Oscar Wilde coined the phrase that a cynic is “a man who knows the price of everything and the value of nothing.” By that definition, investors have for some years now been taking an increasingly cynical approach to investing. With the longest bull market in history making life easy for cheapo passives, and MiFID II underlining the focus on costs from a regulatory standpoint, negative pressure on fees across the industry has reached fever pitch. Soon the FCA will introduce regulation designed to force open-ended fund boards to evaluate whether or not they are good ‘value for money’ on an annual basis. While more transparency on costs is a good thing, one consequence is that many investors are increasingly viewing the cost of an investment product as the most important factor, even beyond performance. With the great playwright’s words in mind, we decided to examine the evidence. We examined the relationship between how much a fund costs and how it performs, with surprising results.
Companies: The Independent Investment Trust
In our recent research, Measure for Measure, we discussed the importance of a manager’s activeness and the difficulties involved in gauging it. As we have highlighted before, the chance of generating alpha generally rises with how active a manager is, and the UK closed-ended universe has become significantly more active in response to the challenge of cheap passive products. In that article we took a look at a range of measures for assessing the ‘activeness’ of a manager and their strengths and weaknesses. In this article we take a deep dive into the numbers, using tracking error, concentration, gearing and sector movements to look at how active the managers are across the major closed-ended equity sectors; the UK All Companies, UK Equity Income, Global, Global Equity Income, Japan, Europe and North American sectors. We rank the trusts based on each individual metric, but also relative to the rest of the sectors. Finally, we discuss which trusts stand out across the different metrics, and establish an overall ranking for each trust which shows how ‘active’ they are. As always, we are not recommending anything here, and this ranking should not be construed as anything other than a scale showing how ‘active’ each fund is relative to the other funds in the study, according to the metrics we have used. Neither are we suggesting that being very active is, in itself, meritorious.
Companies: IIT LTI SMT JEO FSV BGEU SCF JMF DIG
There are more than 26,000 investment funds available to UK investors today, yet the average UK investor has just six funds of any kind in their investment portfolio. Clearly, then, investors must be filtering out a lot of potential investments before they make a decision, and an obvious way to do this is by choosing an appropriate sector - but here too, there is a somewhat daunting range to choose from. The AIC announced yesterday an “overhaul” of its sectors, in order that they are as “clear and helpful as possible” for investors, and there are now more than fifty of them to choose from. In our view, this move by the AIC recognises that investors are using labels to search for funds - and the more granular those labels are, the more likely investors are to find them useful; so full marks for effort. But examination of the 300 trusts that now sit in those sectors highlights a challenge which still remains; however refined a sector label is - many trusts don’t sit easily among their peers. This presents a problem. Filtering funds by sector helps see the wood for the trees, which is essential given the great ‘taiga’ we face as investors seeking one tree among 26,000. But it also means many investors routinely overlook great funds just because they sit in the ‘wrong sector’. The only way to really work out where these trusts are is hard graft - real analysis at a fund level. The good news is that, for investors who have the time to search for them, trusts like this often trade on a wider discount than might otherwise be the case, presenting an opportunity. The even better news is that we’ve done the legwork to find eight of them, so you don’t have to.
