Q1 2021: Great Rotation, Photo by Marek Piwnicki on Unsplash

Q1 2021: Rotation, Rotation, Rotation

After three and a bit years, I’ve slipped back to being level with the global tracker that I use as my main benchmark.

Overall performance to 31 Mar 2021

Portfolio / BenchmarkQ1 2021Annualised
since Jan 2018
My portfolio+1.8%+9.9%
Vanguard FTSE Global All Cap (fund)+4.0%+9.9%
Vanguard LifeStrategy 60 (fund)+0.9%+6.2%
Vanguard UK All-Share Index (fund)+5.7%+0.7%

The usual explanatory note: I use the Vanguard global tracker as my main benchmark. The more conservative LifeStrategy fund (essentially a 60-40 equity/bond portfolio) and UK index tracking fund make me feel a lot better provide additional reference points.

I’ve switched the column for longer-term returns to an annualised measure rather than a total figure. I think that’s more informative now I’m looking at multiple years.

It’s obviously a little disappointing to lose my lead over the global tracker but returns of 10% a year seem pretty decent considering I’m taking a relatively conservative and diversified approach, typically holding between 15 and 20 trusts and funds.

What’s more, this period contained a big slide in the markets at the end of 2018 and the COVID pandemic.

I’d be happy with this level of return over the long term although I’m still aiming to beat the global tracker by 2-3% a year as a stretch target.

Admittedly, that’s looking tricker now. However, it was only a year ago that I was 8% ahead (which was 3.4% annualised).

How quickly things change!

I was a little surprised to see that the FTSE All-Share Equity Investment Instruments index, a useful measure of the investment trust sector, was up just 0.4% in the first quarter of 2021.

I suspect that’s because nearly a fifth of this index is made up of Baillie Gifford trusts, which have nearly all seen their share prices slide in the last couple of months.

Value vs. growth

This topic has been done to death so I won’t dwell on it.

As my portfolio leans more towards factors like growth and quality rather than value, you can probably guess my thoughts on this subject.

The mood certainly shifted with the news of the first vaccine in early November and it’s picked up steam in 2021.

In US dollar terms, the MSCI World Value Index was up 9.8% in the first quarter while Growth rose just 0.3%. That’s a sizeable gap.

Go back a year, though, and the Growth index still leads Value by 58.5% to 49.4%.

And the UK, a value index in all but name, is only marginally ahead of global markets this year and behind the S&P 500 when both are measured in their local currencies.

The UK has also got a long way to go before it reverses its underperformance in 2020, let alone since 2013 when US markets started to outpace pretty much everything else apart from Bitcoin.

My trading

I’ve made a few portfolio changes although some of them were tidying up a collection of small non-ISA positions I had built up over the years.

Although we found out last month that no imminent changes to the capital gains tax regime seem to be planned, I still think it makes sense to use up my annual CGT allowance where possible.

As part of this exercise, I sold a small slice of RIT Capital Partners and reinvested the proceeds into Vanguard’s All-World ETF (VWRL).

I might need to start decumulating my portfolio in the next few years and my VWRL position could be the thing I tap first.

My thinking here is that it would be a market-neutral way of accessing cash. In other words, I don’t need to worry about whether a particular trust or fund is looking over or undervalued should I need to sell something.

Cutting out Caledonia

But the main change I’ve made so far in 2021 was to completely sell out of Caledonia. I had already reduced my position late in 2020 but I’ve dumped the rest in the last few weeks.

The proceeds mostly went into Keystone Positive Change plus a little into my biotech and healthcare basket (Worldwide Healthcare, BB Healthcare, and International Biotechnology).

When I last reviewed Caledonia in early December, I was minded to give it a little more time. But it’s lagged behind in 2021 after having also fallen short in 2020, struggling in two very different market environments.

With concerns over the quality of its private equity skills plus the high level of director pay combined with low performance-fee hurdles, I’ve belatedly decided my money can do better elsewhere.

I still have RIT and three infrastructure trusts in my portfolio as my more defensively minded holdings.

Speaking of which…

Performance by holding

Here’s the usual breakdown by position:

HoldingQ1 20212020
RIT Capital Partners+16.2%-0.4%
Henderson Smaller Companies+11.3%-0.6%
Baronsmead Venture Trust+8.6%+6.2%
BB Healthcare *+8.2%+29.1%
JPMorgan Global Growth & Income+7.7%+15.9%
HG Capital+4.9%+21.6%
Vanguard All-World ETF+4.1%+12.2%
Gresham House Energy Storage+3.4%+10.8%
BlackRock Smaller Companies+2.6%+4.1%
Bluefield Solar Income+1.9%-2.5%
Acorn Income+1.3%-14.1%
Fundsmith Equity+0.9%+18.4%
Worldwide Healthcare *-0.8%+19.9%
Lindsell Train Global-2.7%+11.9%
Smithson-3.0%+31.7%
HICL Infrastructure-4.0%+7.0%
Caledonia #-8.2%-5.9%
International Biotechnology *-9.7%+35.6%
Keystone Positive Change *-15.1%-0.8%

* = bought in 2020, # = sold in Q1 2021

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There’s the usual wide range of returns, even over a period as short as three months.

