Moneywise Investment Trust Awards 2012
For many investment trusts, 2011 was a stressful year. Against the backdrop of the eurozone debt crisis and slowing growth for major emerging sectors, markets delivered a queasy ride for investors, especially through the turbulent summer months; and, overall, there were more investment trust losers than winners.
But what lies ahead for 2012? Given the economic uncertainties that remain in the UK, Europe and globally, it's hardly surprising that the New Year survey of managers from the Association of Investment Companies (AIC) yielded mixed outlooks.
Nonetheless, the AIC reports that more than 70% of managers expect markets to rise over the course of the year, a forecast strengthened by the market rally in January. The strongest performances are forecast from emerging markets and the US.
But while there's no shortage of pundits making predictions about the most attractive sectors to invest in for 2012, it can be difficult to identify the individual trusts that will serve you best over the long term.
The Moneywise Investment Trust Awards aim to point you in the right direction. We have selected the top trusts in eight of the most popular sectors on the basis of the consistency of their performance over one, three and five years. We've also taken into account the expert views of a panel of financial advisers who make active use of investment trusts for their clients. Below are our winners and runners-up in each sector.
WINNER: LINDSELL TRAIN
HIGHLY COMMENDED: RUFFER INVESTMENT TRUST, PERSONAL ASSETS TRUST
This sector is larger than any other investment trust category and includes a wide range of trust styles and approaches.
The winner, Lindsell Train Investment Trust, has shown remarkable consistency of performance over all time periods, hovering in the top five throughout. "This really is a ‘best ideas' portfolio, with typically fewer than 20 holdings from across global equity markets held by managers Nick Train and Michael Lindsell," says Gavin Haynes, managing director of Whitechurch Securities.
"Holding the trust also provides investors with a 25% stake in the underlying Lindsell Train fund management group, aligning the interests of the fund closely with those of the managers' business."
Anna Sofat, managing director of Addidi Wealth, is keen on Lindsell Train's long-term view and focus on ‘exceptional' companies capable of growing the real value of their profits and cashflows over very long periods of time. "The trust's performance speaks for itself, with consistently strong results over three and five years, alongside low volatility for a global equity fund," she adds.
The runner-up slot goes to two trusts: Ruffer Investment Trust and Personal Assets Trust. "Both these trusts are run in an absolute return style where they are focusing on not losing clients' money," says Simon Moore, senior analyst at Bestinvest.
Tim Cockerill, head of collectives research at Rowan Dartington, likes Personal Assets' broad asset base, including large-cap equities, bonds and other asset classes. He says: "Asset allocation is not benchmarked, allowing the freedom to invest wherever the best opportunities lie and to be defensive whenever required."
For Haynes, Ruffer's successful combination of protecting wealth in tough times and exploiting out-of-favour recovery opportunities makes it a good core holding.
UK GROWTH & INCOME
WINNER: FINSBURY GROWTH & INCOME
HIGHLY COMMENDED: EDINBURGH INVESTMENT TRUST
With an attractive income bias, this sector has been one of the most popular over the past year. Investor demand has meant many trusts in this sector trade at a premium – the average discount, as of 8 March, is just -0.6%, compared with, say, the UK growth sector on an average -11.5% discount.
For a second year running, Finsbury Growth & Income, also managed by Lindsell Train, scoops the top slot, albeit by a narrow margin. It is run as a concentrated portfolio of just 26 stocks, managed with low turnover and a longer-term outlook than most.
"Investors are buying the managers, Michael Lindsell and Nick Train. It's a boutique investment management company but they are very focused on what they do, and they do it well," says Cockerill. "The fund's success depends on their ability to find quality businesses that can deliver consistent long-term growth, which is why it requires a long-term approach from investors."
Sofat also picks this trust. As well as its performance record and consistency, she highlights the fact that the discount is actively managed, keeping share price and net asset value (NAV) more or less on a par.
Runner-up Edinburgh Trust is under the respected hand of Invesco Perpetual's Neil Woodford. "It's a focused portfolio of his best ideas, with the top 10 stocks accounting for more than 60% of the fund's total value," says Moore. The fund turned out a positive performance in 2011's tough climate and has outperformed the FTSE All-Share over one, three and five years. Haynes sees it as "an excellent way to gain exposure to blue chip, defensive equity income stocks".
WINNER: KEYSTONE INVESTMENT TRUST
HIGHLY COMMENDED: INVESCO PERPETUAL SELECT UK EQUITY
Invesco Perpetual's UK team, headed by Mark Barnett, runs both the winner and the runner-up in this sector. However, the first-placed trust, Keystone, is well ahead of other contenders, with all the judges placing it top of the shortlist.
Sofat describes the Keystone Trust as "possibly one for the less aggressive investor", with "low volatility, a consistent discount to NAV, decent returns, reasonable charges and solid manager tenure".
