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Best in class

Today, we introduce our investment trust ratings. According to the quantitative screens we have selected in an attempt to highlight the best performers in the closed-ended universe, the trusts discussed here have been the best in their classes over the last five years. We have selected trusts using two different sets of criteria, aiming to identify the top performers for capital growth and for achieving a high and growing income. There are many rating systems for open-ended funds, but no quantitative-based system for investment trusts that is available to the average investor. While we cannot identify trusts which will perform well in the future – past outperformance is no guide to future out-performance – we hope these ratings will highlight the outstanding performers in the closed-ended universe and those managers who have best used the advantages of investment trusts to generate alpha. We are trying to reward consistent and long-term outperformance, and so we have decided to look over a five-year period. All data is as of the end of December 2018, sourced from Morningstar and JPMorgan Cazenove. We have looked at NAV total return performance and discount value has not been considered: the aim is to identify those trusts which have performed the best rather than highlight bargains.

  • 30 Jan 19
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Ruffer Investment Co

Ruffer Investment Company - Overview

Ruffer Investment Company is designed to deliver steady all-weather returns across the cycle, aiming to protect capital in falling markets and deliver double the Bank of England base rate on a 12-month rolling basis. Primarily a long-only vehicle, the trust also uses currencies, derivatives and illiquid strategies as part of its highly differentiated investment process and is managed on a day-to-day basis by Steve Russell, Hamish Baillie and Duncan MacInnes. The managers have believed for a long time that efforts to reflate the economy will result in too much inflation, which central banks will find hard to control, and the portfolio is designed to perform well in an inflationary environment, with significant exposure to UK and US index-linked treasuries. In the meantime, however, the managers are keen to ensure that investors are paid to wait; using equities – a mix of special situations, macro opportunities and value plays – to enhance performance. 2018 was a tough year for Ruffer, which lost 5.6% - more than it has lost in any calendar year since inception, and the trust’s performance as a result of recent declines now looks weak over one, three and five years. The trust has traded at a consistent premium since the referendum and its discount at the time of writing reflects this unusually poor showing – at nearly 5% this too stands at a level which hasn’t been seen since 2007. The trust’s equity exposure – largely made up of cyclical and value stocks, a sharp fall in the oil price, and significant sterling exposure held in the view that more or less any positive news out of the Brexit fiasco would be better than the market’s expectations, all weighed on returns. A difficult time recently, then, for shareholders in the trust. Yet closer examination of the trust’s NAV over the last twelve months shows that, as the sell-off has intensified, the portion of this trust’s assets which really differentiate it from its peers – and offer the greatest defensive qualities – came into their own. The trust’s protective assets, particularly its illiquid strategies, performed well; the Ruffer Illiquid Strategies Fund 2015, for example, appreciated by 30% over the last quarter of 2018. It is worth noting that these defensive assets were put it in place to protect its shareholders against real, consequential, falls in the market - not to shield them from every bump in the road. Ruffer has seen difficult periods before, notably in 2006 when the trust struggled to keep its head above water as the initial cracks appeared before the financial crisis. With that in mind, while concerns about the health of the global economy continue to escalate, the managers believe there is comfort to be taken from the clear impact that these protective assets had on performance in Q4 when markets really began to tumble.

  • 16 Jan 19
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ICG Enterprise Trust

ICG Enterprise Trust - Overview

Market volatility, concerns around a trade war and worries over a slowing global economy have led to falls in markets during the latter half of 2018. Market sentiment has clearly changed since the summer. In the world of investment trusts this has led to discounts widening. The listed private equity sector has shared in this, but nowhere has this de-rating been more heavily felt than in the fund of fund sub-sector. Discounts have widened considerably this year, but most especially from the position in May 2018. As the graph below shows, the average discount for the five fund of fund private equity trusts has widened by 9% since May. In the case of ICG Enterprise, the discount has widened from 9% in May 2018 to 21% at the end of December 2018 – yet the portfolio continues to perform and fundamentals of the drivers of ICG Enterprise’s returns remain unchanged. With an approach that has produced strong returns through the cycle, we take a closer look at the trust which moved to appoint ICG as manager three years ago. The investment team believe the trust’s strategy provides shareholders with the “best of both worlds” in terms of having a relatively concentrated investment portfolio, with the diversification benefits of a third-party funds portfolio. The managers’ choice of ICG as a home nearly three years ago is relevant at the current stage in the economic cycle. ICG’s flagship funds are aiming for private equity type returns, but with lower volatility. The team aims to increase what they term “high conviction” investments - co-investments and ICG originated deals - where they (or the wider ICG investment team) has made the investment decision to invest in the underlying company. Indeed, the team have increased their deployment rate into co-investments to c. 2.5% of NAV per investment (versus c.1% whilst at Graphite). We expect the top 30 holdings to increase to perhaps 55-60% of NAV (currently 47%). Over the past 12 months 39% of all capital deployed has been invested in and alongside ICG as the team take advantage of the proprietary deal flow the trust now benefits from. Given the backdrop of the past year or so, the team believe that a highly selective approach is key and remain cautious. As such, and across the portfolio and the recent investments, three themes dominate. The team have been investing in companies which in their view exhibit defensive growth (recurring revenue, quality earnings, barriers to entry), structural downside protection (including investing in the debt and equity of deals), and relative value (where deal dynamics has facilitated investment at very attractive valuations).

