Go global to make great returns
The bullish outlook means investors should opt for investment trusts targeting the world’s great companies, says Max King
Plenty of pundits insist that stockmarkets are overvalued and heading for a crash. Setbacks or sudden shocks, as in early 2020, are always possible, but investors have learned to ride these out. What would be much more worrying is a sustained bear market from which it takes years to recover. But how likely is that?
Persistent inflation is likely to push up both interest rates and bond yields, but that is well known and should be discounted in share prices, unless we are heading for the conditions of the 1970s without the build-up of the 1960s. Recovery is turning into strong growth and profits are easily beating forecasts with profit margins, despite inflationary pressure, still rising.
Plenty of markets – the UK, Japan, Latin America – look good value and small caps are attractive relative to blue chips almost everywhere. While the forward price/ earnings (p/e) ratio of the top eight companies in the S&P 500, which account for 30% of the index, is around 40, the rest of the index trades at 18 times earnings.
In the investment-trust sector, there are still more opportunities. Listed private equity funds remain cheap. Small and mid-cap trusts have returned to attractive discounts. Healthcare has been dull all year and there is value in the property sector. Investors are almost spoiled for choice.
But before seeking bargains in specialist funds, investors should check their exposure to the backbone of any portfolio – the global equity trusts with the freedom to invest in great companies across the world. Their managers are far better able to identify long-term bargains than the amateur investor.
Scottish Mortgage Investment Trust (LSE: SMT)
SMT is the £22bn giant of the investment-trust sector, with a five-year return of 380%, the best in the market; the MSCI All Countries World index has returned just 82%. Its high-growth portfolio means that the dividend yield is negligible but annual operating costs of just 0.34% are among the lowest in the market. The top-ten holdings make up 44% of the portfolio and include names such as Moderna, Tesla, Tencent and Alibaba. SMT buys for the long term (at least five years) but this does not mean that it holds forever. It has sold Facebook and Alphabet (Google) and significantly reduced its stake in Amazon.
The thesis is to invest in stocks capable of multiplying in value as these, their research shows, account for all stockmarkets’ long-term gains. Just under a fifth of the portfolio is held in 50 unlisted investments on the basis that companies are now coming to market later in their development, so buying early when they are unlisted is key to capturing returns. SMT should be a core holding for any investor, even though the shares trade at a 2.6% premium to net asset value (NAV).
“Corporate profits are beating forecasts and margins, despite inflationary pressure, are still climbing”
Monks Investment Trust (LSE: MNKS)
Monks is SMT’s £3.3bn sister trust at Baillie Gifford. Its 143% five-year return indicates a more cautious approach than SMT’s. But it is still almost double that of the MSCI All Countries World index (77%). The top-ten holdings account for just 23% of the portfolio and there is no private equity other than 4.3% held in Baillie Gifford’s private equity trust, Schiehallion. As with SMT, the focus is on long-term growth, the dividend yield negligible and the operating costs (0.43% per annum) very low. But the portfolio overlap is limited: only Tesla appears in the top ten of both trusts. This makes MNKS, on a 4% discount to NAV, an excellent alternative to SMT for the cautious or a good additional holding for those seeking diversification.
Mid Wynd International Investment Trust (LSE: MWY)
MWY, with £500m of assets, is one of two growthfocused alternatives to the Baillie Gifford trusts with an almost identical performance record: 113% over five years. The dividend yield is low (sub-1%) and the shares trade at a small premium to NAV. Stock-picking is based on identifying long-term global trends and then finding the high-quality stocks – but “with a disciplined approach to valuation” – that best represents them.
Mid Wynd’s themes vary from “online services” and “digital banking” to “healthcare costs” and “low-carbon”. Even in a well-diversified portfolio (the top-ten account for 23%), this leaves little room for old-economy, value or recovery companies. Annual costs are 0.64% but will come down as the trust expands to Baillie Gifford levels. Mid Wynd is an excellent complement to the Baillie Gifford trusts while remaining growth-focused.
Martin Currie Global Portfolio Trust (LSE: MNP)
The remarkable feature about MNP’s performance is that it has been achieved with such low exposure to the relentlessly outperforming US market: 45% compared with 62% for MWY. European exposure is 41% and
net debt is 6% of the portfolio. This is largely due to low exposure to the top eight companies in the S&P 500, which account for 30% of the index’s total market value. Yet the portfolio is very much growth-orientated, with a significantly higher return on invested capital and revenue growth than the index. The holdings are concentrated, with between 25 and 30 overall, and the top ten accounting for 46% of the total.