Companies: IIT MAJE ASIT ARR TFG
The Independent Investment Trust (IIT) aims to offer strong total returns over long periods, through actively managing a diversified portfolio of international companies. The manager, Max Ward, launched the company in October 2000, following his decision to step down as a partner at Baillie Gifford. Max follows no formal style or process in his investment approach, believing that this can cause managers to be restrained in their approach. Instead, Max looks for cash generative and financially strong companies, delving into the fundamental characteristics of each investment proposition before arriving at a subjective assessment of the potential gains. As one might guess, Max pays absolutely no attention to an index when building the portfolio and the end result is a company with an active share of almost 100%. The portfolio is made up of just 32 holdings, one of the most concentrated in the AIC Global peer group and almost 100 fewer than the average number among its constituents. With this said, the recent correction in Q4 knocked Max’s confidence in this approach, and has made him rethink the ideal number of holdings and the maximum weightings within the portfolio. Going forward, he expects a slightly greater number of companies in the portfolio, with more attention being paid to the liquidity of holdings and size of the position they represent. Along with the unique concentration of the trust, another major differentiator is the weighting towards the UK. According to JPMorgan Cazenove, 85% of the portfolio sits in the UK, 5x the weighted average in the Global sector. Recently, this has led the AIC to move the company into the UK All Share investment trust sector, although this is yet to take place. Due to IIT’s concentrated nature, 2018 was a tough year for the company. Almost all of the top 10 holdings underperformed expectations and the final quarter of the year saw the trust lose 27.3% in NAV terms, over double that of the AIC and IA peer groups and almost triple the FTSE All Share. With this said, much of these losses have so far been recovered in 2019. Since the trust’s launch the trust has delivered annualised NAV total returns of 12.32% - over double that of the FTSE All Share 5.18%- and over the past five years the trust has outperformed the AIC Global peer group (96.3%), the IA Global peer group (68.1%) and the FTSE All Share (36.9%) in NAV terms – delivering 122.7%. IIT now trades on a discount of close to 4%, with the rating having retreated significantly we last covered the trust during the summer of 2018, having traded at a premium of around 25% at that time. Max currently views his holdings as being relatively fully valued, underscored by his current 13% cash position.
“The single greatest edge an investor can have is a long-term orientation”, according to Seth Klarman, the American billionaire hedge fund investor. On the Hargreaves Lansdown platform the number of people with more than £1m in their ISA has increased from just three in 2012 to 168 today. However while this sounds very impressive, £1m doesn’t seem that fanciful given full historic contributions to PEPs and ISAs since 1987 would have added up to more than £291,000. We calculate that an investor would “only” have to have generated an IRR of 7.74% on every year’s subscription to have generated a seven-figure sum today. ISAs offer an excellent way to grow capital and benefit from compounding (that eighth “wonder of the world”) over the very long- term entirely free from the clutches of HMRC. Investments are tax neutral within the ISA wrapper, and in contrast to a SIPP, there is zero tax payable on the entire amount when capital or income is withdrawn. Another contrast to a SIPP is that there is no size limit – under current legislation an individual’s ISA can be as big as it gets. Whilst building an ISA pot of £1m is clearly a huge achievement, our analysis suggests that many investment trust managers would have delivered significantly more. There are around 48 trusts for which we have meaningful statistics going back to 1987 which have had broadly the same strategy and/or elements of the same management team over this time. Of these, an incredible 34 trusts would have delivered a total ISA value (share price returns net of fund fees, but before the ISA wrapper fees) of over £1m, if an individual had put their entire PEP / ISA subscriptions in the same trust every year.
Companies: SMT IIT JEO IEM JEO ICGT OCI SUPP ATST LWI FGT
At the latter stages of a bull market, enthusiasm can sometimes get the better of all of us. Investors always find ways to justify prices for companies at any stage in the cycle. To contrarians, the fact that the price of something has gone up tenfold doesn’t necessarily make it more attractive. However, momentum (as it is now called) is popularly touted as a sustainable investment strategy for the long term. Have the proponents of the ‘ever the greater fool’ theory had a re-brand? Within the world of investment trusts, ‘excessive optimism’ is more easily measured in terms of premiums to net asset value (NAV). This is particularly the case where the majority of a trust’s assets are themselves quoted. Of the 90 trusts (or investment companies) which currently stand on premiums, 55% have illiquid and/or unlisted assets representing greater than 50% of their portfolios. With these trusts, overenthusiasm is perhaps a little less easy to gauge – it is entirely possible that either valuations have moved on since the last official valuation, or that the board is being conservative in its valuations. Either way, each is likely to have its own story and a premium is not necessarily an indicator of excessive optimism. We list below the trusts which have greater than 50% of their assets in listed or publicly traded investments, yet trade at significant premiums. One of the common themes observable is that of strong relative performance over recent times. However, whether you are a contrarian or not (or a follower of momentum as a strategy), we believe that paying anything over a very modest premium is setting yourself up for a fall. Premiums are very rarely sustainable and tend to evaporate at inflection points, exacerbating a poor period of performance from a manager in absolute or relative terms. Indeed, the table below shows how quickly a premium can be eroded, with a corresponding effect on shareholder returns, irrespective of manager performance.
