Andrew Pitts’ 10 adventurous investment trust tips: July 2023

Andrew Pitts names his adventurous selections for the next 12 months, which has led to the removal of an investment trust from Baillie Gifford’s stable.

Andrew Pitts’s trust tips were first introduced by Money Observer more than 20 years ago. Their performance began to be monitored as portfolios in August 2014. In July 2020, Andrew took over monitoring the portfolios. The trust tips are made by Andrew and not interactive investor. There is an editorial update of the portfolios every quarter, and the annual review takes place each July.

Investment trusts in this portfolio tend to be more overtly focused on future growth prospects and they can also have a large exposure to smaller companies. They may also employ higher levels of gearing and have more focused portfolios. They can be expected to perform less well than the conservative choices when markets are weak.

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This year, a change is being made for the portfolio’s exposure to North America.

All the performance and discount figures are to the end of June 2023. The ongoing charge figures can be found on the relevant instrument page on interactive investor. For those that also levy performance fees, these have been stated in the copy.

Adventurous portfolio ekes out gains

Notes: * Holdings ranked by one-year performance. Not all constituents were members of the portfolios over the time periods stated. † Trust is being replaced in this review – see text.Data source: FE Analytics as at 30 June 2023.

UK growth

Following a bruising period outlined in the last annual review that saw shares in BlackRock Throgmorton Trust (LSE:THRG) plummet by -40.3%, the UK smaller company specialist has rebounded with a 7.4% gain over the past year.

That ranks as a first-quartile performance in the 25-strong UK smaller companies sector, aided by a slight narrowing in its discount to net asset value (NAV) from -8% to -5.5%.

Dan Whitestone, manager of the £577 million trust, is sticking with a strategy that has seen the trust outperform the benchmark Numis Smaller Companies plus Aim (ex inv cos) index for 11 out of 13 calendar years (last year was one of the exceptions).  

Whitestone favours companies with good pricing power, volume growth and high margins. Of the 116 companies in the portfolio, the top 10 represent a modest 27% of assets, with industrials and consumer discretionary companies accounting for more than half the portfolio’s value.

The trust can use contracts for difference (CFDs) in attempt to boost returns, and also to take short positions in companies (although the latter strategy is employed sparingly). Current gearing (which includes CFD exposure) is 13%, compared with a low of 4% and a high of 28% over the past three years. A CFD is a form of derivative designed to provide extra leverage.

The dividend yield is 1.9%. In addition to its yearly ongoing charges figure (OCF), a performance fee of 15% of net asset value (NAV) total return performance is payable for returns in excess of the benchmark index, assessed over a rolling two-year period, but capped at 0.9% of gross assets.

UK equity income

Despite a slight widening of its discount to NAV to -7.9% over the past year, shares in Dunedin Income Growth (LSE:DIG) have delivered comparatively strong performance for the portfolio with a total return of 8.4%, which puts it in the first quartile of the 20-strong UK equity income sector. However, its NAV total return was usefully higher at 13.8%.

Ben Ritchie and Rebecca Maclean, managers of the £420 million trust, have a strong focus on companies that meet a stringent list of ‘ESG’ factors – companies that meet environmental, social, and governance criteria. The board believes that a concentrated portfolio of high-quality companies that meet its sustainable and responsible investment criteria will deliver both real income growth and attractive total returns over the long-term.

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In the last financial year to January the total dividend (paid quarterly) was again raised, from 12.9p to 13.1p, which means payouts have increased for 39 out of 43 years (and maintained in the other four). The current dividend yield is 4.6%.

AstraZeneca (LSE:AZN), Unilever (LSE:ULVR) and RELX (LSE:REL) are the portfolio’s top three of 36 holdings, representing 24% of its value.

Gearing is 6%, which compares with a low of 5% and a high of 13% over the past three years.

Global

The overtly growth-focused strategy pursued by Monks (LSE:MNKS) investment trust remains out of favour and as such performance against 13 peers in the Global sector is languishing, with a share price total return of 6.8% putting it in the third quartile. However, a better performance at the NAV level of 11.1% is masked somewhat by the discount to NAV widening to -13.1% over the year.

Nevertheless, the portfolio will keep faith in the trust’s aim to give investors low-cost, diversified and lower risk exposure to management group Baillie Gifford’s best global growth ideas.

Analysts at stockbroker Investec believe the trust’s pragmatic and differentiated approach across the growth spectrum – rather than focusing solely on the fastest growth opportunities in the new economy – “will be a critical success factor in delivering superior long-term returns, in what is a dramatically changing market environment”.

The £2.3 billion trust, managed by Spencer Adair and Malcolm MacColl, invests in more than 100 such companies, with the top 10 accounting for a relatively modest 26% of assets. Over half the portfolio is in the US, with 16% in Europe, 11% in emerging markets and 7% in the UK.

