How Andrew Pitts’ 20 trust tips fared in first quarter of 2023

Investors with long memories will remember what happens when lenders tighten their belts. The implication is that the rest of the year could be something of a slog for the investment trust tips, says Andrew Pitts.

Global stock markets have been gently but upwardly mobile in the first few weeks since the end of the first quarter of 2023. Those three months, most memorable for the collapse of Silicon Valley Bank and the once-venerable Credit Suisse (SIX:CSGN), had commentators dusting off their financial crisis history books, with column inches featuring time-worn phrases such as “the dash for cash” or “the flight to shite” (the direction of travel dependent on which side of March’s mini-banking crisis they were writing about).

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These momentous events were not adequately reflected in the performance of the market indices that are used as (albeit imperfect) benchmarks for the investment trust tips portfolios. A snapshot from 3 January to 31 March showed the FTSE All-Share index up 3.1%. But that is only half the story – the FTSE 100 swung in a near 600-point range from 7,450 to over 8,000 over the quarter. The FTSE All-World index, which is dominated by the US stock market, gained 4.2% in sterling terms.

Unfortunately, neither of the portfolios – which are equally weighted between 10 geographic regions and strategies – shared in this market uplift, which was hardly surprising given the ructions that occurred (and which might still come back to haunt us).

Portfolios becalmed in momentous quarter

Notes: performance of the portfolios as at 31 March 2023, before deduction of underlying trading charges. Data source: FE Analytics.

Repeating the comparative performance in the final quarter of 2022, the conservative choices again fared best, gaining 1.3% against a -0.5% loss for the adventurous tips. Although the longer-term performance numbers up to five years still look a little sickly compared with the benchmarks, they look better than they did through much of 2022, when general risk aversion saw many trusts tumble to historically wide discounts to net asset value (NAV).

That remains the case for many overtly growth-focused investment trusts, especially when comparing their ratings to trusts that target dividend income or total return (a mix of income and growth). Several of the former cohort are members of the adventurous portfolio and invest in smaller companies or those that have yet to turn a profit from their activities (so-called jam tomorrow companies).

Trusts such as Allianz Technology Trust (LSE:ATT), Monks (LSE:MNKS), Montanaro European Smaller Companies (LSE:MTE), Baillie Gifford Shin Nippon (LSE:BGS) and Baillie Gifford US Growth (LSE:USA) trade on discounts to NAV of between 10% and 21%. In late 2021, however, they were trading at close to par or at premiums to NAVs. The swing in sentiment has severely dented share price performance and compounded losses from their underlying portfolios.

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It is more likely than not that the ratings of overtly growth-focused trusts will remain depressed for a while yet. Interest rates, particularly in the all-important US market, look likely to stay higher for longer than markets seem to be discounting, despite forecasts from the IMF and others that recession will hit most large, developed economies by the second half of the year.

Stagflation, that unhappy combination of depressed economic activity or recession, coupled with high interest rates to combat inflation, will not be helpful to either of the portfolios. We should also continue to keep an eye on banks, many of which are reining in their lending. I can’t remember seeing the term “credit crunch” being used as often in the financial press since the eurozone debt crisis in 2012.

In a scenario of tight economic and financial conditions, the conservative portfolio should continue to be more resilient than the adventurous version. Over the past six months, the former is up 8.6% compared with 3.1%, while the conservative portfolio’s -5.8% loss over the past year has been easier to swallow than the -14.5% fall from the adventurous tips.

That’s not to say that the glory days won’t revisit more adventurous investors. By way of illustration, they are up 120.4% compared with 103.2% for the conservative tips since the inception of the portfolios in August 2014.

Little respite for the adventurous portfolio

Long-term portfolio member Allianz Technology was the standout performer over the first quarter, returning 9.8%. The £897 million trust has sizeable exposure to Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Meta Platforms (NASDAQ:META) and Alphabet (NASDAQ:GOOGL), which together account for more than 22% of its portfolio, and all of these tech giants led the US stock market higher in the first quarter.

Nevertheless, at around 13%, the discount to NAV remains close to a five-year high, providing investors with a potentially attractive entry point into the trust. Portfolio manager Mike Seidenberg says: “As companies need to reduce costs and improve productivity, particularly in light of a potentially uncertain macroeconomic outlook, we expect to see accelerating demand for innovative and more productive solutions such as cloud, software-as-a-service, artificial intelligence and cyber-security.”

