The Moneywise Investment Trust Awards 2014
Serious money continues to flow into investment trusts, with nearly £110 billion invested in the sector as at the end of January, compared to just over £100 billion this time a year ago.
Overall, investor confidence has changed little over the past 12 months but delve into the sectors and it's a very different story. Emerging markets have fallen from favour big time, having been riding high as the most popular a year ago. Perhaps a victim of proximity, the Asia Pacific sector has suffered a similar fate.
At the other end of the spectrum, it's been a much better year for developed markets after 12 months of strong performance.
Of course, volatility is the nature of investment and just because a sector experiences turbulence one year, there's nothing to stop it picking itself up and dusting itself the following. So investors are advised to hold their nerve and not let quick bouts of disappointment skew their long-term strategy.
That said, a bit of help with navigating what can sometimes be choppy waters never goes amiss.
And we hope this year's Moneywise Investment Trust Award winners, which have proved their staying power as well as displaying strong performance, will do the trick.
INVESTMENT TRUST GROUP OF THE YEAR
Henderson takes this year's crown for investment trust group of the year - winning the award for the first time.
"Henderson has provided exceptional returns within UK and European equities, where it manages a wide range of mandates," explains judge Gavin Haynes, managing director of Whitechurch Securities. "In particular, James Henderson's trusts have been extremely impressive."
He is of the opinion that the group has a strong commitment to the investment trust sector and offers a comprehensive range of trusts across a wide range of sectors that merit consideration.
Fellow judge Patrick Connolly shares his enthusiasm. "Henderson continues to perform well. It remains committed to the investment trust market, with some of its best managers running money for both Henderson and non-Henderson branded trusts. It has the size and strength to be successful in a wide range of different investment regions, but has produced particularly strong results in the UK and Europe."
WINNER: HENDERSON OPPORTUNITIES
HIGHLY COMMENDED: SCHRODER UK MID CAP
The manager of our winning trust, Henderson Opportunities, is a big part of its success, with the judges heaping praise upon him. Jackie Beard, director of closed-end fund research at Morningstar UK, is a particular fan. "James Henderson has done a great job at this fund," she says.
He's been helped, too, by the fund's size and diversity, she adds. "It has allowed him to be very nimble and invest right down the market cap scale but it also shows the benefit of the closed-end structure and a fixed pool of assets."
Looking into the nuts and bolts of the trust, Haynes adds: "James Henderson invests this trust with a focus on recovery situations and ‘special opportunities' within the UK stockmarket. This is a good choice for true active management in UK equities and performance has been impressive over short and longer time periods.The trust produced more than double the return of the UK stockmarket in 2013."
Patrick Connolly adds: "It has left much of the competition standing in the past two years by investing in mid-cap companies benefiting from the improving economic outlook in the UK."
Just behind the Henderson trust and taking the highly commended title is last year's winner, Schroder UK Mid Cap. Explaining why, Connolly says: "This trust has benefited hugely from the outperformance of mid-cap stocks in the past couple of years. In Andy Brough and Rosemary Banyard it has managers who have shown they are able to add significant value in rising markets."
Haynes adds: "This fund is focused on companies operating within the FTSE Mid 250 Index and has outperformed this benchmark and exploited the strong performance of this area of the market in 2013."
UK GROWTH & INCOME
WINNER: FINSBURY GROWTH & INCOME
HIGHLY COMMENDED: LOWLAND
Winning the award for the fourth year running is Finsbury Growth & Income. "This investment trust, managed by Nick Train, posted another strong return in 2013, to extend its impressive track record," says Haynes.
"Train has a distinctive investment process whereby he builds a concentrated portfolio of UK companies that are viewed as global leading franchises and are held for the long term," he explains.
Its top 10 holdings consist mostly of consumer goods manufacturers, including Diageo and Unilever. Haynes says Train is a proven stockpicker and Finsbury Growth & Income "is an attractive proposition for investors seeking capital growth and income from UK equities".
Fellow judge Monica Tepes, investment companies analyst at Cantor Fitzgerald, likes its "high-conviction, low-turnover investment style, focusing on brands and growing markets".
Jackie Beard agrees: "Nick Train is a solid, dependable investor who is undeterred by noise and the need to take action just for the sake of it. While 2013 was a definite sweet-spot for his style, his low turnover approach and thorough analysis has stood him and his investors in excellent stead over the long term."
Connolly sees it going from strength to strength: "This trust has outperformed significantly in the past and there is no reason to think that won't remain the case in the future."
