Kepler | Trust Intelligence

Martin Currie Global Portfolio Trust

Martin Currie Global Portfolio Trust (MNP), managed by Zehrid Osmani, offers investors a concentrated portfolio of global equities with a high active share of c. 97%, differentiating it from both its peers and its benchmark. MNP’s impressive track record is in large part thanks to Zehrid’s successful stock selection and three-part investment process, outlined in detail in the Portfolio section. Zehrid’s forward-looking approach to analysis has led him to create a robust portfolio which has been partly insulated from the impacts of COVID-19, having evaluated for just such a worst-case scenario prior to the outbreak. The team also make exhaustive use of proprietary ESG analysis, and MNP ranks in the top 2% for sustainability amongst over 6,700 global equity peers. Since taking over sole management of MNP in October 2018, Zehrid has generated an NAV total return of 42%, exceeding the MSCI ACWI benchmark’s 22.9% return over the same period. It is important to note that this performance was achieved with a substantial underweight to the large-cap technology stocks which have driven a significant proportion of global equity markets’ performance over the last two years. Despite its commendable performance, MNP has traded closely to NAV, helped by the board’s proactive policy of discount control, and currently the trust trades on a premium of 3.1%. Recently MNP has enacted a new gearing policy to better take advantage of the trust structure, whereby it has implemented £30m in gearing, equivalent to 9% of the current NAV. Alongside this the board has seen fit to implement a new charges structure, with the intention of simplifying the overall cost of the strategy.

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Aberdeen Japan Investment Trust

Aberdeen Japan Investment Trust (AJIT) is a Japanese equity strategy dedicated to investing in what the managers believe are the highest-quality companies in Japan. The team, based predominantly in Tokyo, implement a detailed investment process which exhaustively analyses a company’s overall quality, both in terms of conventional quantitative factors (such as having a high Return on Invested Capital (ROIC)) but also in terms of the quality of management. We outline this further in the Portfolio section. We believe that one of the important features of AJIT is its allocation to small- and mid-cap companies. A truly all-cap mandate, AJIT has an overweight to small and mid-caps compared to its benchmark, the TOPIX Index. Governance reform also plays a large role in AJIT’s investment process. The team actively engage with many of their holdings to promote policies conducive to better governance and shareholder returns, as we detail in the ESG section. AJIT has performed remarkably well over 2020 in our view, with a one-year NAV return of 22% outperforming its benchmark’s 9.2% return and its peer group’s 19.8%. Returns have been helped by the strategy of buying high-quality companies, which allowed AJIT to weather the COVID-19 crisis better than the broader Japanese equity market, as shown by AJIT’s lower drawdown during the crash. AJIT has recently adopted a new dividend policy, whereby it now pays out its dividend through a combination of revenue and capital, leading to a 278% increase in its dividend in the last (2020) financial year. It currently yields 2% on a historical basis. Like much of the Japanese equity peer group, AJIT trades at a discount, currently c. 7.9%.

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UKW IHR NESF USF TRIG

In December we highlighted that ESG was the surprise ‘thematic winner’ of 2020. Perhaps not in performance terms (can anything beat the FAANGs?), but almost overnight it has become a standard part of fund presentations. Asset flows into ESG funds also back up our contention, with huge growth in assets seen by ESG-related funds during 2020. However, as we discussed in December, within the equity trust universe there are relatively few equity trusts that offer ‘pure’ exposure to the theme. And of those that do, many stand at chunky premia. The new US presidency is focussing on climate change as one of its four key pillars. Larry Fink, CEO of BlackRock, published his ‘Dear CEO’ letter in January, which for the second year in a row ‘majored on’ (as they say on that side of the pond) climate change – we touch on elements of his letter below. Suffice to say, the CEO of the world’s biggest asset manager thinks that aside from posing a big risk to traditional portfolios, “the climate transition presents a historic investment opportunity”. It would appear that increasingly everyone else thinks so too. We examine the potential and pitfalls of being greenwashed, and look for the best opportunities to avoid it.

