Around the World in Eight Investment Trusts 2022

Bags lightly packed, and armed with a battered copy of Around the World in Eighty Days, we are once again off on our annual globe-spanning trip, following loosely in the steps of Jules Verne’s enigmatic hero, the exacting and “polished man of the world” – to Victorian tastes, at least – Phileas Fogg.

Fogg sets out on his voyage determined to settle an argument with the members of his gentlemen’s club, beat the clock and win a £20,000 wager. Our goal is a little less showy, though no less wide-eyed: to journey around the world via eight investment trusts listed on the London Stock Exchange, aided as ever by our trusted stock screen. This will be our 11th eastward circumnavigation, based on the same rough itinerary.

We begin in Fogg’s home city of London with a UK trust, before boarding the Eurostar in search of an exciting and underappreciated portfolio of European equities. From there, we make stops in mainland Asia, Japan and the less-travelled emerging markets, before crossing the Pacific to the home of the world’s largest and most important stock market, the US.

With six destinations under our belt, we follow Fogg back home to add two final trusts: a UK income fund to park the winnings from his wager, and a global trust as a trophy of another completed expedition.

As our now well-worn metaphor shows, there is nothing new about thinking global. In 1872, the year Verne’s novel is set, the ever-expanding use of steam power in travel over land and sea had created the conditions for one early version of globalisation. “The world has grown smaller, since a man can now go round it ten times more quickly than a hundred years ago,” observes one of Fogg’s fellow club members.

But fast forward 150 years, and the planet’s connectivity has taken several quantum leaps forward. Even accounting for the extra complications and costs that have beset international travel since 2020, today’s multi-stop backpacker can expect to travel faster, further and more cheaply than Fogg, who incurs so many expenses on his odyssey that he has little more than £1,000 to show from his successful wager.

Similarly, the globe-spanning investment trust options open to today’s armchair investor are colossal. But as the past year has shown, even the most intrepid investor can struggle to escape the steep costs at a time of pan-asset, pan-geographic market pain. For good or ill, the world has grown smaller.

Our own Passepartout

Before he sets off, Fogg hires a reluctant though steadfast Frenchman, Jean Passepartout, as his valet. Our own Passepartout, which has served as travel companion, guide and steadying hand since this feature first ran in 2012, is our Investment Trust Report screen.

The screen will be familiar to subscribers to the IC's Alpha service, who receive its counsel on a monthly basis. Its criteria hunt for the most attractive trusts based on a combination of three-month share price performance and a valuation measure called the Z-score.

The Z-score allows investors to compare investment trusts with different remits and capital structures. It does this by calculating a standard measure (the standard deviation) of how far a trust’s premium or discount to net asset value (NAV) is from the one-year average. This self-referencing measurement is based on the one-year range. A Z-score can be considered to be pretty cheap when it gets below -1 and extremely cheap at or below -2.

Three-month share price momentum is used as an indicator of sentiment on trusts and their recent investment success.  

Fogg has good reason to trust this process. While the Alpha screen uses a slightly different set of rules to construct its portfolio, its annually-rebalanced selections since mid-2004 have generated a 657 per cent total return. In headline terms, that’s better than both the MSCI World and FTSE All-Share indices.

While the long-haul outperformance is convincing, the screen has long been susceptible to periods of exaggerated pessimism. The past year has been a case in point. Since the screen’s all-time total return peaked at 1,010 per cent exactly a year ago, investors have not only bid down the value of investment trusts in line with falling NAVs, but sold shares at wide discounts in the expectation that inflation, rising interest rates and the prospect of recession will further erode the value of trust portfolios.

Another hidden cost of the Alpha IT screen’s 18-year journey – its own version of visa fees, fuel duties and airport taxis – is dealing costs. With time, these compound, which is why we’ve included the performance of the Alpha screen both with and without a notional 1.5 per cent annual charge in the table below. The performance of the MSCI World and FTSE All-Share indices over the same period is also there.

Our Around the World portfolio adopts the approach by selecting the top-ranking trust from each of the geographies Fogg visits. In the past decade, this process has had mixed success. The big issue has been a low proportional weighting to a high-flying US stock market, whose companies make up more than two-thirds of the MSCI World Index, seen by many investors as the go-to global equity benchmark.

Fortunately for the portfolio, the US trust that the screen selected a year ago – JPMorgan US Smaller Companies Investment Trust (JUSC) – outperformed the freefalling S&P 500, although that relative filip was undone by big reversals in several of its other picks, most notably Invesco Perpetual Select Trust (IPVU), Montanaro European Smaller Companies Trust (MTE) and JPMorgan Japanese Investment Trust (JFJ).

