Andrew Pitts’ trust tips: bargain-hunting boosts adventurous portfolio

The widely held belief that global interest rates had peaked markedly improved stock market sentiment in the fourth quarter of 2023, with decent gains registered across the board.

Among the two investment trust tips portfolios, the “risk-on” rally that began in late October put a rocket under several adventurous selections, with gains of up to 20.5% over the quarter. The adventurous portfolio benefited most with a gain of 8.9% in the final quarter, far outstripping the 4.7% uplift from the 10 trusts in the conservative version. Those gains compare quite favourably with returns of 3.2% from the UK FTSE All-Share index and the global FTSE All-World (including emerging markets) index, up 6.2% in sterling terms.

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Historically the adventurous tips still have some catching up to do. Although the outsized gains towards the end of the year saw the annual total return jump to 8.3%, the portfolio is still down -11.8% after three years, compared with a small gain from the conservative portfolio. The 42.6% adventurous gain after five years is beaten fair and square by the near 50% return from the conservative portfolio.

Given the loss of appetite for overtly growth-focused investments over the past three years, the performance disparity is hardly surprising, and has been compounded by many adventurous trusts falling to abnormally wide share price discounts to net asset value (NAV) as investors deserted them.

An element of bargain-hunting has generally helped to drive the recent outperformance of some adventurous choices, rather than outsized gains from the investments they hold.

That is demonstrated by analysis from stockbroker Stifel showing that the average investment trust discount to net asset value (excluding 3i) widened to -19% in late October, but ended the year at -13% – a significant turnaround for the better.

Expectations that interest rates will begin to fall in the first half of 2024 seem to have dampened in the past few weeks, but the macroeconomic picture has undoubtedly been looking a little brighter. As Stifel comments: “If rates continue to remain off the peaks, this year could finally deliver a bit more joy for the sector as macro headwinds subside and fundamentals have a chance to shine.”

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Those of a more bearish disposition will point to the escalating crisis in the Middle East. One of the consequences could be a return of higher inflation, which will give policymakers a good reason to keep interest rates higher for longer than investors have hitherto priced in.

Where investment analysts are broadly in agreement is that the UK stock market is historically and relatively extremely cheap across all sectors and particularly among small and mid-sized companies. Some also highlight the growing attractions of emerging markets, which have underperformed their developed counterparts for a decade.

Equity income trusts and investment companies specialising in infrastructure also stand to do much better than in the recent past should expectations for lower cash interest rates materialise.

Investment trusts generally have been under the cosh for the past two years as discounts to NAV have widened significantly, but if the past few months are a guide to 2024 and beyond, the clouds are lifting, and sunlit uplands might again be within reach.

Bear in mind performance figures are to 31 December 2023. Other figures stated in the copy, such as discounts, are to 12 January 2024 unless stated.

How the portfolios are performing

Notes: performance of the portfolios as at 31 December 2023, before deduction of underlying trading charges. Data source: FE Analytics. Past performance is not a guide to future performance.

Adventurous choices bounce back

Allianz Technology Trust Ord (LSE:ATT) was the portfolio’s standout performer over 2023, registering a gain of 44.5%, driven by strong gains from the so-called Magnificent Seven US technology behemoths. Among the trust’s 44 holdings as at 30 November, six of them – Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT), NVIDIA Corp (NASDAQ:NVDA), Meta Platforms Inc Class A (NASDAQ:META), Alphabet Inc Class A (NASDAQ:GOOGL) and Amazon.com Inc (NASDAQ:AMZN) – accounted for 37% of the portfolio’s value. Despite gaining 16.1% in the last quarter, shares in the £1.17 billion trust can still be bought at a discount of -11.7% to net asset value (NAV).

That discount looks appealing but is not as wide as that on US-focused Pershing Square Holdings Ord GBP (LSE:PSH), the portfolio’s top performer over the quarter with a 20.5% gain. Despite the strong gain from this highly focused trust (it holds just 11 companies), shares trade at a discount estimated by data provider Morningstar of around 28%, which means the trust has a market capitalisation of £8.5 billion, compared with total assets of £11.8 billion.

The trust’s board will be encouraged to see the discount to NAV down from around -35% in October, but it is discouraging to see manager Bill Ackman potentially sidetracked from his day job by high-profile spats with financial news site Business Insider and Harvard University.

In the final quarter, the portfolio’s private equity choice, NB Private Equity Partners (LSE:NBPE), added another 5.6% to its share price total return of 11.6% over the year and 66.3% after three years. Iain Scouller, an analyst at Stifel, rates the trust as among the stockbroker’s best ideas for 2024.

Scouller cites the portfolio’s attractive vintage, with three-quarters of investments made between 2017 and 2020, meaning it is “pregnant” for potential realisations. Scouller points out that the trust has a good record of achieving strong gains on realisations – in the year ended 31 December 2022 exits generated a 2.7 times gross multiple of capital initially invested.

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Stifel also believes a simplification of the capital structure – with a final tranche of zero dividend preference shares due to be repaid in October – will make the trust more appealing to investors who have become wary of investment companies with dual share classes.

