The Moneywise Investment Trust Awards 2013
It has been a good year for investment trusts so far. The sector has just passed the £100 billion milestone as more savers plump to put their cash in investment trusts. In addition, new regulations introduced in January have stopped investment fund managers paying a commission to advisers selling their products.
This will level the playing field investment trusts share with unit trusts and, hopefully, bring them out of the shadows.
Investment trusts could be a sensible option, whether you are trying to generate income from your investments or save for the future. However, while the choice isn't as wide as it is in the unit trust sector, it can still be hard for novice investors to make the right decision.
To help you narrow down the options, the Moneywise Investment Trust Awards reveal the best trusts across eight of the most popular sectors.
INVESTMENT TRUST GROUP OF THE YEAR
This year, the award for investment trust group of the year goes to Aberdeen, knocking JPMorgan off the top after three consecutive years.
Commenting on the winner, Moore says: "It has a wide range of investment companies and is committed to the investment trust sector, despite the overwhelming size of its unit trust range. Aberdeen brings dynamism and originality – it is now bringing directors and the chairman to meet investors, which is unfortunately rare in the sector."
Cockerill adds: "Aberdeen has had a good year with many of its trusts, demonstrating excellent performance. It also offers a great choice of trusts both regionally and by strategy – some are specialist, some are mainstream. Its website is informative and easy to navigate, which is an enormous help for investors when selecting trusts."
WINNER: SCOTTISH MORTGAGE
HIGHLY COMMENDED: LINDSELL TRAIN
Global growth trusts can be a sensible choice as a first foray into international investment. The sector includes some large and long-established trusts. This year's winner, the Scottish Mortgage Trust, run by Baillie Gifford, is one of the latter.
"With a history dating back to 1909, this is one of the longest-established investment trusts, and it benefits from exceptionally low charges, partly as a result of economies of scale from its large size," says Simon Moore, judge and senior research analyst at Bestinvest, but he warns it's not for cautious investors.
He adds: "James Anderson has added value since taking over the trust in 2000, but the trust typically has a high weighting in riskier areas such as technology and emerging markets. As a result, performance can be volatile – the fund underperformed substantially during the 2008 banking crisis."
The sector includes a number of more specialised trusts that may not be as diversified as investors might expect. This group includes last year's winner, Lindsell Train, which this year takes the runner-up position.
Gavin Haynes, judge and managing director of Whitechurch Securities, says: "2012 was a solid year for this focused global stockpicking trust.This is a best ideas portfolio with, typically, less than 20 holdings from across global equity markets."
Its largest holding (16.8%) is Lindsell Train (its management company), as well as its own global and Japanese equity funds. Other significant holdings include drinks brands AG Barr, Diageo and Heineken, as well as Nintendo, eBay and Unilever.
UK GROWTH AND INCOME
WINNER: FINSBURY GROWTH AND INCOME
HIGHLY COMMENDED: TEMPLE BAR AND PERPETUAL INCOME AND GROWTH
This is reflected in the fact that this is the only sector in our awards where the average trust trades at a premium, in this case 1.55%, compared with an average discount of -11.11% for UK growth, according to Association of Investment Companies (AIC) data.
The good news for investors is that there is a wealth of quality trusts in this sector, which makes competition in this category intense. The Finsbury Growth and Income Trust has clung on to its crown for the third year running.
"This investment trust, managed by Nick Train, posted a strong return in 2012, extending its impressive track record. Train has a distinctive investment approach whereby he builds a concentrated portfolio of UK companies that are viewed as global leading franchises and held for the long term," says Haynes.
This makes the trust an attractive proposition for the many investors seeking both capital growth and income from UK- based equities. So close was this category that we decided to highly commend two leading trusts: Temple Bar and Perpetual Income and Growth.
Judge Anna Sofat, founder of wealth manager Addidi, says of Temple Bar: "This has been one of my favourite trusts for a while, providing consistency over long periods and a decent income stream." She finds this good all-rounder suitable for most of her clients.
Tim Cockerill, fellow judge and head of collectives research at Rowan Dartington, sings the praises of Perpetual Income and Growth. He says: "This fund has been a very consistent performer and is managed without reference to the benchmark, allowing manager Mark Barnett freedom to follow his convictions."
