Since launching Alpha, the monthly investment trust screen has proved particularly popular with subscribers and we’ve decided to boost our coverage by providing a more in depth look at the trusts highlighted each month.
Specifically, I will be casting an eye over the trusts that make up the 10 stock portfolio. These stocks fit with specific rules (below) that ensure a degree of diversity in the selection of trusts but still give scope for distinct investment themes to emerge. And while this screen, like almost all screens run by the Investors Chronicle, is considered a source of ideas for further research rather than an off-the-shelf portfolio, the back test of the 10-trust rules over the last 15 years suggest they do considerably enhance the performance of the screen.
Here's a recap on how the screen works:
To fairly compare investment trusts with different remits and capital structures, we assess trusts’ value relative to their one-year average premium/discount. This is done using a standardised measure called the Z-score (the number of “standard deviations” the premium/discount is from the mean average). A Z-score can be considered to be pretty cheap at about -1 (the bottom 16 per cent of the range) and below and extremely cheap at -2 (the bottom 2.5 per cent).
Three-month share price momentum is used as an indicator of sentiment towards trusts and their investments’ recent success. Our tables show the top 25 investment trusts based on a combined ranking of Z-score and momentum while the 10 stock portfolio represents the highest ranking trusts based on the following rules:
* Market capitalisation must be more than £100m. * No tracker or hedge funds. * No more than half the portfolio (five out of 10 shares) should have “niche” themes, and no more than two trusts should come from the same niche. Trusts defined as niche are those focused on non-mainstream asset classes or sub-sectors such as private equity, debt, technology and biotechnology, and those focused on single countries (excluding the UK and US) or high-risk economic regions such as emerging markets. I also regard Asian smaller companies trusts as niche, but not Asian generalists. * No more than half the portfolio (five out of 10 shares) should be mainstream trusts of the same type. This rule does not apply to global funds, but it does to other mainstream themes such as trusts investing in the UK (large and small companies), Europe, the US or Asia. * All trusts must trade at a discount to NAV. |
Here are the tables of trusts making up the ten trust stock portfolio this month and the top 25 trusts.
| Discount to NAV | Share Price Performance | |||||||||||||||
| Rank | Name | TIDM | Market Cap | Price | DY | Z Score | Now | Avg | Low | High | 1m | 3m | 6m | 1y | 3y | 5y |
| 1 | Baillie Gifford US Growth | USA | £573m | 213p | - | -1.6 | -0.7% | 3.0% | 13.3% | -8.4% | 5.5% | 37.4% | 44.4% | 44.2% | - | - |
| 2 | TR European Growth | TRG | £438m | 874p | 2.6% | -1.5 | -18.4% | -14.1% | -6.0% | -22.1% | 6.6% | 28.5% | -11.3% | -0.7% | -12.3% | 50.5% |
| 3 | JPM US Smaller Cos | JUSC | £169m | 288p | 0.9% | -1.8 | -10.8% | -3.3% | 5.0% | -18.8% | -1.0% | 18.3% | -20.7% | -9.8% | 8.0% | 63.5% |
| 4 | Henderson Eurotrust | HNE | £268m | 1,265p | 2.5% | -1.3 | -12.8% | -10.0% | -4.6% | -20.9% | 6.3% | 22.8% | 2.4% | 12.1% | 20.0% | 58.5% |
| 5 | Henderson European Focus | HEFT | £268m | 1,250p | 2.5% | -1.4 | -12.1% | -9.4% | -3.3% | -16.0% | 5.5% | 18.2% | -5.3% | 2.1% | -3.2% | 30.2% |
| 6 | Fidelity China Special Situations | FCSS | £1,511m | 293p | 1.5% | -1.0 | -10.2% | -8.6% | -4.9% | -16.4% | 15.4% | 29.7% | 17.5% | 33.9% | 45.2% | 123.9% |
| 7 | Jupiter US Smaller Cos | JUS | £122m | 944p | - | -1.3 | -14.4% | -10.4% | -5.6% | -21.2% | -0.5% | 19.3% | -19.3% | -13.8% | 11.1% | 39.8% |
| 8 | AVI Global Trust | AGT | £755m | 707p | 2.9% | -1.2 | -12.3% | -10.4% | -6.3% | -15.6% | 6.6% | 21.5% | -11.2% | -6.8% | 9.0% | 54.6% |
| 9 | European Assets | EAT | £353m | 98p | 7.2% | -1.2 | -11.4% | -8.5% | -4.7% | -23.5% | 4.0% | 19.2% | -10.9% | -4.1% | -7.0% | 23.3% |
| 10 | JPM Euro Smaller Cos | JESC | £579m | 363p | 1.9% | -1.1 | -16.1% | -13.4% | -9.5% | -24.1% | 10.0% | 21.8% | -7.4% | -1.3% | 2.0% | 56.4% |
| Discount to NAV | Share Price Performance | |||||||||||||||
