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Alpha Investment Trusts: Magic Formula

Our screen compares the best value closed-end funds, whatever their investment mandate, and identifies those with the best growth prospects. Plus: we select an automated portfolio of 10 trusts.
April 5, 2018

Investment Trusts invest in assets as wide-ranging and exoteric as social housing, timber and distressed debt, as well as offering exposure to extremely niche equity markets and sectors, such as Vietnam and financials.

For a stock screen, a key challenge is to find common ground between such a varied range of trusts from which comparison can be made. Our expert, Algy Hall, has created a useful screen by focusing on two 'high-level' factors that researchers have shown to be predictive of future share price performance: “value” and “momentum”.

  • To accurately compare valuations of trusts with different investment remits and capital structures we look beyond the level of premium/discount to net asset value (NAV) per share.
  • Value is assessed relative to historic ‘Z-scores’ – the number of standard deviations trust valuations are from their historic mean premium/discount.
  • Three-month share price momentum indicates market sentiment towards the fund.
  • The composite value-momentum ranking is arrived at using the methodology of hedge fund manager Joel Greenblatt in his two factor ‘Magic Formula’.

Based on 14-year back-testing of the screen (the period over which we have been able to source reliable historic data), the strategy has produced a 619 per cent cumulative total return or 482 per cent if an annual dealing charge is included for the presumed yearly reshuffles of the portfolio. Over the same period, a 50:50 split between the FTSE All-Share and the MSCI World indices has produced a 250 per cent total return. This data is based on annual reshuffles of 10-stock portfolios like the one included in Algy’s report.

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