Here’s my portfolio review for the first three months of 2023. I ended the quarter up 2.4% while global markets rose 4.0% and the investment trust index fell 1.3%.
My performance
This table summarises my recent performance against a range of comparators:
| Portfolio/comparators | Q1 2023 | FY 2022 | FY 2021 | Annualised since Jan 2018 |
|---|---|---|---|---|
| My portfolio | +2.4% | -13.0% | +16.2% | +6.4% |
| Vanguard FTSE Global All Cap (fund) | +4.0% | -8.0% | +18.9% | +7.8% |
| Vanguard LifeStrategy 60 (fund) | +3.6% | -11.2% | +9.9% | +3.8% |
| Vanguard UK All-Share Index (fund) | +3.6% | +0.3% | +18.2% | +3.4% |
| FTSE All-Share Equity Investment Trusts (index) | -1.3% | -16.6% | +12.8% | +4.9% |
Notes: I measure my returns for these articles by starting from 1 January 2018. A Vanguard global tracker fund is my main benchmark and I have a stretch target of beating it by 2-3% per annum over the long term. The more conservative LifeStrategy 60 fund (essentially a global 60% equity/40% bond portfolio), a UK index tracking fund, and an index of UK investment trusts are included as additional reference points. All returns are measured in sterling using a unitised method that adjusts for any new money I put in or any withdrawals I make. Any trading and administrative costs I incur are included in my portfolio returns but no such costs are included for the fund or index returns. For simplicity, I ignore taxes.
It was yet another eventful quarter. It’s been accepted for a while that the pace of interest rate rises we’ve seen over the past year was always going to break something. We had the LDI crisis in the UK pension industry last Autumn and last month it was a number of smaller US banks and Credit Suisse. All these events were seemingly resolved very quickly, with little damage to the wider economy.
Global markets have been remarkably resilient although they gave back some of the gains they made in January. Both the UK market and the S&P 500 ended the quarter up around 4%. The NASDAQ has been the standout with a gain of 17% although it’s still down significantly from where it started in 2022. Europe has been quite strong, up 7%, with Germany up nearly 12%. India and Brazil have been among the worst performers among major markets, down 9% and 6% respectively.
The pound has seen little movement against other major currencies but bond rates have been a lot more volatile. For example, the 10-year gilt started and ended the quarter at around 3.5% but fell as low as 3.0% in early February and rose as high as 3.9% in early March.
The investment trust index lagged global markets once again as a result of discounts widening, particularly in alternative asset trusts that focus on property and infrastructure.
While inflation has started to come down and should continue to do so given recent falls in energy prices, it’s not clear whether it will keep on decreasing to the 2% target level favoured by central banks. And even if it does, will it stay there or are we going to see waves of inflation over the next several years until past excesses work their way out of the system? It’s somewhat of a cliche, but the only certainty is that we’re always facing a lot of uncertainty.
I tend not to adjust my portfolio based on macro factors like these as I find that there are too many moving pieces to make sense of. As has been the case for a while now, I am expecting returns in the 2020s to be a fair bit less than we saw in the 2010s, but not to the extent that I don’t want to be a long-term holder of equities.
News from across the trust sector
The first quarter of 2023 has followed a similar pattern to the last quarter of 2022 for the investment trust sector. Discounts remain wide with the average discount increasing from 13% to 16% and that’s after most alternative asset trusts have reported their December 2022 NAVs using slightly higher discount rates or higher rental yields in their valuation calculations. I suspect NAVs may have a little further to fall but the bearishness seems excessive to me.
IPOs and major fundraisings have continued to be practically non-existent. I think only BH Macro (£315m) and 3i Infrastructure (£100m) managed to get larger fundraisings away. A few popular trusts such as Ruffer, JPMorgan Global Growth & Income, BlackRock World Mining, Law Debenture, Merchants, and City of London have been able to maintain their regular issuance but Capital Gearing, famous for its zero discount control target and admonishing the lack of similar policies elsewhere in the sector, has sunk to a rare but small discount.
A tiny £13m new trust called Onward Opportunities appeared last week but I’m not sure if it’s going to be included on the AIC website. AT85, an infrastructure trust, has delayed its IPO closing date from February to June, Conviction Life Sciences pulled its IPO plans at the end of January, and Long Term Assets hasn’t said anything since issuing an intention to float notice last November.