| Rank | Name | TIDM | Market Cap | Price | DY | Z Score | Now | Avg | Low | High | 1m | 3m | 6m | 1y | 3y | 5y |
| 1 | Baillie Gifford US Growth | USA | £573m | 213p | - | -1.6 | -0.7% | 3.0% | 13.3% | -8.4% | 5.5% | 37.4% | 44.4% | 44.2% | - | - |
| 2 | TR European Growth | TRG | £438m | 874p | 2.6% | -1.5 | -18.4% | -14.1% | -6.0% | -22.1% | 6.6% | 28.5% | -11.3% | -0.7% | -12.3% | 50.5% |
| 3 | JPM US Smaller Cos | JUSC | £169m | 288p | 0.9% | -1.8 | -10.8% | -3.3% | 5.0% | -18.8% | -1.0% | 18.3% | -20.7% | -9.8% | 8.0% | 63.5% |
| 4 | Henderson Eurotrust | HNE | £268m | 1,265p | 2.5% | -1.3 | -12.8% | -10.0% | -4.6% | -20.9% | 6.3% | 22.8% | 2.4% | 12.1% | 20.0% | 58.5% |
| 5 | Henderson European Focus | HEFT | £268m | 1,250p | 2.5% | -1.4 | -12.1% | -9.4% | -3.3% | -16.0% | 5.5% | 18.2% | -5.3% | 2.1% | -3.2% | 30.2% |
| 6 | Fidelity China Special Situations | FCSS | £1,511m | 293p | 1.5% | -1.0 | -10.2% | -8.6% | -4.9% | -16.4% | 15.4% | 29.7% | 17.5% | 33.9% | 45.2% | 123.9% |
| 7 | Jupiter US Smaller Cos | JUS | £122m | 944p | - | -1.3 | -14.4% | -10.4% | -5.6% | -21.2% | -0.5% | 19.3% | -19.3% | -13.8% | 11.1% | 39.8% |
| 8 | AVI Global Trust | AGT | £755m | 707p | 2.9% | -1.2 | -12.3% | -10.4% | -6.3% | -15.6% | 6.6% | 21.5% | -11.2% | -6.8% | 9.0% | 54.6% |
| 9 | European Assets | EAT | £353m | 98p | 7.2% | -1.2 | -11.4% | -8.5% | -4.7% | -23.5% | 4.0% | 19.2% | -10.9% | -4.1% | -7.0% | 23.3% |
| 10 | JPM Euro Smaller Cos | JESC | £579m | 363p | 1.9% | -1.1 | -16.1% | -13.4% | -9.5% | -24.1% | 10.0% | 21.8% | -7.4% | -1.3% | 2.0% | 56.4% |
| 11 | Polar Capital Global Financials # | PCFT | £134m | 109p | 4.0% | -1.9 | -9.1% | -4.0% | 1.2% | -10.7% | 2.4% | 12.1% | -26.6% | -20.9% | -9.5% | 15.1% |
| 12 | Aberdeen Emerging Markets # | AEMC | £255m | 555p | 3.9% | -1.4 | -17.0% | -14.4% | -10.8% | -19.1% | 6.7% | 15.9% | -10.8% | -6.1% | 6.2% | 42.1% |
| 12 | Atlantis Japan Growth | AJG | £102m | 220p | 0.1% | -1.1 | -17.0% | -13.2% | -6.7% | -22.4% | 4.8% | 22.2% | -7.0% | -0.6% | 25.6% | 61.3% |
| 14 | Martin Currie Global Portfolio | MNP | £265m | 323p | 1.3% | -1.4 | -2.9% | -0.3% | 4.9% | -10.5% | 6.3% | 15.8% | 2.2% | 8.1% | 44.9% | 93.0% |
| 15 | Aberdeen New India | ANII | £241m | 410p | - | -1.3 | -17.7% | -14.3% | -7.2% | -25.3% | 12.0% | 17.1% | -14.6% | -20.4% | -12.5% | 23.5% |
| 16 | JPM Indian | JII | £435m | 555p | - | -1.1 | -16.2% | -11.7% | -5.7% | -25.6% | 10.3% | 18.7% | -26.9% | -28.1% | -25.5% | 3.0% |
| 16 | VPC Specialty Lending | VSL | £187m | 65p | 12.4% | -0.6 | -27.0% | -19.9% | -6.3% | -50.4% | -7.0% | 39.1% | -20.1% | -3.2% | 8.0% | -0.4% |
| 18 | BMO Global Smaller Cos | BGSC | £693m | 116p | 1.5% | -1.4 | -11.5% | -6.8% | -1.0% | -21.8% | 0.5% | 12.8% | -21.1% | -13.8% | -8.0% | 22.1% |
| 19 | Baillie Gifford Japan | BGFD | £738m | 803p | 0.4% | -0.9 | -4.9% | -2.1% | 3.8% | -12.2% | 4.6% | 22.8% | -4.5% | -0.4% | 19.8% | 74.1% |
| 19 | Asia Dragon | DGN | £513m | 405p | 1.2% | -1.3 | -13.2% | -11.2% | -5.1% | -19.8% | 6.3% | 14.1% | -6.5% | -2.9% | 15.6% | 57.4% |
| 21 | Pacific Assets | PAC | £310m | 256p | 1.2% | -1.6 | -11.1% | -4.0% | 3.3% | -15.4% | 4.3% | 10.8% | -8.9% | -15.0% | 2.8% | 33.8% |
| 22 | Schroder Asian Total Return | ATR | £371m | 380p | 1.7% | -1.0 | -1.9% | 0.7% | 5.6% | -16.3% | 11.3% | 18.6% | -1.4% | 3.1% | 27.2% | 107.7% |
| 23 | Aberdeen Asian Income | AAIF | £327m | 185p | 5.0% | -1.5 | -12.1% | -8.6% | -4.5% | -16.4% | 1.9% | 10.8% | -15.5% | -12.7% | -2.2% | 20.6% |
| 24 | BlackRock Frontiers | BRFI | £229m | 95p | 6.4% | -1.7 | -6.4% | -0.2% | 9.0% | -8.1% | -2.3% | 9.7% | -28.9% | -29.8% | -28.0% | 7.3% |
| 25 | JPM American | JAM | £1,023m | 499p | 1.3% | -0.8 | -5.6% | -4.5% | 0.6% | -12.3% | 3.0% | 20.5% | -0.4% | 4.4% | 36.3% | 91.5% |
Source: Winterflood Securities
One of the key attractions of investment trusts is that they can provide investors with expert access to a wide range of geographic regions. This month’s screen is all about regional stories, with Europe and the US featuring particularly prominently. Interestingly, given the valuation gap between the two regions, and especially US large growth plays and European small value plays, one region’s loss (the US) could actually be the other one’s gain (Europe). Market events rarely work out so neatly, but this seems an interesting little contradiction in the screen results which also picks up on a popular investment narrative about the potential for a “rotation” in the forces driving returns.