Companies: MAJE SUPP IBT SLPE ICGT IIT SEC JEO SYNC III
Max Ward, who had previously managed Scottish Mortgage while a partner at Baillie Gifford, launched The Independent Investment Trust in 2000. Over both short and long-term periods, the trust has delivered significant NAV returns – albeit with very high levels of volatility as a result of Max’s highly unique approach. Max does not follow a predetermined investment process or specific investment style – as he believes both concepts to be overly constrictive and detrimental to long-term shareholder returns. Instead, this a pure, best ideas stock picking portfolio with Max assembling the portfolio without reference to any benchmark or index whatsoever. The portfolio is highly concentrated, and currently only has 34 holdings. Max also likes to run his winners, leading to an extremely low turnover. The performance of the trust is therefore entirely predicated on Max’s skill as a fund manager, and it has certainly paid-off for longterm investors. But, it has also led to some very painful periods over the years – as we note in the performance section. Though the Independent Investment Trust sits in the AIC Global sector, this is effectively a UK equity portfolio that has the flexibility to invest overseas when Max sees opportunities. According to JPMorgan Cazenove statistics, around 8% of the portfolio is invested in overseas listed companies. This heavy UK exposure (particularly to the domestic stocks such as housebuilders, travel and leisure and technology) has had a major influence on the trust’s relative and absolute returns recently, having been the worst performer in the AIC Global sector in 2016 when Brexitinduced uncertainty had a detrimental effect on sentiment. However, the uncertainty surrounding the UK has not affected the performance of the trust over the past year, and the trust has offered handsome returns, especially over 2017. Shares in the trust are very tightly held, and despite both the board and the manager himself reducing their holdings in the trust (which previously collectively stood at c.35%), the trust’s premium continues to increase. As of the 4 July 2018, the trust trades on a c.20% premium. As it is self-managed, shareholders are not charged an annual management fee (Max draws a salary only from the trust’s ongoing costs). This leads to one of the lowest ongoing charges figures (OCF of 0.24%) of any actively managed equity fund (both closed and open-ended) available to UK investors.
Since the launch of the first index fund in 1976, passive investing has proven to be a successful investment strategy for both institutional and retail investors. The first of its kind, the Vanguard 500 Index fund, has delivered an annualised rate of return of 10.01% totalling to a return of over 1,500% since 1989. Whilst good in absolute terms, in relative terms because of fees it has underperformed the index, with the S&P 500 delivering an annualised return of 10.12% over the same period. Although there is only a small difference between the two annually, we calculate that over the 42 years this equates to underperformance of c.53%. However, this difference is a declining feature, and with fees now at only 0.14%, another 42 year period would see a difference of only 6% relative to the index. On the other hand, active management hasn’t (if one looks at the performance of the average fund) covered itself with glory either in terms of outperforming benchmarks. According to the most recent S&P Indices vs Active Management (SPIVA) report, which offers information on the passive vs active debate in the US over the course of 2017, 63.1% of large-cap managers, 44.4% of mid-cap managers, and 47.7% of small-cap managers underperformed the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, respectively. Over a five-year period, the numbers look even worse for supporters of active management:- 84.23% of large-cap managers, 85.06% of mid-cap managers, and 91.17% of small-cap managers lagged their respective benchmarks. Outperformance of a benchmark is possible, but the numbers above suggest that active managers are mediocre, and that those who can achieve outperformance over the long term are therefore difficult to identify. So, what marks this small sub-set out? What are the small minority of active managers who are outperforming their benchmarks doing differently?