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NextEnergy Renewables (NREN) is a proposed investment company to be listed on the London Stock Exchange which will invest globally across the renewables energy space, investing in private funds and co-investments in order to offer a higher return potential than the existing listed renewables funds, as we discuss in the performance section. NREN will target a 9-11% NAV total return, from a portfolio split roughly equally between private funds run by the manager NextEnergy Capital, private funds run by third parties and co-investments with those third parties in attractive assets or portfolios. The manager already has a seed portfolio of ten funds lined up, while co-investments are expected to follow as opportunities arise. The targeted return includes a quarterly dividend worth 5.5p which is expected to grow each year. The dividend for the period from launch to December 2021 will be 3p. NEC has a team of 200 professionals whose experience in the sector will be brought to bear on investment selection. While NEC specializes in solar power, NREN will invest in wind power, battery storage and emerging technologies such as hydrogen via third party managers who specialise in these assets. As well as the potentially superior returns, NREN will be investing in early-stage assets, meaning it will be contributing to increase the renewables energy capacity in the global economy, as we discuss in the ESG section. NREN is seeking to raise up to £300m, with a further placing programme enabling the manager to expand the size of the trust further. The intention is to use a revolving credit facility to manage liquidity when making new investments before equity can be raised. The closing date for the offer is Early March and the shares are expected to begin trading shortly after.

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Blackrock World Mining Trust

The past 12 months has seen a significant shift in fortunes for BlackRock World Mining Trust (BRWM), which appears decisively for the better. The team’s long-running investment thesis – of investing in miners which show capital discipline and a willingness to reward shareholders with dividends – is paying off. Commodity prices have remained firm during 2020, and in most cases seeing gains with a background of supply constraints. On the demand side, despite the pandemic induced economic slowdown, global demand for commodities seems rosy. Thanks to several themes identified by the managers, this looks set to continue for the short to medium term. As we discuss in Portfolio, amongst these are the stimulus-led synchronised global infrastructure spend in the offing. A further boost for BRWM is the apparent focus by governments to use stimulus to accelerate the decarbonisation of economies, which will mean a significant increase in demand for copper and other metals if it transpires. In the team’s view, inflation is also a likely prospect, which historically has been supportive of commodity prices and related equities. Relative to the reference index and broader equity market, BRWM’s Performance during 2020 has been strong. BRWM is a specialist trust which aims to maximise total real returns. However, of ever-increasing interest – especially in an environment where income sources elsewhere are under pressure – is the Dividend component. The trust structure enables illiquid investments including debentures and unlisted royalties which are clearly contributing strongly towards helping BRWM achieve its yield objectives. With a renewed interest in commodity related investments, the Discount has narrowed decisively. Over the past three years, the average discount has been 12.3%, compared to the current premium of 0.8%.

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MIGO MINI BMPG THRG BRSC GPM ASL BRWM

It is often considered axiomatic in investment markets that smaller companies offer greater pricing inefficiencies, and thus greater opportunities to active managers to generate outperformance. In the UK Small Cap space, we have certainly seen suggestions over the long term that this is true, with the Morningstar UK Small Cap sector producing an average NAV return of c. 173.4% over the ten years to 05/02/2021, compared to a return of c. 115.2% from the Numis Small Cap including AIM excluding Investment Companies Index. Yet in more recent months the average active strategy has notably lagged a strong rally in the Numis index, albeit they have produced strong absolute returns themselves. That this has coincided with a strong period of performance in mining companies is, we think, no coincidence. In the current environment, we think this is relevant, and a pattern that is likely to continue to hold. Shareholders in UK small cap trusts should, if anything, be reassured if it does. Below we explain why, and review both the case for mining stocks and UK small caps. Before we go any further, let us clearly set out our stall: we are positive on the relative prospects for UK small cap equities, and for mining equities. We do not believe, by any manner of means, that this is an either/or allocation decision, especially when we look at historic correlations (the Numis index has a ten-year median R2 of 0.34 to BRWM). So, we believe investors are well-advised to consider holding exposure to both asset classes at this time. Nonetheless, investors in UK small cap trusts should accept that a concurrent rally in these assets is likely to prove a headwind to relative returns for actively managed small cap strategies. Conversely to what may be an instinctive reaction to this, we think shareholders should welcome this if a commodity rally does result in it becoming harder for active managers to outperform.

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