30th May 2014
Investment journalist Cherry Reynard takes her weekly look at the investment trust landscape.
Terry Smith unveiled his new investment trust this week. The FundSmith Emerging Equities trust will invest in the same high quality companies with dependable franchises as the group’s UK-focused fund. Smith has backed the fund with £5m of his own money and is hoping to raise between £100m and £250m. The trust will invest in 35-55 companies, with no more than 40% in any country or 5% in an individual company.
It is a relatively inauspicious time to launch an emerging market fund. The annual management charge will be 1.25% – high relative to other trusts in the sector, but the trust will not have a performance fee. Equally, the success of the UK fund and the simplicity of approach has won Smith a loyal backing.
The other noteworthy news was the re-engineering of the gearing on the Edinburgh Investment trust. The trust had been paying 7.75% and 11.5% on two sets of gearing, expensive on any measure. The trust has renegotiated some of its borrowing from June onwards, which should get rid of a drag on performance.
There were lots of VCT announcements this week, revealing the sector to be in buoyant shape and a key beneficiary of the economic recovery. The Artemis VCT, for example, announced plans to deliver a special dividend to shareholders, saying that the managers were finding relatively few investment opportunities in the Aim market at present. This is in spite of – or perhaps because of – a 23.8% gain in net asset value for the six months to 31 March. The trust had sold out of Andor Technology, Ducat Ventures and Ilika. These and other sales totalled £4.1m. Only £2.7m of that was deployed in other investments – specifically new weightings in GetLenses, Kalibrate Technologies and Nasstar.
The Rensburg VCT also had a strong year. The NAV was up 18% over the year to 28 February 2014, after adjusting for dividends of 4p per share and a special dividend of 2p per share. The group was a little more optimistic than the Artemis managers, concluding: “The majority of our investee companies are soundly financed and are, therefore, well placed to benefit from any improvement in the UK and global economies.”
Elsewhere, Aberdeen-managed Shires Income also reported this week. The company’s net asset value rose 11.5% over the year to 31 March, compared to a return of 8.8% from the benchmark FTSE All Share index. Gearing was a positive factor in overall returns, as was the trust’s holding in the Aberdeen Smaller Companies High Income trust, as smaller companies continued their strong run. The trust will pay a full year dividend of 12p per share.
The TR Property Investment trust continued to reflect the resurgence in commercial property in the six months to 31 March. The trust saw an NAV total return of 22.4% against a benchmark total return of 14.9%. The discount narrowed and remains low as demand for the trust’s shares continued to improve. The income picture was also robust, with the trust showing a 6.4% increase in overall dividends.
The private equity-focused Caledonia Investment trust also proved itself a beneficiary of the improving economic environment. The trust delivered an uplift in NAV of 14.9% for the year to 31 March, with the quoted portfolio delivering the strongest performance (at 20.5%) and the unquoted pool also doing well – rising 17.7%.
Trust in focus – Capital Gearing
Capital Gearing, run by market veteran Peter Spiller, has maintained the impressive record of preserving investor capital in every one of the last 30 years. Until 2013/14. Spiller’s defensive positioning – low equity weighting, high inflation-linked bond and cash weighting – cost the fund dearly as markets embraced risk with vigour.
The latest annual results for the trust showed NAV dipped 2.5% for the year to 5th April. Spiller said this reflected ‘the portfolio’s relatively high exposure to underperforming defensive asset classes and unfavourable currency movements’. The asset allocation of the portfolio is completely flexible, but Spiller believed equities were highly valued, and inflation remained a real risk in a debt-burdened society.
Spiller is maintaining the trust’s current asset allocation: Where he is invested in equities, it is in hedge funds, private equity and other ‘special situations’ type funds. He still holds around one- third of the portfolio in inflation-linked bonds and a further 30% in ‘extended cash’ such as zeros, preference shares and convertibles.
Spiller’s track record would suggest that he is a good manager having a tricky patch, rather than anything more sinister. The trust’s premium to net asset value has moved considerably lower and the managers have reduced their investment management fee from 0.85% to 0.60% of gross assets. It could be an opportunity to pick up a good manager at a lower price.
Fund pick – Nick Greenwood, manager of the Miton Worldwide Opportunities fund
“Phaunos Timber – [PTF] – SPECIAL SITUATION: Launched at the end of 2006, a time when Forestry was very much in vogue, touted as the ultimate non-correlated asset. The slump in the US housing cycle and a general decline in iron and steel production subsequently took a toll on the industry’s prospects. Furthermore the market developed a deep distrust of the manager. The recently appointed chairman understood the depth of the problem and dispatched with the original managers while keeping many of the sharp-end staff within Phaunos as it became self managed. The stock remains friendless , however. Once a lower more realistic net asset value has been established then there is significant scope for the discount to narrow as the market learns to trust Phaunos.”