Around the world in eight investment trusts

This stock screen attempts to take in the global reach of the investment trust universe by following in the footsteps of the fictional 19th-century explorer Phileas Fogg on his 80-day circumnavigation of the globe. That means starting off in Blighty and selecting a UK growth fund before hotfooting it over the channel to pick up a European investment trust. We then venture to more exotic climbs to bag an emerging markets investment trust before moving on to Asia. From there it's off to Japan, followed by a hop across the Pacific to North America, before arriving back on home soil again to select a UK Income fund. Finally, as a memento of these around-the-world antics, there is a global investment trust to select. However, unlike Fogg's journey, this international stock-screening odyssey is conducted in eight trusts rather than 80 days.

How the screen has done

It's the third year I've undertaken this global stock-screening adventure. The results from the screen in both of the previous years have been superior to the smorgasbord of indices the trusts are best compared against (see table).

Source: Thomson Datastream

The cumulative total return (share price return with dividends reinvested) from both screens, which ignores the negative impact of dealing costs and spreads, stands at 25.1 per cent, which is some way above the 19.5 per cent from the FTSE All-Share but inferior to the 28.4 per cent total return from the FTSE World index over the same period (see graph).

Source: Thomson Datastream

How the screen works

The screen looks at two factors. The first is long-term net asset value (NAV) performance. The cumulative average growth rate (CAGR) over five years, three years and one year is compared with the corresponding growth rates of the appropriate index to find the average level of outperformance or underperformance across the periods. This is what I've termed the 'outperformance factor'. This is combined with what I've called the 'discount factor', which is the difference between a trust's current discount or premium and the average level over the past year.

Adding these two factors together creates what I have rather ostentatiously named the 'upside factor'. The trust showing the highest 'upside factor' is the one selected by the screen. It should be noted that the 'upside' in question is only based on a trust's history and is not a forecast of future returns, although the hope is it will serve as a pointer to unspecified future outperformance.

The trusts showing the highest upside factors from many of the eight regional screens I've run are very esoteric in nature. For example, some have highly concentrated portfolios, others have very specialist investment styles and some focus on smaller companies. With this in mind, for each of the eight mini screens undertaken, I've provided details of both a mainstream trust choice and a more niche one. The top 10 holdings and sector/country allocations of the trusts are detailed with the write-up below with further details on discounts and historic NAV performance in the accompanying tables.

ALL ABOARD

UK Growth

The screen's top UK growth pick, Strategic Equity Capital (SEC), certainly isn't your run-of-the-mill UK growth investment trust. The fund's managers try to use private equity techniques to identify investment opportunities. Once an investment is made, the managers then engage with the company and its other shareholders to try to create value. This isn't macho activism, though, which the trust believes is all too often detrimental to returns. Instead the trust uses a long-term 'constructive' approach in its attempts to engineer change. The trust's managers usually have a three-year investment plan and the trust is willing to take big bets on companies, with the top 10 holdings making up over four-fifths of the portfolio. Such a concentrated portfolio has the potential to significantly boost returns but it also makes the trust more risky, as does the fact that most of its holdings are small-caps.

A more conventional UK growth option comes in the form of Invesco Perpetual Select UK Investment Trust (IVPU). That said, while the portfolio, which is based on high-conviction bets, may be a bit more 'plain vanilla' than that of Strategic Equity Capital, the structure of the fund isn't. Indeed, the trust's UK shares are one of four different share classes - the others being Global Equities, Global Diversified, and Managed Liquidity - which investors can switch between on a quarterly basis without triggering capital gains tax charges. The trust also operates an aggressive 'zero tolerance' discount-control policy, so little upside is on offer based on the screen's 'discount factor'. The trust is run by respected manager Mark Barnett, who previously worked with fund management super star Neil Woodford before Mr Woodford left Invesco earlier this year.

