Here’s my portfolio review for the first half of 2023. I was up 4% while global markets were up 7% and the investment trust index was down 3%.
This table summarises my recent and longer-term performance against the usual range of comparators:
|Vanguard FTSE Global All Cap (fund)
|Vanguard LifeStrategy 60 (fund)
|Vanguard UK All-Share Index (fund)
|FTSE All-Share Closed End Investment (index)
Notes: The 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 All returns are measured in sterling using a unitised method that adjusts for any money put in or withdrawn. All my trading and admin costs are included in my returns but no such costs are included for fund/index returns.
It’s been a topsy-turvy six months. Once again, I made no major changes to my holdings or overall strategy, just reinvesting some dividends.
When I checked a few weeks ago, I think I was up around 7% for the year and ahead of global markets. But that all changed in June as the discounts on many trusts widened once again. The fear that interest rates would have to go higher than previously expected and stay there for longer seemed to cause the skittishness.
It was a strong six months for the pound — not a phrase I have used much since starting this blog — and that was a drag on returns for UK-based investors like myself. Sterling went from $1.21 to $1.26, €1.12 to €1.16, and most remarkably 158 yen to 182 yen.
That meant that a US dollar gain of 17% for US markets became just 11% when converted into sterling and a 23% increase in yen for Japanese markets a mere 6%. Germany and Brazil were also strong performers in the first half while China was the weakest among major markets.
Global markets did well, despite all the macro concerns thrown their way with the big US tech stocks doing the heavy lifting. The UK market did ok with large caps faring better than smaller companies once again.
It was a difficult period for the investment trust sector with discounts widening in the property, infrastructure, and renewable sectors in particular.
What happened across the investment trust sector
Let’s start with alternatives. The Home REIT saga seems to get worse with every announcement although a new investment manager has now been appointed in the form of AEW. We’re yet to hear much about the plans to turn things around but clearly it’s a monumental task.
ThomasLloyd Energy Impact suspended its shares after unanticipated cost increases on a project in India led to material uncertainties about its financials and delaying the publication of its accounts. It now faces a continuation vote and I suspect shareholders may want to cut their losses.
Fundraising among alternative asset trusts continues to be practically non-existent. Instead they are looking at various options like share buybacks, asset disposals, tweaking their debt structure, evaluating merger partners, and reducing their fees.
There were bids for Industrials REIT, CT Property, and Civitas Social Housing. I expect there will be more deals in the second half although identifying exactly which trusts will get snapped up is extremely tricky.
Among equity trusts, we did have a small IPO with Ashoka WhiteOak Emerging Markets raising just over £30m. But wind-up announcements have been the main story. Abrdn Japan has thrown in the towel and is offering a rollover into Nippon Active Value Fund. Abrdn Latin American Income has just been delisted, Abrdn Smaller Companies Income is considering various ideas, and Abrdn Diversified Income & Growth has launched a strategic review. Momentum Multi-Asset Value is also set to disappear, offering its investors a rollover into a larger open-ended fund run by the same manager.
Private equity valuations have continued to hold up, defying the sceptics at least for the time being. The debt structures at the underlying companies and how they will be refinanced are still a concern and this will take a little longer to play out (ditto for commercial property). Most of the private equity sector still trades on discounts in excess of 20% with the more diversified fund-of-funds operators at 40% or more.
The average discount for the whole investment trust sector ended the period at around 17%, which is as wide as it got last October and during the US regional banking crisis in March/April of this year.
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.
|Gresham House Energy Storage
|Bluefield Solar Income
|JPMorgan Global Growth & Income
|Vanguard All-World ETF
|Lindsell Train Global
|RIT Capital Partners
|Keystone Positive Change
|Henderson Smaller Companies
|BlackRock Smaller Companies
Note: the links go to my trust profiles, all of which were written some time ago. My views on most of them probably haven’t changed that much but the information they contain will be quite dated.
The weighted average discount across all my positions was 5.7% at the end of June. That compares to 4.7% at the end of March and 4.0% at the end of 2022. So discount widening probably accounted for around half of my underperformance against global markets in the first half of this year. That’s the price we pay for liquidity of course but it never ceases to cause some discomfort.
Here are some quick thoughts on my individual holdings…
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RIT Capital Partners has continued to buy back its shares this quarter, with announcements made almost on a daily basis. The discount initially narrowed from the low 20%s to around 15% but it has recently widened back out to the low 20%s again. Year-to-date, the NAV is pretty flat. I’m still not particularly convinced by the arguments that this trust has significantly changed its strategy in recent years and become more risky as a result. I recently looked at some of its old annual reports and noticed a great deal of similarities with how its portfolio looks today.
JPMorgan Global Growth & Income has managed to keep the premium rating it regained back in February and has continued to edge ahead of the returns from global markets. I’m not expecting anything spectacular from this position but since its manager reshuffle a few years ago it has kept on grinding away and edging ahead of its benchmark.
Lindsell Train Global and Fundsmith Equity have tracked both each other and global markets quite closely for most of this year. Terry Smith sold Adobe and Amazon recently, having owned both of them for less than two years. So that’s two sales so far in 2023 compared to five each in both 2021 and 2022 and a long-term average of around three per year. Lindsell Train Global sold Pearson and bought FICO in the first half of 2022 but has made no portfolio changes since then as far as I know.