Coming in a close second within the UK Growth & Income category is Lowland, which was also highly commended in 2011 and the winner in 2006 and 2007.
Connolly says: "This is another trust that is managed by highly regarded manager James Henderson. While sitting in the equity income sector, its primary goal is capital growth and this has been achieved superbly in recent years with a focus on fast-growing mid-cap companies benefiting from the improving economic environment in the UK."
UK SMALLER COMPANIES
WINNER: BLACKROCK SMALLER COMPANIES
HIGHLY COMMENDED: STRATEGIC EQUITY CAPITAL
BlackRock Smaller Companies takes the crown after being named runner-up for the past three years."Mike Prentis has delivered solid long-term returns at this fund, through running a well- diversified portfolio," says Beard. "His process is detailed and thorough and meeting management is considered key," she adds.
Haynes says the manager extended the excellent record of outperformance for this trust in 2013. "Prentis focuses on companies that can demonstrate sustainable growth, and the majority of the portfolio is in core, long-term holdings."
The majority of the portfolio is invested in industrials, consumer services and financial companies.The returns have been impressive over one, three and five years although the heavy exposure to Alternative Investment Market (Aim) stocks can result in this being a volatile investment, says Haynes. "Still, the manager has a strong track record and a solid investment process that offers exciting growth opportunities."
Tepes adds that Prentis's "pragmatic stockpicking with a focus on growth and quality" is key to the trust's success.
However, Connolly sounds a word of caution: "This is a strong-performing diversified fund, which has benefited from the upturn in the UK economy. It tends to outperform when markets are rising, as has been the case in the past couple of years, but it can do worse than many other funds when markets fall."
The runner-up in this category was Strategic Equity Capital, run by GVO Investment Management. "This trust is building an exceptional track record by investing in very small companies and then working with management teams to grow shareholder value," explains Connolly.
"The managers construct both an entry and exit strategy for their investments, aiming to leave when they believe shareholder value has been realised," he adds.
WINNER: JUPITER EUROPEAN OPPORTUNITIES
HIGHLY COMMENDED: JPMORGAN EUROPEAN INCOME
Jupiter European Opportunities' commitment to quality and the expertise of its manager singled it out as the winner of the Europe category – for the fourth year running. Haynes says: "2013 was another good year for this trust. Alexander Darwall has proved to be an exceptional stockpicker, investing in a focused portfolio of around 40 stocks. He favours high-quality businesses and invests based on the belief that Europe plays host to global leading companies."
As such, returns for shareholders in this trust have been very strong – more than 200% over the past five years – and Haynes says he would recommend it for anyone looking for core European exposure.
Tepes adds investments are also made in the UK and points out that Darwall is significantly invested in the trust himself – which is uncommon for the sector, she says, and something investors can take confidence from.
Beard explains continuity has also played a part in the trust's success. "Darwall has delivered excellent risk- adjusted returns since the fund's launch and this is one of only a few funds where the same manager has been in charge throughout the fund's life," she explains.
Connolly adds: "It's a genuine stock- picking trust, which is so popular with investors that it's the only one in the sector with its price standing at a premium."
Highly commended in the category was JPMorgan European Income. "The trust benefited from strong investor demand for income-producing shares in 2013 as well as the improved economic outlook on the Continent and produced a total return for 30%," says Haynes.
Beard praised its managers' focus on quality and valuations which, while put to the test following the financial crisis, they have stayed true to and their approach has delivered, she says.
WINNER: JPMORGAN AMERICAN
HIGHLY COMMENDED: NORTH AMERICAN INCOME TRUST
The winning trust here is JPMorgan American – another consistent performer, winning the category every year for the past five years.
It's managed out of the group's New York office and headed up by Garrett Fish. He manages "a portfolio that provides highly diversified exposure of large-, mid-cap and small US stocks," says Haynes.
A "solid choice for actively managed US exposure", he adds, explaining that the trust "stood out against its peers in 2013 and has achieved the difficult task of outperforming the efficient S&P 500 benchmark over the long term".
Connolly agrees, adding: "It is notoriously difficult for active managers to outperform in the US, which is why more people are looking at tracker funds in this region."
However, he says, JPMorgan is a consistent performer and this trust provides a good degree of diversification, although there are also periods when it will underperform."
Commenting on the runner-up, North American Income Trust – which has also won this category for the past five years – Connolly says it aims to combine capital growth with an attractive level of income by investing in good quality larger US companies. However, "while the income level is good, currently at 3.8%, and it performs well compared with other active US funds, it still struggles to outperform the US index," he explains.