WINNER: SCHRODER UK MID CAP
HIGHLY COMMENDED: MERCANTILE (JPMorgan)
The UK growth sector provides access to actively managed UK equity funds.The best performers over the past year have been those that have been prepared to invest beyond the FTSE 100. Both mid- and small-cap investments have provided investors with exceptional returns.
This has certainly been the case for our winner, the Schroder UK Mid Cap trust, which increased its net asset value (NAV) last year by almost 32%, according to Morningstar data.
Haynes says: "This fund is focused on companies operating in the FTSE Mid 250. Under Rosemary Banyard, the trust has outperformed this benchmark and exploited the strong performance of the market in 2012." Cockerill adds that it is Banyard's expertise and the quality of her team that sets this trust apart from its peers.
"While the detailed fundamental assessment of a company is standard fare these days, the application and understanding of this information is not so easy and this is where experience counts."
The runner-up in this category is Mercantile investment trust, which, with a current value of £1.5 billion, is one of the biggest trusts in the UK and a popular core holding among advisers. Moore says: "This is a large actively managed fund with a well-diversified portfolio that favours medium- and small-cap companies."
Cockerill adds: "Diversification through 150 stocks will at times be a drag on performance but it's also a benefit in difficult markets."
UK SMALLER COMPANIES
WINNER: STANDARD LIFE UK SMALLER COMPANIES TRUST
HIGHLY COMMENDED: BLACKROCK SMALLER COMPANIES
"Smaller companies returned to favour with investors in 2012," notes Haynes, and rewarded those investors prepared to take a risk with their cash with exceptional returns. Our winner in this category for the seventh consecutive year is Standard Life Smaller Companies.
Although it wasn't one of the top performers over the last 12 months, over five years it has returned an impressive 90.79% and is the best- performing fund over this time period.
Cockerill says: "This has been one of the most consistently successful smaller companies trusts since Harry Nimmo took over its management more than 10 years ago. It has an inherently conservative nature, focused on quality with a long- term outlook."
Moore adds: "The fund has a growth style bias that may lead it to underperform during recovery or value-led rallies, however, we feel this is a core fund for small-cap exposure."
For the third year running, the highly commended accolade goes to BlackRock Smaller Companies. Haynes is a fan of the trust, but warns investors need to be prepared for a bumpy ride. "The returns have been impressive over three years, although heavy exposure to AIM (the
Alternative Investment Market) stocks can result in this being a volatile investment. Still, the manager has a strong track record and a solid investment process that offers exciting growth opportunities."
WINNER: JUPITER EUROPEAN OPPORTUNITIES TRUST
HIGHLY COMMENDED: HENDERSON EURO TRUST
Despite all the political and economic drama being played out across continental Europe, the region has rewarded investors well over 2012 – and, reckons Haynes, there are still more gains to come.
"European equities were perhaps the surprise package of 2012, given the economic backdrop on the continent. While European equities rallied strongly over the past 12 months, I still believe there are attractive options," he says.
Leading the way is Jupiter European Opportunities, which has been the winner in this category for the last three years.
"This trust's performance stands head and shoulders above the rest. It's very concentrated and has 70% of its assets in the top 10, so getting stock selection right is very important. Investors are therefore very reliant on Alexander Darwall, who has been the manager since 2000," says Cockerill.
However, investors will be reassured that the manager is himself a major shareholder in the trust. Sofat commends Darwall for his "well-managed risk" and notes the trust has "held up well during the crisis".
For the second year in a row, the runner-up in this category was the Henderson Euro Trust. Haynes describes it as "a solid choice for European equity exposure".The fund has been run by Tim Stevenson for some 20 years and, like the Jupiter trust, has fared well during the economic crisis.
WINNER: JP MORGAN AMERICAN TRUST
HIGHLY COMMENDED: ABERDEEN NORTH AMERICAN INCOME
Despite being the largest and most significant of global stockmarkets, it comes as a surprise that there's only a handful of American investment trusts for investors to choose from. "It's a bit of a quirk we can't explain," says Cockerill. "There's a decent selection in the open-ended universe."
Once again the judges' decision was unanimous, with all four voting for the JPMorgan American Trust. The trust, which receives this award for the fourth year running is run by Garrett Fish from JPMorgan's New York office and is regarded as a good core holding for investors wanting exposure to US equities.
"This trust was the best performer among its peers in 2012 and has achieved the difficult task of outperforming the S&P 500 benchmark over the long term," says Haynes.
