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Four trusts for investors for the end of the cycle

14 August 2018

Kepler’s Trust Intelligence highlights four investment trusts with different investment approaches investors should consider against the turning of the cycle.

By Maitane Sardon,

Reporter, FE Trustnet

Mid Wynd, British Empire Trust, Schroder Asian Total Return and Finsbury Growth & Income Trust are closed-ended funds that allow investors to remain in equities while offering them protection against the turning of the cycle, according to Kepler Trust Intelligence’s Thomas McMahon.

The investment trust analyst noted that investors who would wish to remain invested in equities but also want some protection against the turning of the cycle have a problem, as there are plenty of signs that markets have entered the latter part of the cycle.

“The only attractive areas to invest in seem expensive and therefore potentially due the most severe correction when the market does eventually turn,” he said.

However, McMahon said investors can still find ways to remain invested in equities as the cycle comes to an end.

These include buying investment trusts that allocate to sophisticated value strategies, finding managers that can be short stocks or indices or sticking to those stockpickers who would outperform no matter what stage the cycle is at.

Below, Kepler Trust Intelligence’s McMahon highlights a number of strategies that investors could consider for the turning of the cycle.

 

Mid Wynd International

According to the analyst, buying a trust with the balanced approach adopted by the managers of this trust can be one way of dealing with the late-cycle narrowing of the market.

The £190.4m Mid Wynd International has been overseen by Alex IllingworthRosanna Burcheri and Simon Edelsten since 2014.

Although the team aims to identify long-term growth, they tend to focus on less obvious, secular growth areas while avoiding those that become over-owned and overvalued.

“The team is sceptical of buying value stocks per se and Illingworth does not expect a rebound of the factor’s performance versus growth,” McMahon said.

“Overall, he believes the best store of value over the long run is still in secular growth stocks with expected 8-10 per cent revenue growth over the medium term.

“This approach accepts that the main opportunities are in technological secular growth stocks but seeks to hedge these exposures with carefully-selected value opportunities.”

Performance of fund vs sector and benchmark over 3yrs

  Source: FE Analytics

As such, the analyst noted Mid Wynd could provide a core global portfolio for those who want to retain exposure to the fastest-growing parts of the market but make sure they aren’t 'all-in' on the bull run continuing.

While the average fund in the IT Global sector is up 63.29 per cent over three years, Artemis’ Mid Wynd International is up 62.37 per cent.

The fund is trading at a 1.2 per cent premium to its net asset value (NAV), is 1 per cent geared and has an ongoing charge of 0.67 per cent, according to data from the Association of Investment Companies (AIC).


British Empire Trust

Allocating more to sophisticated value strategies, as Joe Bauernfreund’s British Empire Trust does, can be another way for investors to approach the late-cycle investment backdrop.

The £861m closed-end fund invests in family holding companies and investment trusts on wide discounts.

The trust is also exposed to more growth-orientated family holding companies as well as value ideas, which has helped it perform in a poor period for value without taking exposure to the crowded more-expensive-trades.

“While the overall value factor has struggled even in the recent rising interest rate environment, some active managers have done well by taking a more nuanced approach than the rules-based methodologies used by index [trackers] and ETFs [exchange-traded funds],” the analyst explained.

“For example, British Empire Trust’s NAV total return is up 10 per cent over a year compared to 6.2 per cent from the MSCI AC World index ex USA benchmark.”

Over three years, British Empire Trust has delivered a 63.85 per cent total return compared with the IT Global sector and MSCI ACWI ex USA index respective gains of 63.29 per cent and 41.57 per cent.

The fund is trading at an 8 per cent discount to its NAV, is 4 per cent geared and has an ongoing charge of 0.86 per cent, according to the AIC.

 

Schroder Asian Total Return Investment Company

Another approach to investing in this late-cycle environment, McMahon noted, would be to invest in managers who can short stocks of indices, a characteristic that defines the approach of Schroder Asian Total Return.

The £329.7 fund is overseen by FE Alpha Manager Robin Parbrook alongside Lee King Fuei.

“This trust focuses on stock picking but uses derivatives such as options and futures to reduce beta and exposure to different countries,” he explained.

“This risk-mitigation has helped the trust to outperform in the falling Asian market in 2018.”

Performance of fund vs sector and benchmark over 3yrs

 

Source: FE Analytics

“Perhaps demonstrating the attractiveness of this type of approach in the global market environment we have described, the trust has moved onto a premium in 2018, and is now trading over 3 per cent above NAV,” he added.

“However, we would note that regular issuance hasn’t reined in the premium, so it could remain a feature for some time given the market environment.”

Over three years, the five FE Crown-rated Schroder Asian Total Return has delivered a 96.96 per cent total return compared with a gain of 58.31 per cent for the average fund in the IT Asia Pacific excluding Japan sector and a 59.90 per cent gain for the MSCI AC Asia Pacific ex Japan index.

The fund is 2 per cent geared and has an ongoing charge of 0.97 per cent.


Finsbury Growth & Income Trust

A final approach suggested by the analyst is to opt for a concentrated stockpicker – such as FE Alpha Manager Nick Train – to select stocks that will outperform over multiple cycles.

“Rather than trying to diversify away from the fastest-growing sectors, one could simply trust in a manager to avoid the blow-ups,” McMahon said.

As such, while valuations are generally high across consumer goods and tech sectors, he noted they might be justified if “growth should continue to be strong”.

“In its latest quarterly earnings, Alphabet reported a 26 per cent increase in revenues and earnings way ahead of market expectations, and Amazon’s results saw profits 13x higher than the same period last year,” said McMahon.

“Within the consumer staples space, there are some stocks which have managed to make strong returns even as the sector has been hit by a change in the macro-economic winds.”

One such example is alcoholic drinks company Diageo, which McMahon noted is up 27 per cent over a year and is the top holding in Nick Train’s Finsbury Growth & Income Trust.

He explained: “Train believes that the division into value and growth is unhelpful. He argues that innovative companies with strong brands will continue to outperform and the apparent relative performance of the different factors is derivative of a more basic difference between stocks – those with successful, defendable businesses which cannot be replicated, and the rest.

“While his focus is on consumer brands, similar arguments could be made for investing in Amazon, for example, which has seemed cheap for years but made its shares look to have been undervalued year after year.”

Performance of fund vs sector and benchmark over 3yrs

 

Source: FE Analytics

With a 52.11 per cent total return over three years, the five FE Crown-rated trust has more than doubled the 21.22 per cent gain by the IT UK Equity Income sector.

Finsbury Growth & Income Trust is trading at a 0.6 per cent discount to its NAV, is 2 per cent geared and yields 1.74 per cent. It has an ongoing charge of 0.71 per cent.

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