Given the focus on geography, my write up of this month’s screen focuses first on the broader regional stories before moving on to specifics about the trusts highlighted. Both the US and Europe are caught up in fast moving events at the moment and readers are encouraged to check for any price moves that have happened between the writing and publication of this column.
In regard to potential price-moving events, of particular significance at the time of writing is the meeting that EU leaders are embroiled in; a weekend of horse trading over a eurozone relief package. Markets are likely to view a strong, successful conclusion very positively. However, expectations are currently dim after ill-tempered exchanges on the first day of talks on Friday. With no resolution late on Sunday, it seems a bit of classic EU can-kicking looks like it could be on the cards. If an agreement has not been reached already by the time of publication, the expectation is further efforts will be put in to get something signed off by the end of the month. Given Europe is the most represented theme in this month’s screen (five out of 10 trusts), this seems a good place to start.
KICKING THE EUROPEAN CAN
For euro watchers there has always been a conundrum at the heart of the project: how can you have a monetary union that works for its economically- and culturally-diverse membership without some kind of fiscal union. Until now the thorny politics of redistributing wealth between countries has always trumped any concerted effort to tackle the economic elephant in the room.
While the idea of rich countries providing handouts to poorer countries is a hard sell on a national level, from a purely economic standpoint there are strong arguments that there would be benefit for all from focusing on the overall economic health of the euro area rather than the budget deficits and surpluses of individual members. In many ways the persistent budgetary imbalances between members look more like blockages in the system rather than reflections of strength and weakness. As such the establishment of some kind of united fiscal front is likely to be taken positively by markets as long as overall political cohesion could also be maintained.
Covid-19 is forcing members of the currency bloc to make a genuine attempt to grasp the nettle. To borrow a phrase from French President Emmanuel Macron, the EU now faces its “moment of truth”. A €750bn Covid-relief scheme, funded by joint borrowing, is on the table with a significant portion earmarked for country “grants” (give-aways) as opposed to loans.
The impact of the virus looks so uneven and severe that many wonder if the euro can survive if members are not prepared to come together to provide a fiscal boost to the worst hit. Real lives depend on it. Significantly, the countries suffering most are big EU players, including Italy. This makes things different to the financial crisis where fiscal problems were most severe for bit players that were easy to hang-out to dry; most notably Greece.
TR EUROPEAN GROWTH
| Name | TIDM | Mkt Cap | Price | DY |
| TR European Growth | TRG | £438m | 874p | 2.6% |
| Discount to NAV | ||||
| Z-Score | Now | Avg. | Low | High |
| -1.5 | -18.4% | -14.1% | -6.0% | -22.1% |
| Share Price Performance | |||||
| 1m | 3m | 6m | 1y | 3y | 5y |
| 6.6% | 28.5% | -11.3% | -0.7% | -12.3% | 50.5% |
| Top Ten Holdings | |
| Name | % Port |
| Zur Rose Group Ag Ord | 2.8 |
| Finecobank Spa Ord | 2.6 |
| Nexans Ord | 2.5 |
| Van Lanschot Kempen Nv Cert Of Sh | 2.4 |
| Soitec Sa Ord | 2.2 |
| Dfds As Ord | 2.2 |
| Medios Ag Ord | 2.1 |
| Tkh Group Nv Ord Ctf | 1.8 |
| Hellofresh Gmbh Ord | 1.8 |
| Embracer Group Ab Ord B | 1.8 |
| Total | 22.2 |
Source: Winterflood Securities/FactSet
One of the trusts highlighted by the screen that is likely to see most benefit from the launch of an impressive, grant-focused recovery fund is TR European Growth (TRG). The trust targets smaller companies and describes itself as “valuation aware”. Any tilt towards value is currently regarded negatively by most investors, but traditionally the early stages of economic recovery massively favour this type of investment.