RIT sits at the top of my tree. It reported a strong rise in its net asset value for December 2020 in early January and has also benefited from the IPO of Coupang (previously a 4% position). Its small discount has become a small premium.

My collection of UK small-cap trusts (I include the Baronsmead VCT in this group) has done well, too. Their net asset value increases have been fairly similar but discount changes have resulted in a wider variation in share price returns.

The aforementioned biotech/healthcare basket has been a mixed bag with biotech companies getting hit in a similar fashion to highly rated growth stocks. So BB Healthcare has held up well while International Biotechnology has suffered the most.

International Biotechnology has also seen its lead manager of several years depart, with his two deputies stepping up to co-manage in his place. One has been with the trust for a long time and the other for a few years, so I think it should be a fairly seamless handover.

Tougher times for quality

My ‘quality stocks’ threesome (Fundsmith, Smithson, and Lindsell Train Global) has largely tread water in recent month. Most trusts and funds that follow this style have seen similar returns so I’m more than happy to stay put.

However, my initial foray into the world of Baillie Gifford with Keystone Positive Change has not got off to a good start.

The switchover from Invesco in mid-February pretty much took place right at the recent peak for growth stocks.

I’ve been buying Keystone in stages both before and after the changeover, taking advantage of the fall in share price to build up my position a little more quickly than originally planned.

The more I listen to Baillie Gifford’s managers across all of its trusts and funds, the more I like what I hear with regards to their long-term approach. I suspect I may look to add another one or two of their trusts over the next couple of years.

They are volatile beasts, as we’ve seen ample evidence of recently, so sensible position sizing is even more important than usual.

In terms of detailed trust reviews on this blog, I have written about all of my holdings at least once now and I plan to cover most of them between every 1 and 2 years going forward.

JPMorgan Global Growth & Income, Acorn Income, and Gresham House Energy Storage are probably the ones I will review again next.

And when Keystone publishes its first set of results as a Baillie Gifford trust, I will probably look at that, too.

Small acorns

Acorn Income is the smallest trust I hold (with less than £100m in assets) and also one of my smallest positions. But it’s an interesting situation right now.

Three-quarters of its portfolio is in UK small caps with the remainder in corporate bonds. However, it’s heavily geared via zero dividend preference shares.

However, it looks like it will have to cut its dividend in 2021 and it faces a regular continuation vote at its next Annual General Meeting, likely to be held in August.

Despite being highly geared, its share price hasn’t seen a particularly strong recovery since late March 2020 and its performance is now well behind many other UK small-cap trusts. So I don’t think it’s a done deal that it will survive.

Its next results are due later this month and it’s sitting on a 15% discount so I’d like to see how things pan out before deciding what to do with my own position.

A vote against continuation could see the trust’s discount narrow if we end up something like a tender offer, roll-over into another vehicle or the full disposal of the portfolio to fund a cash return.

A round-up of sector stats

As for the investment trust sector as a whole, the first quarter saw discounts widen out a little from 1.3% to 3.5%.

The AIC has updated its annual list of dividend heroes and next-generation dividend heroes — those trusts with 20+ year histories and 10-20 year histories of rising dividends respectively.

It also revealed research saying that 85% of equity-based trusts maintained or increased their dividends in 2020, with many of them tapping into their revenue reserves.

I’m still of the view that this could mean lower dividend increases than the wider market going forward, as these revenue reserves are built back up again.

We also heard that the CEO of the AIC, Ian Sayers, is stepping down after a long and successful tenure, most notably helping trusts reclaim over £200m in VAT.

We’ve seen three sizeable new issues: Cordiant Digital Infrastructure (£370m), Digital 9 Infrastructure (£267m), and VH Global Sustainable Energy Opportunities (£243m).

There has been a lot of secondary fundraising as well with Greencoat UK Wind, SDCL Energy Efficiency, Chrysalis, Renewables Infrastructure, and Tritax Eurobox all raising around £200m or more.

In fact, the total of £2.9bn raised in the secondary market in the first quarter could herald a record year, surpassing the £7.4bn raised in 2019.

Finally, we have three new trust sectors — China/Greater China, India, UK Property: Logistics.

Books I’ve been reading

There’s a new investment trust book in town. Written by Andrew McHattie, it’s called Investment Trusts: A Complete Guide.

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I’ve known Andrew for many years and he has been publishing the Investment Trust Newsletter since 1996 so few people have more experience of the sector.

There’s not that much overlap with the recent series of Investment Trust Handbooks edited by Jonathan Davis with Andrew taking a more holistic view of how the sector has developed over the last two and a bit decades.

There are also some good explanations of some of the quirkier aspects of investment trusts, with numerical examples using well-known names to make things clearer.