Gearing is modest at 4%, compared with a three-year high of 7%.

Emerging markets

Mobius Investment Trust (LSE:MMIT)’s focus on small and medium-sized companies in frontier and emerging markets has seen it post a volatile performance over the year (at one stage the shares were up 25%) but a 12.2% gain puts it in the top half of 11 trusts in the global emerging markets sector.

Investors in the £147 million trust clearly like the differentiated approach of managers Carlos Hardenberg and Mark Mobius, with the shares trading on a tight discount to NAV of just -2.2% (compared with a sector average of -10.7%). 

The managers aim to invest in companies with resilient and innovative business models that are mispriced. The trust’s top 10 holdings – representing 50% of the portfolio’s assets – are in companies that UK investors are unlikely to know much, if anything, about. Around 60% is invested in technology companies. Country exposure is mostly to Taiwan (25%), India (16%) and South Korea (15%). China is a noteworthy underweight position at just 7% of the portfolio, which has 27 holdings. The trust is ungeared.

North America

Investors continue to shun Baillie Gifford US Growth (LSE:USA), shares in which have slipped to an outsized 20% discount to NAV. A tepid 2.8% recovery in performance, following a loss of -57.5% at the last annual review, is not enough to warrant its retention in the portfolio. Longer-term investors will likely be rewarded, however, particularly should its private equity holdings – which account for 34% of the portfolio – bear fruit.

The portfolio is switching allegiance to Pershing Square Holdings (LSE:PSH), which is ranked first out of 141 peers over five years in the Investment Association (IA) and Association of Investment Companies (AIC) North America sectors.

The start of that period coincided with a strategic pivot in the investment strategy that saw the company return to its roots as a pure investment vehicle rather than one aimed at raising capital for open-ended hedge funds, according to analysts at stockbroker Investec Securities.

In that period, the portfolio has generated a return of 220%, compared with a return of circa 80% from the S&P 500 index. However, its outsized discount to NAV of -36.1% means the shares have returned a much lower, but still spectacular, 176.7%.

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Somewhat inexplicably, given this record, say the Investec analysts, the trust “continues to fly beneath the radar screen”. This is likely to be down to historic misconceptions. It is no longer a hedge fund and lead manager Bill Ackman (pictured below) – whose stake in the trust is worth £1.4 billion –  has not engaged in activist short selling for some years. However, the legendary investor has in recent years employed two highly successful and opportunistic hedging strategies that netted the company more than 10 times the $446 million outlay.

The fact that this trust aims to typically hold only eight to 12 stocks might be viewed as very high risk. However, Investec points out that the volatility/return profile is very attractive in comparison to the small band of funds and trusts that have beaten the S&P 500 index  – just 9.9% of 141 funds over five years. 

The 10 current portfolio constituents, valued in the portfolio at just over £8 billion, are very large companies including rail operator Canadian Pacific (TSE:CP), Alphabet (NASDAQ:GOOGL), Hilton Worldwide Holdings Inc (NYSE:HLT) and Universal Music (EURONEXT:UMG). The manager says they are examples of companies that are conservatively financed, have predictable recurring cash flows, with formidable barriers to entry that the manager believes will also be highly resilient in a downturn.

The trust is ungeared and is currently holding 17% in cash. There is a 16% performance fee, and the dividend yield is 1.4%.

Europe

Montanaro European Smaller Companies (LSE:MTE) has benefited from the global pivot to European stocks and has gained 16.8% over the year. The trust, managed by George Cooke, invests in around 50 small and mid-sized companies that must meet its ‘quality growth’ threshold as well as scoring highly on ESG criteria.

Despite this solid gain, investment strategies that focus on smaller companies have generally underperformed large-cap strategies, not only in Europe, but also in other global developed markets.

Montanaro Asset Management recently pointed out that the increasing attractiveness of valuations makes this a rich hunting ground for long-term investors. “We would go so far as to say that the pickings are as attractive as they have been for several years,” it said.

Shares in the £264 million trust trade at a discount of -11.5%. Gearing is modest at 3%, compared with a three-year high of 6%.

Japan

Baillie Gifford Shin Nippon (LSE:BGS) suffered a significant loss of -38.3% in the 2021-22 period. The second half of 2022 saw a recovery, but the gains have been erased in the first half of this year, leaving shareholders with a small loss of -0.9%.

Shin Nippon’s poor relative performance – the worst among five trusts in the Japanese smaller companies sector over one and three years – has been exacerbated by maintaining a high level of gearing, currently 17%, and further widening of the discount to NAV from -8% a year ago to -10.5%.

