Andrew Pitts’ trust tips: Nick Train available on a rare discount

Finsbury Growth & Income has been added in place of Troy Income & Growth. Andrew Pitts shares his latest quarterly update.  

Andrew Pitts’ trust tips were first introduced by Money Observer several years ago. Last summer Andrew took over the portfolios. The trust tips are made by Andrew and not interactive investor. There is an editorial update of the portfolios every quarter.

Global stock markets took a downward turn in September, which removed some of the gloss from gains made during the third quarter by several of the 20 investment trusts that make the conservative and adventurous portfolios, while compounding losses for a few others.

The conservative portfolio outpaced the adventurous selections, returning 2.3% versus 2%, broadly in line with the FTSE All-Share benchmark return of 2.2% but ahead of the FTSE All-World Index, which was up 1.4% in the three months to end of September.

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The table shows that over the past year the FTSE All-Share has provided marginally better returns than the FTSE All-World index as well as the portfolios, as the UK stock market re-rated compared with other global markets. Over longer time frames, the portfolio's have far outstripped the UK index. For example, since Money Observer launched the portfolios in August 2014, the adventurous version is up 192.2%, compared with 140.8% for the global benchmark and 48.3% for the FTSE All-Share.

Trust tips portfolios build on strong gains

Notes: performance of the portfolios as at 30 September 2021, before deduction of underlying trading charges. Data source: FE Analytics.

Private equity leads the way

Over the first quarter, the private equity investment trusts made very useful contributions to both the adventurous and conservative portfolios, each of which comprises 10 trusts to provide investors with diversified exposure mainly to UK and global equity markets. Adventurous choice NB Private Equity Partners (LSE:NBPE) was the top performer with an 18% gain over the quarter, with its conservative cousin Pantheon International (LSE:PIN) coming third with an 11.5% uplift.

NBPE’s one-year return of 72.6% is by far the best of the 20 trusts, but had it not been for a particularly poor September, our UK smaller company choices BlackRock Throgmorton (LSE:THRG), a conservative choice, and recent addition Henderson Smaller Companies (LSE:HSL), adventurous selection, would have run NBPE close.

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However, over the last quarter THRG eked out a 2.3% gain and shares in HSL were flat, down 0.1%. Further afield, smaller companies were among the best performers over the quarter, with Montanaro European Smaller Companies (LSE:MTE) managing a second-placed 16.7% gain despite being down 5.7% in September.

Long-time portfolio favourite Baillie Gifford Shin Nippon (LSE:BGS) posted a respectable 7.6% uplift over the quarter. Both trusts are adventurous choices, befitting their focus on regional smaller companies. Renewed enthusiasm for Japanese stocks is also reflected in the performance of JPMorgan Japanese (LSE:JFJ), which experienced a welcome return to form with an 8.6% uplift, making it the best-performing equities-focused trust in the conservative portfolio, followed by a market-beating 5.6% gain from its peer JPMorgan American (LSE:JAM), which seeks to find the best growth and value shares on an equal opportunity basis.

Asia hit by China

Our Asia excluding Japan selections were among the most disappointing performers, but this largely reflects concerns over China’s crackdown on everything from conspicuous consumption to increasingly powerful internet giants and the hugely leveraged real estate sector.

Recent worryingly poor performance at the share price level of JPMorgan Asia Growth & Income (LSE:JAGI) – down 16.3% over the quarter – is largely due to a big shift in its rating. At end-June, the shares of our adventurous Asia excluding Japan choice were trading at a premium to net asset value of just under 2%, but this has since fallen to a discount to NAV of -9.5%.

This sharp fall in the rating means its yield has risen from 3.5% three months ago to 4.5%. The trust commits to paying dividends equivalent to 1% of its net asset value each quarter (which is determined on the last business day of each quarter). A final quarterly dividend of 4.6p for the year ending 30 September will be paid on 16 November to shareholders on its register on 15 October.

The trust’s portfolio is dominated by companies listed in China (34.5% as at end August) and Hong Kong (9.5%), which helps to explain low demand for the trust’s shares. However, its two largest holdings are Taiwan Semiconductor (NYSE:TSM) (representing 9.6% of assets) and Korea’s Samsung Electronics (LSE:SMSN) (7.4%).