Companies: FGT JEO SMT ATST IIT
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Litigation Capital Management (LCM) is an alternative asset manager specialising in disputes financing, with its main operations in Australia and the UK. The company provides funding for litigation in exchange for a share of any settlement and has built a strong track record of supporting winning c
Companies: Litigation Capital Management Ltd
Mondelez International has announced that it has appointed MediaMonks to manage global technology infrastructure, global websites and content production for North America, Latin America and AMEA. We believe this account win by S4 Capital further vindicates the unitary structure and integrated offer of the group as Mondelez initially worked with MightyHive before broadening the scope of this relationship to encompass MediaMonks. S4 Capital describes the account as a Whopper, indicating that it will generate revenues of over $20m when the account is fully transitioned. We will update our forecasts for the account win at the next financial newsflow from the group. We currently forecast LFL Gross Profit growth of +26% for FY21 and believe the Mondelez win will further accelerate this. We raise our target price to 500p (was 475p) and retain our Buy recommendation.
Companies: S4 Capital plc
President Trump likes to project himself as a highly successful businessman, but surprisingly little is known about his true financial position. Various articles, including a 2016 in-depth analysis by The Wall Street Journal, have speculated about his income and asset base. All sorts of claims and counter-claims have been made about his wealth – by Trump himself, pitching his fortune at some $9bn, and by journalist Timothy O'Brien, suggesting that it is as “low” as $150m-$250m. It is doubtful whether we shall ever know the truth, but we can use Trump’s UK corporate filings to gain an insight into his businesses in Scotland.
Companies: AVO ARBB ARIX CLIG DNL FLTA ICGT PCA PIN PHP RECI STX SCE TRX SHED VTA YEW
Liontrust has delivered in line interims, however AuM growth since the HY point drives higher earnings estimates. In H1, net inflows remained strong despite the backdrop and, alongside performance, contributed to 28% AuM growth. Post-period, performance momentum has boosted AuM by a further 5% to £28.1bn, plus the completion of Architas. Together, this results in a step up in the run rate. We update our forecasts for higher than expected AuM driving a +5% upgrade to FY21e EPS and +10-13% in outer years. We do not forecast scaling in Architas or Global which could prompt further upgrades, reducing the 15x FY22e PER.
Companies: Liontrust Asset Management PLC
Today’s $2.3m framework agreement with an existing Tier 1 global customer is further validation of Clareti’s competitive advantage, of its ability to land and expand and, logically, is the augury of incremental revenues ahead. Gresham continues to gain market share in the critical Tier 1 space and we expect this to show in a resumption of revenue growth next year. Trading on forward Clareti recurring revenues of c. 4.1x, we see significant upside.
Companies: Gresham House
The COVID-19 pandemic has accelerated trends in online retailing, to the benefit of the European logistics market, in which Tritax EuroBox (EBOX) is a leading player. Demand for logistics space is growing exponentially, while supply of existing and new stock is depleted. This dynamic is even more acute in prime locations close to heavily populated conurbations and prolonged rental growth is forecast. EBOX has amassed a portfolio of big box facilities located in major logistics hotspots across Europe. Numerous value-add opportunities also exist within the portfolio, including development and asset management projects. One of the key differentiators of EBOX to its peers is its exclusive ties with established logistics developers. Through the relationships, EBOX has access to and first right of refusal over a pipeline of development assets worth €2bn.
Companies: Tritax EuroBox Plc
Palace Capital’s (PCA) H121 performance was robust and ahead of our central expectations. We have slightly increased FY21 earnings forecasts and introduced FY22–23 estimates, with growth driven by Hudson Quarter completion, on track for March 2021. Significant additional reversionary potential and development/refurbishment represent significant value creation potential.