Indeed, the trust’s history suggests shareholders will be in for a good time if recovery hopes take further hold. During the selloff to March, the opposite was true and TR European Growth suffered badly. The trust’s respected manager Ollie Beckett has focused on shifting the trust’s portfolio away from companies with weaker balance sheets to focus on recovery plays that he believes are not too dependent on a rescue package getting ascent.
EUROPEAN ASSETS
| Name | TIDM | Mkt Cap | Price | DY |
| European Assets | EAT | £353m | 98p | 7.2% |
| Discount to NAV | ||||
| Z-Score | Now | Avg. | Low | High |
| -1.2 | -11.4% | -8.5% | -4.7% | -23.5% |
| Share Price Performance | |||||
| 1m | 3m | 6m | 1y | 3y | 5y |
| 4.0% | 19.2% | -10.9% | -4.1% | -7.0% | 23.3% |
| Top Ten Holdings | |
| Name | % Port |
| Diasorin Spa Ord | 6.4 |
| Tecan Group Ag Ord Reg | 5.7 |
| Gerresheimer Ag Ord Brr | 5.6 |
| Asm International Nv Ord | 5.1 |
| Imcd Nv Ord | 4.9 |
| Vidrala Sa Ord | 4.1 |
| Ringkjobing Landbobank As Ord | 4.0 |
| Forbo Holding Ag Ord Reg | 3.5 |
| Indutrade Ab Ord | 3.3 |
| Wizz Air Holdings Plc Ord | 3.3 |
| Total | 45.9 |
European Assets (EAT) is another trust with a focus on smaller companies, however, its strategy of investing in quality plays with sustainable competitive advantage means it may be less well positioned to see such a pronounced recovery upswing. That said, the trust has been playing the Covid crisis well, although, arguably this is down to a fair bit of luck as well as design.
While the trust’s long term record is strong, performance over recent years has been disappointing and at the start of 2020 the managers decided it was time to clear out positions in interest-rate sensitive sectors; positions judged to have held back performance. This meant when Covid struck, not only had the trust sold holdings that would have been hard hit by the selloff, but it also had financial firepower to buy stocks as markets bottomed. This has worked out well so far and European Asset may be a trust that is in the process of getting its mojo back.
One thing to note is the very high dividend paid which is paid quarterly. The policy is for a payout equivalent to 6 per cent of net asset value. Given the lack of income coming from Covid-hit companies, the trust’s plan to sustain the payment is likely to mean selling a portion of the underlying portfolio to redistribute to shareholders. With the very real possibility that high-yields from many stocks are, in the main, a thing of the past, we could be looking at a dividend policy that involves the trust eating itself over time. How attractive an option paying dividends from capital ever is represents an open question, but particularly so in volatile markets. Whatever one’s view, the mega-yield on the trust’s shares must be seen in this light.
JPMORGAN EUROPEAN SMALLER COMPANIES
| Name | TIDM | Mkt Cap | Price | DY |
| JPM Euro Smaller Cos | JESC | £579m | 363p | 1.9% |
| Discount to NAV | ||||
| Z-Score | Now | Avg. | Low | High |
| -1.1 | -16.1% | -13.4% | -9.5% | -24.1% |
| Share Price Performance | |||||
| 1m | 3m | 6m | 1y | 3y | 5y |
| 10.0% | 21.8% | -7.4% | -1.3% | 2.0% | 56.4% |
| Top Ten Holdings | |
| Name | % Port |
| Asm International Nv Ord | 3.4 |
| Sig Combibloc Group Ag Ord | 3.2 |
| Bravida Holding Ab Ord | 2.7 |
| Shop Apotheke Europe Nv Ord | 2.6 |
| Zur Rose Group Ag Ord | 2.6 |
| Solaria Energia Y Medio Ambiente Ord | 2.5 |
| Falck Renewables (Actelios) Spa Ord | 2.4 |
| Be Semiconductor Industries Ord | 2.4 |
| Imcd Nv Ord | 2.3 |
| Siegfried Holding Ag Ord Reg | 2.2 |
| Total | 26.3 |
While European Asset’s portfolio reshuffle saw it well set to negotiate the selloff, the same cannot be said for JPMorgan European Smaller Companies (JESC), which went into the Covid crisis with a relatively high level of gearing (borrowings used to increase market exposure). That said, it is the star performer of the screen’s three European smaller-companies picks over the last 12 months, six months and one month (it is beaten by TR European over three).
Part of the reason for the strong recovery from the selloff has been the JPMorgan trust’s continued use of borrowing facilities to take advantage of buying opportunities thrown up by the crisis. The trust is playing a number of themes that could benefit from the situation including sustainability, wellness and technology trends. The trust also boasts a good longer-term record of market outperformance.
