Troy Income & Growth, Foreign & Colonial, BlackRock Smaller Companies and Capital Gearing have all made way for new strategies in Winterflood Investment Trusts’ model portfolio following an interim review.
With the first half of 2018 in the books, Winterflood analysts Simon Elliott, Kieran Drake and Emma Bird noted that it was a good time to review their list of recommended trusts.
The list – which forms the basis for its model portfolio – outperformed the FTSE All Share Equity Investment Instruments index in 2017 and has continued to do so during the first half.
“So far this year our model portfolio is up 3.9 per cent compared with 2.8 per cent for the index and perhaps more importantly, 22 of our 36 recommendations have outperformed their relevant indices year‐to‐date, equivalent to 61 per cent,” they noted.
While performance at a net asset value (NAV) level has been good, discount tightening has also played a part, the analysts added, meaning that some trusts no longer look as attractive as they did at the start of the year.
As such, five trusts have been removed from the recommendation list with four added across the global, UK and emerging markets equities regions as well as one shift in the alternatives space.
Starting with the UK, where the Winterflood team has swapped the BlackRock Smaller Companies trust for Standard Life UK Smaller Companies.
The BlackRock trust has been the best relative performer year-to-date within the model portfolio, up 18.31 per cent so far this year compared to a 5.16 per cent rise for the average IT UK Smaller Companies peer and three basis-points loss for the Numis Smaller Companies and AIM ex IT index, as the below chart shows.
Performance of trust vs sector and benchmark over YTD
Source: FE Analytics
The analysts said: “The UK smaller companies sector has been re‐rated and BlackRock Smaller Companies is currently trading on a discount of 6 per cent compared with its 12‐month average of 10 per cent.”
Meanwhile, the rating of Standard Life UK Smaller Companies has moved in the other direction (6 per cent current compared with a 3 per cent 12‐month average).
“In our view this reflects a perceived overhang from the proposed merger with Dunedin Smaller Companies,” the team said.
Investors remain concerned that the fund, which was proposed as the rollover vehicle for the voluntary liquidation of Dunedin Smaller Companies and if approved will increase in size, may be impacted by the merger.
However, following recent uncertainty, the discount has doubled and this could present an attractive entry point for investors into a fund that has been the fourth-best performer in its sector over the last decade.
“With the sector in general trading on relatively tight discounts the discount control mechanism of Standard Life UK Smaller Companies offers some mitigation of downside discount risk if there were to be a sell‐off in the small-cap sector,” the analysts said.
The trust is managed by FE Alpha Manager Harry Nimmo and uses his proprietary stock selection Matrix quantitative screening tool that sorts companies by a number of metrics.
Also in the UK, the team have taken FE Alpha Manager Francis Brooke and Hugo Ure’s £221m Troy Income & Growth off the recommended list.
The Winterflood analysts continue to recommend Perpetual Income & Growth and Temple Bar Investment Trust instead.
They noted: “We continue to rate [Troy Income & Growth] highly but we want to concentrate the exposure within the model portfolio to the two funds that we believe currently offer greater value.”
In the global equities space, the analysts have removed the Foreign & Colonial Investment Trust run by Paul Niven in favour of Alasdair McKinnon’s Scottish Investment Trust.
Performance of funds vs sector over YTD
Source: FE Analytics
“The Scottish Investment Trust is differentiated from its global peer group by its clear contrarian investment approach, which was introduced in 2015 following Alasdair McKinnon's appointment as lead manager,” they said.
“We believe that the value bias resulting from this approach provides diversification to the other global funds in our model portfolio [Scottish Mortgage and Monks Investment Trust], which are significantly more growth‐oriented.”
The closed-end fund, which trades on a 9 per cent discount at present, also offers one of the highest yields in its peer group at 2.3 per cent, which rises to 2.8 per cent with special dividends included.
Turning to emerging markets, the team have added JP Morgan Global Emerging Markets Income, replacing JP Morgan Emerging Markets, which was left as the team’s only holding in the space following the demotion of Templeton Emerging Markets (TEMIT) earlier in the year.
TEMIT was removed following the departure of Carlos Hardenberg, who had driven a resurgence in the fund’s performance, they said.
“Emerging markets have suffered another difficult period so far this year, partially as a result of a US rising rate cycle, a slowdown in the Chinese economy and the potential impact of a trade war between the US and China,” the team said.
Indeed, the MSCI Emerging Markets index has been one of the worst among global equities regions, down 3.94 per cent in sterling terms.
Performance of index over YTD
Source: FE Analytics
The Winterflood analysts added: “Perhaps unsurprisingly this has led to discounts widening across the sector and retail demand for the asset class remains weak.
“We believe that this presents a value opportunity for contrarian investors and have therefore decided to switch our recommendation to JPM Global Emerging Markets Income.”
The fund has been de‐rated this year with its shares, having started the year trading at around par to NAV, but now on a 7 per cent discount.
“We believe that this fund could benefit from a change in sentiment far more than most of its peers, given its strong long‐term performance record, its yield of 4.1 per cent and retail orientated shareholder base,” they added.
Finally, within the alternatives space, the team have replaced Capital Gearing Trust with BH Macro, a trust which specialises in trading currencies and rates.
This is despite the performance of the fund being subdued over the five years to the end of 2017 – when it was up 26.45 per cent.
“However, there are signs that the environment for the fund’s macro trading style is improving with a divergence in economic performance and monetary policy globally and increased volatility in rates and FX,” the analysts said.
“In May the fund had its second strongest ever month with the NAV up 8 per cent and in our view the fund is an attractive option as a portfolio diversifier with limited discount risk given its discount control mechanism which targets a discount tighter than 8 per cent.”