A number of trusts have decided to either wind themselves up or seek merger partners, demonstrating the industry’s ability to refresh and renew itself when things aren’t working out. The two major news stories were the ongoing revelations into the still-suspended Home REIT and the boardroom departures/squabble at Scottish Mortgage. I can’t see the Home REIT story ending well but I suspect Scottish Mortgage will be able to sort itself out.
Fans of trust statistics might want to check out some of the AIC’s recent press releases on Dividend Heroes (eight trusts have now raised dividends for at least fifty years), the Next Generation Dividend Heroes (those with at least ten years of increases), and its ISA Millionaire list (28 trusts that would have made you a million or more if you had maxed out your ISA subscriptions since 1999).
My performance by holding
Here’s how my individual positions did on a share price and NAV basis along with their current rating. The column headers should be sortable although they might not be on some mobile devices.
| Holding | Share price return Q1 2023 | Net asset value return Q1 2023 | Premium/ (discount) |
|---|---|---|---|
| Gresham House Energy Storage | -3.0% | +1.2% | +5.1% |
| Bluefield Solar Income | +3.7% | +1.5% | -4.2% |
| HICL Infrastructure | -4.5% | +1.3% | -7.5% |
| HgCapital | -0.8% | +0.4% | -26.5% |
| JPMorgan Global G&I | +8.2% | +6.7% | +0.3% |
| Vanguard All-World ETF | +4.3% | +4.3% | n/a |
| Lindsell Train Global | +4.4% | +4.4% | n/a |
| Fundsmith Equity | +6.3% | +6.3% | n/a |
| Smithson | +5.0% | +8.8% | -9.3% |
| RIT Capital Partners | -9.7% | +1.8% | -21.7% |
| Keystone Positive Change | +4.4% | +9.4% | -15.3% |
| Bellevue Healthcare | +0.8% | -2.7% | -7.2% |
| Worldwide Healthcare | -3.4% | -1.3% | -9.6% |
| International Biotechnology | -6.1% | -1.3% | -7.3% |
| Baronsmead Venture | -4.0% | -3.6% | -6.4% |
| Henderson Smaller Companies | -2.6% | +0.9% | -12.6% |
| BlackRock Smaller Companies | -4.4% | -4.9% | -12.7% |
| KR1 | +74.0% | +55.0% | -29.0% |
The weighted average discount across all my positions was 4.7% at the end of the quarter compared to 4.0% at the end of 2022, so discount widening hurt my performance a little bit. Nine of my positions posted a negative share price return but only five fell on a NAV basis, the greatest drop being 4.9%.
Here are some quick thoughts on my individual holdings…
Global
RIT Capital Partners has rarely found itself out of the news with broker notes from Investec highlighting its increased weighting towards private companies and a generous share-based incentive plan. Both are concerns and need monitoring but the sell-off in the shares seems very overdone to me. Pleasingly, RIT has ramped up its buyback since its latest results at the end of February. It bought back around £44m shares last month at an average discount of around 20%. A quick back-of-the-envelope calculation suggests RIT’s March share repurchases could have added 0.3% to the NAV, so I’m hoping the buybacks continue at a similar pace.
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JPMorgan Global Growth & Income seems to have regained its premium rating after its back-to-back mergers and it’s been issuing new shares on a regular basis since early February. It’s also been able to convert the C shares it issued after swallowing JPMorgan Elect, which enabled it to take its time selling Elect’s more illiquid positions. Its NAV increase is a little better than global markets again so unless there’s a major reversal in the next three months, the year ending June 2023 should be the fourth year on the spin its portfolio has outperformed.
The returns from both Lindsell Train Global and Fundsmith Equity have been very similar to JGGI, i.e. a gentle outperformance. There’s been no real change in either case here, in my view, and I’m happy to keep both of these as core global positions.
Smithson and Keystone Positive Change have posted slightly better NAV returns than my other global positions but their discounts have both widened slightly. Smithson has now bought back nearly 5% of its shares since February of last year. Keystone hasn’t done anything as the size of the trust means any shrinkage might reduce its liquidity. Keystone’s NAV is up by more than 25% since its low point in June 2022 and, as it only has a few unquoted holdings, it’s avoided the structural issues that have caused Scottish Mortgage some difficulties.
