Investment trust weekly round up – modernisation on the cards as trusts cut charges

4th April 2014


The investment trust industry has frequently been accused of needing to modernise. This week, there were increasing signs that it is taking that message on board, with funds dropping fees and restructuring writes Cherry Reynard.

The more forward-thinking trusts have been dropped fees over the past month in order to retain their competitiveness with the open-ended sector in the post-RDR environment. This week, the Schroder Japan Growth and the Montanaro European Smaller Companies trusts both reduced their annual management charge, with the Montenaro trust also ditching its performance fee. They join funds such as the Fidelity China Special Situations trust, which lowered fees at the end of March.

Anthony Bolton bid farewell to the trust this week, and fund management in general, with a stinging attack on the standards of corporate governance in China, saying the Chinese were ‘great liars’. He hands the reins of the fund over to Dale Nicholls following a more respectable run of performance than characterised his early years on the trust.

A trust long in need of modernisation has been the £2.6bn Alliance Trust. It resisted buybacks to narrow its hefty discount until put under intolerable pressure from activist shareholders, but manager Ilario Di Bon is now trying to get on the front foot with a radical overall of the trust’s portfolio. He is hoping that his strategy will show a turnaround before activists force the issue once again.

It was a quiet week for results. The Chelverton Growth trust saw results hit by its Nasdaq-OTC company One Horizon. The net asset value rose 11.4% over the six months to the end of February, which was slightly behind the benchmark MSCI Small Cap UK index, which increased by 17.2%.

The Ruffer investment company also showed a rare period of weakness. It reported a decline in NAV of 3.1% for the first quarter of the year, compared to the trust’s target return of 0.25% (twice the time-weighted Bank of England base rate over the period). Nevertheless, the trust reflected the general malaise among investors by increasing its cash weighting from 5.9% to 8.3%.

There was better news from the VCT sector, where an increase in corporate activity has buoyed the market. The Octopus Aim VCT 2 reported a 32.4% increase in net asset value for the year to 30 November 2013.

At the end of the week, JPM-managed trust Mercantile Investment trust reported its full year results to the end of January. One of the three managers, Guy Anderson, is still relatively optimistic on stock markets and the fund retains gearing of almost 9%. The trust rose 27.7% for the full year, compared with a return from the benchmark FTSE All-Share ex FTSE 100 Index of 27.5%.

Featured trust – Merchants

Managed by Allianz Global Investors, the £638m Merchants trust was originally incorporated in 1889 to invest in the railway companies of North America. The trust now focuses on major UK companies with a growing dividend yield.

The trust has seen a marked improvement in performance over the past year, having previously stuck relatively close to the UK Equity Income sector average. The share price rose 19.1% in the twelve months to 31 January, well ahead of its FTSE 100 benchmark. The trust also pays an attractive yield of 4.7% against a FTSE 100 sector average of 3.6%. The trust has used reserves to keep the income stable, but said that dividends are now covering earnings once again. In common with all income trusts, the trust’s shares are no longer a bargain, trading at near asset value.

Manager Simon Gergel is currently finding the best value in several of the ‘mega-caps’ stocks, plus some recovery situations. Among its top ten holdings are BP and Royal Dutch Shell, plus the larger pharmaceutical names and energy groups. Important for recent performance has been the absence of banking names – Lloyds and Barclays do not feature.

Adviser pick

Andrew Merricks, head of investments at Skerritts Consultants highlights the Biotech Growth trust, managed by Orbimed: “This fund and the Worldwide Healthcare trust are only available in investment trust form in this country. It’s a management team we like a lot. In the short-term the trusts have taken a knock and we are using it as an opportunity to add to our holdings. There is a long-term multi-year story in biotechnology and the Orbimed team knows that world inside out.”

Analyst ratings

Morningstar reinstated the Morningstar Analyst Rating of Bronze for the BlackRock Commodities Income fund previously under review after the departure of manager Richard Davis. The group said: “Olivia Ker has been a member of the Natural Resources team at BlackRock since 2011 and it’s a team of which we think highly. Deputy manager Tom Holl continues in this role, having acted as deputy to Richard Davis, bringing consistency. Given the depth of experience among team members and their collegial approach to fund management, we have sufficient confidence to reinstate the Bronze rating.”

It also reinstated a neutral rating for the Henderson Global Trust, saying that while the developments at the fund and its remit made good sense, new manager Wouter Volckaert has no public track record in fund management and joins a team recently remodelled under Henderson’s new head of global equities Matt Beasley.

Winterflood expressed some caution on the BlackRock Smaller Companies fund, despite rating manager Mike Prentis highly: “Small‐cap stocks and small‐cap funds have been positively re‐rated over the last couple of years. Continued earnings growth appears to be key to supporting the ratings and in turn sentiment towards the small‐cap fund sector. As such, at the fund’s current level of 7%, there is an increased element of discount risk.”

The group also highlighted Greencoat UK Wind as an attractive prospect for income seekers: “In its first financial year Greencoat UK Wind has successfully achieved its targets, paying dividends totalling 4.5p (equivalent to 6p p.a.) and achieving a total return of 8.7%. This last figure is not seasonally adjusted for the fact that the fund’s assets operated in two summer quarters and only one winter quarter when wind speed, and hence power generation, is greater. Based on the current share price and new dividend target of 6.16p the fund has an attractive prospective dividend yield of 5.9%.”

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