  • 16 Jan 19
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BH Global

BH Global - Overview

BH Global is a feeder into the Brevan Howard Multi-Strategy Master Fund. The MultiStrategy Master Fund is a macro hedge fund, and aims to deliver strong risk-adjusted NAV returns in all market conditions. It aims to achieve this by gaining exposure to the range of trading strategies offered by Brevan Howard across multiple asset classes. Allocations to these different strategies, traders and asset classes are managed by Brevan Howard’s investment committee. BH Global is differentiated to sister fund BH Macro, in that it has a potentially wider mandate and has historically had a more balanced portfolio with lower volatility and less concentrated exposure. BH Global accesses trades through a variety of means, but mainly though investing in BH’s range of offshore hedge funds. The BH Master Fund (of which BH Macro is a direct feeder) is now once again the largest allocation within the portfolio at 46% of NAV. The Direct Investment Portfolio (DIP) currently consists of allocations to six traders, and represents 45% of assets. The DIP was one of the key drivers of returns during 2017, which was a more difficult time for the BH Master Fund. The current portfolio represents the shifting opportunity set and the investment committee’s expectations of the potential returns on offer. As market conditions change then the exposures will change - at times being more similar to BH Macro, and at times having very different biases. Currently, the majority of exposure (as is the case with BH Macro) is to “Macro” and “Rates”, but the performance in 2017, where BH Global had c. 60% of NAV invested in the DIP, illustrates how the two companies’ underlying exposures can differ at times. Whatever their specific trading style or area of focus, Brevan Howard’s traders try to exploit pricing anomalies, and to provide investors with asymmetric pay-off profiles over defined periods in the future. These trades are typically leveraged (using margin), and might typically generate proportionately high returns if the trade works out, but should it not, then the maximum loss might be the cost of putting the trade on. The markets that the traders have exposure to, as well as the way they construct trades, means that the fund has demonstrated low correlation to equities and bonds. The most recent example of this was the “European stress” trade which BH Global had exposure to leading into May 2018, which had minimal downside, but demonstrated huge upside and the NAV rose by 5.4% in the month. This marked a welcome return to form for the managers. Looking at monthly data since inception, it is rare to see a month in which the NAV falls by more than 2%, which reflects the fact that the risk management team tend to dial down traders’ risk exposure after significant falls from a peak. Brevan Howard emphasises that its team aims to control the risk they are taking in terms of actual losses incurred, and not volatility or VAR which they view as backward looking and therefore less helpful. Overall the managers believe risk is defined as permanent loss of capital which forms the backbone of their approach. Since inception, the only negative year for BH Global was in 2015, which in our view illustrates Brevan Howard’s strong risk controls at work. The solid showing in 2018, with a return of 5.4% in the GBP share class, is perhaps made all the more noteworthy for the corresponding negative returns delivered by equities. In a rising interest rate environment, it appears that global multi-asset macro funds have been struggling. The performance differential opening up during 2018 between BH Global and Standard Life GARS is illustrative. With the strong performance in 2018, BH Global has seen the discount narrow, and at the time of writing, the shares trade on a narrow discount to NAV of c. 3%. The board has stated that whilst it hasn’t bought shares back since June 2018, it remains alert to discount volatility.

  • 16 Jan 19
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Mid Wynd International Investment Trust

Mid Wynd International - Overview

Mid Wynd (MWY) aims to grow real wealth through investing in high-quality stocks across the world. The managers, Simon Edelsten, Alex Illingworth and Rosanna Burcheri, take a long-term perspective, looking to invest in companies which have relatively low business risk (and low leverage), high barriers to entry and strong secular growth - regardless of the short-term economic environment. They aim to find these companies by first identifying themes which the managers believe have long-term tailwinds. The team then draw up a roadmap for each theme establishing how it is expected to develop over the next few years, and only then research which companies exposed to that theme have the best investment characteristics. The portfolio will normally consist of 8-10 themes, each having an upper limit of 25% of NAV. The themes are compared across a correlation matrix, helping to ensure that the trust is not over exposed to a particular trend. At the time of writing, healthcare costs (17.6%), online services (16.0%) and automation (14.9%) make up the largest themes. The objective of the trust is to outperform the MSCI AC World Index, and the managers believe this is most easily accomplished by profiting during rising markets, and then protecting capital when markets fall. The aim of protecting capital is a key and consistent aspect of the trust and, according to the managers, since inception the trust has outperformed more in falling markets than in rising markets (67% vs 51%). Since inception the team have a downside capture ratio of 85.5%, and upside capture of 108.6% (source: Artemis, inception to end November 2018). Since May 2014, the trust has delivered a NAV return of 77.1%, compared to a return of 61.3% and 70% respectively from the MSCI AC World index and the IT Global sector average. As such, the trust sits in the top quartile of the AIC Global peer group for generating alpha (2.63) over that time, and has a Sharpe ratio in the top three of the peer group, a testament to the success of the teams’ risk management processes. Over the past few years the trust has consistently traded at a premium and this became even more pronounced towards the end of 2018, as investors looked increasingly for a ‘safe haven’. In December, the trust reached a premium as high as 7%, but this has since narrowed and currently the trust is trading on a premium of 3.2%.

  • 15 Jan 19
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