HENDERSON EUROTRUST
| Name | TIDM | Mkt Cap | Price | DY |
| Henderson Eurotrust | HNE | £268m | 1,265p | 2.5% |
| Discount to NAV | ||||
| Z-Score | Now | Avg. | Low | High |
| -1.3 | -12.8% | -10.0% | -4.6% | -20.9% |
| Share Price Performance | |||||
| 1m | 3m | 6m | 1y | 3y | 5y |
| 6.3% | 22.8% | 2.4% | 12.1% | 20.0% | 58.5% |
| Top Ten Holdings | |
| Name | % Port |
| Koninklijke Dsm Nv Ord | 5.6 |
| Roche Holding Ag Ord Drc | 5.3 |
| Novo Nordisk As Ord B | 4.9 |
| Nestle Sa Ord Reg | 4.7 |
| Muenchener Rueckver Ord Reg | 3.8 |
| Cellnex Telecom Sa Ord | 3.7 |
| Prosus Nv Ord N | 3.6 |
| Telecom Italia Spa Svgs Ncv | 3.4 |
| Delivery Hero Se Ord | 3.4 |
| Vivendi Sa Ord | 3.3 |
| Total | 41.7 |
Two European focused Janus Henderson trusts also make the list of screen picks. Henderson Eurotrust (HNE) is focused on quality and operates a relatively high-conviction portfolio. As of the end of June, the top ten holdings made up just over 40 per cent of the portfolio and the top 20 made up about 60 per cent.
At the time of the interim results in April the manager, Jamie Ross, who has been running the fund since early 2018, outlined themes he was looking to play in the post Covid world. These include the virtualization of business, the accelerated rise of e-commerce and a boost to automation in manufacturing industries.
HENDERSON EUROPEAN FOCUS
| Name | TIDM | Mkt Cap | Price | DY |
| Henderson European Focus | HEFT | £268m | 1,250p | 2.5% |
| Discount to NAV | ||||
| Z-Score | Now | Avg. | Low | High |
| -1.4 | -12.1% | -9.4% | -3.3% | -16.0% |
| Share Price Performance | |||||
| 1m | 3m | 6m | 1y | 3y | 5y |
| 5.5% | 18.2% | -5.3% | 2.1% | -3.2% | 30.2% |
| Top Ten Holdings | |
| Name | % Port |
| Lafargeholcim Ltd Ord Reg | 7.6 |
| Nestle Sa Ord Reg | 4.9 |
| Asml Holding Nv Ord | 4.4 |
| Sap Se Ord | 4.0 |
| Roche Holding Ag Ord Drc | 3.6 |
| Upm Kymmene Oyj Ord | 3.3 |
| Akzo Nobel Nv Ord | 3.2 |
| Kion Group Ag Ord | 3.1 |
| Koninklijke Philips Nv Ord | 2.8 |
| Novartis Ag Ord Reg | 2.6 |
| Total | 39.5 |
The other Henderson trust, Henderson European Focus (HEFT), is managed by John Bennett who has established a strong track record during his ten-year stint at the helm of the fund. Broker Winterflood puts the trust’s total return since he’s been in charge at 166 per cent compared with 102 per cent from the benchmark, although the outperformance really relates to the first half of the decade. The fund makes an interesting play as it is striking out against the dominant investment narrative of recent times.
The manager thinks there could be a switch in global investor enthusiasm from big US tech stocks (recently christened the most crowded trade ever by Bank of America’s fund manager survey) towards more value orientated cyclical plays. He also sees good scope for a V-shaped recovery accompanied by a pick up in inflation. This is very much in line with the compelling case made by Janus Henderson’s economist Simon Ward who forecasts are based on combining monetary and cycle analysis.
Reflecting this economic and investment standpoint, Mr Bennett has increased exposure to cyclical and value stocks since the Covid sell off. He is mindful of avoiding what he regards as likely value traps, such as oil and gas plays. He’s also attempted to build the inflation theme into the trust’s portfolio by taking on exposure to banks, which the trust had previously avoided.
This is a non-consensus view, but if right, the trust could be set for a period of strong performance from its investment portfolio coupled with some useful discount narrowing. If Mr Bennett is right, his success could well come at the expense of US markets, which brings us on to the next feature of this somewhat self-contradictory screen.
GO USA!
If Europe is struggling with fiscal union, the US is demonstrating that a more federal model is no panacea when it comes to dealing with a pandemic. After a seemingly chaotic response, a number of states, including California and Texas, appear to be edging back towards lockdown as Covid-19 cases pick up once more.
However, the monetary and fiscal response to the crisis by the US has been breathtaking in scale. A fifth Covid relief package of $3 trillion or more is currently on the table, while the Federal Reserve has slashed interest rates and flooded the system with money. Fed action has gone as far as the purchase of corporate debt, an event that has proved shocking to some.