The poor show over the quarter puts the trust’s shares at the bottom of the performance table, in contrast to the much better return from our conservative choice for the region, Schroder Asian Total Return (LSE:ATR), whose shares are down by a more palatable -0.8%. That is despite the trust being geared by 7% in a weak market.

In contrast, JAGI currently has negative gearing, but ATR also uses derivatives to provide downside protection and at the end of August they accounted for 11.2% of the asset allocation.

Weakness in Asia has inevitably spilled over into returns from global emerging markets trusts, most of which have high weightings to the region. Shares in JPMorgan Emerging Markets (LSE:JMG), our conservative selection, fell by -3.4% over the quarter. This ii Super 60 constituent also has a high weighting to China – of 30.8% at end-August – but this was three percentage points less than the weighting in the benchmark MSCI Emerging Markets index. 

Fellow ii Super 60 member Mobius Investment Trust (LSE:MMIT), introduced as our new adventurous choice in July’s annual review, is among the top performers, not just in the global emerging markets sector but also among the 20 trusts in the portfolio. Its 3.5% gain over the quarter was helped by having comparatively little in China (12.5% of the portfolio) and it also invests in so-called frontier markets such as Kenya.

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As with JMG, Mobius has a fairly concentrated portfolio of 29 holdings, but it operates at the opposite end of the market capitalisation spectrum by focusing on “dynamic” small and mid-sized companies. At 59%, the trust’s shares have provided nearly three times the gain of JMG, aided by a reduced discount to NAV of 2% from 12% over the past year.

Because MMIT is still comparatively small, with a market capitalisation of around £150 million, performance at the share price level is likely to be volatile. In its short history, the rating has fluctuated from a premium of 7% soon after its launch in October 2018 to a discount of nearly 20% last March during the Covid-19 market sell-off.   

How the portfolio constituents have fared in the third quarter*

Notes: *holdings ranked by three-month performance. Not all constituents were members of the portfolios over the time periods stated. † Trust name in italics indicates that a change to the portfolio has been made. See text for details. Data source: FE Analytics as at 30 September 2021.

Switching from Troy to Nick Train’s Finsbury Growth & Income

Troy Income & Growth (LSE:TIGT), our conservative UK equity income selection, is also comparatively small in its sector, with total assets of £248 million, compared with the likes of City of London, Murray Income, Edinburgh Investment and Finsbury Growth & Income (LSE:FGT), which each have total assets of between £1.2 billion and £2.1 billion.

While FGIT is the sector’s biggest trust, it also provides the lowest historic dividend yield at 1.9%. But TGIT is not far ahead, with a yield of 2.6%, compared with a sector average of 3.8%. Both trusts are ungeared. There the similarities end, for although TGIT has performed better than FGIT over the past year or so, the latter’s performance record over longer periods is far superior.

In the midst of last year’s Covid crisis, TGIT ‘rebased’ its dividend but recently stated its intention to at least maintain the quarterly dividend rate of 0.49p for the year to 30 September 2022, barring unforeseen circumstances. It seems unlikely, then, that the trust will be able to improve on its annual dividend growth record of -4.2% over the past five years.

Although FGIT’s dividend yield is among the lowest in the UK equity income sector, the trust is managed for growth of capital and income first and foremost, rather than an explicit focus on income. Yet it has also grown its dividend by an annualised 6.5% over five years.

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Its ‘total return’ approach is appealing for the conservative portfolio’s purposes on two fronts: it could benefit from having some exposure to large UK-listed companies with strong growth characteristics; and the manager is mindful of the benefits of holding companies with pricing power, which will become increasingly important should higher levels of inflation persist.

Rather than seek out a trust with a higher income yield, I feel comfortable sacrificing some dividend income for the prospect of superior total returns, and if history is any guide, manager Nick Train is adept at providing these.

Train’s investment philosophy in a nutshell is to have “big positions in intrinsically low-risk companies”, something which is certainly evident in the fact that the 10 largest of 25 holdings in the £2.1 billion trust represent nearly 80% of the total portfolio. Over five years, it has also provided far superior returns (10% annual) compared with the FTSE All-Share Index (6% annual), but with far less volatility.

Another reason I am attracted to FGIT is because the shares are trading on a rare discount to NAV, currently -4.3% (compared with its 12-month average of -0.8%), following the recent period of poor performance.

Andrew Pitts was editor of Money Observer magazine from 1998 until 2015.