After making a loss of 2.9 per cent in 2018, the Winterflood model portfolio of investment trusts has rebounded with a total return of 12.4 per cent during the first half of the year. However, it has lagged the FTSE All Share Equity Investment Instruments index by 0.3 per cent over this time.
Nevertheless, 25 of the research house’s 35 recommendations have outperformed their relevant indices.
“Discount narrowing/premium expansion has been one element of this, with 25 of our selections being re‐rated in the period, but performance at an NAV level has also been good,” the firm said.
It noted that some of the new names added to the portfolio were switches into better value opportunities or where there was a catalyst for outperformance in developing markets.
Additionally, the firm also redeployed some of the cash raised earlier in the year following the removal of three trusts.
Neil Woodford’s Woodford Patient Capital was removed due to the potential impact from the gating of his flagship open-ended fund, while JPM American was taken out due to a change in strategy and manager. Furthermore, 3i Infrastructure was sold on valuation grounds.
Performance of removed trusts during H1 2019
Source: FE Analytics
The first name removed from the model portfolio was Troy Income & Growth, the closed-ended strategy run by FE Alpha Manager Francis Brooke and colleague Hugo Ure.
While Winterflood continues to rate the trust highly for defensive exposure to UK equities with an income bias, the firm’s analysts believe that Dunedin Income Growth offers better value with shares trading at a discount to net asset value (NAV) of around 9 per cent.
Dunedin Income Growth is overseen by Ben Ritchie and Louise Kernohan who have positioned the UK equity portfolio in higher-quality businesses more recently, given the potential for more volatile market conditions and the uncertain political environment.
Another new addition to the UK equity portfolio is Baillie Gifford UK Growth, which the Winterflood analysts believe should add some balance to its predominantly value-biased recommendations: Aurora Investment Trust, Mercantile Investment Trust, Standard Life UK Smaller Companies and Perpetual Income & Growth.
The analysts noted that Baillie Gifford UK Growth trust is the asset manager’s only closed-ended fund trading at a discount to NAV – currently 4.3 per cent, according to the Association of Investment Companies. In addition, the analysts noted that the trust has the potential to be re-rated as managers Iain McCombie and Milena Mileva have recently completed their first year in charge.
Performance of newly added trusts during H1 2019
Source: FE Analytics
In the specialist equity portion of the portfolio, the firm switched from BlackRock World Mining to BlackRock Energy & Resources Income trust as the latter has swung out to a wide double-digit discount, having traditionally traded much tighter.
The trust, managed by Olivia Markham and Tom Holl, has a high historical yield of 5.4 per cent, covered by income from its portfolio of energy and mining companies and option writing.
Another trust removed from the portfolio is Fair Oaks Income, which Winterflood sold due to its exposure to the debt sector. The closed-ended strategy seeks exposure to US and European collateralised loan obligations which it believes provide an attractive risk-return profile, although it emphasises a focus on the credit quality of the underlying borrowers.
A further switch in the portfolio has been from Standard Life Investments Property Income to BMO Commercial Property.
Although the Standard Life trust was added at the start of the year, during that time it has moved from a discount of 12 per cent to trade at a 7 per cent premium to NAV.
“While we continue to rate the fund’s manager, Jason Baggaley, and his active approach to portfolio management, highly, we believe that BMO Commercial Property trust offers better value,” the analysts noted.
BMO Commercial Property – overseen by Richard Kirby – has a large quality portfolio trading at a significant discount to NAV (currently 14.7 per cent).
Finally, in the emerging markets portion of the model portfolio, Winterflood has switched from JP Morgan Emerging Markets to JP Morgan Global Emerging Markets Income.
“Our rational for the switch is driven by valuation,” the analysts said. “JP Morgan Emerging Markets is trading on one of the tightest discounts in the peer group and close to its tightest level in the last 12 months, while JPMorgan Global Emerging Markets Income is trading on a discount of 5 per cent having traded on a premium for most of May, despite having delivered NAV outperformance of its benchmark.
“We therefore believe that there is greater potential for the fund to be re-rated.”
It has also decided to add BlackRock Frontiers Investment Trust to the model portfolio with shares trading at around par to NAV.
“We rate the management team highly and we subscribe to their view that in normal market conditions, returns from a diversified portfolio of frontier market companies can have low correlation with developed markets.
“The fund tends to trade on a premium, which has been as high as 11 per cent over the past 12 months. We therefore believe that with the shares currently trading around NAV, this represents an attractive entry opportunity.”
Current model portfolio holdings
Source: Winterflood Investment Trusts
Winterflood’s analysts do not attempt to make particular macro calls, and weights in individual trusts are not intended to reflect conviction but align asset allocation and geographic exposure with that of a typical balanced private investor.
As such, 30 per cent of the portfolio is held in UK equity strategies, 33.4 per cent is in international equities, 17.5 per cent is in fixed income trusts, 5 per cent is in property strategies and 10 per cent is in alternative funds. The remaining 4.1 per cent is held in cash.
Each trust is limited to 5 per cent of the portfolio and it will not include more than two trusts with a market capitalisation of less than £100m.