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Seeking the best investment trusts

Peter Hewitt explains how he selects investment trusts that will deliver results
August 13, 2014

Unlike most other Global Growth investment trusts, IC Top 100 Fund F&C Managed Portfolio does not get its results by picking the right companies, but rather by homing in on the best of its peers - investment trusts. And the way F&C Managed Portfolio's manager, Peter Hewitt, homes in on his holdings is not necessarily what other fund of investment trust managers do.

"I am definitely not a discount player, although historically fund of investments trust managers are," he says. "I believe that asset performance over the long-term is more important: a discount can close but how a trust does against a relevant benchmark is more important. So selecting fund managers who do well against a benchmark is a good starting point and I won't sell a trust if it is historically expensive but doing well."

For this reason Mr Hewitt visits each manager he holds at least once a year, to assess things such as their process. "Experience indicates that outperformance is more likely from investment managers who have a clearly defined process, experience of a variety of different market conditions (including bear markets), and have ample resources to underpin their management skills and a relentless focus on the portfolio they are charged with managing," he says.

Some fund of funds managers allocate according to sector or geography rather than according to the merits of an individual investment. Mr Hewitt combines both these approaches, though gives more consideration to a trust's individual merits. "For example, you can get a trust invested in a poorly performing market but if it has a really great manager you can still get good returns," he explains. "That is why I focus on manager quality, and consider their performance record and whether they can continue to achieve it. That said, if I like a given country I will seek trusts which invest in it, and it is also important not be focused on only one area just because it is doing well."

Mr Hewitt doesn't like investment trusts which have too much debt, known as gearing. "I also have them on alert if their performance has declined substantially," he says. "It could be that the manager's style is out of favour, and I might sell the trust if it looks like that style of investing is going to do badly for a while. I also make sure that a manager's professed style is reflected in the portfolio and watch for style drift. One of the reasons I do meetings is to try and understand a manager's style so I can know in what markets he or she might under and out perform."

Mr Hewitt's two portfolios, income (FMPI) and growth* (FMPG), both have substantial holdings in funds run by Invesco Perpetual's Mark Barnett, who has taken on a considerable amount of the money that Neil Woodford used to run. Both Mr Hewitt's portfolios have Perpetual Income & Growth Investment Trust* (PLI) as a top 10 holding, because it is good for growth although classified as an income fund. Mr Hewitt's income portfolio also holds Keystone Investment Trust (KIT), and Edinburgh Investment Trust* (EDIN) which was run by Neil Woodford but taken over by Mr Barnett on 28 January this year. Mr Hewitt had bought into it before Mr Barnett became manager.

"I like Mark Barnett but my issue with him is whether can he manage all of these trusts and two enormous open-ended funds, Invesco Perpetual Income (GB0033053827) and High Income (GB0033054015)," says Mr Hewitt. "I met him in June and Invesco were aware of the situation so have hired more to the team. Some of these may take on some of the funds Mr Barnett runs at some point.

"These funds also have a high overlap of holdings, albeit at different weightings, and all have certain focuses, for example, tobacco and pharmaceutical shares. So in that respect Mr Barnett is not as stretched as he maybe appears, and there are many people around him who want to ensure he is not overloaded.

"But ultimately the proof will be in the pudding - his performance going forward - so we will have a clearer picture next year. For the moment I am persuaded by Mr Barnett but am monitoring his performance."

He adds that all three of the Mark Barnett-run trusts he holds have differences. For example, Edinburgh offers a decent yield while Keystone has a debenture so tends to do slightly better than Perpetual Income & Growth in rising markets, and is doing well now.

Mr Hewitt feels that some investment trusts in areas such as on infrastructure, debt and environmental infrastructure are over valued at the moment. "The premiums on infrastructure trusts are a concern because they do not have great growth potential," he says. "And you can get some equity income trusts with yields of around 4 per cent that would give you a better return in the long-term. As interest rates rise some infrastructure trusts will appear less attractive so could underperform."

Read more on infrastructure trusts

Another area he is not so sure on is Europe, though he points out that some European trusts' discounts have widened, "so if we get more confident on the region and its recovery, there is good value there."

Conversely if the outlook for the region deteriorates he will cut his exposure, although "this is the most attractively valued of developed markets."

If he were to increase Europe he would add to current portfolio holdings Jupiter European* (JEO), Henderson European Focus Trust (HEFT) and European Assets Trust* (EAT). "They all have high quality fund managers with strong long-term performance records and have moved to small discounts after being at premiums," he says.

Read our update on European Assets Trust

Read more on investing in Europe

Meanwhile he is bullish on technology and biotechnology investment trusts. He points out that while the discounts on these are still single digit, they have been tighter, and there is a good long-term outlook for these assets.

A trust he thinks could offer good value is BlackRock World Mining Trust* (BRWM) of which a small holding was added to the income portfolio in the spring. "That whole area has been a nightmare for the last two to three years but this trust is well run, has a yield of around 4 per cent and will quickly reflect any uptick," explains Mr Hewitt. "I may increase my holding and it may merit inclusion in the growth portfolio as well if we get more confident."

F&C Managed Portfolio's income portfolio underperformed the FTSE All-Share over its last financial year for the first time since launch in 2008. One of the main reasons for this was its holdings in Asian equity income funds - Aberdeen Asian Income Fund* (AAIF), Henderson Far East Income (HFEL) and Schroder Oriental Income (SOI).

These had performed well for years, but Asian markets did not do well over the trust's last financial year. Mr Hewitt says the Asian trusts have already been reduced because he took some profits last year so that each one accounts for between about 2.5 and 3 per cent of assets rather than around 4 per cent.

"But these are good trusts and I want them to diversify my income sources," he says. "And the Far East will do well over the long-term."

He is also optimistic that F&C Managed Portfolio can increase its dividend in the current financial year. "Dividends are coming in well, there are no negative announcements from the trusts," he says.

*IC Top 100 Fund