While all trusts have a focus on environmental, social and governance (ESG) issues, few have such a comprehensive evaluation process for it as MNP, which believes it to be an essential precondition for healthy long-term returns. The shares of the £400m trust trade at a tiny discount to NAV, yield 1% and have annual costs of 0.65%. It’s an excellent alternative to MWY and also deserves to be a lot larger.
Avoid: F&C Investment Trust (LSE: FCIT)
Launched in 1868, FCIT is the oldest trust in the market. With its £5.7bn portfolio, it is the secondlargest in the sector but has fallen a long way behind SMT. A five-year performance record of 87% is perfectly respectable, but isn’t good enough to justify its shares trading at a discount to NAV of less than 8%. Debt of 11% of assets has clearly helped performance, as has 8% exposure to private equity, but this means that the underlying portfolio’s performance is no better than the index. Management of the 41% of the portfolio invested in the US is sub-contracted out to two American managers, one value, one growth-orientated.
More of the portfolio is sub-contracted out to internal teams covering income, smaller companies and global opportunities. This fact is buried in the report and accounts but is not in the fact sheets; it means that the manager has direct control of less than half of the portfolio. Annual charges are a reasonable 0.59% of net assets. With the top-ten underlying holdings accounting for just 22.4% of the portfolio, it is very – perhaps too – well-diversified. The yield, at 1.4%, is modest. Despite the discount, holders should consider switching into the better-performing trusts above.
Avoid: Alliance Trust (LSE: ATST)
Alliance, with £3.8bn of assets, was once another giant of the sector. But its performance, 84% over five years, is no better than FCIT’s, which is why the shares trade at a 6% discount to NAV, with a yield of 1.4% providing little support. Again, performance has been boosted by borrowing worth 10% of assets.
The manager, Willis Towers Watson, subcontracts direct management out to ten underlying managers with difference styles and specialisations, but the portfolio still looks pretty growth-orientated. Towers Watson’s job is to monitor the managers and change allocations to them if their performance disappoints or a different portfolio tilt is required.
With the top ten underlying holdings accounting for just 22% of the portfolio, it is probably too diversified, and the investment strategy is arguably too inflexible. Even if a manager had picked Tesla in 2019 as a stock to invest in, the holding would have been small and the manager, fearing an embarrassing mistake which would have jeopardised their contract, would probably have sold too soon. Like FCIT, ATST is likely to struggle to beat the MSCI index.
AVI Global Trust (LSE: AGT)
AGT, with £1.2bn of assets, is a value-orientated trust with its portfolio divided into closed-end funds trading at a large discount (37%), undervalued familycontrolled holding companies (33%) and deep value in Japan (30%). AVI seeks to engage with the companies it invests in and actively presses for change to improve investor returns. Its five year return of 86% has been boosted by an excellent 12 months (+28%) and so it is on something of a roll. This makes its 9% discount to NAV a bargain. The shares yield 1.8%.
Three more to consider
The Bankers Investment Trust (LSE: BNKR) ,witha five-year return of 87%, has been held back by a poor 12 months but, with a yield of nearly 2% and a discount to NAV of 2%, is probably worth the benefit of the doubt for now – especially as it is more value-orientated than other trusts in the sector.
The Witan Investment Trust (LSE: WTAN), with £2.3bn of assets, yielding 2.2% and trading on a 7% discount to NAV, has a disappointing five-year record but performance has picked up in the last 12 months. A quarter of the portfolio is allocated to specialist funds and investments, while management of 75% of it is sub-contracted to five global managers and one British manager. RIT Capital Partners (LSE: RCP), with £4.7bn of assets, is not a full equity trust but with 46% of its portfolio in listed global equities and 33% in private equity, it has a good record of limiting declines in poor markets but performing well in good ones. A five-year return of 73% (27% in the last year) is therefore attractive, helped by the shares trading on a 5% discount to NAV.
While these global trusts provide good exposure to world markets, they offer scant access to the UK, Japan, emerging markets, smaller companies and listed private equity – the areas that look most undervalued. Most of the global trusts are also heavily tilted towards growth so any investor seeking contrarian exposure to “value” sectors such as energy and financials will need to top up their portfolio with specialist trusts.
“The Bankers Investment Trust is more valueorientated than the rest of the sector and deserves the benefit of the doubt”