Andrew Pitts’ trust tips: winners and losers so far in 2024

Please note performance figures as at 31 March 2024; other figures in the copy as at 5 April 2024 unless stated.

Global stock markets collectively had their best first quarter for five years as investors focused on hopes of lower global interest rates in the face of declining inflation numbers.

The FTSE All-World index, which includes emerging markets, rose by an impressive 9% in sterling terms over the quarter. Despite inching towards a fresh all-time high, the UK stock market benchmark was something of a laggard, with the FTSE All-Share index up a still respectable 3.6%.

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The contrasting performance of the two investment trust portfolios (which both hold 10 investment trusts) shows differing forces at work. In what could generally be described as a “risk-on” environment for global stocks, the adventurous portfolio should be expected to outperform the conservative version, because it has exposure to more overtly growth-focused themes, such as smaller companies and trusts that have concentrated portfolios and higher levels of borrowing – or “gearing” – in an attempt to ratchet up returns.

Smaller companies, however, generally continue to be out of favour, while investment trust watchers are still concerned about trusts with high levels of gearing, because high interest rates generally make the debt that trusts take on more expensive to service. That means many of the trusts in the portfolio are trading on stubbornly high discounts to net asset value (NAV).

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Recent readings on inflation, which is coming down more slowly than many expected, is forcing investors to rethink the trajectory of interest rates. These look like staying more elevated in major economies (including the UK) for longer than investors had hoped at the end of last year. In turn, that cools hopes of more robust economic growth, which has a more profound effect on smaller companies than their larger brethren.

This goes a long way to explain the conservative portfolio’s superior 5.5% gain over the quarter compared with the 3.4% uplift for the adventurous version. The six-month numbers favour the adventurous trusts, with the 12.8% gain versus 10.5% for the conservative choices.  

Over one year, however, the 10 conservative choices continue to have the upper hand, gaining an aggregate 14.1% compared with 12.6% for the adventurous choices. That trend is confirmed over longer periods of up to five years. Historically, however, investors with a penchant for higher risk have been more amply rewarded: since inception in August 2014, the adventurous portfolio has recorded a 147% gain compared with 132% for the conservative choices.

Generally speaking, the adventurous selections are more likely to gain the upper hand when interest rates reduce further, global growth expectations are revised upwards and, just as important, investors regain their enthusiasm for some of the more risky strategies that these trusts adopt.  

How the portfolios are performing

Notes: Performance of the portfolios as at 31 March 2024, before deduction of underlying trading charges. Past performance is not a guide to future performance. Data source: FE Analytics.

Adventurous portfolio saved by the tech

It was another quarter of widely contrasting fortunes for the 10 portfolio constituents, with trusts that invest in technology and a few other big US stocks leading the way, while most of the portfolio’s smaller company trust members were significant detractors.

What may be beginning to look like a bubble in AI-related companies such as NVIDIA Corp (NASDAQ:NVDA) and other members of the so-called Magnificent Seven stocks continues to benefit the portfolio’s top performer, Allianz Technology Trust Ord (LSE:ATT).

Allianz Technology gained in share price total return terms 14.5% over the quarter, although the £1.35 billion trust continues to trade on a wide discount to NAV of 11.1%. That performance over the quarter cements this specialist selection’s position as the top trust over one year among all 20 across both portfolios, with a stonking 50.8% gain.

Nvidia, Microsoft Corp (NASDAQ:MSFT), Meta Platforms Inc Class A (NASDAQ:META), Apple Inc (NASDAQ:AAPL) and Broadcom Inc (NASDAQ:AVGO) account for a third of the £1.36 billion trust’s portfolio, although nearly a quarter of its 42 holdings is invested in medium-sized tech companies.

The adventurous portfolio’s second-best show came from another US-focused trust in Pershing Square Holdings Ord GBP (LSE:PSH). Its 14.1% uplift at the share price level over the quarter also propelled the Bill Ackman-managed trust to a 46.3% gain over the year, supported by a sizeable share buyback program.

Unlike Allianz Technology, much of those gains have benefited from a following wind in the shape of a narrowing discount to NAV. However, the NAV is up by a still-impressive 30% over the period.

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The £7.5 billion trust had just 10 investments last year, including Alphabet (NASDAQ:GOOGL) (owner of Google), which the trust bought in early 2023. The annual report to 31 December revealed that the trust had exited its position in DIY giant Lowe's Companies Inc (NYSE:LOW), reducing the number of equity holdings to nine.

The report also noted the launch of Pershing Square SPARC Holdings, a vehicle that will have 10 years to find private companies to list on public markets, with Pershing Square-managed funds as anchor investors. The report notes that “SPARC expands the universe of potential businesses that PSH can buy” although, of the approaches so far received, none have met Pershing Square’s “standards for business quality, durable growth and sufficient scale”.

