Mid Wynd International Investment Trust has distinguished itself by outperforming most of its global investment trust peers over the past few years - including in the last financial year to the end of June - as well as its benchmark, the FTSE World Index.
Its manager, Michael MacPhee, makes it his mission to exploit inefficiency in markets. "I take advantage of the sheer stupidity with which our industry analyses risk," he says. "They start with the premise that the index is risk-free, with the result that their portfolios look similar to it. We look to long-term growth companies, which our industry tends to avoid because they cause them discomfort or they incur some volatility. Our portfolio is different to any indices because the best way to beat them is to ignore them totally."
He says oil exploration and production companies have boosted the trust, for example Alternative Investment Market (Aim) listed Bahamas Petroleum. "I progressively sold the shares on the way up," says Mr MacPhee. "This was a name institutional investors were uncomfortable with."
Other small companies that have benefited the trust include electronics company Dialight. "This was not well known and looked anomalous, but has made us three to four times the money we paid for it," he says. "I have held Ocean Wilsons for 20 years, a UK-listed Brazilian maritime services company. It has been a very good long-term investment, moving up from around 80p to £14 a share over 20 years."
Mr MacPhee is familiar with Brazilian stocks because he used to analyse this market in the 1990s. He also holds Odontoprev and Santos.
Look to the long term
"The year ahead does not mean much as I manage money over five to 10 years. Focusing on the short term is unhelpful, although so far, so good," says Mr MacPhee. "At the moment I am largely focusing on companies I know, because with prices moving around a great deal, I don't want to strike out and buy anything new. I may invest slightly more in existing holdings if they are hard hit. But, over time, volatility has served us well."
That said, earlier this year the trust took out insurance, in the form of derivatives, against the possibility that sovereign debt problems will worsen. Mr MacPhee sold index futures to help protect against any significant fall in markets.
"This helped quite a lot and probably added around 3-4 per cent to performance," says Mr MacPhee. "It provides cash and so gives you ammunition at a time when equities are interesting. The timing of the purchase was fairly fortuitous, because although volatility was low, it has now gone up a lot. We had been considering doing this for quite a while because although earnings reports had been stupendous, the margin for error was getting lower. We have also had a period of extreme stimulus, which is coming to an end."
It is the first time the trust has used derivatives since Mr MacPhee started managing it in 1998. "You have to respond to opportunities and risks and this seemed the best way to do it," he explains. "But this is essentially a stockpicking fund and, over time, you make relative money for your shareholders by picking the right stocks. On balance we are better off trying to do this. This is not a very complicated fund, we have also not used much gearing."
Michael MacPhee CV Michael MacPhee is manager of the Mid Wynd International Investment Trust which he has managed since 1998. He joined Baillie Gifford in 1989 and has also worked as a barrister. Mr MacPhee has a degree in Law from Oxford University. |
Risk off
Risk analysis is an important part of the trust's investment process. "People tend to be mostly backward looking," he says. "But I try to analyse how the portfolio would perform in different scenarios to avoid losing money. This forces you to look forward rather than back. You should first of all think correctly about what you own."
He works with colleagues at Baillie Gifford, in particular with Gerald Smith who runs Monks Investment Trust, and describes Baillie Gifford as a 'collegiate' atmosphere.
Portfolio diversity key
Mr MacPhee favours portfolio diversity. "It is helpful to have holdings uncorrelated to each other which are exposed to different things. As we are a small fund it is easier for me to achieve diversity because I can invest in smaller companies."
But he does not target cap size when choosing shares. "We are more exposed to smaller companies than some other global trusts but that is just a consequence of the way we can invest," he says.
Around 22 per cent of the trust's equities are small caps, with 63 per cent in mid-caps and 15 per cent in large-caps.
"It is important to invest in a way that accommodates the fact that some of what you buy won't work," he says. "You should invest in enough that will go up by a multiple that will negate or diminish what doesn't work. At the core of your portfolio you should have things that will make a difference steadily over a long period. Alongside this you can hold some risky idiosyncrasies which are mispriced."
This strategy may be put to the test via the trust's exposure to Canada-listed Chinese forest plantation operator Sino-Forest. The company's shares have been suspended following allegations of accounting irregularities. Allegations of fraud or malpractice have plagued a number of US and Canada-listed Chinese companies this year, which have also been held by investment trusts including Fidelity China Special Situations and RENN Universal Growth.
"Sino Forest had great performance until recently when a hedge fund alleged accounting irregularities, the chief executive officer left and the shares were suspended," says Mr MacPhee. "But forestry is a good diversifier in any portfolio and we will await the outcome of the inquiry before deciding what to do."