Renewables and Infrastructure
Gresham House Energy Storage has announced its first dividend increase since its IPO in late 2018, from 7.0p to 7.35p. That’s encouraging and indicates that the dividend is well covered despite its ambitious expansion plans and the cash drag it faces as a result. Last year’s supersized NAV gains are unlikely to be repeated but I don’t regard that as a particular issue. As well as trebling its UK capacity over the next two years, we should hear some more details on its international expansion plans in its next set of results later this month. Having let my initial position ride here for a long time, I might add some more if the trust lets retail shareholders participate in its next fundraising.
Not much has changed at either Bluefield Solar Income or HICL Infrastructure. Of the two, I remain happier with Bluefield. HICL did issue a quarterly NAV update, rather than its usual six-monthly cadence, so that was good to see. It’s also refinanced a large chunk of its debt. The discounts on both these trusts mean fundraisings are off the table for the time being although I suspect solutions will be found (a rights issue perhaps?) if this situation persists. Most renewable and infrastructure trusts face a similar dilemma.
Tech-Focused Private Equity
HgCapital is one of a number of private equity trusts that has maintained its NAV over the past year but investors are yet to be convinced that’s a fair reflection of events. Hg reduced some of its underlying multiples used in its valuation but said underlying profits have kept growing so the two effects largely cancel each other. The latest annual results saw a reduction in commitments for one Hg fund and the partial disposal (at NAV) of another, giving it some more balance sheet flexibility. We saw one buyback last October at 336p per share which I used as a reference point for a small top-up myself. I’d like to see more buybacks here with the discount in the high 20s but appreciate that the illiquid nature of unquoted assets makes this trickier to do.
Biotechnology and Healthcare
International Biotechnology is somewhat in limbo at the moment as its investment management firm, SV Health, wants to focus on its private equity interests. The trust is considering its options but it looks like the two managers, Ailsa Craig and Marek Poszepczynski, will end up joining another firm and the mandate will move with them. That would be my preferred outcome but let’s see what happens.
Along with both Bellevue Healthcare and Worldwide Healthcare, my other holdings in this sector, returns here have continued to lag global markets. This is a long-term sectoral bet for me, though, so I’m happy to keep holding onto all three positions assuming a satisfactory outcome to the management arrangements.
UK Smaller Companies
Much like the saggy returns from my biotech & healthcare trusts, my smaller company trusts seem to be treading water with the handbrake on the UK economy.
BlackRock Smaller has started buying back its shares, although its discount is about the same level it’s been at for a while so I’m not sure what’s spurred the change of heart. The next set of results at the end of April might shed some light. Henderson Smaller has stuck to its long-term policy of not buying back shares. I think that’s justifiable if the discount in single digits but once you get over 10%, the economics of buying back shares become more appealing in my view.
Baronsmead Venture has cut its dividend from 6.5p to 5.75p. This wasn’t unexpected and it was still above the revised guidance of 7% of the opening NAV it first set out back in September 2019, which would have suggested 5.5p. A further cut is likely this year, with 7% of its opening NAV as of September 2022 suggesting a minimum payout of 4.1p. The share price total return over the last five years is about the same as my holdings in Henderson Smaller and BlackRock Smaller, despite Baronsmead’s much-higher underlying costs. Under VCT rules, I have to wait until February 2024 before I can sell my entire position here without giving up the initial tax benefits. It’s a fiddly position to sell so I’m in no great rush but I still expect to dispose of it over the next few years.
Crypto
KR1 posted a spectacular first-quarter gain with crypto markets rebounding strongly. Its discount to NAV narrowed sharply as well. I’m still heavily underwater here, though, and it remains my smallest position by far. However, I was very pleased to see that KR1 has now started to issue monthly NAV updates that include its top ten positions, making the job of tracking its progress considerably easier.
My trading
I topped up on Bellevue Healthcare, HgCapital, and Keystone Positive Change at various points over the last quarter. I didn’t sell anything and remain happy with my overall portfolio weightings.
