One of the things I like most about investment trusts is that they aren’t too many of them. You have plenty of choices, but not so much that paralysis sets in.
There are around 400 investment trusts and that number has stayed at roughly the same level for more than a decade. By way of comparison, Morningstar lists around 2,600 funds and some 10,500 ETFs!
The AIC splits its universe into nearly 60 sectors, making it pretty easy to compare almost any trust to its closest rivals.
The murky world of Flexible Investment
One sector that’s perhaps hardest to analyse, though, is Flexible Investment. It’s one of the newest, weirdest, and least homogeneous corners of the investment trust universe.
But this sector does contain a couple of trusts I already own and a number that always seem to be highly regarded, so I wanted to get a better feel for it.
It’s defined quite simply as funds that “invest in a range of asset types” but it also houses a few trusts that don’t fit neatly elsewhere.
The Flexible sector was first introduced in 2016 when it consisted of ten trusts.
One of the original ten, BACIT, has since morphed into Syncona, the life sciences specialist, and hence it has moved out of the sector.
Another, BlackRock Income Strategies, changed both its name and manager and is now Aberdeen Diversified Income and Growth Trust. Trust veterans may remember its original incarnation when it was called British Assets.
Twelve more trusts have become part of the Flexible sector since 2016. So, it is now 21 strong and one of the largest AIC sectors in terms of pure numbers and total assets.
It boasts four trusts with assets of over £1bn: RIT Capital Partners, Caledonia, Tetragon, and Personal Assets.
Making sense of the sector
To get a better overview, I’ve broken the sector down into a few sub-categories.
These sub-categories are of my devising and they are certainly not perfect descriptions in every single instance.
In each sub-category table, I’ve added roughly how much each trust has invested in equities to give some idea of how much diversification away from plain vanilla stock-market investments it may offer.
To calculate this number, I’ve included listed shares, funds that mostly invest in listed shares, and private equity, so be aware that it’s a pretty loose definition.
As global markets have been on such a tear over the last decade, up some 210% in sterling terms, the performance of many of these funds looks somewhat lacklustre.
But this has to be considered in context, I think. While some adjust their asset mix according to their view of market conditions, most of them are looking to smooth out returns and reduce the level of drawdowns that their shareholders experience.
A better comparison for many of them is arguably something like Vanguard Lifestrategy 60, which is the classic mix of 60% equities and 40% bonds. That’s up 49% over the last five years and some 95% since it was launched in June 2011.
The first grouping includes the three largest funds in the sector and it’s where there is a large family/private shareholding.
In RIT’s case, it’s the Rothschilds, while Caledonia is a vehicle for the Cayzer family’s wealth and the Salomon family are behind Hansa.
Tetragon is not family-owned, but its founders and employees own around a quarter of the shares, so I’ve lumped it in with this group.
|RIT Capital Partners||RCP||1988||3,452||+50%||+127%||70%|
It’s worth highlighting the relatively high equity component behind these funds. This has helped them nudge ahead of the 60/40 portfolio in most cases over the last five years.
There is a wide range of discounts here, with RIT at a 10% premium but Caledonia at a 20% discount, Tetragon at nearly 50% and Hansa at over 30%.
Hansa sticks out like a sore thumb here for other reasons, though. It used to mentioned in the same breath as the like of RIT and Caledonia but has found it tough going this past decade.
The share price of its largest investment, Ocean Wilsons, has suffered this year. Hansa owns 26.5% of Ocean Wilsons, which in turns owns 58.2% on Wilson Sons (a listed Brazilian maritime services firm) along with a raft of other fund investments that Hansa also manages.
The stake in Ocean Wilsons has done well for Hansa in the past and it’s been held by the Salomon family for around 50 years I believe. It still accounts for around a quarter of Hansa’s portfolio.
Over the last 15 years, Hansa’s net assets are up 9.0% a year, but just 7.1% if you strip out Ocean Wilsons. However, for the last five years, it is 4.4% a year in total but 6.1% with Ocean removed.
Hansa hasn’t increased its dividend since 2014 and its discount has more than doubled over the last decade from 15% to over 30% (most other trust discounts have narrowed considerably of course). Ocean Wilsons also trades at a discount to its net asset value. Taking this into account, the look-through discount is some 40%!
Something drastic needs to happen here but with the large family shareholding, I get the feeling it may well limp along for years.
Maybe Ocean Wilsons will have a reversal of fortune but I find it a hard business to analyse and I must confess that I know next to nothing about the prospects for Brazil. So Hansa has to go into the ‘too hard’ pile as far as I am concerned.
Wealth protectors/market timers
Grizzly bears live in this sub-category, with the proportion invested in equities substantially lower than the family offices.
Income & Growth
Personal Assets is the best-known fund here and arguably the most pessimistic of the bunch. Its non-equity exposure consists of 9% gold, 23% cash and 34% in bonds. Data on its website shows it has largely traded at around net asset value or at a small premium since 1995, thanks to its policy of issuing new shares or buying them back.
Famously its investment policy is “to protect and increase (in that order) the value of shareholders’ funds per share over the long term”.
Since 1990, when it became self-managed, its net asset value return has largely matched the All-Share with Personal Assets up 1,100% to the UK market’s 1,000%.
