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Numis: Three trusts for a diversified portfolio

23 September 2016

Based on the recent release of annual reports from several investment trusts, the research team at stock broker Numis Securities discusses three vehicles that could be attractive opportunities for investors.

By Lauren Mason,

Reporter, FE Trustnet

The City of London trust, Pantheon International and BlackRock Greater Europe could present particularly attractive opportunities for investors who are looking to diversify their portfolios, according to Numis Securities.

Following the release of several annual reports from investment trusts earlier this week, the stock broker has taken a look under the bonnet of these vehicles and highlighted which of them have performed well and are exhibiting positive signs that they could continue to achieve strong returns.

In the below article, the firm’s research team takes a look at the trusts which they deem to be of particular interest at the moment.

 

City of London IT

First up is Job Curtis’s £1.3bn City of London investment trust, which is the only trust within the AIC universe to have grown its dividend every year consecutively for the past 50 years.

In terms of its performance over the last 12 months to the end of June, the trust has returned 3.1 per cent, outperforming its FTSE All Share benchmark by 90 basis points – this was primarily driven by stock selection, according to the trust’s annual results.

Over Curtis's 25-year tenure, the trust has outperformed its sector average and benchmark by 106.17 and 104.81 percentage points recptively with a total return of 415.58 per cent.

Performance of trust vs sector and benchmark over 1yr

 

Source: FE Analytics

Not only this, the trust has managed to increase its dividend pay-out by 3.9 per cent over the last 12 months to pay a 15.9p dividend, which is completely covered by revenue at 17.4p.

“Stock selection was the key driver behind outperformance,” Numis said. “An underweight position in the banking sector, particularly Standard Chartered and RBS, was positive.”

“More generally, the portfolio’s defensive positions performed well, including a position in Verizon Communications in the US which produced a 32.5 per cent share price return.”

“An overweight position in utilities, including National Grid, was also helpful, as was the largest position in the portfolio, British American Tobacco, which delivered a share price total return of 47.5 per cent.”

The report details that, over the course of the year, companies within the trust’s portfolio increased their dividends by 4.6 per cent on average, excluding specials. Numis says its performance was also helped by its large-cap bias, with 61 per cent of the portfolio’s turnover coming from overseas and 28 per cent of the dividends received being paid in US dollars or euros.

“We view City of London IT as a core holding for investors seeking income from UK equities. Job Curtis has managed the fund since 1991 and his track record over the past 10 years has been strong, with the NAV outperforming the FTSE All Share,” the stock broker said.

“In addition, City of London pays an attractive yield of 3.9 per cent compared to 3.5 per cent for the FTSE All Share, and has increased its dividend every year since 1967.”

“It benefits from low fees (0.42 per cent ongoing charges ratio in FY16) and has a diversified portfolio with a greater focus on FTSE 350 stocks than most of its equity income peers. The fund currently trades at a 1.5 per cent premium to NAV and issues shares on a regular basis to meet demand.”


Pantheon International

In the private equity space, Numis believes that Pantheon could be attractive for investors who are looking to gain diversified exposure to the market area.

Over the course of the financial year, the trust’s NAV rose by 22.3 per cent to £1,187m, partially as a result of currency gains of 17.2 per cent due to post-Brexit sterling weakness. However, Numis says these gains were offset in both expenses and taxes and a provision in relation to asset sales.

Over 12 months to the end of June, the trust’s total return was relatively flat, having returned 1.02 per cent compared to its sector average and benchmark’s losses of 0.45 and 3.65 per cent respectively.

Performance of trust vs sector and benchmark over 1yr

 

Source: FE Analytics

“Pantheon made 59 new investments in the year, amounting to £345.9m in commitments with £192m drawn at the time of purchase,” Numis said.

“This included £173.2m committed to 13 secondary and late primary funds, £78.8m to 26 co-investments alongside selected private equity managers and £93.9m in primary commitments. Since the year end, the company has committed an additional £19.4m.”

The trust also began issuing share buybacks throughout the year, repurchasing £1.9m worth of redeemable shares and leading to a 1.1 per cent uplift to NAV of 17.3p per share.

“We regard Pantheon as an attractive way to gain diversified exposure to private equity on a global basis at reasonable cost (the total ongoing charges excluding tax were 1.34 per cent in FY 2016). The group is well resourced with a team of over 70 investment professionals that manages assets of $34.3bn, and the listed fund has priority access to secondary investments,” the team said.

“In common with a number of other listed private equity funds, we believe that Pantheon’s discount to NAV has been excessive in 2016 year-to-date. In part, this reflected share prices lagging the uplift to NAV as a result of sterling weakness.”

“Although the discount has narrowed in recent weeks, supported by corporate action elsewhere in the listed PE sector, we believe that Pantheon should have been more active in buying back shares given the strength of its cash flows. The portfolio has been highly cash generative in recent years, with distributions exceeding calls in every period since Q3 2009.”

While Numis believes that the outlook for Pantheon’s portfolio remains positive, they warn that its dual share class structure could be a hindrance, particularly in terms of trading liquidity. The trust is currently trading on a discount to NAV of 18.8 per cent.


BlackRock Greater Europe

The third trust on Numis’s list is BlackRock Greater Europe, which is headed up by Sam Vecht and Vincent Devlin.

The three crown-rated trust aims to achieve growth through a concentrated portfolio of European stocks which range across the cap spectrum and across a wide range of regions – its holdings currently span across 16 different countries.

According to Numis, the £291.6m fund is currently holding a tender offer for up to 20 per cent of the trust’s share capital, for shareholders on the register on the 19 September.

The calculation date will be 30 November and the tender price will be at a 2 per cent discount to NAV.

“The board of BlackRock Greater Europe has the discretion to offer a semi-annual tender for up 20 per cent of share capital. It did not offer a tender in May 2016, because the fund had been trading at close to the exit discount and in the November 2015 tender, just 1.2 per cent of share capital elected to exit,” the stockbroker said.

“However, we believe it is positive that the fund has stuck by its discount control and offered the tender a time when sentiment toward Europe has waned.”

While the trust has underperformed its sector average over three and five years, it is in the top quartile for its total returns over six and 12 months. Over the last year, it has more than doubled the performance of its average peer with a total return of 18.27 per cent while remaining broadly in line with its benchmark.

Performance of trust vs sector and benchmark over 1yr

 

Source: FE Analytics

“The discount has widened to 4.6 per cent, albeit narrower than the peer group average of 10 per cent,” Numis continued.

“BlackRock Greater Europe, managed by Vincent Devlin, has a good long-term track record with NAV total returns of 97 per cent over the past five years versus 83 per cent for the MSCI Europe ex UK. It is differentiated from its peers by an allocation to Emerging Europe, currently around 8 per cent, managed by Sam Vecht.”

BlackRock Greater Europe has an ongoing charges figure of 0.89 per cent and yields 1.8 per cent. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.