With Bitcoin halving in value from its peak this year, many cryptocurrency advocates are hailing this as a buying opportunity. But as anyone with a modicum of knowledge about investing will tell you, the previous price of an asset has little bearing on what it will be worth in the future unless it is backed up by fundamentals.
It may seem hypocritical then to shine the spotlight on a selection of top-performing investment trusts purely because they have pulled back from their peak; many of those highlighted below focus on markets that still look expensive on conventional valuation metrics.
Yet with internet forums full of people willing to take a chance on a novel asset that has yet to prove it has any sustainable real-world value but possesses every characteristic of a bubble, publicising the investment vehicles with a track record of delivering value to shareholders over the long term seems positively prudent in comparison.
Baillie Gifford
Baillie Gifford’s focus on long-term winners of the future meant it dominated the top of performance tables last year as the lockdown led to a surge in tech stocks. Its large overweight position in Tesla across its US and global funds didn’t do it any harm either.
However, rising inflation expectations have led to a reappraisal of the high valuation multiples paid for growth stocks, and a correction in this area of the market.
This helps to explain the performance profile of two Baillie Gifford trusts: Baillie Gifford US Growth is down 27.19 per cent since its February peak, but made 133.45 per cent last year and is up 189.05 per cent since launch in March 2018; meanwhile Edinburgh Worldwide IT is down 25.3 per cent since its peak, but made 87.72 per cent last year and is up 421.97 per cent over the past decade.
Performance of trusts
Source: FE Analytics
Looking forward, the managers of both trusts remain confident in the strategies that have delivered such strong gains over the medium and long term.
Speaking before the recent pullback, Kirsty Gibson of Baillie Gifford US Growth said: “It would be all too easy to sell a stock simply because it has gone up a lot, like many share prices did last year.
“However, [I want] to avoid knee-jerk reactions. In times of dramatic change, what we must do is double down on our philosophy and process. While we cannot predict returns in the future, what we can control is how we react today. We remain resolute in our search for exceptional growth companies.”
Edinburgh Worldwide looks for companies of less than $5bn in size, but manager Douglas Brodie said it is not a conventional small-cap investment trust.
“You create the same dollar value in a company growing from $1bn in size to $50bn in one going from $50bn to $100bn,” he explained. “But one is a 50x return and one is a 2x return.
“If you get into these businesses early, it tends to be terrifically powerful. Industries and societies undergo profound change over decades, if not multiple decades. And while some of the [investment headlines] do feed into that, they don't ultimately define that human ingenuity, entrepreneurial flair, technology, progress and innovation which are key contributors.
“You need an investment process and philosophy that embeds that stance, one that emphasises the long term, one that emphasises patience. And if you do that, then growth and the compounding effect of growth can really come to the fore.”
Despite the pullback in each trust, both are still on premiums: 5.14 per cent for Baillie Gifford US Growth and 3.52 per cent for Edinburgh Worldwide.
Japan
Another Baillie Gifford trust, Shin Nippon, is one of the big fallers in Japan: it is down 18.15 per cent since reaching its peak at the end of 2020, although this came on the back of a year when it made 48.5 per cent.
The trust’s manager Praveen Kumar looks for disruptive and fast-growing smaller businesses run by young and dynamic entrepreneurs.
He admitted that the trust’s focus on such companies benefited from last year’s coronavirus-related acceleration of digitalisation, but pointed out Japan still lags behind the rest of the developed world in this regard, meaning this theme has plenty of room to run.
“Historically, Japanese businesses have been notoriously slow in adopting modern business practices, including the use of technology,” he said.
“The discerning nature of Japanese consumers who value personal contact and high standards of service has insulated brick and mortar retailers from online competition. This has resulted in slower e-commerce penetration in Japan. This state of affairs has been shaken up by the pandemic as restrictions to avoid the spread of the virus have forced consumers and companies to adapt.
“Businesses and consumers are realising the immense value that technology and online services bring to the table, and therefore we think many of these trends are likely to persist over the long term.”
Baillie Gifford Shin Nippon is up 611.76 per cent over the past decade. Despite its recent pullback, it is still on a premium of 3.88 per cent.
JPMorgan Japan Small Cap Growth & Income has fallen even further from its peak, down 19.38 per cent from its January level. Again though, this came on the back of a strong year, when it made 43.45 per cent.
Eiji Saito, co-manager of the trust, said Japan’s declining and ageing population means it will struggle to break free from the sluggish growth that has characterised its economy for the past 30 years.
However, like Kumar, he believes that Japan will be forced to embrace companies that are innovating and disrupting established competitors. This helps to explain why his trust has a correlation of 0.86 with Baillie Gifford Shin Nippon over the past year, where 1 means a perfect correlation and 0 means no correlation.
Performance of trusts over 10yrs
Source: FE Analytics
JPMorgan Japan Small Cap Growth & Income has made 289.76 per cent over the past 10 years. Unlike the other trusts mentioned above, it is on a discount, of 5.6 per cent.
Biotech
A global pandemic appeared to be the perfect tailwind for the biotech sector and many of the companies racing to produce a vaccine surged on every piece of positive news from clinical trials. Yet Carl Harald Janson of the International Biotechnology Trust warned most of these companies wouldn’t make any money from these drugs.
Janson takes a different approach to his peers when investing in biotech. Rather than trying to second-guess binary events such as clinical trials, he will often trim his position in a company ahead of a major announcement in a bid to avoid a potential double-digit price fall if the results disappoint.
In a previous interview with Trustnet, Lucy Costa Duarte, head of investor relations on the trust, said this strategy works because the market is inherently optimistic.
“We ride the optimistic price rise, sell out, leave maybe a bit on the table until the data comes out and then we are not in a position of holding a falling knife and looking for a hasty exit if the news is bad,” she explained.
“And if it is good, we can buy it back pretty quickly. Even if we lose a little bit, on a risk-weighted valuation basis, it’s actually probably cheaper.”
International Biotechnology Trust is down 16.14 per cent since its February peak, but made 35.64 per cent last year and is up 455.16 per cent over the past 10 years.
It is currently on a premium of 0.75 per cent.
Last up is the Biotech Growth Trust, down 21.11 per cent from its February peak, but up 67.66 per cent in 2020 and 639.23 per cent over the past decade.
Performance of trusts over 10yrs
Source: FE Analytics
Manager Geoffrey C Hsu uses a bottom-up approach to selecting stocks, after carrying out research that includes financial modelling, an assessment of research pipelines, identification of potential catalysts, and meetings with company directors.
An analyst report from Edison back in March said the trust has delivered strong returns over the long term and could be of interest to investors who are willing to tolerate periods of industry volatility, but it warned of high valuations.
“US stocks are 12 years into a protracted bull market and, in aggregate, the valuation of biotech shares looks somewhat rich,” it said.
“The DS World Biotech index is trading at a forward P/E multiple of 26.4x, which is higher than the five- and 10-year averages of 24.5x and 23.0x respectively. While a biotech fund may be a valuable addition to a global equity portfolio, investors may benefit by waiting for a general market pullback.”
The Biotech Growth Trust is on a premium of 1.66 per cent.