While the long-term outperformance of investment trusts over open-ended funds is well documented, many investors are put off holding these products by discount volatility. A narrowing discount will of course super-charge your returns, but a widening one will amplify losses, and it is this that discourages many people.
However, the five FE Crown-rated Unicorn Mastertrust is one of a handful of funds of investment trusts in the IA universe that does the legwork for you. FE Alpha Manager Peter Walls not only selects the trusts, but his ongoing process involves recycling capital out of areas that have done well and moving it into those that have fallen out of favour – where discounts have widened, for example – where he has identified a catalyst for change.
The tactic certainly appears to be working – Unicorn Mastertrust has made 190.33 per cent since Walls took charge in September 2008, compared with gains of 109.91 per cent from the FTSE All Share index and 92.08 per cent from its IA Flexible Investment sector.
Performance of fund vs sector and index under manager tenure
Source: FE Analytics
The fund has also beaten both measures over one, three and five years as well.
Walls (pictured) said he has achieved this long-term outperformance by playing to the structural strength of investment companies – taking a long-term view and investing in less liquid assets. He added there are two areas in particular that have allowed him to generate alpha, the first of which is small caps. ” 
“The long-term outperformance of small caps is well documented,” he explained. “In its 62-year history, the Numis Smaller Companies index has generated excess returns of 3.4 percentage points a year over the FTSE All Share.
“But small-cap trusts trade at high discounts and don’t seem to be well liked – even though the sector has many well-respected managers who have long-term track records of consistently outperforming the Numis index. This applies to trusts focused on small caps overseas as well.”
The other area that the manager said has allowed him to add value is private equity.
“Listed private equity funds have long-term processes that allow them to outperform public markets over significant periods of time,” he added.
“But there is a lot of dry powder in this area at the moment – it is more of a seller’s market and we are probably approaching the mature end of the cycle, so I have begun to take the top off my private equity funds.”
Walls has taken his exposure to this area of the market down to between 10 and 11 per cent of the portfolio as he does not see scope for discounts to narrow much further, although Standard Life Private Equity is still his second largest position at 2.55 per cent of assets.
Looking forward, the manager is introducing a modicum of caution into the portfolio.
“We have all had it pretty darn good for a long time,” he said. “We have all lived off the punchbowl of QE, which has delivered good returns across the investment companies universe, but made it difficult to find value.”
The manager now has a greater active share in the portfolio than usual and is also more diversified – the fund currently has more than 50 holdings, with its top 10 accounting for just 24.39 per cent of assets.
In addition, its largest and third-largest holdings, Foreign & Colonial and Alliance Trust, are both multi-asset vehicles. Aside from the diversification benefits these trusts offer, he is also using them for their liquidity: Foreign & Colonial is £3.4bn in size and Alliance Trust is £2.6bn.
“When we see the next correction, which will happen at one point, the liquidity in these trusts will allow me to recycle the cash into more distressed opportunities,” he added.
He is also trying to tilt the portfolio towards value, following a large degree of bifurcation in UK and world markets.
“People say that markets are at high levels and point to Shiller’s CAPE index, but there is still fundamental value in value stocks as it has not been these that have driven markets, but growth stocks,” he continued.
“That is why we have increased our exposure to small caps. For example, most of the growth in emerging markets has come from the likes of Baidu, Tencent and Alibaba – small caps have underperformed as they haven’t owned these stocks.”
Unicorn Mastertrust has an ongoing charges figure (OCF) of 0.85 per cent, well below the sector average of 1.3 per cent.
Walls said there are other ways he is trying to keep charges in the portfolio to a minimum.
“I do not have a high turnover style. I am reluctant to get involved in IPOs, which is a measure of my meanness I suppose as I don’t want to suffer the additional costs,” he added.
“I’m not a broker’s friend in that respect, but don’t tell anyone.”
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