That brought the total loss from Fogg’s picks to 18 per cent, and the decade-long cumulative return to 155 per cent. Though better than the FTSE All-Share over the same period, that return falls short of both the FTSE World index and a blend of both indices. Factor in a 1.5 per cent charge to account for transactional costs, and the total return falls to a more pedestrian 110 per cent, less than half the 230 per cent gain from the FTSE World.

*ATW table 2012-22 (with/without charges)**2021 performance table**ATW Chart*

What will this year’s journey bring? Much will again depend on currency swings, which had a big bearing on last year’s returns. Just like Fogg – who is forced to spend $8,000 on four cross-Atlantic tickets at the end of his journey – the greenback has been a source of pain for global investors watching the relative value of their yen-, euro- or yuan-denominated assets slide. Fortunately for UK investors, a global outlook is one way to reduce exposure to the pound, although this is also partly true of investing in the FTSE 100.

But while investors often have their own version of Fogg’s financial prize in mind, it’s handy to remember that even the most sensibly planned itinerary can go wrong. Like all things in life, it’s best to embrace uncertainty rather than curse it. After all, it’s not the destination that counts, but the journey.

A puzzled grin overspread Passepartout’s round face; clearly he had not comprehended his master. “Monsieur is going to leave home?”

“Yes,” returned Phileas Fogg. “We are going round the world.”

Destination 1: UK

When not racing around the 19th-century world on a whim, Fogg is a quiet and secluded sort. Though a dab hand at whist, he only ever plays “for the sake of playing”. Any winnings from the game, Verne tells us, “never went into his purse, being reserved as a fund for his charities”.

It’s therefore likely that Fogg would have approved of our screen’s domestic selection, Literacy Capital (BOOK), which beyond investing in private UK businesses has made it its mission to help disadvantaged children in Britain learn to read. With 0.9 per cent of NAV committed to the cause each year, donations in support of this noble goal have now topped £5mn since the trust was founded in 2017.

This shouldn’t dissuade investors of the trust’s shareholder-oriented credentials. Since listing midway through 2021, the trust’s NAV has grown by 143 per cent. Jump back to the trust’s inception in April 2018, when former Capita chief executive Paul Pindar and his son Richard founded the trust with £54mn in investor capital, and the return has been 328 per cent.

Impressive? Certainly. But comparisons with the FTSE investment company index and FTSE All-Share only get you so far, given some 88 per cent of Literacy’s gross assets are buyout stakes, with the balance in growth capital investments and other private equity funds.

The issue with this strategy – or benefit, depending on your perspective – is that it sidesteps the rigour (and volatility) of liquid market pricing. In the 12 months to 30 September, a period in which most listed UK-focused trusts were looking at substantial paper losses, Literacy was claiming a 57 per cent NAV gain. The subsequent loss of the trust’s own premium to NAV may reflect some creeping doubts that recent quarters haven’t been quite as kind to portfolio companies as reported value uplifts imply.

What Literacy has got going for it is a cautious approach to leverage for a private equity sponsor, a permanent capital model that allows it to be more patient and ambitious than most funds’ managers, and a shareholder register stuffed with directors and staff. A sector-agnostic strategy that focuses on flexible funding models for smaller (though profitable) businesses also sets the trust apart from many of its fellow UK travellers.

Destination 2: Europe

Once he reaches the other side of the Channel, Fogg passes through Europe in a flash. Within three days, he is in Brindisi boarding the Suez-bound Mongolia and sailing across the Mediterranean with barely a comment on the continent.

It’s hard not to draw a parallel with the lack of attention the UK's investors (and financial media) often seem to pay European equity markets. Is the continent a hive of corporate variety, innovation and excellence, underpinned by one of the largest and wealthiest economies anywhere? Or does it remind us too much of home to feel like diversification?

Henderson Euro Trust (HNE), a stable fund offering of the asset management giant Janus Henderson, makes the case for the former. It is also in many senses typical of its genre. Marketed as a “diversifier to UK- or US-biased equity portfolios”, it splits its £290mn portfolio across 35 to 55 companies, largely of the ‘quality’ bent. In recent years it has been steered by Jamie Ross, who took the reins from Tim Stevenson, the latter having run the fund from its inception in 1992 until his retirement at the end of 2018.

What is remarkable, however, is the price at which the trust now trades. Though it has narrowed slightly in recent weeks, the current 16 per cent discount to NAV is comparable with the worst of the pessimism when the coronavirus pandemic first hit in 2020.

Why then are investors so downcast? Charges don’t provide much of a clue: the 0.65 per cent annual management fee is hardly out of whack for an actively managed fund. Nor is the strategy a turn-off: Ross and his team like companies that either have sustainable and high returns on capital, or sit in sectors with good prospects for structural improvement.

Perhaps it’s that old nugget: the seeming fragility of Europe’s political economy. But while that might be a reason to avoid European equities writ large, it doesn’t explain why those owned by Henderson Eurotrust can be acquired quite so cheaply.