Haynes agrees: "Barnett aims to provide absolute returns with low volatility and the portfolio provides good core exposure to defensive blue chip companies." That relatively defensive approach helped it produce positive returns in 2011, when the average UK growth trust lost 12%.
Second-placed, Invesco Perpetual Select UK Equity, like Keystone, is a defensively positioned trust with the stamp of the Invesco Perpetual team on it. As Cockerill observes: "The core of both funds is based in the team's long-term view of the UK economy, which has been bearish for a long time."
Sofat points out that Invesco Perpetual Select UK Equity has produced higher three and five-year returns than Keystone, but at the cost of higher volatility; it's also slightly more expensive. However, she adds: "We like the consistent discount to NAV and its decent yield, paid every six months."
UK SMALLER COMPANIES
WINNER: STANDARD LIFE UK SMALLER COMPANIES TRUST
HIGHLY COMMENDED: BLACKROCK SMALLER COMPANIES
Small companies have been a core holding for growth investors over the past decade but they struggled in 2011, as a result of the combination of the UK's recent sluggish economy and investors' general risk-aversion. Nonetheless, our panel gave a firm thumbs up to
Standard Life UK Smaller Companies, our winner in this category for the sixth year running.
Despite a middling performance that saw the trust's value fall by 13% over 2011, manager Harry Nimmo is widely regarded as outstanding in his field. "He has produced solid three and five-year performance with below-average volatility," says Sofat. As Haynes explains: "Nimmo employs a disciplined investment approach, determined by using the group's in-house quantitative approach with a fundamental research overlay."
He regards the trust as "an excellent choice" for anyone looking for a purely UK-focused smaller companies investment. Moore agrees: "Nimmo's open-ended fund is now closed to new investors, so this is the best way to access this excellent manager." An added bonus is the fact that although it often trades at around NAV, it's currently on a 9% discount, so looks good value.
As an alternative, BlackRock Smaller Companies is the favoured choice for the second year running. "BlackRock has a very experienced and well resourced UK smaller companies team; they also manage the Throgmorton Trust," says Cockerill. "They do perhaps take more risk than some in the sector, and of those shortlisted they have the highest volatility scores, but this is reflected in the fact that they are able to add a lot of value."
WINNER: JPMORGAN AMERICAN TRUST
HIGHLY COMMENDED: MIDDLEFIELD CANADIAN INCOME, EDINBURGH US TRACKER
The US was the only major economy in the world to perform better in the second half of 2011 than in the first half, and it's certainly an area that has been attracting investor interest over recent months. However, there is only a handful of general North American trusts available. The judges were divided but, by a narrow margin, first place goes for a third year to the JPMorgan American Trust, run by Garrett Fish.
"Fish manages a portfolio that provides highly diversified exposure to large, mid-cap and small US stocks, and has achieved the difficult task of outperforming the efficient S&P 500 benchmark over both the long and the short term," says Haynes. "For mainstream US exposure, I believe this is a very good choice."
Second place goes jointly to two very different trusts. The cheap Edinburgh US Tracker makes a good alternative to JPMorgan's offering, says Anna Sofat: "Performance over three and five years is broadly similar but Edinburgh has a highly competitive total expense ratio of 0.68% in its favour."
Edinburgh's tracker ties with a rather unusual specialist trust, Middlefield Canadian Income. It has done very well – returning more than 300% over the three years to the end of 2011 – by investing in income-generating Canadian corporations.
Cockerill warns that the tax status on the underlying corporations has changed, so performance may not be so outstanding looking ahead, but he recommends Middlefield on the grounds of "providing investors with an alternative income option".
WINNER: JUPITER EUROPEAN OPPORTUNITIES TRUST
HIGHLY COMMENDED: HENDERSON EURO TRUST
There are mixed feelings about the wisdom of investing in Europe at present, but the judges all came to the same conclusion: anyone prepared to ride out the likely short-term volatility in order to exploit a potential recovery in European equities would do well with Jupiter European Opportunities, our winner in this sector for a second year running.
This is an aggressively run trust with a concentrated portfolio – the top 10 holdings make up almost 70% of the trust – and quite a bit of gearing to enhance returns. "Its focus is on the ability of businesses to grow, taking into account the macroeconomic environment – an important factor in the trust's success," explains Cockerill.
That aggressive approach has certainly paid off for longer-term investors, according to Haynes: "Manager Alex Darwall has beaten all other European trusts, as well as the benchmark, over three and five years." However, performance has been less outstanding over the past year, and Sofat is slightly nervous about the relatively high gearing.
There was almost unanimous consensus, too, on the runner-up, Henderson Euro Trust, which Sofat recommends as "something a bit more conservative". Manager Tim Stevenson has been at the helm for 16 years and "is only just behind Jupiter's Darwell in his average monthly outperformance score", according to Moore.
"Performance has been solid in recent years and the trust held up well in a difficult 2011," says Haynes.