The shares trade on a 24% discount but Stifel expects this to narrow to between 15%-20% over the year. Coupled with NAV growth expectations of 5%-10% the broker believes a fair valuation for the shares is 1880p compared with 1589p on 12 January.

Smaller company trusts enjoyed a welcome change in fortunes in the last quarter. Montanaro European Smaller Companies Ord (LSE:MTE) was the highest-gaining beneficiary among the four trusts in the portfolio that focus on market minnows.

Its shares ended the quarter up 13.9%, which was enough to ensure that holders eked out a small gain over the year, although that was beaten by UK-focused BlackRock Throgmorton Trust Ord (LSE:THRG), with its annual total return of 6.2% boosted by a 7.9% uplift in the last quarter.

Mobius Investment Trust Ord (LSE:MMIT), the emerging markets smaller companies specialist, also made a small gain of 2.6%, which is also its annual return. Joint manager Mark Mobius has announced his retirement at the age of 87, and while analysts at stockbroker Numis are expecting a revival in comparative fortunes for emerging markets, they note that Mobius has been selling some shares in the trust. That could create something of an overhang in the market and likely explains the shares moving out to a 9% discount in recent weeks.

The strategy of investing in undervalued small and mid-sized companies across emerging and frontier markets is not expected to change under the continued management of Carlos Hardenberg, joint founding partner of Mobius Capital Partners. Hardenberg appeared in a recent podcast interview with interactive investor.

Baillie Gifford Shin Nippon Ord (LSE:BGS) also registered a small gain over the quarter of 3%, but it remains the worst-performing holding in the portfolio over one year and particularly three years, over which period its -50.6% loss has been significantly detrimental to the adventurous portfolio’s overall performance.

Although patience is wearing increasingly thin with its performance, I will keep the faith for a while longer before considering a switch, especially as it has been in the portfolio since inception in August 2014. Nippon Active Value (LSE:NAVF) and AVI Japan Opportunity (LSE:AJOT) are on my radar as potential replacements as less overtly growth-focused small-cap trusts. Shin Nippon’s stablemate Baillie Gifford Japan (LSE:BGFD) – which has more of a mid-cap focus – is also a possibility.

Adventurous portfolio set alight

Notes: * Holdings ranked by total return over the past quarter. Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 31 December 2023.

Conservative choices make solid progress

Another strong quarter from JPMorgan American Ord (LSE:JAM) (up 6.8%) helped to secure the conservative portfolio’s number one spot over the course of 2023 with a gain of 26.6%, which also ranked among the top 10 performers across the investment company industry.

Its strategy of identifying the best ideas among companies with growth and/or value characteristics has also propelled it to the number one position in the portfolio over three years with a share price total return of 53.3%. The £1.56 billion trust has been the portfolio’s US choice since exposure to North America was introduced in July 2019.

The best show over the quarter, however, came from Schroder Asian Total Return Inv. Company (LSE:ATR) with a gain of 7.8% and a highly commendable 10.3% uplift over the year. The £408 million trust has a decent yield of 2.6% and the shares are currently trading on a discount of around 6% to NAV. Although it can use derivatives to protect or enhance returns when the managers feel this is appropriate its recent performance has been driven at the stock level.

The portfolio is quite concentrated, with the top 10 holdings accounting for 42% of the portfolio, led by a large position in Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) at 10% and Samsung Electronics Co Ltd DR (LSE:SMSN) at 7.6% (as of 30 November).

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Pantheon International Ord (LSE:PIN), the conservative portfolio’s private equity choice, also had another solid quarter, returning 6.5% and 19.6% over the year. Analysts at Numis rate the £1.48 billion trust as a solid choice in the private equity space for 2024. The stockbroker cites its sensible capital allocation policy, which was demonstrated by last year’s £150 million tender offer plus ongoing share buybacks of up to £50 million in the year ending in June.

These initiatives have helped to reduce the trust’s discount to NAV from close to -50% to a current estimate of -35%, which remains historically high. Numis reckons the trust is an attractive route for private investors to gain highly diversified access to the industry, which is gaining in importance because many companies are remaining private for longer rather than seeking a listing on public markets.

Numis also likes the portfolio’s UK choice of Fidelity Special Values Ord (LSE:FSV). Analysts point out that the contrarian approach adopted by manager Alex Wright (who has managed the trust since September 2012) has led to an average annual total NAV return of 12.6% versus 7.5% for the FTSE All-Share index. The £906 million trust is typically overweight in small and mid-sized companies, where Numis adds “we believe there is considerable value on offer following a difficult two years in light of uncertain economic conditions”.

The conservative portfolio has a higher weighting to UK assets than the adventurous version, so it is refreshing to see its performance compare well against the UK benchmark over the past year.

Conservative choices post solid gains

Notes: * Holdings ranked by total return over the past quarter. Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 31 December 2023.

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

As part of a diversified portfolio, Andrew holds shares in Baillie Gifford Shin Nippon, Bankers, Capital Gearing, Dunedin Income Growth, Fidelity Special Values, Mobius, Monks, Pacific Horizon, Pantheon International, Pershing Square Holdings, Schroder Asian Total Return and Schroder Japan.