This has been a major shot in the arm to markets and there could be further to go. Indeed, in response to the crisis it is not unimaginable that we could see the first serious experiments with modern monetary theory (MMT) emerge in the US. MMT represents a view that has been gaining popularity over a number of years that, if used correctly, money-printing is a hugely-underrated economic tool and that politicians and society at large have been hoodwinked by erroneous conventional wisdom about the significance of deficits.
Earnings season has recently got underway in the US and this is helping to highlight the Covid-19 story so far. With many of the big US banks reporting last week, it seems Wall Street and Main Street are experiencing very different fortunes. The banks have reported spiralling bad-debt provisions for their lending operations, which reflects the weakness of the economy at large. However, investment banking operations have made huge profits from the volatility in markets and the rebound in share prices from lows.
There is now a major question about what the market’s next move will be with two popular scenarios in investors minds. Interestingly, this month’s screen seems to want to play both sides; did I mention the results are somewhat contradictory!
Tech stocks have led the market during the crisis and have benefited from an acceleration of many of the trends that were already underpinning their growth. While not many big tech plays have reported this year, the reaction to Netflix’s results reflects the quandary investors now face. While the subscription online video service reported very strong subscriber growth over its second quarter, its guidance was for this to moderate substantially as things went back to a more normal pattern in the third quarter. The shares dropped substantially as investors reflected on the fact the Covid-effect will not last forever. Likewise, a major market setback last week for the tech sector coincided with a slew of positive news about vaccine developments The other Covid related worry for tech is that President Trump’s response to the pandemic is being judged so unfavourably that it could give the Democrats a clean sweep in elections in November. This could open the way to increased regulation and tax for big tech.
If there is a major vaccine breakthrough, it is the stocks suffering worst from “the nightmare on Main Street” that should benefit the most. What’s more, there remains a huge disparity in valuation between large US growth plays and US small cap value.
JPMORGAN US SMALLER COMPANIES
| Name | TIDM | Mkt Cap | Price | DY |
| JPM US Smaller Cos | JUSC | £169m | 288p | 0.9% |
| Discount to NAV | ||||
| Z-Score | Now | Avg. | Low | High |
| -1.8 | -10.8% | -3.3% | 5.0% | -18.8% |
| Share Price Performance | |||||
| 1m | 3m | 6m | 1y | 3y | 5y |
| -1.0% | 18.3% | -20.7% | -9.8% | 8.0% | 63.5% |
| Top Ten Holdings | |
| Name | % Port |
| Pool Corp Com | 3.2 |
| Catalent Inc Com | 2.9 |
| Aptargroup Inc Com | 2.5 |
| Toro Co Com | 2.3 |
| West Pharmaceutical Services Com | 2.1 |
| Quaker Chemical Corp Com | 2.1 |
| Bjs Wholesale Club Holdings Inc Com | 2.0 |
| Lci Industries Com | 1.9 |
| Kinsale Capital Group Inc Com | 1.9 |
| Patrick Industries Inc Com | 1.9 |
| Total | 22.8 |
The screen has highlighted trusts in both small cap value and large cap growth camps. On the value side there is JPMorgan US Smaller Companies (JUSC). While the company does focus on quality, a key feature of its approach is to find companies trading below so-called “intrinsic value”.
Around a quarter of the portfolio is exposed to financials, a sector that traditionally shows very cyclical characteristics and therefore could benefit significantly were there a recovery but is also likely to suffer from low interest rates and a drawn-out recession. Whichever way one cuts it, though, the trust's approach has made for a poor performance in a US market led by the large growth stocks.
JUPITER US SMALLER COMPANIES
| Name | TIDM | Mkt Cap | Price | DY |
| Jupiter US Smaller Cos | JUS | £122m | 944p | - |
| Discount to NAV | ||||
| Z-Score | Now | Avg. | Low | High |
| -1.3 | -14.4% | -10.4% | -5.6% | -21.2% |
| Share Price Performance | |||||
| 1m | 3m | 6m | 1y | 3y | 5y |
| -0.5% | 19.3% | -19.3% | -13.8% | 11.1% | 39.8% |
| Top Ten Holdings | |
| Name | % Port |
| Bok Financial Corp Com | 8.0 |
| Americas Car Mart Inc Com | 5.1 |
| Palomar Holdings Inc Com | 5.0 |
| Cash/Short-Term Investments | 4.8 |
| Ensign Group Inc Com | 4.6 |
| Addus Homecare Corp Com | 3.8 |
| Lci Industries Com | 3.4 |
| Techtarget Inc Com | 3.4 |
| Stonex Group Inc Com | 3.3 |
| Alleghany Corp/De Com | 3.2 |
| Total | 44.6 |
A similar story to that of the JPMorgan trust is told by the performance of the other US-focused small cap trust highlighted by the screen, Jupiter US Smaller Companies (JUS). Financials also account for a significant proportion of this trust’s portfolio at about 34 per cent of the total based on FactSet data. Long-term performance has been pretty lackluster, too.
There are signs of real shareholder discontent with 40 per cent voting late last year against the reappointment of the trust’s chairman, Gordon Grender, who has been in place for over a quarter of a century.