ASIA PACIFIC EX JAPAN
WINNER: ABERDEEN ASIAN INCOME
HIGHLY COMMENDED: SCHRODER ASIA PACIFIC
Long-term prospects remain attractive but 2011 was a tough year for the Asia Pacific region, with the average trust in this sector down by about 15%. Only the winner, Aberdeen Asian Income, managed to turn in a positive total return during the 12-month period, reflecting the importance of dividend payments in a difficult market.
"Asian income stocks have been performing well and this trust, which is trading at a premium, has been performing well, too," says Cockerill. He highlights its conservative management, focusing on high-quality businesses with sustainable earnings.
Aberdeen is one of the most experienced management groups operating in Asia, with a highly regarded manager in the shape of Hugh Young and "a well-resourced Asian team", adds Haynes. "The trust has produced consistent long-term returns of more than 80% over five years," he says.
Schroder Asia Pacific, in second place, aims for capital growth from a diverse portfolio of shares in companies from developed Asian economies such as Hong Kong, as well as emerging markets in the region.
"We like the broad range of holdings and consistent outperformance of the benchmark index over one, three and five years, and since launch," says Sofat. She adds that the trust has "reasonable volatility for Asia Pacific - close to the IMA sector average for UK equities".
Cockerill is particularly keen on the strong emphasis on fundamental analysis that underpins the selection process in Schroder Asia Pacific: "It's critical when investing in this region to avoid poor stocks," he says.
GLOBAL EMERGING MARKETS
WINNER: TEMPLETON EMERGING MARKETS INVESTMENT TRUST
HIGHLY COMMENDED: JPMORGAN EMERGING MARKETS INVESTMENT TRUST
Emerging markets have also had a difficult year. The sector was down by 17% over 2012, according to AIC data, underlining the fact that these exciting new markets are still a relatively risky option and that investing in them has to be a long-term decision.
Although the relatively small size of the sector means there is a limited number of trusts to pick from, the judges were unanimous in their choice of winner. Top slot for the third year running goes to Templeton Emerging Markets, run since 1989 by the ‘legendary' Dr Mark Mobius and now worth more than £2 billion.
For Cockerill, Templeton's emerging market trust is "the largest, the best-known and still the best". Its strength lies in its extensive resources and local knowledge, which he believes "provides an edge that others don't seem able to match".
But Dr Mark Mobius is very much the star of the show. "He continues to impress us with his market insight and individual stock knowledge. At Bestinvest we give him four stars for consistency of outperformance," says Moore.
Second place, also by unanimous vote, remains with last year's runner-up JPMorgan Emerging Markets – a well-resourced fund managed by a 40-strong team and headed by Austin Forey. Haynes sees it as "an excellent way to get well diversified, well-managed exposure to emerging markets".
Importantly, says Sofat, both trusts show consistency in their discounts to NAV. That suggests share prices are well supported by steady demand from investors, and shareholders are less likely to get any nasty surprises with sudden swings in share price.
MANAGEMENT GROUP OF THE YEAR
For the third year running, JPMorgan scoops the award for management group of the year. As Cockerill emphasises, picking an overall winner is always difficult because of the many different shapes and sizes of investment groups.
However, he says, JPMorgan shapes up in terms of the range of trusts managed (amounting to 24 in total) the resources available to managers and the overall performance of its trusts. The JPMorgan American Trust also topped the poll for the North American sector.
"As a whole, I think JPMorgan is a bedrock of the investment trust world, offering investors an excellent choice, from UK mid cap, mainstream Europe and America, to Brazil, Russia and China," he says. "But perhaps most importantly, I believe investors can trust it, and that performance won't let them down."
Haynes seconds the choice, noting the group's large number of quality investment trusts. JPMorgan "provides investors with leading trusts in both mainstream and esoteric areas", he says. It's also worth mentioning Lindsell Train, which is a very different kind of manager operating on a much smaller scale.
It manages two of this year's winning trusts: Lindsell Train Investment Trust and Finsbury Growth & Income. Sofat applauds the group's "long-term consistency, volatility management, good performance and the fact that it makes clients' interests the same as its own".
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Named after a high value gambling chip, the term is used for an investment seen as solid and whose share price is not volatile. Blue chip companies are normally household names and have consistent records of growth, dividend payments, stable management and substantial assets and are the bedrock of a pension fund’s portfolio.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
Investors who borrow money they use for investment and use the securities they buy as collateral for the loan are said to be “gearing up” the portfolio (in the US, gearing is referred to as “leveraging”) and widely used by investment trusts. The greater the gearing as a proportion of the overall portfolio, the greater the potential for profit or loss. If markets rise in value, the investor can pay back the loan and retain the profit but if markets fall, the investor may not be able to cover the borrowing and interest costs, and will make a loss. Also used to describe the ratio of a company’s borrowing in relation to its market capitalisation and the gearing ratio measures the extent to which a company is funded by debt. A company with high gearing is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are.