We set up the MoneyWeek investment trust portfolio in 2012 after readers suggested putting our money where our mouth was. We picked a portfolio of six London-listed investment trusts to give investors a global, all-weather portfolio with a wide array of investment styles and asset classes.
We’ve always preferred investment trusts to unit trusts – they tend to be cheaper, and research shows they outperform over the long term. The closed-ended structure of these vehicles also makes them more suitable for holding illiquid assets.
Investment trust Gearing boosts returns
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What’s more, investment trusts, which are structured as companies, can borrow money to boost returns – something the latest entrant to the portfolio, AVI Global Trust (LSE: AGT) has been taking advantage of to increase its exposure to Japan and reduce foreign currency risk (see my article last week for a full overview).
We added AGT to the portfolio in the first quarter, the first change since 2020. We removed RIT Capital Partners (LSE: RCP), which turned out to be a good investment decision. RIT has continued to sell off over the past few months as concerns have gathered pace about the quality of the trust’s private portfolio and the valuation of these assets. Shares in the trust have fallen by 16% in 2023, compared with a decline of 2.4% for AGT (excluding income). Following this change, the portfolio consists of Scottish Mortgage Investment Trust (LSE: SMT), Personal Assets Trust (LSE: PNL), Mid Wynd International Investment Trust (LSE: MWY), Caledonia Investments (LSE: CLDN), Law Debenture (LSE: LWDB) and of course AVI Global Trust (LSE: AGT).
Discounts drive underperformance
It’s been a difficult year for all of the holdings in the portfolio. Even Personal Assets, which prioritises protecting investors’ capital over growing it, is in the red this year.
This trust’s problems are emblematic of the performance of the rest of the portfolio. PAT entered 2023 positioned defensively against the backdrop of rising interest rates, high inflation and a bleak outlook for the economy.
However, unexpectedly good household spending numbers have driven a “narrow equity market rally”, says Charlotte Yonge, assistant fund manager of PAT. Combined with rising real yields and a strong pound, this has thrown out projections made at the beginning of the year. The most important factor hampering PAT’s performance, however, has been a move “from a 1.2% premium to a modest discount of -1%”.
The trust uses a discount control mechanism to try to project shareholders from these moves (buying back shares when the trust is trading at a discount to asset value and issuing more when trading at a premium). However, other trusts don’t, and a widening of discounts has been one of the biggest negative performance drivers in the year.
Take the two worst performers in the portfolio, Scottish Mortgage and Caledonian Investments. Shares in these trusts have lost between 9% and 14% excluding dividends in 2023, though they are showing signs of recovery, but their underlying net asset values (NAVs) have risen by around 8% and 2% respectively. And it’s not just these companies. Investment trust discounts across the market are trading close to the widest levels since the financial crisis.
PAT stands pat
For its part, PAT believes its defensive positioning remains the best approach for the current market. “Labour market inflation remains too high and consumer savings from the pandemic mean the impact of higher rates is not yet fully visible,” Yonge notes. Reflecting this caution, the fund has less than a quarter of its assets in equities. Instead, it favours inflation-linked bonds instead, “where positive real yields are available, and gold as the currency that can’t be printed”.
It’s no surprise that SMT and CLDN have chalked up the worst performances in the portfolio this year. These trusts both have roughly a third of their assets in private businesses, and investors have become very concerned about the value of these holdings. That scepticism might be warranted, but we think there is a reasonable chance it might not be, based on conversations with managers in the private equity sector, so we continue to hold these companies. As we’ve seen this year, investment performance can be surprising.
UK equities outperform
Indeed, against all the odds, the best-performing trust this year in the portfolio is LWDB. It is essentially flat year-to-date, while its total return, including income, is positive. James Henderson, one of the UK-focused equity income trust’s managers, tells me the portfolio has reaped strong returns from its holding in Flutter Entertainment, which is benefiting from the growth of the gambling market, and from Marks & Spencer. The latter has defied expectations for profit and sales growth, and the stock has surged by nearly 60% this year.
Mid Wynd’s exposure to US tech stocks has helped it in 2023. Its NAV is up by 2.9% for the year to the end of June, but a growing discount means the stock slipped by 3% over the six-month period. Still, we like this company. It complements SMT’s high growth approach, focusing on identifying long-term global trends but with a disciplined approach to valuation.
However, we will be keeping an eye on this trust following the decision by the board to replace its investment management company, Artemis, after the retirement of long-serving managers Simon Edelsten and Alex Illingworth. Lazard Asset Management is taking over. Fees are expected to be lower as a result, but it remains to be seen how the trust’s portfolio will change.
An equally weighted portfolio of the trusts has produced a total return of -2.5% for the year to 18 July. We intend to update the returns table quarterly in future, and rebalance the portfolio once a year.
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Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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