On rare occasions, it takes a more aggressive stance. In 2009, for example, it had 70% in equities and gearing of 15%. Co-founder Robin Angus retires next year I believe, although Sebastian Lyon has been managing the fund since 2009 after Personal Assets’ other co-founder, Ian Rushbrook, passed away.
Capital Gearing, where Peter Spiller has run the show since 1982, is similar in many ways to Personal Assets. It has a better long-term record — returning 14% a year since 1982 versus 10% for the UK market — but a lot of that outperformance came in the 1980s and Spiller has become increasingly bearish as the years have passed.
Capital Gearing’s financial years run to 5 April, presumably to mimic the tax year here in the UK.
As far as I can see, Capital Gearing has only recorded one single down year in net asset terms since Spiller has been in situ and that was the year to 5 April 2014 when it lost 2.5%.
Another factor to be aware of with Capital Gearing is that it has been issuing shares by the bucketload these past few years. Its share count was just under 3 million in August 2015 when it launched its discount control policy. It’s now 10.5 million and the trust’s ongoing charge figure has come down from 0.96% to 0.7% as a result.
Both Personal Assets and Capital Gearing sailed through the tech bubble and financial crisis largely unaffected.
I’m not a market timer, but if I ever did feel a need to hunker down, these two trusts would seem to be ideal options. They could also be decent ways of increasing my fixed-income exposure.
Ruffer and Seneca, I am less familiar with. Both are much newer, so only have the financial crisis to show their mettle. Ruffer’s shares fell slightly but Seneca took a major hit. However, Ruffer did get a bit of a hard time for its performance in 2018 when its net asset value fell by 5%.
Seneca seems to be most aggressive of this quartet, though, with a new-ish return target of CPI +6%. Peter Elston, who along with Gary Moglione, provides portfolio oversight for Seneca’s multi-manager approach is due to leave at the end of this year.
Trust of trusts
The trusts in this sub-category are all quite small but are often a good source of investment ideas I find, given they mostly invest in other investment trusts.
However, it does always feel a little odd to me to pay an extra layer of charges (0.65% in most cases here plus a performance element) for a group of funds you can buy yourself.
Nick Greenwood (Miton) and Peter Hewitt (BMO) are both often quoted in the press and seem eminently sensible fellows. The Miton approach seems to be a bit more active than BMO’s from what I can tell, tilted more towards exploiting pricing inefficiencies.
New Star is another fund I’ve never really looked at in any great detail. It’s had some horrible periods of performance in the past, in the few years after it launched and in the financial crisis when it stopped paying dividends for five years.
John Duffield, the founder of the ill-fated New Star asset management business, still owns 59% of this trust. Its top investments include Fundsmith and Polar Capital Technology but it has a load of more dubious-looking selections to my untrained eye. New Star’s discount has narrowed a little recently but is still 25%.
Major-manager multi-asset funds
I’ve not got much to add about these. The two JPMorgan funds are very new and the others don’t inspire me. There seems little reason to choose these ahead of LifeStrategy 60 or the likes of Personal Assets/Capital Gearing.
Income & Growth
|JPMorgan Global Core|
Some split-capital offerings exist elsewhere in the world of investment trusts, but I thought I would group these two together.
|JZ Capital Partners||JZCP||2008||679||+40%||+151%||51%|
JZ is a US micro-cap specialist which appears to have come unstuck recently after an ill-advised move into US property. It’s had to postpone its results after saying its property assets most recently valued at $443m might need to be written down by between $50m and $150m.
Its share price fell from 475p to 35op on the day this news was announced — akin to a small-cap profit warning rather than a staid investment trust.
JZ’s discount has varied between 30 and 40% for most of the last decade. It’s 56% right now, but that’s before the asset write-down is confirmed.
Fortunately, JZ’s gearing via its zero dividend preference shares is pretty mild with a net gearing position of 2.5%.
UIL, on the other hand, has gearing of 63% with four classes of zeroes in issues at the moment. So, its recent good performance needs to be seen in that light. It also has a very concentrated portfolio with its top 5 investments making up 70% of its assets.
|CIP Merchant Capital||CIP||2017||48||–||–||50%|
Bailiwick is Channel-Island listed so can be hard to get information on from the usual sources. Its performance record is peculiar with a flattish performance in its first five years, followed by rapid gains since. It’s another concentrated fund with 60% of assets in its top three holdings.
Last and possibly least we come to CIP. Since launch less than two years ago, its net assets are down some 10% and its share price some 40%. About half of its assets are still in cash with the rest spread over seven investments. It’s pursuing a ‘private equity’ approach with typically 5-10 companies that will be held between 1 and 5 years.
I’m not really sure why CIP sits in the Flexible sector; global smaller companies, growth capital, or private equity would seem more sensible homes.
With such a diverse group of trusts, it’s impossible to do them justice in a single article. I’ve perhaps been overly dismissive of a few of them, especially where I suspect they’re unlikely to neatly fit into my own portfolio.
I’m planning to dig a little deeper into the likes of Capital Gearing and Personal Assets, and maybe even Ruffer and Seneca at a later date as well.
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.
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