At the end of last month the trust announced it was seeking a replacement for Mr Grender. Sometimes such events can be a front runner to more significant changes at a struggling trust, such as the appointment of a snazzy new fund manager like Baillie Gifford. That admittedly contrived segway brings us onto the screen’s next US trust pick.
BAILLIE GIFFORD US GROWTH
| Name | TIDM | Mkt Cap | Price | DY |
| Baillie Gifford US Growth | USA | £573m | 213p | - |
| Discount to NAV | ||||
| Z-Score | Now | Avg. | Low | High |
| -1.6 | -0.7% | 3.0% | 13.3% | -8.4% |
| Share Price Performance | |||||
| 1m | 3m | 6m | 1y | 3y | 5y |
| 5.5% | 37.4% | 44.4% | 44.2% | - | - |
| Top Ten Holdings | |
| Name | % Port |
| Shopify | 7.7 |
| Amazon.com | 7.7 |
| Tesla Inc | 7.1 |
| Wayfair | 4.7 |
| Netflix | 4.0 |
| MarketAxess | 3.4 |
| Alphabet | 3.2 |
| The Trade Desk | 3.2 |
| Illumina | 3.0 |
| Mastercard | 2.8 |
| Total | 46.8 |
While it is probably fair to say both the JPMorgan and Jupiter trusts can be described kindly as “contrarian” choices by the screen, the third US pick is far more of the moment. Baillie Gifford US Growth (USA) - launched just over two years ago from the same stable as the multi-billion pound Scottish Mortgage (SMT) - has shot the lights out over the last year and has qualified for the screen after moving from a premium rating to a very small discount. The trust employs the management group’s far-sighted approach to investment focusing on highly innovative growth companies that are leading lights in the transformation of industries.
The investment style and the trust’s concentrated portfolio meant it was incredibly well-placed when the crisis struck. Indeed, the trends benefiting many of its holdings appear to have accelerated during the crisis, as is the case with its stakes in the likes of video-conferencing software company Zoom and telemedical firm Teladoc.
With many of the best US growth investments remaining off market for long periods, the management group has also used its financial muscle and reputation as a long-term holder to build up its exposure to unlisted companies. At the end of May these accounted for about 12 per cent of the portfolio.
If the reversal in market leadership from large growth companies to small cap value recovery plays does occur, it could indeed be painful for the trust given the high valuations commanded by many of its holdings. Indeed, the trust’s move to a discount has accompanied the recent bout of nerves over tech’s standing should a vaccine breakthrough be on the cards. However, one thing that is hard to argue with is that the trust has positions in a selection of extremely exciting companies achieving very impressive growth.
PUT OUT YOUR BEST CHINA
FIDELITY CHINA SPECIAL SITUATIONS
| Name | TIDM | Mkt Cap | Price | DY |
| Fidelity China Special Situations | FCSS | £1,511m | 293p | 1.5% |
| Discount to NAV | ||||
| Z-Score | Now | Avg. | Low | High |
| -1.0 | -10.2% | -8.6% | -4.9% | -16.4% |
| Share Price Performance | |||||
| 1m | 3m | 6m | 1y | 3y | 5y |
| 15.4% | 29.7% | 17.5% | 33.9% | 45.2% | 123.9% |
| Top Ten Holdings | |
| Name | % Port |
| Tencent Holdings Ltd Ord | 12 |
| Alibaba Group Holding Ltd Spons Adr | 9.9 |
| China Meidong Auto Holdings Ltd Ord | 8.0 |
| 21Vianet Group Inc Sponsored Adr A | 5.2 |
| Equity Other | 4.9 |
| Cash/Short-Term Investments | 3.7 |
| Skshu Paint Co Ltd Ord A | 2.8 |
| Hutchison China Meditech Ltd Ord | 2.4 |
| Noah Holdings Ltd Sponsored Adr | 1.9 |
| Kweichow Moutai Co Ltd Ord A | 1.8 |
| Total | 52.6 |
A key issue for investors in China revolves around whether the country wants to do what it says it does, and if so, whether it can do what it says it wants to do. Recent second quarter GDP figures from the economic power-house highlighted the central issue investors face while also prompting a 5 per cent fall in mainland stocks.
Trade wars and human-rights issues aside - admittedly that’s rather a lot to brush into the corner - the positive China story is of an economy moving from investment-led growth to growth built on innovation and consumption. This vision is encapsulated in the country’s “Made in China 2025” five-year plan and actions such as the establishment of a Nasdaq-esque, high-tech exchange called Star Market.
This positive future is what Fidelity China Special Situations (FCSS) is betting on. The trust’s manager reckons two-fifths of the trust’s concentrated portfolio should benefit from accelerating e-commerce, for example. Big overweight themes are healthcare, consumer discretionary stocks and information technology. The trust also aims to benefit from growth trends through exposure to small and mid-sized companies. And it has about 6 per cent of the portfolio invested in unquoted stocks. This includes a stake in ByteDance, the owner of hugely successful app TikTok, which may face a ban in the US as part of the ongoing trade war between the countries.
