Invesco Perpetual Smaller Companies and Aberdeen Diversified Income & Growth were among four strategies to exit the Winterflood Investment Trusts model portfolio as it made a loss during the first half of the year.
The Winterflood Investment Trusts model portfolio sank to an 8.7 per cent loss during the first half of 2020 as 27 of the 35 trusts in the portfolio de-rated.
The research house’s analysts argued that a number of its selection were not well-positioned for the economic crisis caused by the Covid-19 pandemic.
However, a number of the trusts in the portfolio moved from trading at premiums to net asset value (NAV) to trading at discounts, while others saw their discounts widen significantly.
As such, Winterflood decided to remove four recommendations from the portfolio and make six additions.
UK
One notable change in the portfolio was the addition of the £805.5m Law Debenture Corporation. It followed the earlier sale of Temple Bar as it was announced that long-term manager Alastair Mundy would be taking an extended leave of absence for health reasons.
According to the Winterflood analysts, Law Debenture is unique because of subsidiary Independent Professional Services.
“This is a significant contributor to the fund’s revenue, which provides the managers James Henderson and Laura Foll greater flexibility in stock selection within the equity portfolio,” they said. “More recently, it has enabled them to allocate to companies that have suspended their dividends in light of Covid-19 uncertainty.”
The trust is currently (as at 13 July) trading at a premium to NAV of 0.3 per cent, has a yield of 4.8 per cent, is 28 per cent geared and ongoing charges of 0.3 per cent.
Another change to the portfolio was the addition of Harry Nimmo’s Standard Life UK Smaller Companies investment trust.
It replaced the Invesco Perpetual UK Smaller Companies trust, after it announced a change in the dividend policy. Winterflood had recommended the trust based on its earlier dividend policy which it said helped reduced the downside risk in a sub-sector where some strategies were trading at premiums or near the top of discount ranges.
However, the change in the dividend policy saw the trust move from a premium to a discount and coupled with market volatility had left it one of the worst performers and a “disappointment” for the analysts.
As such, Winterflood took the opportunity of a de-rating in Nimmo’s Standard Life UK Smaller Companies trust to add it to the model portfolio.
“This fund has an exceptional long-term performance record under the stewardship of Nimmo, who pursues a quantitative-drive, systematic investment approach,” they noted. “This has allowed him to capture the undoubted growth in potential in mid- and small-cap UK companies, while being able to navigate periods of volatility.”
The £550.4m Standard Life UK Smaller Companies trust is trading at a discount of 9.1 per cent, is not geared and has ongoing charges of 0.91 per cent.
Emerging markets
In the emerging markets portion of the model portfolio, the analysts switched from JP Morgan Global Emerging Markets Income to sister strategy JP Morgan Emerging Markets.
“While we continue to rate the income-focused fund highly, we believe that in the current market environment a broader mandate may be beneficial for performance as dividends and income stocks may continue to come under pressure as the economic impact of the pandemic unfolds further,” they said.
The firm highlighted long-term emerging markets manager Austin Forey’s focus on high-quality growth businesses with competitive advantages and strong finances that should be “well-suited to the current environment”.
In addition, the trust has just 29 per cent overlap with the other emerging markets strategy in its portfolio: Templeton Emerging Markets.
JP Morgan Emerging Markets is currently trading at a discount to NAV of 8 per cent, is not geared and has ongoing charges of 1.02 per cent.
Bonds/debt
In the fixed income portion of the portfolio, Winterflood decided to remove Real Estate Credit Investments, which moved from a 3 per cent premium to a 16 per cent discount.
Discount/premium of Real Estate Credit Investments over 5yrs
Source: FE Analytics
“Real Estate Credit Investments had positioned itself more defensively ahead of the pandemic by increasing its allocation to senior loans to larger institutional borrowers and reducing exposure to mezzanine loans,” said the analysts. “However, it was hit hard by mark-to-market movements, although realised losses were much smaller.”
The trust also had significant exposure to retail, hotel, student accommodation, leisure and mixed-used sectors, areas that had been hit by the pandemic and the lockdown conditions in place.
As such, they replaced the trust with the £201.3m Henderson Diversified Income investment trust – overseen by Jenna Barnard and John Pattullo - which is able to invest across bonds and loans and typically invests in large, high-quality companies in industries with high barriers to entry.
They added: “We rate the management team of Barnard and Pattullo highly and note their conviction macro views, which saw them remain long duration last year when the market consensus was that interest rates would rise.
“This positioning was rewarded as central banks cut interest rates.”
Henderson Diversified Income is currently trading at a discount of 5.3 per cent, is 16 per cent geared, has a yield of 5.2 per cent and ongoing charges of 0.91 per cent.
Property
While one of the sectors hardest hit by the Covid-19 pandemic, Winterflood decided to add another name to its property portfolio in Tritax EuroBox.
“This fund appears to be the beneficiary of the longer-term impact s of the Covid-19 pandemic, primarily an acceleration of the adoption of e-commerce and the onshoring of supply chains, strengthening the already attractive outlook for continental European logistics assets,” the analysts said.
The £498.4m trust is trading at an 11.8 per cent discount to NAV, is not geared, has a yield of 4.2 per cent and ongoing charges of 3.34 per cent.
Alternatives/hedge funds
Finally, Winterflood switched out of Aberdeen Diversified Income and Growth following discount widening and into the £3.4bn RIT Capital Partners trust.
“This fund has traded on a premium rating for a number of years, however, it was de-rated in the March sell-off and, in our opinion, the current discount of 4 per cent offers an attractive entry point,” they said. “Although Lord Rothschild stepped back from the frontline in September last year, the fund remains its long-established characteristics as a well-managed, sophisticated family office.”
Discount/premium of RIT Capital Partners over 5yrs
Source: FE Analytics
RIT Capital Partners is trading at a discount of 4.6 per cent, is 18 per cent geared and has ongoing charges of 0.68 per cent.