Monks, the £2.3 billion trust managed by Baillie Gifford’s ‘global alpha’ team led by Spencer Adair, took second place, eking out a gain of 2.5% over the quarter. Its shares, too, trade at an abnormally wide discount of -11%, having traded at a small premium for much of the past five years. The trust has consistently been buying back its shares in recent months in an effort to reduce the discount.

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Although Microsoft is also one of its top five holdings, Monks has a very diversified portfolio by sector and geography with 110 equity holdings – double that of Allianz Technology. The portfolio is geared by around 4% and ongoing charges are extremely competitive at 0.4% of assets.

Next in the table is Montanaro European Smaller Companies. Having experienced a fantastic bounce of 26.2% in the final quarter of 2022, it made a 1.7% gain in the first quarter. But that was high enough for third place in the performance stakes, although shares in the £268.6 million trust continue to trade close to a historically high discount of around 12%.

The trust likes to focus on what it calls ‘quality growth’ companies with attractive environmental, social and governance (ESG) characteristics. It has 49 such companies in its portfolio, with the top 10 representing close to 50% of assets.

Private equity specialist NB Private Equity Partners (LSE:NBPE) was the portfolio’s worst performer, suffering an -8.3% loss, but still retaining its third-placed ranking over one year and top place over three years with an impressive 138.5% return.

In common with most other trusts in the sector its shares trade at a high discount to NAV, in this case 35%. Income-seekers can get a decent yield from the shares, currently 5%, compared with a target of 3% or greater of NAV, with dividends paid half-yearly.

Adventurous tips slip*

Notes: *Holdings ranked by three-month performance. Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 31 March 2023.

Conservative portfolio ekes out a gain

As with the adventurous portfolio, private equity was quite a drag on the conservative portfolio’s overall 1.3% gain over the quarter. Shares in Pantheon International (LSE:PIN) fell 10.2%, pushing its one-year loss down to -25.8%.

Its discount to NAV is among the widest in the sector, at nearly 49%. However, this figure reflects the fact that there is a significant valuation lag for much of its underlying portfolio of private equity funds.

Data for 28 February (the latest available, released in late March) showed that nearly half the estimated value of the £2.5 billion portfolio was valued on 30 September 2022 or before and 35% was valued on 31 December.

The upshot is that in a period of market volatility, nervousness about prospects for growth capital and a perceived lack of price discovery for privately held assets, investors can be forgiven for erring on the side of caution when ascribing a rating for a fund of funds such as Pantheon International.

Its long-term returns speak volumes, however. The shares have made an average annual total return of 10.9% over 10 years to 28 February and 10.7% since its launch in 1987.

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Topping the table is Henderson EuroTrust (LSE:HNE), which continued a welcome return to form, with its 8.6% return over the quarter the best in show. Its discount to NAV, however, remains stubbornly high at -15%, close to its five-year high point.

A market capitalisation of £295 million makes it the smallest of seven trusts in the Europe sector, which includes stablemate Henderson European Focus Trust (LSE:HEFT), capitalised at £340 million (the next smallest trust, trading on a 13% discount). One can’t help but think that combining efforts would improve marketability of the shares and contribute to an improved rating.

Finsbury Growth & Income (LSE:FGT), managed by Nick Train, has also been making a welcome return to form. The total return focus of this UK equity income sector stalwart is paying dividends again, with a 6.8% gain among the best in the sector over the quarter and one year.

The discount to NAV of the £1.9 billion trust has reduced a little to 4%, but the dividend yield remains comparatively modest at 2%, although average annual dividend growth of 5% over five years offsets this to an extent.

Other trusts in the conservative portfolio to post decent comparative returns in their sector over the quarter include Schroder Asian Total Return (LSE:ATR) (4%) and JPMorgan American (LSE:JAM) (3.7%).

Conservative choices gain a little*

Notes: *holdings ranked by three-month performance. Not all constituents were members of the portfolios over the time periods stated. Data source: FE Analytics as at 31 March 2023.

Discounts to NAV, gearing and yields refer to prices as at 17 April 2023 unless otherwise stated.

Andrew Pitts was editor of Money Observer magazine from 1998 until 2015. Andrew holds shares in Capital Gearing.

The author holds Baillie Gifford Shin Nippon, Bankers, Capital Gearing, Mobius, Monks and JPMorgan Japanese (as part of a globally diversified portfolio).