Monks Ord (LSE:MNKS), the Baillie Gifford-managed global trust, continued its recent return to form, posting a 8.1% gain, lifting its annual return to 18.7%. Previously a top performer in the global trust sector, investors at large have not yet warmed to its recent return to form, with the discount to NAV continuing to languish at around -12%. In its glory days, which came to an abrupt end in 2022, the shares usually traded at a small premium to NAV.

Unfortunately, its stablemate Baillie Gifford Shin Nippon Ord (LSE:BGS) is yet to stage anything that could be described as a turnaround. The shares lost a further -8.3% over the quarter, anchoring the trust firmly at the bottom of the rankings among all trusts not only over three months but also over all the other performance periods monitored (see table).

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The trust’s board has been galvanised into action by announcing a potential tender offer of up to 15% of the issued share capital if, after three years to 31 January 2027, the trust’s NAV has failed to beat the benchmark MSCI Japan Small Cap index.

That seems a long time to wait and could result in nearly a decade of underperformance versus the benchmark. Regular adventurous portfolio followers will know that I’m less than happy about the trust’s performance on an absolute and relative basis, but I will wait for the forthcoming annual review before deciding whether to switch to potential alternatives.

Pacific Horizon Ord (LSE:PHI), the portfolio’s Asia ex-Japan selection, continued the resurgence of other Baillie Gifford-managed trusts, posting a 4% gain, which was among the best of its cohort, against which it has done well over the past year.

Adventurous portfolio held back by smaller companies

Notes: *Holdings ranked by total return over the past quarter. Not all constituents were members of the portfolios over the time periods stated. Past performance is not a guide to future performance. Data source: FE Analytics as at 31 March 2024.

Conservative choices provide a steadier ride

Of the 10 trusts in the conservative portfolio, six rank among the top quartile in their respective peer groups over the past quarter, with another two also beating the average performance in their sectors. Over the past year, seven trusts have beaten their respective sector average, with investors in all 10 trusts making a respectable 14.1% gain.

The conservative portfolio’s US-focused trust again dominated the quarterly rankings, as JPMorgan American Ord (LSE:JAM) beat both the adventurous portfolio’s US-focused selections with a 14.8% gain. Jonathan Simon, one of the trust’s respected managers, has announced his retirement, in early 2025, but the trust has a very well-resourced team that implements a tried and tested investment policy, so I have no pressing concerns of any detrimental impact.

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Corporate action has arguably helped to boost the performance of the portfolio’s Europe choice, Henderson EuroTrust Ord (LSE:HNE), which continued its recent fine run, registering a 10.6% gain over the quarter.

In a previous update, I questioned whether it was necessary for Janus Henderson to manage three Europe-focused trusts, so I was pleased to see an announcement that the boards of Henderson European Focus Trust Ord (LSE:HEFT) and Henderson EuroTrust Ord (LSE:HNE) have proposed a merger, subject to shareholder approval.

If approved, the proposed new trust, Henderson European Trust, will have net assets of around £750 million, and will greatly improve liquidity and marketability of the new entity, which will be eligible for inclusion in the FTSE 250 index of mid-sized UK companies.

The combined trust will be managed by EuroTrust’s current lead manager, Jamie Ross and Tom O’Hara, who is co-lead of European Focus. Henderson European’s proposed new mandate will be to invest in a focused portfolio of Europe’s “global champions”, essentially large, established businesses that will be selected with no particular style bias. It won’t have a specific yield target and will be focused on total return from a mixture of growth and income.

Although the new trust will inherit European Focus’s long-term structural and short-term strategic gearing of up to €35 million, this is very inexpensive at a weighted average annual cost of 1.57% over 25 to 30 years.

At first glance, the proposals look sensible and there seems little reason to seek an alternative at this stage, particularly as the portfolios of the trusts have roughly 50% overlapping holdings. If approved by shareholders, which seems likely, the new entity should be up and running by the end of June.

Schroder Japan Trust Ord (LSE:SJG), introduced to the portfolio in the 2023 annual review, continues to justify its inclusion with another strong quarter, with the shares up 10.8%. That takes its gains over a year to 28.3%.

It’s also pleasing to see Bankers Ord (LSE:BNKR), the globally diversified trust, acting less like a lumbering giant. Despite continuing to languish on a -12% discount to NAV, the shares are up 9.7% over the quarter, better than the average gain from 12 other peers in the global sector.

One of the reasons for including Bankers in the conservative portfolio is the trust’s progressive dividend policy, which aims to beat UK inflation. For the year ending 31 October, the trust recently declared a first interim dividend of 0.672p, which represents an increase of 8.4% on last year’s interim. That puts it on track for a 58th consecutive year of rising dividends. The current dividend yield is 2.3%.

To find out more about Bankers, watch interactive investor’s recent video interview with fund manger Alex Crooke.

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Conservative choices put up a good show

Notes: *Holdings ranked by total return over the past quarter. Not all constituents were members of the portfolios over the time periods stated. Past performance is not a guide to future performance. Data source: FE Analytics as at 31 March 2024.

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.