There are good reasons to retain the £441 million trust in the adventurous portfolio, not least its very strong long-term performance record. Manager Praveen Kumar says many of the 80-odd companies in the portfolio have experienced weakening share prices despite growing sales and profitability. He is also finding plenty of new ideas to invest in: “It is quite exciting to own high-growth Japanese smaller companies at valuations that do not reflect their long-term potential,” he says.

At a fundamental level, Kumar says the price/earnings ratio of the portfolio was 27 times five years ago versus 12 times today, which is almost in line with the benchmark MSCI Japan Small Cap index. However, in that time Shin Nippon’s portfolio has been significantly derated, despite delivering far superior sales and profits growth than the benchmark.

Kumar says the portfolio is “incredibly cheap”. It should reasonably be expected to deliver much higher rates of growth than the benchmark over time.

Asia Pacific

In last year’s review the portfolio switched allegiance from JPMorgan Asia Growth & Income to the Baillie Gifford-managed Pacific Horizon  (LSE:PHI) trust, primarily on the grounds that I wanted to include a more overtly growth-focused trust for the region.

In hindsight it would have been better to wait another year before making that switch, with the JPMorgan trust down 0.6% compared with a fall of -11.4% for Pacific Horizon. However, the reasons for continuing to hold Pacific Horizon are similar to those for backing its Baillie Gifford-managed counterpart in Japan.

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Managers Roderick Snell and Ben Durrant are increasingly positioning the portfolio to focus on the effect of technological change on economies and existing businesses. Although these growth-oriented themes continue to be less popular with investors than so-called value strategies, I believe it will be worth waiting for a change in sentiment.

Just over the half the portfolio is invested in Hong Kong/China-listed shares, with half in India. Samsung Electronics (LSE:SMSN) and Samsung SDI represent 9.3% of the portfolio, with the top 10 holdings accounting for 33% of its value. It’s interesting that metals and mining is the largest sector exposure at around 13% of assets.

Shares in the £493 million trust trade at a discount of -9.2%. There is no gearing compared with a three-year high of 8%.

Private equity

NB Private Equity (LSE:NBPE) has generated another solid year of returns for the adventurous portfolio, with the shares up 8.2%, despite a persistently wide discount to estimated NAV of 34%, which reduces its market capitalisation to £704 million.

It currently invests in 90 companies directly, chosen by US-based Neuberger Berman with long-term structural growth trends in mind. The primary focus is on the US, which accounts for 73% of assets.

Over the past five years, the average annual return on direct investments has been 17%, with a 44% uplift to the carrying value of IPOs/realised investments. In the year to date it has made only $7 million in new investments but has received $41 million in cash realisations. It has $306 million in liquidity available for new commitments.

The managers aim to find compelling investments across a variety of sectors, led by technology, industrial technology, consumer/e-commerce and financial services. The top 10 investments, led by European discount retailer Action, account for around a third of the portfolio.

The trust aims to pay a progressive dividend, which is paid semi-annually, with a target yield of 3%. There is currently no gearing, but it has been as high as 21% in the past three years. The trust has, however, issued zero dividend preference shares valued at £61.9 million, which will be repaid in October 2024. There’s a 7.5% performance fee payable on a hurdle rate of 7.5%.

Specialist

Portfolio stalwart Allianz Technology (LSE:ATT) produced the best performance among all 20 trusts across the two portfolios, gaining 26% over the year – nearly all of which came in the first half of 2023.

The discount to NAV on the £1.04 billion trust has narrowed somewhat from -16% a year ago to -11.5% but that is still much wider than two years ago, when the discount stood at around -5%.

The San Francisco-based technology team led by Mike Seidenberg has a very strong long-term record that has resulted in a share price total return of 83.6% over five years and 555% over the past decade.

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Seidenberg acknowledges that the excitement over generative artificial intelligence (AI) has boosted returns in 2023, particularly from companies such as NVIDIA (NASDAQ:NVDA). The semiconductor manufacturer represents 8.5% of the portfolio, with similar weightings to Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL). The trust has 38 other holdings.

“We are in a period of rapid change, where the importance of technology is key to the prosperity of most industries,” he says. “We believe that this environment is likely to provide attractive growth opportunities in many technology stocks over the next several years.”

The trust is ungeared. A 10% performance fee is payable for outperformance against the Dow Jones World Technology index benchmark, capped at 1.75% of assets.

Andrew Pitts was editor of Money Observer from 1998 to 2015. 

Data sources: FE Analytics, AIC/Morningstar, company documents. All data refers to 30 June unless stated (some portfolio weightings quoted in the article are as at 31 May).

As part of a diversified portfolio, Andrew Pitts holds shares in Baillie Gifford Shin Nippon, Bankers, Capital Gearing, Dunedin Income Growth, Fidelity Special Values, JPMorgan Japanese, Mobius, Monks, Pacific Horizon and Schroder Asian Total Return.