Strategic Equity Capital

Source: Winterflood Securities

Source: Trust

Invesco Perpetual Select - UK

Europe

Once again, the screen has picked Jupiter European Opportunities Trust (JEO)* as its top trust, but only by the smallest of margins. The trust is managed by star manager Alexander Darwall, who takes a very individual approach to investing which has produced very high returns over the year. Mr Darwall looks for companies that have tapped into "structural" growth themes that he believes could run and run. The fund is under no constraints when it comes to benchmarks and country weightings, and the portfolio is very concentrated, typically consisting of about 35 shares. Currently the trust's top 10 holdings make up 68 per cent of the entire portfolio. Given the nature of the strategy and concentration of the portfolio, I've included Jupiter European Opportunities as the screen's niche pick despite its mainstream popularity.

The Henderson European Focus investment trust (HEFT), run by John Bennett, has a more conventional flavour than Jupiter European Opportunities based on the diversity of the portfolio and the spread of countries invested in. Nevertheless, the manager does try to target strong themes that will power outperformance. Themes that are on the agenda include utility companies and the pharmaceuticals sector. The defensive nature of such businesses could prove useful given the recent ructions in European markets and some of the horrid economic data coming out of the region. He's also been winding down the fund's focus on domestic European names, which also looks in tune with recent swings in sentiment against the prospects for the European economy.

*The writer owns shares in Jupiter European Opportunties investment trust

 Jupiter European Opportunities*

Henderson European Focus

Emerging Markets

Emerging markets are hard places to invest as they often require strong local knowledge and connections to make decent decisions. The dangers are amplified in so-called frontier markets, where the investment scene is considered to be at an even less-developed phase, but where potential profits are all the greater. The need for on-the-ground expertise is at the heart of Advance Frontier Markets Investment Trust's (AFMF) approach, which involves seeking out top local funds through which to invest. Advance also aims to use closed-end funds with the hope of benefiting from a narrowing of the discount at which they trade to NAV. Discounts can always widen as well as narrow, though, so the focus on closed-end funds adds an extra layer of risk as well as potential reward.

Genesis Emerging Markets (GSS) was the screen's top pick last year and it put in a decent performance in what proved to be a tough year for investment in this disparate 'region'. Indeed, as taper fears resurface and worries once again swirl about global economic growth, the fund could be in for more of the same. Fortunately, Genesis's approach to investing is very long term with an average holding period of around seven years. The trust attempts to identify undervalued opportunities through in-depth 'bottom-up' research, and the approach has earned it an impressive record of NAV performance.

Advance Frontier Markets

Genesis Emerging Markets

Asia

The same fund management house, First State, is behind both the niche and mainstream Asian picks the screen has made, which are Scottish Oriental Smaller Companies Investment Trust (SST) and Pacific Assets (PAC). First State has a strong reputation in this area with its head of Asia Pacific (ex-Japan) equities, Angus Tulloch, considered by many to be one of the best fund managers in the space. He is very cautious on the outlook for Asian companies despite the fact that Asian indices have recently kept pace with US and UK stocks following a period of underperformance. The key fear centres on the extreme monetary policy of recent years, which the manager believes may cause an inflationary spike in Asia while at the same time recognising that deflation is currently the biggest threat.

Scottish Oriental has the most cautious outlook of the two trusts as the manager is particularly concerned about asset bubbles in smaller companies, which the trust defines as companies with a market capitalisation of less than $1.5bn at the time of investment. What's more, the trust has been having difficulty finding companies that offer significant long-term upside. Given the manager's cautious stance, a significant proportion of both trusts' portfolios remains uninvested: almost 13 per cent in the case of Scottish Oriental and just over 10 per cent for Pacific Assets.

Scottish Oriental Smaller Companies

Pacific Assets

Japan

As with the screen's Asian trust picks, the same investment house is responsible for both the niche and mainstream Japanese picks - Baillie Gifford. The trusts in question are the manager's smaller companies fund, Baillie Gifford Shin Nippon (BGS), and its more mid-cap focused sister, Baillie Gifford Japan (BGFD). Following the Abenomics-induced stock market run at the end of 2012 and into 2013, the going has got tougher for Japanese equities, although we're nowhere near the stage of lamenting yet another false dawn yet. However, deteriorating global economic conditions and worries about the impact of tapering have hit the market's many export-focused companies. The prospect of consumption tax increases have also unsettled investors, although the Japanese government has recently suggested there could be flexibility over these measures in order to protect the economy.