The year-by-year recap of the sector that closes out the book was particularly revealing as it reminded me just how many trusts have disappeared or rebranded themselves. This keeps the sector healthy but shows you can never take a hands-off approach, especially when you’re investing in more specialised trusts.

I’m also enjoying reading Built On A Lie which is one of two recent books on the rise and fall of Neil Woodford. I’m only about halfway through, but I’d forgotten just how dominant a force Woodford was at first Perpetual and then Invesco Perpetual before setting out to start his own firm.


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6 Replies to “Q1 2021: Rotation, Rotation, Rotation”

  1. Just to add a post-script on Caledonia (and to reinforce just how poor my market timing can be).

    This trust released its 31-Mar NAV update this morning, which has its half-yearly update on a large chunk of its portfolio. And it was a good one with NAV rising from 3,462p at the end of Feb to 3,940p – a 14% uplift.

    The share price reaction has been more muted, up 5.5% at the moment. That implies a massive 27.5% discount, quite a bit higher than its more usual 15-20% range.
    https://investegate.co.uk/caledonia-investmnts–cldn-/rns/unaudited-net-asset-value-and-portfolio-update/202104090901239684U/

  2. The global tracker is a fearsome opponent, and of course you’re right to measure against it. 2020 enabled me to open up some clear water with it again over the longer-term, but the thing is already inching ahead YTD in 2021. (This is why my co-blogger always appears so well-rested, while I read company reports at midnight by candlelight to save electricity!) I cling to the belief that reinforced UK/£ home bias will help against VRWL someday soon, but we’ll see.

    I think we’ve all dallied in Caledonia from time to time. And Hansa. Big discounts that rarely seem to really close much. But I do think you undersell the RIT narrowing, if you don’t mind me saying. 🙂 It’s gone from a double-digit discount to a premium of 6% – so a ‘free’ 15% move on top of NAV. 🙂 Happy days, and there was even time to buy after the Coupang news. (I know, because I re-upped on that RNS after stupidly and impatiently selling it shortly before!)

    p.s. Thanks for the link!

  3. I could not get rid of Caledonia not just as it was one of my first IT holdings 30 years ago but also I feel the PE side has something different to my other regular holdings. I added it for my children too as I just like the family money feel so I also have RIT and Brunner.

    I have 5 years before retirement so its safety first and Im increasingly thinking of income. Looking back I should have stuck more with ITs rather than various dalliances with funds.

  4. @The Investor – Yes, it’s a lot tougher to beat over the long term than many people think, especially those who haven’t been investing that long. It’s been good to see a few managers explicitly calling out just how exceptional the last 12 months have been, helping to moderate investor expectations.

    Hansa was one I looked at briefly a long time ago, probably around the same time I ended up buying Caledonia (and I had RCP already). I can’t remember what put me off adding it to my portfolio, but I suspect it may have been the sheer size of the Ocean Wilsons position at the time.

    I kind of think of RCP as still being a discount as they flagged in early March that the NAV post the Coupang IPO was nearly £2 higher than the 2,316p they announced for the end of February. With the volatility that we’ve seen over the last year, these monthly NAV updates seem outdated before they are even published.

    @J – I think something similar probably helped me hold onto RCP over the last few years. With the size of CLDN’s reserves, it should have little trouble continuing to add to its record of dividend increases, so it’s definitely worth considering for those who want to put more emphasis on a rising income.

  5. Interesting to see you have fallen back in line with the global tracker. When you factor in the costs of Trusts versus a tracker, I imagine the global tracker is actually ahead of you? I think a lot of people under estimate the impact of costs on long term performance and is one of the reasons actively managed funds rarely beat it over the long term.

  6. Yep, certainly tough to beat trackers over extended periods and measuring your performance can be a major challenge in itself.

    On the cost front, though, I am including more in the way of costs for the trusts/funds that I actually hold than for the notional trackers I am comparing them against. So, I don’t think the trackers would be ahead, not yet at least!

    For the trusts/funds, I’m using closing prices so this reflects any underlying management charges and other costs that are paid from within those vehicles. Ditto by using closing prices for the trackers.

    With my actual holdings, as I am using the cash and stock value in my accounts, I’m including any holding costs I have to pay to my broker and any dealing costs I incur along the way when I trade.

    However, I am not including any equivalent real-world holding costs for the tracker funds. They would vary depending on which broker I used to hold them and might be just £120pa with II, for example, but substantially higher if I used Vanguard’s own service (0.15%) or someone like AJ Bell or HL.

    This was an existing portfolio, so I am not assuming I bought it all on 1 Jan 2018 or that I am selling it in its entirety to get the latest value (I’m likely to sell it piecemeal over a few decades and any disposal costs will get counted as they are incurred).

    Lastly, I’m using pre-tax figures in both cases, so assuming no income tax is due on dividends or CGT on disposals. In reality, I have incurred some of the former (and would have incurred a similar amount if I held the tracker in a real-life account) but none of the latter over the last few years.

    If I incur any significant tax costs then I may need to revisit this but it keeps things simpler in the meantime.

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