For each of the past three years, I've been following in the footsteps of Phileas Fogg by taking an eastward circumnavigation of the globe through the world of investment trusts. Last year's jaunt was the most successful to date, with the trusts picked by my screens racking up a total return of 16.4 per cent compared, with 7.3 per cent from their benchmark indices (see table).
2014 performance
| Name | TIDM | Total Return (22 Oct 2014 - 14 Oct 2015) |
|---|---|---|
| UK | ||
| Strategic Equity Capital | SEC | 36.5% |
| Invesco Perpetual Select UK | IVPU | 20.2% |
| FTSE All Share | - | 5.4% |
| Europe | ||
| Jupiter European Opportunities | JEO | 32.0% |
| Henderson European Focus | HEFT | 19.0% |
| FTSE Europe ex UK | - | 8.7% |
| Emerging Markets | ||
| Advance Frontier Markets | AFMF | -16.9% |
| Genesis Emerging Markets | GSS | -12.5% |
| FTSE Emerging Markets | - | -5.8% |
| Asia | ||
| Scottish Oriental Smaller Companies | SST | -10.4% |
| Pacific Assets | PAC | 7.4% |
| FTSE Asia Pacific ex Japan, Australia, New Zealand, and India | - | 1.2% |
| Japan | ||
| Baillie Gifford Japan | BGFD | 31.9% |
| Baillie Gifford Shin Nippon | BGS | 30.2% |
| FTSE Japan | - | 20.0% |
| North America | ||
| JPMorgan US Smaller Companies | JUSC | 25.6% |
| North American Income Trust | NAIT | 1.2% |
| Russell 5000 | - | 10.7% |
| S&P 500 | - | 11.6% |
| UK Income | ||
| Small Companies Dividend Trust | SDV | 26.3% |
| Henderson High Income | HHI | 12.2% |
| FTSE All Share | - | 5.4% |
| Global | ||
| Oryx International Growth | OIG | 48.7% |
| Scottish Mortgage | SMT | 10.2% |
| FTSE World | - | 8.0% |
| Averages | ||
| Trust Average | - | 16.4% |
| Index Average | - | 7.3% |
Source: Thomson Datastream, as at 14 October 2015
However, while last year's investment trust globe-trotting was a success, I think the returns could be improved by employing a new screening method that I developed last year. This new approach, which I've been calling the Overlooked and Outperforming screen, attempts to find the same combination of low valuation and good performance that my previous screen set out to identify. However, rather than trying to calculate a percentage upside based on a trust's discount and historic NAV performance - the method employed by my old Around-the-World screen - the newer screen uses a ranking methodology developed by US hedge fund manager Joel Greenblatt.
Importantly, last year I was able to backtest the Overlooked and Outperforming screen over two 10-year periods with historic data provided to me by Winterflood Securities. The results from the backtesting were impressive (see table).
10-YEAR OUTPERFORMING AND OVERLOOKED BACKTEST
| Total Return | IT Screen | IT Screen with ann. costs at 1.5% | FTSE All Share | MSCI World | FTSE/MSCI blend |
|---|---|---|---|---|---|
| 10 years to mid 2014 | 305% | 247% | 133% | 95% | 114% |
| 10 years to 2014 | 253% | 201% | 132% | 94% | 113% |
Source: Thomson Datastream, Winterflood Securities, IC
Adding to my conviction that the new screening approach is the way to go is the fact that, despite the good performance over the past 12 months, my old Around-the-World approach was pretty mediocre in the first two years I used it (see chart).
All in all, while this year's screen remains consistent with past screens in the attributes it looks for in a trust (value and good performance), the way it looks for these attractive characteristics has changed - and hopefully improved.
HOW THE SCREEN WORKS
The screen uses investment trust Z-Scores to look for value (this measure of value should not be confused with the Altman Z-Score, which evaluates bankruptcy risk). The Z-Score is a standardised measure of where a trust's share price discount/premium to net asset value (NAV) sits compared with the historic range (the one-year range in the case of this screen). A negative Z-Score indicates a discount/premium on the cheap side of the range, while valuations on the expensive side of the range get a positive score. The standardised nature of Z-Scores means trusts can be compared with one another even though 'value' is being judged only in relation to a trust's own discount range. This is very useful because the esoteric nature of trusts means there are often very sound reasons for different trusts offering widely different average discounts/premiums and one-year ranges.
The other factor the screen looks at is three-month price momentum. The investment trust universe is so diverse that it is hard to find fundamental data that offers comparative insights between trusts. However, looking at price movements gives a very broad indication of what the market thinks about a trust, based on its NAV performance and outlook as well as other factors such as sentiment towards the trust's manager and any corporate activity. And, importantly, many academic studies have shown that share price movement is a major determinant of future performance - ie, what goes up tends to carry on going up.
The screen brings the 'value' factor and the 'momentum' factor together using the wonderfully simple ranking system used by Joel Greenblatt for his 'magic formula' screen, which he presented to investors in his highly readable classic The Little Book That Beats The Market. The trusts are ranked for value, as implied by the Z-Score, and are separately ranked for momentum. A final ranking is created from the sum of the value and momentum rankings - the lowest combined ranking being the best ranked trust. Trusts with a market cap under £100m or with shares trading at a premium to NAV are excluded from the screen.
For my Overlooked and Outperforming screen I apply a number of rules around the construction of a 10-stock portfolio. However, in the case of the Around the World screen, I am simply selecting the highest ranked shares from each of the global categories on my Phileas-Fogg-inspired world tour.
THE JOURNEY ITINERARY
We set out from blighty looking at UK Generalists before setting sail across the Channel to see what's on offer in Europe. It's then off to Asia ex Japan followed by a brief stop in the land of the rising sun itself. The exact geographical location of emerging markets is not precise, but that's where we end up next before hot footing it to North America and then skipping back across the pond to the UK to take in a UK Income trust. Just to make sure all bases are covered, a Global trust rounds off the voyage. As well as the highest ranking trust for each category, I've included the next highest option due to the esoteric nature of some of the top choices. So hang on to your hat, as we go around the world in eight investment trusts.
UK Generalist
