Kepler Trust Intelligence has added TwentyFour Income to its high-income investment trust portfolio and Ruffer Investment Company to its growth offering following its latest performance review.
The firm has included TwentyFour Income to its Evergreen Annuity portfolio, which aims to provide a high income that rises at least in line with inflation.
TwentyFour Income joins Aberdeen Diversified Income & Growth, Empiric Student Property, Greencoat UK Wind, Henderson Diversified Income and Starwood European Real Estate in the portfolio.
The closed-ended fund has been added to the portfolio due to concerns that Empiric Student Property may no longer fit the bill for lower-risk investors.
It highlighted the impact of management cost-cutting after the property fund revealed high vacancies and unexpectedly high costs, resulting in a dividend cut.
“While the forecast dividend still meets our desired level of income, there is a risk that management’s cost cutting will not work and further dividend cuts become necessary,” the firm noted.
The real estate investment trust had traded on a discount on a premium of 6 per cent when Kepler first bought into it, which had swung out to 13 per cent by the end of June. However, that has since narrowed.
“The board has discussed the possibility of share buybacks, while there is also a chance the company will be taken private,” reported Kepler. “Both outcomes would justify our decision to hold on through the turmoil rather than sell at the worst time.
Performance of trust vs sector during H1 2018
Source: FE Analytics
“Investors with a higher tolerance for risk might want to hold on – over the long run, if the cost-cutting drive is successful, there could be a healthy uplift to shareholder returns from the discount closing while the asset class remains attractive, and for those investors we note that the board has discussed the possibility of a share buyback.”
Nevertheless, the firm has added TwentyFour Income – team-managed and launched in 2013 – to the portfolio as another high-income option for investors.
“Yielding a healthy 6 per cent, this trust invests in asset-backed securities and targets a 6 per cent yield each year with total NAV returns of 6-9 per cent inclusive,” the firm noted.
“On this portfolio it uses the advantages of the closed-ended structure to invest in small and illiquid issues it would be expensive to trade daily, as an open-ended fund might have to.”
Kepler highlighted the trust’s mix of UK and European assets, which includes collateralised loan obligations, residential and commercial mortgage-backed securities, and other asset-backed securities like auto or credit card loans.
“As these securities are floating rate, the duration is less than a year, meaning that the fund’s NAV is not exposed to rising interest rates as conventional fixed income would be,” the firm added.
“There is also no danger of the £460m trust growing too large to be able to invest in its market meaningfully, as could be the case with their successful open-ended funds were they unable to stem inflows when they wished.”
Since launch in 2013, the trust would have delivered £351.86 in income from an initial £1,000 investment, according to data from FE Analytics. During that time it has delivered a total return of 58.63 per cent compared with a gain of 24.82 per cent for the average IT Debt trust, as the below chart shows.
Performance of trust vs sector since launch
Source: FE Analytics
Another change is the addition of Ruffer Investment Company to Kepler’s Endurance Growth Portfolio, which aims to generate long-term capital growth with a bias towards quality and defensive characteristics.
The portfolio currently consists of Edinburgh Worldwide, Henderson Opportunities Trust, RIT Capital Partners, Scottish Oriental Smaller Companies and Witan.
Over the past three years the equally weighted portfolio of the five investment trusts has underperformed the MSCI AC World index, with NAV returns of 43.2 per cent compared with 50.8 per cent for the index.
The firm noted the portfolio’s high weighting to UK equities of 32.3 per cent as a reason for underperformance of the benchmark, which has 5.6 per cent exposure.
Ruffer has been added due to its long-term cautious approach, which it said aims to avoid overvalued stocks while management is happy to lag markets if it thinks “behaviour is irrational or reversals are near”.
“It could reasonably be used as ballast in a long-term buy-and-hold portfolio, or as a significant part of a portfolio for a cautious investor,” said Kepler.
“If you have the possibility to shoot the lights out by being right, you retain the possibility of shooting yourself in the foot if you are wrong,” he said.
“So, our ambition is to be ‘not wrong’. The reason for this is that if we put clients’ money at risk, and we avoid losing money, the inherent volatility of the risk taken will ensure that, as an indirect consequence, the value of the portfolio will almost certainly rise over that period.”
According to Kepler, the Ruffer trust may suit investors with a lower tolerance to risk and “distaste” for RIT Capital Partners’ 5 per cent premium.
Performance of trusts over 3yrs
Source: FE Analytics
Over three years – with the model portfolio being launched in 2015 – the Ruffer closed-ended fund has generated a total return of just 9.11 per cent compared with a 40.91 per cent gain for RIT Capital Partners.
Yet, over 10 years the trusts have delivered similar results with the Ruffer trust up by 106.2 per cent compared with a return of 105.76 per cent from RIT.