ASIA PACIFIC – EXCLUDING JAPAN
WINNER: SCOTTISH ORIENTAL SMALLER COMPANIES
HIGHLY COMMENDED: ABERDEEN ASIAN SMALLER COMPANIES
Taking first place in the category this year (after being runner-up last year) is a trust run by First State – "one of the best Asian and emerging markets teams", according to Patrick Connolly. Headed by Angus Tulloch, "one of the premier managers in the region", he adds, "it invests in good quality smaller companies and has outperformed significantly in both the short and long term."
Haynes says the Scottish Oriental Smaller Companies fund has consistently beaten its benchmark over the short and long term and its absolute returns have remained "compelling".
"The fund produced a positive return despite the difficult backdrop in 2013, benefiting from the policy of investing in high-quality businesses.This is a solid trust for well-managed exposure to smaller companies in Asia," he says.
However, Beard is keen to point out that a lot of the trust's success over the past five years was brought about by former lead manager Susie Rippingall, who retired in 2013. "Susie was a driving force behind the fund's impressive risk-adjusted returns," she says.
The Aberdeen Asian Smaller Companies trust was highly commended by the judges, after winning the category last year. "Alongside First State, Aberdeen is just about the best investment manager in Asia and the Emerging Markets.The investment team produces excellent long-term performance and while this trust has been off the boil in recent months, as lower-quality companies have rallied, you can expect it to pick again going forwards."
Beard credits the team's steadfastness: "We like the fact they haven't been deterred from their process just because of one poor year and they have shown their ability to outperform on a long-term view."
Haynes says manager Hugh Young looks for companies that can offer a margin of safety, operate in an area that provides good long-term growth prospects, and have sound management teams and robust balance sheets.
WINNER: SCOTTISH MORTGAGE
HIGHLY COMMENDED: LAW DEBENTURE CORPORATION
Scottish Mortgage is the winner of the Global Growth category for the second year in a row.The trust returned more than 30% to investors in 2013, says Haynes. Its highly regarded manager James Anderson focuses on "long-term themes and is very much focused on exploiting the shift of economic power towards emerging markets", he adds, "which has proven to be a successful philosophy over the short and long term".
Connolly believes the trust is "an excellent core equity holding", which combines an internationally diversified portfolio, a strong management team and good performance. "It is ideal to be used as a long-term pension fund or for children's savings plans," he says.
The runner-up prize in the category went to Law Debenture Corporation which, like the winner, returned more than 30% in 2013.
"Under James Henderson the performance of this trust has once again been impressive in 2013 (returning over 30%)," says Haynes.
It differs in approach to the winner, however, in that rather than focus on emerging markets, its manager favours the domestic market and the trust has more than 80% of its portfolio in UK shares.
GLOBAL EMERGING MARKETS
WINNER: UTILICO EMERGING MARKETS
HIGHLY COMMENDED: GENESIS EMERGING MARKETS
Taking first place in the Global Emerging Markets category is Utilico Emerging Markets. "This is one of the most secure emerging markets trusts, if there is such a thing," explains Connolly. "It invests mostly in infrastructure and utility companies, which can potentially provide stable returns in all economic environments," he adds.
Its performance has been impressive in 2013, says Haynes, in a difficult climate for emerging market-focused investment and the trust has produced a return of more than 100% over five years.
Tepes adds it is the most defensive portfolio amongst its peers and has preserved capital better in periods of market stress. This, she says, makes it a good investment for those looking for emerging markets returns with lower volatility and higher yield.
The Genesis Emerging Markets fund was highly commended by the judges. "This trust proved resilient during a difficult year for emerging markets to maintain its very strong long-term track record. Its long-term growth has been generated from a specialist and highly experienced team", explained Haynes. And its investment style focused on quality companies was a big help, says Tepes.
This year the awards looked at eight sectors: UK Growth, UK Growth and Income, UK Smaller Companies, Global Growth, Global Emerging Markets, Europe, Asia Pacific Ex Japan and North America.
For each sector, Morningstar provided us with performance data over one, three and five years (up to 31/12/13).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 four 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 two.
Jackie Beard, director of closed-end fund research at Morningstar UK
Patrick Connolly, chartered financial planner at Chase de Vere
Gavin Haynes, managing director of Whitechurch Securities
Monica Tepes, investment companies analyst at Cantor Fitzgerald
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
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%.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
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.
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.
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.