Destination 3: Asia

There are several reasons why members of the Reform Club take the other side of Fogg’s wager, among them the chance of “bad weather, contrary winds, shipwrecks, railway accidents, and so on”. One character even imagines the prospect that those far afield from the UK might "stop the trains, pillage the luggage-vans, and scalp the passengers!”

While Fogg remains undeterred, Verne is keen to paint a specifically Asia-based jeopardy as the chief source of his novel’s dramatic tension.

Does a version of this bias persist in the minds of global investors? Do Asian equities spell greater than average risk to our Around the World investment portfolio? Fortunately, our screen’s pick of the continent’s trusts – the Scottish Oriental Smaller Companies Investment Trust (SST) – has huge experience in the region’s dizzying array of markets. The trust has also been in business since 1995, thereby pre-dating the epochal scare that was the Asian financial crisis by two years.

The fund is managed by the Singapore-based Vinay Agarwal, who aims to achieve long-term capital growth by investing in quoted companies with market capitalisations below $5bn at the time a position is first acquired.

With the US dollar once again casting its long shadow, fears have grown in recent months that some Asian nations could be susceptible to another 1997-style currency crunch. An economic decoupling between the West and China has only added further complexity to what until recently was seen by many global equity investors as a clear bet on the continent’s fast-growing consumer appetites and young populations.

Given this backdrop, SST’s geographic concentration makes a lot of sense. The fund is now heavily overweight Indian and Indonesian equities – which together make up around two-thirds of the portfolio – and underweight China, Hong Kong and Taiwan.

Destination 4: Emerging markets

Although Fogg’s trip is full of incident, its speed is largely made possible by sticking to established routes that a London-based armchair traveller would probably know about. Verne has his hero completely bypass south and central America, sub-Saharan Africa and central Asia. The path less trodden remains undisturbed.

How to define ‘emerging markets’ remains a slippery task. By one definition, they comprise 84 per cent of the global population, and a 58 per cent share of economic output once adjusted for purchasing power. Yet as emerging market specialist Ashmore points out, investors in the developed world typically allocate less than 10 per cent of their portfolios to economies classed as ‘emerging’.

Our portfolio aims to do slightly better than that. And this year it is the job of the screen’s number one overall pick, Utilico Emerging Markets Trust (UEM), to fill that space.

Despite holding up relatively well over the past year – both the share price and NAV are up on a one-year basis, compared with a 14 per cent decline in the sterling-priced MSCI Emerging Markets index – the trust’s discount to NAV is currently at a two-year low. And while a double-digit discount has been a constant of recent years, no other trust comes close to UEM’s current Z-score of -2.8. Market pessimism in this stock is rarely so pronounced.

While it is hard to neatly sum up such a widely invested portfolio, there are a couple of reasons to think the current price is unwarranted. For one, the trust’s bias towards real assets, predominantly in the utility and logistics sectors and via stakes in companies with monopoly-like positions, looks well-suited to a world of stubbornly high inflation and rising geopolitical risk. A 22 per cent allocation to resource-rich Brazil, the highest of any one country, looks less of a risk now that a fractious presidential election is over, and now there are signs that inflation may be peaking.

UEM’s balance sheet is also both modestly geared and sufficiently cash-rich to support share buy-backs, while the stockpicking strategy is flexible enough for the investment manager to consider stakes in less strictly ‘emerging’ nations such as Poland and South Korea. And while the portfolio’s 15 per cent allocation to China and Hong Kong may be less inspiring, this weighting has declined 3 percentage points since March 2021.

Given the trust’s scope, there will almost always be reasons for concern. But the track record should also count for something: annual dividends have climbed from 1.5p to 8p a share since the trust’s inception in 2005, and have risen every year for the past decade.

Destination 5: Japan

Fogg spends his brief stint in the Japanese port city of Yokohama searching for Passepartout, from whom he had been involuntarily separated in Hong Kong. Investors in Japanese equities may have felt similarly unmoored from their compasses in the past year, as the famously ex-growth and deflationary economy struggles with a new global reality.

One of the effects of this macroeconomic and financial adjustment has been a steep devaluation in the yen, as investors have piled into US Treasuries and out of negatively-yielding Japanese bonds. Even the pound has held up well against Japan’s currency, which partly explains why our screen’s best-performing trust, the sterling-denominated Fidelity Japan Trust (FJV), has lost a third of its value over the past year.

Another cause of this punishment has been FJV’s strong relative weighting to software and services businesses and smaller companies. And while a lack of exposure to defence and interest-rate-sensitive financial services names has been a positive for much of the past decade, it has caused the trust to underperform its benchmark, the Tokyo Stock Index, since late 2021.

