A few years ago, it would have seemed inconceivable that funds such as Scottish Mortgage or Witan would trade on premiums, but now they are issuing new stock on a regular basis,” it said.
However, the team warns that investment approaches within the global sector are becoming more and more differentiated, and as such investors should consider the individual risk/return profiles of investment vehicles in this area of the market.
Having analysed the bottom-up fundamentals across trusts in the sector, Numis Securities has found a small number of trusts that are both trading on hefty discounts and could provide strong long-term returns for the investor, as listed below:
Alliance Trust – 9.1 per cent discount
“We believe that Alliance Trust is a far more interesting vehicle following the recent changes to the fund’s board and corporate structure,” Numis said.
“The fund is now protecting its discount through buybacks and there remains the potential for further corporate action unless NAV returns are strong (Elliott still owns a 15 per cent stake).”
Activist hedge fund Elliott is the trust’s largest shareholder, and has been buying shares since 2010. The firm has previously criticised the £3.2bn Alliance Trust for its poor performance and high charges over the years.
Following an ongoing clash between Elliott and chairperson Karen Forseke though, the trust appointed Lord Robert Smith to chair its board as the result of a governance reshuffle, and Numis believes that this could have a positive impact on the trust’s performance.
Manager Katherine Garrett-Cox has been at the 127 year-old trust’s helm since 2007. She was then joined by co-manager Rob Davidson in 2010, and Simon Clements four years later.
Over the trio’s tenure, Alliance Trust has delivered a top-quartile return of 9.93 per cent, outperforming its peer average by 4.42 percentage points and almost tripling the FTSE All World index, which is 50 per cent of the trust’s benchmark alongside the FTSE All Share.
Performance of trust vs sector and benchmarks over management tenure
Source: FE Analytics
The self-managed investment company has a value focus, and has no fixed asset allocation benchmark. Its largest regional weighting is currently North America at 45.5 per cent, followed by Europe at 20.48 per cent, the UK at 17.77 per cent and global emerging markets at 12.85 per cent.
Alliance Trust is 13 per cent geared, yields 2.1 per cent and has an ongoing charge of 0.69 per cent.
Caledonia Investments – 17.7 per cent discount
The four crown-rated Caledonia Investments trust, which is £1.2bn in size, has been on the road to recovery following a rocky period between 2006 and 2011, which led to the trust falling into the bottom quartile over 10 years.
Over the last few years though it has dipped between the first and second quartile on an annualised basis, providing a top-quartile return of 42.52 per cent over three years and outperforming its peer average by 15.36 percentage points.
Performance of trust vs sector and benchmark over 3yrs
Source: FE Analytics
“We have been impressed by the changes that Will Wyatt has made since taking over as CEO of Caledonia Investments in mid-2010,” the team at Numis said.
“It now invests via four pools (Quoted Equities, Unquoteds, Funds and Income & Growth) and is differentiated from its global growth peers by its significant exposure to unquoted assets (with a target investment size of £25-100m). It has recently acquired majority stakes in Gala Bingo and Seven IM (7IM), the UK wealth manager.”
The team said that they expect some capital to be returned to Caledonia as a result of a refinancing of its investment in Park Holidays, but it estimates that the ‘Unquoted’ pool is now at around 37 per cent of net assets.
However, Numis explains that while the trust’s unquoted assets have delivered a strong performance recently, they have made some investors cautious which could have led to the trust’s wide discount.
“We continue to believe that this discount is excessive as we believe that the fund’s investment process is now far more rigorous, with a clear strategy to deliver strong long-term performance in both absolute terms and relative to equity market indices,” the firm added.
Caledonia Investments is 2 per cent geared, yields 2.3 per cent and has an ongoing charge including a performance fee of 1.3 per cent.
British Empire Trust – 13.5 per cent discount
Another value play that Numis is keen on is the British Empire Trust, which the team says offers differentiated exposure to value situations.
“The portfolio is currently biased towards holding companies, particularly in Europe and Asia, but the weighting in closed-end funds has increased and includes a number of listed PE vehicles, including NB Private Equity, HarbourVest Global PE and JPMorgan PE,” the team said.
“We believe that the fund has an interesting and differentiated mandate, but that stronger performance and a clearer marketing strategy are needed to attract the attention of investors.”
The one crown-rated trust holds a concentrated portfolio of assets that manager Joe Bauernfreund, who took over the helm from John Pennink last October, believes to be undervalued.
It is in the bottom quartile for its total returns over five and 10 years and is in the bottom decile over one and three years, providing a notably weak performance over three years when it lost 6.75 per cent, compared to its sector average’s gain of 27.16 per cent and its benchmark’s return of 3.58 per cent.
Performance of trust vs sector and benchmark over 3yrs
Source: FE Analytics
“There have been recent changes in management responsibility, with Joe Bauernfreund taking over as lead manager,” Numis continued.
“However, the fund’s value style has been out of favour, while exposure to Asia and emerging markets of approximately 19 per cent and commodity stocks (such as BR World Mining and Dundee Corp) has not been helpful, with the NAV down 8.7 per cent over the past six months.”
Currently, the £591m trust has 48.07 per cent in industrials, 37.65 per cent in investment trusts and 15.48 per cent in property shares. These are spread across continental Europe, which is the trust’s largest weighting, as well as the US, the UK, Asia Pacific, Japan and global emerging markets.
The British Empire Trust yields 2.8 per cent and has an ongoing charge of 0.9 per cent.