Smithson and Keystone Positive Change have done well on a NAV basis but have seen their discounts widen. I consider these to be the most aggressive of my various global positions so they are the smallest in terms of position size.
Renewables and Infrastructure
After not doing much for the first 4-5 months of this year, all three of my holdings in this area have seen their ratings decline significantly in recent weeks.
Gresham House Energy Storage announced a placing in May to part-fund its first international expansion, a co-located solar/battery project in the US. I think it was the only one of the 22 renewables trusts to be trading at a premium at that point. GRID was looking for £80m although it ended up just getting £50m. Had it waited a few weeks it probably would have been trading at a discount and not been able to raise any money. I subscribed for a few shares, the first I have bought in this trust for quite some time, although the price has slipped quite a bit since then.
It’s been a quiet quarter for Bluefield Solar Income but it did refinance some of its debts. This trust’s ten-year anniversary is later this month and at the time of writing it was up a respectable 111% since its IPO, equivalent to 7.8% a year. Its NAV return has been 10% a year.
HICL Infrastructure‘s annual results saw a noticeable shift in tone, with a lot more emphasis on how the portfolio is being slowly shifted away from its original focus on UK-based PPP projects to a much wider geographical spread of more economically sensitive assets. It’s a big portfolio, so it’s a multi-year job to change course. The discount here has widened more than most, which seems to be because investors think it’s moving up the risk curve and a higher discount rate might be appropriate. Its investment in Affinity Water might be spooking people as well, given the troubles at Thames Water. HICL has also tweaked its debt structure, raising £150m from a private placement at 5.8%. I added a little HICL at what I thought was a pretty attractive double-digit discount although it’s since become even more attractive!
Tech-Focused Private Equity
HgCapital has been trying to convince investors that its NAV isn’t overstated. It seemed to be succeeding until the declines of the last few weeks. I thought its recent Capital Markets Day did an excellent job of fleshing out its longer-term strategy, the unassuming culture at Hg, and what the firm is looking for in its investments. This is one of my larger positions and I consider it to be a core long-term holding. If it drops much further, I might add to my position.
Biotechnology and Healthcare
We’re still waiting to see what happens with International Biotechnology where the management firm has given its notice but the individual managers want to carry on and might join a new firm in order to do that. A short list of six firms have been selected to present to the directors and I suspect we will hear the outcome in the next month or two.
All of my three biotech/healthcare holdings — Bellevue Healthcare and Worldwide Healthcare being the other two — are roughly where they started the year in NAV terms and are buying back their shares when the discounts get into the high single-digits.
UK Smaller Companies
It’s continued to be a difficult environment for UK small-cap stocks so these trusts are all comfortably in the red for the year. Both Henderson Smaller and BlackRock Smaller are yielding 3% and still increasing their payout year-on-year (BlackRock more so than Henderson). I think it’s a case of sitting and waiting for valuations in this part of the UK market to recover. Baronsmead Venture cut its interim dividend from 3.0p to 1.75p as readjusts to its newish dividend policy of paying out 7% of its opening NAV each year.
My smallest position, KR1, saw a spectacular share price gain in the last few weeks with a 30% discount turning into a very small premium for no obvious reason that I could see. It’s made a few new investments recently using the staking income that it gets from a few of its major holdings. I’ve held this for two years now and would expect to hold it for several more. Its managers have extended their exclusivity deal for an extra year.
I’ve topped up on Bellevue Healthcare, Bluefield Solar Income, HICL Infrastructure, and Gresham House Energy Storage in the last few months and I bed and ISA’d some RIT Capital Partners as part of a longer-term aim of reducing my taxable positions before the CGT regime becomes more restrictive.
With a number of my trusts on insultingly large discounts, I’m certainly not short of future top-up opportunities. The renewable/ infrastructure trusts, Hg, RIT, Smithson, and Keystone probably look the most appealing right now but the picture seems to change on a weekly basis. Baronsmead remains the position I am most likely to sell although I want to tidy up my remaining taxable positions first.
Read my fund profiles at Money Makers
I’ve been writing detailed fund profiles over at Money Makers for the last two years now. Trusts covered in the last three months have included Invesco Bond Income Plus, AVI Japan Opportunity, Polar Capital Global Healthcare, Pacific Horizon, HydrogenOne Capital Growth, Mercantile, Abrdn Property Income, JPMorgan American, Octopus Renewables, BlackRock Energy & Resources, BioPharma Credit, Fidelity European, and Greencoat UK Wind.
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 months ago for European Smaller Companies.
The Investment Trusts Handbook 2023 is still available. 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 and it is also available at Harriman House. We’re starting to work on the 2024 edition, which should be published by the end of this year.
I think I might move these reviews to twice a year in future as quarterly seems rather frequent considering how little my portfolio changes. Or I might do three shorter quarterly reviews and a more detailed year-end piece.
As always, thank you for stopping by and I hope your own portfolio is holding firm.
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.
Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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