The planned decrease in the CGT annual allowance to £6k next year and £3k the year after has meant some rethinking about how I tidy up my taxable positions. I’m probably going to sell part of my holding in RIT Capital Partners and buy it back within my ISA. Smithson and Worldwide Healthcare are my other positions in taxable accounts that are likely to be shifted to my ISA at some point.
It looks like we could be facing harsher rules on capital gains and dividend income for a few years at least, regardless of who wins the next election, so that’s something we’ll all need to deal with. The reduction in the CGT allowance appears to have broken the dam, although I used a much stronger word when this policy was first announced.
Read my fund profiles at Money Makers
I’ve been writing regular fund profiles over at Money Makers since June 2021, aiming to cover a roughly equal mixture of equity and alternative asset trusts. Profiles in the last three months have included JPMorgan Emerging Markets, Harmony Energy Income, European Smaller Companies, Invesco Asia, GCP Infrastructure, Lowland, Baillie Gifford Japan, Urban Logistics REIT, Polar Capital Technology, Foresight Sustainable Forestry, Oakley Capital, and SDCL Energy Efficiency. Greencoat UK Wind, Fidelity European, and BioPharma Credit are coming up in the next few weeks.
Here is the sign-up page if you’d like to find out what else you get as a subscriber. We have also produced a free sample you can download containing the profile I did a few weeks ago for European Smaller Companies.
The Investment Trusts Handbook 2023 is still available. I contributed again this year with a profile of BH Macro, which was a shortened version of the piece I did for Money Makers last year. As with previous editions, the e-book version is free and the hardcover retails at £29.99. You can click here to order via Amazon (just £21.10 for the hardcover at the time of writing) and it is also available at Harriman House.
As always, thank you for reading!
Disclaimer
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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Congrats on a respectable start to the year.
Many thanks on the KR1 info – I didn’t know that. I found the Income activity very interesting – seems lumpy, but will be good to gradually get a sense of their staking yield (looks like could be between 5-10%). I am down like you, but it’s a small position – was always a ‘just in case’ punt, & still seems a relatively sensible way to get exposure (i.e. managers seem sensible & connected) & one to tuck away for 10 years in hope that it might come round.
Thanks.
I think the vast majority of KR1’s staking income comes from Polkadot (14% staking yield) and Cosmos (23%) plus a little from Kusama (14%) so that’s running at about £600k a month at the moment, moving up and down a bit as these assets change in price. The rest of the portfolio, barring a few minor assets, isn’t being staked according to its website. I would guess the higher income in January meant a fair bit came from the parachain rewards and that will tend to be lumpier based upon exactly how those are distributed out over time. Be handy to have these two income types broken down but they get absorbed into the monthly NAV anyway.
Thanks for the update! Great post as usual.
Thanks for another insightful update. As you say, interesting times with lots of moving parts! I would be really interested in how you assess if a trust is good value or expensive. Citywire use Z scores but I think that is more an indicator about whether a trust is cheap in relation to its recent discount rather than a guide as to whether one trust is cheap compared to another trust. Are PE ratios or Free Cashflow Yield indicators useful for Investment Trusts?
Yes, that’s a fair comment about Z scores. I think they can be useful as a starting point but, as you say, comparing a trust to others in its sector or in similar sectors is probably more instructive.
PE and free cash flow yields don’t really work for trust themselves but some of them publish this information for their underlying holdings, which is another way of looking at this.
I think you also get a feel for when trusts are cheap when you have been following them closely for a while. So I tend to focus on that when I am looking to top-up an existing holding. However, I only tend to consider valuation factors after I have selected the area/sector I want to add more to.
Hope that’s useful.
Thank you for taking the time and effort to post this excellent and informative update.
Can i ask –
Do you have limits on the percentage size that any one holding gets to within your portfolio?
Thanks Peter, glad you found it interesting.
I do have position limits, but not firm ones. And they tend to vary depending on what sort of trust it is. So with established global trusts, I am happy to have larger amounts. For more specialist trusts and ones with a shorter track record, my limit would be smaller. Sometimes with the themes, I will split a holding over a few trusts with the aim of maybe trimming them down in number over time as I get more familiar with what the key return drivers are.
I also take a view of what I’m likely to add to my portfolio in future. So a position that’s getting a big large might not be topped up for a few years, by which time the position sizes may have readjusted themselves anyway.