Companies: Palace Capital plc
Alliance Trust (ATST) underwent a major overhaul three and a half years ago, refocusing on its global equity portfolio. Non-core parts of the company have been sold and overheads slashed. Today, the trust’s assets are managed by nine of the world’s best stock pickers. Investing sustainably is a strong theme within the fund, but the manager, Willis Towers Watson, seeks to blend managers with different styles so that the trust is not beholden to any particular fashion in markets.
Companies: Alliance Trust
Today's news & views, plus announcements from Capita, JD Wetherspoon, HarbourVest Global Private Equity, Walker Crips Group, Randall & Quilter*, Michelmersh Brick, LoopUp, Schroders British Opportunities Trust and Baillie Gifford UK Growth Trust.
Companies: Randall & Quilter Investment Holdings Ltd.
Today's news & views, plus announcements from KGF, MRO, UU, BAB, BRW, FUTR, GNS, HICL, LIO, AEXG, FUL, KWS
Companies: AEX GNS HICL
Murray Income Trust’s (MUT) recent combination with Perpetual Income and Growth Investment Trust (PLI) has doubled the trust’s assets under management to £1.1bn and is expected to deliver a substantial fee reduction to investors. MUT invests in a diversified portfolio of mainly UK equities and aims to provide a high and growing income, combined with capital growth. It has achieved these objectives, having just delivered its 47th consecutive year of increasing annual dividends, while also outperforming its benchmark (a broad UK stock market index) and most of its peers over both the short and longer term. Manager Charles Luke’s success – even in the current climate, which has been characterised by widespread dividend cuts – confirms his conviction that ‘quality, sustainable and growing income is out there, if you know where to look’. He intends to maintain his research-intensive search for resilient companies capable of growing future earnings and dividends over time.
Companies: Murray Income Trust
Interim results demonstrate YoY growth and a resilient outcome that has exceeded management's expectations from the start of the Covid-19 pandemic. This is testament to the degree of recurring revenue generated across the business. FY21 trading looks to be more challenging, as notably lower new insurance sales post-lockdown will translate into lower premium income. A number of organic opportunities are being worked on to fill the shortfall. Rising UK redundancies and their impact on policyholder retentions creates great uncertainty, hence our forecasts remain withdrawn and recommendation remains Under Review.
Companies: Personal Group Holdings Plc
The current crisis is definitely unprecedented. Like most of its peers, not only did the group not make any extra provisions related to the pandemic but it released some provisions following an update to its macroeconomic scenario. The group also managed to mitigate the rate cut impact and generate 60bp of capital ahead of next year’s headwinds.
Companies: Lloyds Banking Group plc
NextEnergy Solar Fund’s interims show continued generation outperformance, driving a NAV rise from 98.4p in June to 99.6p in September. Pricing was also ahead with power sales contracting adding £5.4m of benefit in the period. The company continues to benefit from efficient financing which we believe, along with low operating costs, gives it a cash cushion protecting the dividend. The shares offer the lowest NAV premium and highest yield of the UK renewable yieldcos.
Companies: Nextenergy Solar Fund
Standard Life UK Smaller Companies (SLS) manager Harry Nimmo is very bullish on the outlook for UK small-cap stocks, with the proviso that Brexit presents a near-term risk. He notes that despite current challenges due to the coronavirus, many companies are trading above expectations and there are now only a handful of SLS’s portfolio companies that are not paying dividends. The manager is comfortable with the trust’s ability to maintain its own dividend payments and is hopeful its valuation will improve given its very strong performance record. SLS’s NAV has outperformed its benchmark over the last one, three, five and 10 years; however, Nimmo cautions that given the trust’s focus on quality businesses, if there is a cyclical recovery in the UK market with a ‘dash for trash’, SLS is likely to underperform during this period.
Companies: Standard Life UK Small Co's Tst