Highly commended in this category, also for the fourth year in a row, is Aberdeen's North American Income (formerly Edinburgh US Tracker). "With more and more investors searching for income from equities, this trust provides a good way to gain exposure to dividend-yielding shares in the US stockmarket," says Haynes.
ASIA PACIFIC EX JAPAN
WINNER: ABERDEEN ASIAN SMALLER COMPANIES
HIGHLY COMMENDED: SCOTTISH ORIENTAL SMALLER COMPANIES
"Having struggled in 2011, Asian equities rallied in 2012. For 2013, the prospects are very much aligned to the fortunes of the Chinese economy," says Haynes.
Investing in Asia is always risky, as is investing in smaller companies. Nonetheless, both the winner and the runner-up in this category have consistently been able to bring home the bacon by investing in this niche area.
The winner – Aberdeen's Asian Smaller Companies trust – has been the top-performing trust over each of the time periods we analysed and was the unanimous choice among our judges, each of whom lauded praise on the quality of the fund management.
Haynes says: "While this is a speculative area in which to invest, the diligence in stock selection and experience of manager Hugh Young and team provide exposure to a portfolio of high-quality companies at low valuations."
Moore adds: "The Aberdeen Asian team has one of the strongest track records of investing in the region and Aberdeen has years of experience researching Asian smaller companies." Scottish Oriental Smaller Companies takes the highly commended accolade. Although it hasn't kept pace with Aberdeen's stellar returns, its performance is still impressive.
Cockerill says: "In a region known to carry above-average risks and in an asset class where risks are higher, the cautious approach of First State has continued to perform well. Its investment process is long term and based on investing in high- quality companies."
GLOBAL EMERGING MARKETS
WINNER: JP MORGAN EMERGING MARKETS
HIGHLY COMMENDED: TEMPLETON EMERGING MARKETS
After a terrible 2011 – in which the Association of Investment Companies (AIC) sector was down by a whopping 17% – global emerging markets enjoyed a better 2012, rising by 7%. These figures highlight the inherent ups and downs associated with investing in emerging markets.
Nonetheless, Haynes reckons if you're up for a rollercoaster of an adventure it might just be a risk worth taking. "There remain some compelling opportunities in this area for investors who can tolerate the high levels of volatility." This year, the JPMorgan Emerging Markets trust finally took the crown from Templeton Emerging Markets after three consecutive years as the winner.
Commenting on the JPMorgan trust, Haynes says: "This trust has an excellent long-term absolute and relative track record and performed well in 2012. It is an excellent way to get a well- diversified, well-managed exposure to emerging markets."
Sofat adds: "It's well rated with good exposure to the Far East – roughly 50% – and we find it suitable for most clients comfortable with investments in emerging markets. Over one and three years,` Templeton's performance has lagged behind JPMorgan's. However, our judges are still big fans of its manager, Dr Mark Mobius.
Haynes says: "His long-term track record with the investment trust is one of sound outperformance. Mobius has more than 30 years' experience of emerging markets."
Interestingly, Moore also points out the trust has beaten its unit trust equivalent's performance. "This investment trust has performed significantly better than its open-ended sibling, showing the benefit of investing in this asset class using a closed-ended structure."
For each sector, Morningstar provided us with performance data over one, three and five years (up to 31 December 2012). Trusts were ranked on NAV performance with income reinvested. We aggregated performance over each period to calculate the top trusts in each sector.
Morningstar's Sharpe Ratios enabled us to remove any trusts that took a disproportionate risk. This helped us create shortlists of the top five performing trusts (the shortlist for North America only comprised three trusts as it is a smaller sector).
These shortlists were sent to a panel of independent judges who were asked to vote for their top three trusts in each sector, taking into account suitability for Moneywise readers, risk, manager ability, investment strategy, consistency, prospects and pricing in addition to performance.
The shortlist for investment group of the year was based on the number of appearances each group made in the sector shortlists. We then asked the judges to vote for their top three.
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.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
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).
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.
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.
Alternative Investment Market
AIM is the London Stock Exchange’s international market for smaller companies. Since its launch in 1995, 2,200 companies have raised almost £24 billion listing on AIM. The market has a more flexible regulatory system than the main market and can offer tax advantages to investors but its constituents are a riskier investment than bigger companies listed on the main market.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.