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Investment trust portfolio: Refining value exposure

John Baron explains how the portfolios are balancing their exposure as sentiment shifts
Investment trust portfolio: Refining value exposure

With much talk in evidence of the rotation into value, investors will be forgiven for thinking little else has come to matter. Yet history suggests it remains wise to maintain portfolio balance. Market sentiment is often fickle and can distract. Remaining focused on the fundamentals of the investment, while relating this to one’s assessment of sentiment and long-term prospects, is key to the successful management of portfolios over time. And now is no different.

The portfolios have benefitted from their overweight exposure to growth companies. They will continue to seek the many entrepreneurial managements and companies which are embracing both existing and emerging trends and technologies. However, the last year has seen a reduction in the extent of this overweight position to ensure a better balance between the two approaches. The logic is well rehearsed.

The disparity in valuations between the two, the increasingly evident determination of governments to engineer a strong economic recovery, the prospect of artificially low interest rates and the concomitant risk of higher inflation, all point to those less fashionable but still good quality companies disproportionately benefitting. But maintaining a balance within this now larger ‘value’ component remains just as important as ensuring portfolio balance in general.


Sector balancing

For the reasons highlighted in the column ‘The case for commodities’ (10 July 2020), last year most of the nine real investment trust portfolios managed on the website, including the two regularly featured in this column, introduced and then added to their commodities exposure. BlackRock World Mining Trust (BRWM) and CQS Natural Resources Growth & Income (CYN) were bought at prices of between £3.38 and £4.00 in the former and £0.73 and £0.86 in the latter.

We remain positive about the outlook for commodities. However, because of the extent of outperformance by BRWM and CYN, including that of BlackRock Energy & Resources Income (BERI), sector exposure has become outsized. BRWM has therefore been top-sliced or sold in recent months at prices between £6.41 and £6.89 when standing on a premium to net asset value (NAV), safe in the knowledge that exposure to the sector remains meaningful.

A further consideration for some of the portfolios is the requirement for a reasonable or high level of income. Because of the strong performances from BRWM, CYN and BERI, their yields have fallen considerably. Other ‘value’ sectors which have lagged the commodities sector therefore perhaps offer more potential.

The commercial property sector is a case in point. It has had to endure a torrid time courtesy of an unprecedented economic shock involving rent arrears, higher vacancy rates and dividend cuts. Yet fund managers’ caution and therefore lack of development exposure, their focus on income and diversification, and the lack of investment and therefore shortage of supply, are just some of the positives. The sector in general is well positioned to benefit as the economy recovers. Furthermore, the sector offers attractive income opportunities.

Standard Life Property Income (SLI) has a long-term record of good strategic and effective asset management courtesy of Jason Baggaley, its lead manager. A focus on quality assets and wise sub-sector allocation have assisted. After a dividend cut of 20 per cent last year, a 25 per cent increase in the quarterly dividend this year suggests a yield exceeding 5.1 per cent. SLI believes this dividend is sustainable given current rent collection levels. The portfolios have therefore been adding to holdings at prices of £0.67 and £0.70 when standing on a c.20 per cent discount.

Some of the monies raised from the portfolios’ commodities exposure has also been used to increase exposure to other sources of sustainable income.

For example, the Winter portfolio has added to GCP Asset Backed Income Fund (GABI) at a price of £1.01 The company seeks attractive risk-adjusted returns by investing in asset-backed loans across the social infrastructure, property, energy, infrastructure, and asset finance sectors. A disciplined approach to portfolio construction and focus on defensive assets meant all interest due was received in 2020. A modest discount to NAV and yield of 6.4 per cent when bought add to the investment case.


Trade of the decade

Meanwhile, for the reasons highlighted in last month’s column (‘Trade of the decade?’), the portfolios have been further adding to their UK exposure, which has also assisted income levels.

Examples include City of London (CTY) and BMO UK High Income (BHI) at prices of £3.92 and £0.94 respectively. CTY has a proud track record of dividend growth, under its respected manager, Job Curtis – for which it is recognised by the Association of Investment Companies as being a ‘Dividend hero’. Recent evidence suggests relative performance is improving as the rotation into value stocks continues. An increased dividend and prospective yield of 4.9 per cent when bought reinforces the investment case.

In recent years BHI has been quietly accumulating a good track record, again relative to its ‘value’ focus. Strong revenue reserves and an on-going move by the manager to reposition the portfolio towards companies with lower yields but ones with greater potential for dividend growth helped the company to increase its pay-out again last year. This search for sustainable dividends has led to a non-FTSE 100 bias accounting for over 60 per cent of its portfolio. A reasonable discount and yield of 5.6 per cent when bought adds to the attraction.

Meanwhile, Edinburgh Investment Trust (EDIN) has been further added to at a price of £6.28. EDIN has recently appointed Majedie Asset Management and seeks companies in the UK with strong business models and good managements. The managers take a high conviction approach, while Majedie’s UK portfolio has outperformed the FTSE All-Share by 3 per cent a year on average since 2006. A new manager with a good long-term record, a modest discount to NAV and 3.8 per cent yield when bought suggest patient investors will be rewarded.

Artemis Alpha Trust (ATS) has recently been introduced to the Thematic portfolio at a price of £4.54. The company adopts an ‘unconstrained and opportunistic’ approach which best suits the portfolio’s higher risk/reward remit. The company’s portfolio is concentrated and varies significantly from the index. This will make for added volatility. However, its performance has been good – for example, last year its NAV rose 10 per cent when the benchmark, the FTSE All-Share index, was down 9.8 per cent.

Meanwhile, the website’s portfolios have also been adding to their UK smaller companies exposure. The Commentary piece ‘The future is small’ (10 February 2021) explains our long-held positive view which has been reflected in the composition of the portfolios over the years. However, the future now looks particularly attractive as the economy picks up.

Aberforth Split Level Income Trust (ASIT) and Invesco Perpetual UK Smaller Companies (IPU) have been introduced to some portfolios. ASIT is a split capital investment trust where the zeros account for gearing of c.33 per cent. Aberforth are ‘value’ investors who buy shares in companies they calculate to be selling below their intrinsic value. Performance long-term has been respectable given the value focus, but it has picked up markedly of late as the rotation into value proceeds – returns being helped by the gearing.

IPU has a sound performance record and proven investment approach. Unfortunately, the Board made the mistake last year of abandoning the company’s stated policy of paying a dividend equating to 4 per cent of the share price. This was not well received and the discount widened considerably – such stated policies are pointless if abandoned at the first whiff of gunshot. The Board has accepted its mistake and the policy has recently been reinstated. The discount has narrowed as a result but has yet to fully recover.

This rebalancing of the portfolios’ value component - away from commodities, towards UK equities and commercial property - has now largely run its course. However, the portfolios will remain fleet of foot in capitalising on opportunities which offer good long-term prospects for the patient investor.

For more portfolios and commentary from John's company please visit his website at John Baron has joined a team that forms a separate discretionary management business Baron & Grant. 



Portfolio performance

Growth            Income

1 Jan 2009 – 31 May 2021

Portfolio (%)                            426.6               289.2

Benchmark (%)*                      203.0               151.8

Year to 31 May 2021

Portfolio (%)                             6.8                  5.7

Benchmark (%)*                        6.6                 4.6

Yield (%)                                    2.6                  3.1

* The MSCI PIMFA Growth and Income benchmarks are cited (total return)