Baillie Gifford Shin Nippon hopes to be somewhat shielded from broader concerns about the state of the Japanese economy by investing in companies that have strong structural-growth stories independent of the export market or the domestic outlook. Baillie Gifford Japan meanwhile has recently benefited from its relatively high gearing level which stood at 15 per cent at the end of August. The manager hopes that the success of the current government in stoking inflation could see a move away from risk-adverse assets into equities with the government itself leading the charge.

Baillie Gifford Shin Nippon

Baillie Gifford Japan

North America

Despite the global significance of the US economy, UK investors have very few North American investment trusts to choose from. In fact, there are only five trusts that can be screened, which make this the sector with the most limited choice out of all eight screened. Top of the pops is the JPMorgan US Smaller Companies Investment Trust (JUSC). JPMorgan benefits from having a large well-established US presence, which the Smaller Companies trust can draw on. Small-caps have actually not been the place to be for US investors recently, as over the past year the Russell 2000 has fallen by 2.6 per cent while the S&P 500 has made a 9.8 per cent ascent - although, at the time of writing, these gains are rapidly reversing.

The more mainstream fund selected by the screen is the Aberdeen Asset Management run North American Income Trust (NAIT). As the trust's name suggests, the manager has a particular focus on investing in companies with good dividends and solid cash flows. Given the generally defensive nature of such investments, the trust's focus may provide some protection if the current market carnage continues for much longer.

JPMorgan US Smaller Companies

North American Income

UK Income

Over the past 12 months large-caps have significantly outperformed smaller companies in the UK, with the FTSE Small Cap index dropping 2.5 per cent and the Aim All-Share 11.3 per cent lower compared with a 1.8 per cent fall from the FTSE 100. Nevertheless, the small-cap focused Smaller Companies Dividend Trust (SDV) has retained its place as top pick from the UK Income section of the screen. Indeed, the focus on income seems to have served the trust well over the past year with the fund having managed to increase NAV, including dividends, by 4.6 per cent. The trust has also issued zero-dividend preference shares recently, which provide a form of gearing for the rest of the portfolio.

The mainstream income pick is Henderson High Income (HHI). The fund has some interesting features, which means it is not totally 'plain vanilla' UK income. For example, it tends to split its portfolio between equity and bonds, allocating about four-firths of shareholders' money to the former and one-fifth to the latter. It also invests in strong small-caps alongside the blue-chip names that dominate its top 10 holdings. What's more, there is a small international element to the portfolio, with 10 per cent of the holding outside the UK as of the end of August.

Smaller Companies Dividend

Henderson High Income

Global

Only if your definition of world stock markets is UK mid and small-caps would the Oryx International Growth fund (OIG) seem like a conventional global fund. At the end of March the trust was almost entirely UK focused with 84 per cent of its assets in UK-listed equities, and just a smidgen of its 12.4 per cent position in unlisted equities accounted for by US stocks. Nevertheless, Oryx is classified as a global fund and the trust, managed by activist investor Chris Mills, has come out as the top pick in this year's global portion of the screen. The trust aims to invest in companies that have a strong underlying business model but where performance is being held back for some reason. A long-term activist approach can be used to rectify the problems and deliver strong returns from these investments. Incidentally, Mr Mills North Atlantic Smaller Companies trust is the second top global pick; however, as it is also a specialist vehicle it won't get any more time here.

The top mainstream global fund is Scottish Mortgage Investment Trust (SMT), which is one of three Baillie Gifford funds making it into this year's screen. The trust takes a long-term approach, aiming to outperform the market on a rolling five-year basis. The fund attempts to do this by targeting high-growth companies. Recent themes the trust has been playing include the emergence of disruptive technologies and the economic resurgence of China.

Oryx International Growth

Scottish Mortgage

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