However, China’s recent quarterly GDP numbers suggested economic reality may remain far from visions of high-tech, consumption-driven growth.
In and of itself, and considering the backdrop of Covid-19, second quarter GDP was impressive with 3.2 per cent growth over the three months to the end of June. This followed a Covid-induced 6.8 per cent decline the first three months of the year. But it was the way the second quarter numbers were achieved that gave investors the shivers.
The key driver was the industrial sector while consumption was notably weak. Indeed, while there is much potential in China, consumption is feeble at about 40 per cent of GDP compared with 65 to 70 per cent in the US. Meanwhile, inequality is very high, bad debts are a huge concern and since the financial crisis much growth has been achieved by funnelling investment through inefficient state enterprises and into unwanted real-estate projects.
While it is certainly forgivable for the Chinese authorities to pull the closest economic lever to hand in response to the crisis, it is a concern that the quarterly numbers suggest this may be the only lever there’s easy access to. It is not the lever Fidelity China’s portfolio position suggests its manager wants to see in operation.
Still there’s clearly huge potential to be tapped from the Chinese consumer, growth in the middle-class and technological innovation. Indeed, for all the grumbles about unsustainable debt and the role of sickly state enterprises, the country is home to several massive and highly-impressive technology companies, such as Alibaba, which Fidelity China backed pre-float.
Meanwhile, until the recent setback, Chinese markets have come through the crisis extremely well due to the decisive action taken by authorities to control the virus. Markets have also remained strong despite the escalating trade war with the US and increasingly frosty relations with the West in general. Should Fidelity China’s bet that the country is building a healthier economy prove correct, the trust looks well placed to maintain its strong record.
From the trust’s IPO in 2010 to June this year, based on figures from broker Investec, annual returns have averaged about 11 per cent compared with closer to 7 per cent from the MSCI China index. While there have been changes of manager over that time, a judicious use of gearing as well as the growth focus has contributed to the outperformance. It is also of note that the trust has a formal policy to keep the discount in single-digits and it has been buying in its own shares recently to stop the discount pushing too far into double-digit territory. Fans of the story should continue to expect bumps on the road.
AVI GOING JAPANESE
| Name | TIDM | Mkt Cap | Price | DY |
| AVI Global Trust | AGT | £755m | 707p | 2.9% |
| Discount to NAV | ||||
| Z-Score | Now | Avg. | Low | High |
| -1.2 | -12.3% | -10.4% | -6.3% | -15.6% |
| Share Price Performance | |||||
| 1m | 3m | 6m | 1y | 3y | 5y |
| 6.6% | 21.5% | -11.2% | -6.8% | 9.0% | 54.6% |
| Top Ten Holdings | |
| Name | % Port |
| Japan Special Situations (14 stk basket) | 17.8 |
| Pershing Square Holdings | 9.2 |
| Oakley Capital Investments | 7.3 |
| Softbank Group | 7.1 |
| Sony | 5.9 |
| Fondul Proprietatea | 5.3 |
| Kinnevik B | 5.2 |
| Third Point Offshore Investors | 4.7 |
| EXOR | 4.1 |
| Jardine Strategic | 3.8 |
| Total | 70.4 |
The screen’s final country story involved the long-term push towards improved governance in Japan. To be fair, I’m shoehorning this country-link in as AVI Global (AGT)* is, as the name suggests, an international investment trust. However, Japan has become a major theme accounting for about a quarter of the portfolio. The opportunities in the country also very much fits with the trust’s distinctive investment approach and its self-reported top holding is a basket of 14 stocks playing a Japanese special situations theme.
AVI attempts to seek out companies that trade at a substantial discount to the sum of their parts. For discount-nuts, this offers the tantalising prospect of a discount (the trusts own) on a discount (the 37 per cent discount AVI calculates its underlying portfolio trades at versus net asset value).
The reasons AVI’s investments trade at big discounts is often due to a holding company structure and governance issues, frequently relating to family ownership. Japan is rich pickings for this type of play and the pressure to address these issues from the government and regulators is in the right direction.
While value investing is often associated with exposure to no-hoper, mature businesses, AVI’s approach actually means it has exposure to some of the raciest tech stocks on the market - including Alibaba and Tencent - but through lowly-rated holding companies. Softbank has been a particularly profitable example of this recently. AVI first bought Softbank shares February before seeing the discount push out to what the trust’s manager describes as “an eye-popping 76 per cent”. This prompted AVI to buy more.
A key attraction of Softbank for AVI is the presence of activist investor Elliott Advisors along with ample scope to improve governance. Indeed, Softbank's decision to sell its stake in T-Mobile US was taken as a major signal that things are moving in the right direction and has helped fuel a surge in the stock from its March lows.
*the authors holds shares in AVI Global
SEE YOU AGAIN IN A MONTH
I hope you’ve enjoyed our first Alpha Investment Trust screen round-up. The plan is to improve as we go and, if as a subscriber, there is anything else you’d like to see included please get in touch. The column will not always be so heavily weighted towards themes but will continue to attempt to highlight them when clear themes do emerge.
algy.hall@ft.com
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