On the plus side, market interventions have helped to keep Japan’s inflation below that of most advanced economies, Covid-19 is now in the rearview mirror, and the country remains a byword for innovation and corporate excellence. The trust’s strategy, though always likely to struggle in a recession, is built with long-term returns in mind. Its manager, Fidelity veteran Nicholas Price, is a follower of the Garp (growth-at-a-reasonable price) investing style, which he also deploys across several of the asset manager’s other Japan funds.

One flipside of this aggressive approach is a high level of balance sheet gearing, largely in the form of long-only contracts for difference (CFDs) on equity positions. Should the sell-off in Japanese stocks persist in the coming months, investors will need to watch these derivative positions closely.

Destination 6: US

Fogg's arrival and passage through America is set at the start of the country's Gilded Age, an epoch renowned for the immense wealth and power wielded by titans of industry such as John D Rockefeller, JP Morgan and Andrew Carnegie.

Bill Ackman, the founder-manager of Pershing Square Holdings (PSH), has never held an iron grip over a chunk of the economy, and probably wouldn’t welcome the company of those 19th-century names, despite his own fortune and storied career in finance. But as one of the most celebrated and successful investors of his generation, his views still carry significant weight on Wall Street.

More than any fund on our global tour, and perhaps in the UK investment trust universe, Pershing Square’s brand is inseparable from its chief’s. This tie also has a lot to do with style: although Pershing Square is classed as a hedge fund, Ackman is at his core an activist investor who likes to take a handful of big positions in large US stocks. This, together with the odd bit of classic hedging, has resulted in 16 per cent compound annual NAV growth since the first iteration of the fund in 2004.

Ackman’s reward for this long-term record has been a quite staggering 36 per cent discount to NAV. A $300mn share buyback programme, initiated earlier this year, appears to have had little effect.

In an August letter to shareholders, Ackman suggested that demand for Pershing shares, and the limitations of marketing the trust to certain investors, might help explain the situation.

Another more prosaic reason is the fund’s costs and idiosyncratic structure. In addition to a 1.5 per cent management fee, a 16 per cent performance fee kicks in above a high-water mark, and the trust’s occasional legal battles can chew through a lot of capital, too. In 2021, for example, a shareholder NAV return of 26.9 per cent paled against the trust’s 33.9 per cent gross return. 

And yet as Ackman points out, as of August, PSH could boast the best five-year NAV return of the 100 largest closed-end equity funds in the world – even after fees and expenses. Even acknowledging an ill-timed bet on Netflix (US:NFLX) earlier this year, it’s hard to completely account for the disconnect.

Destination 7: UK income

Although income is in its name, Harmony Energy Income Trust (HEIT) is still very early on in its journey to becoming an investment trust dividend stalwart.

The fund, which was launched 12 months ago to invest in utility-scale battery energy storage projects in the UK, has so far only paid a 1p-a-share token dividend to shareholders in July. Another 1p dividend should follow at the end of this year, before the trust gears up to a targeted 8p distribution in 2023.

‘Gears’ here works on two levels. First, Harmony needs to get some projects up and running. By the end of 2022, both the flagship Pillswood project in Yorkshire and a smaller site in Broadditch, Kent, should be operational and generating revenues. Another four – including the recently-acquired Bumpers project in Buckinghamshire – are expected to be live by this time next year.

Second, Harmony’s balance sheet is set to gear up after the company signed a £60mn debt package in June to finance Bumpers’ construction. Though structured as an interest-only loan for the first three years, and with the ability to expand to £130mn over time, interest on the facility is already 6 per cent and rising.

The ability to fund and expand a portfolio of infrastructure assets through a mixture of debt and equity has clearly changed since Harmony listed. A higher cost of capital raises the stakes for the trust’s ambition to generate a total return of 10 to 12 per cent a year.

But despite this tricky backdrop, the trust’s manager, Harmony Energy Advisors, has made a decent start. It acquired the 99-megawatt Bumpers project at a price that was independently judged to have been below market value, has signed several revenue optimisation contracts with Tesla, and tapped equity investors for a further £15mn in a 100p-a-share placing last month.

Most encouragingly, the fund’s longer-duration battery storage assets should benefit from more favourable pricing, already boosted by high gas prices.

Appropriately enough, it’s at the Battery at the southern tip of Manhattan where Fogg spies the trading vessel that will take him and his crew back across the Atlantic. Our voyage is nearing its end.

Destination 8: The world

The final stop in our round-the-world jaunt is Hansa Investment Company (HANA), a storied trust that since the 1950s has been closely associated with the Salomon family, who own a controlling stake. William Salomon, son of its founder Walter, is both a director and senior partner of Hansa’s portfolio manager.

Like Fogg, Hansa is somewhat of a riddle. Although it spreads its investments widely across global markets, it has for 70 years retained a core holding in Ocean Wilsons Holdings (OCN). This peculiar mishmash of business comprises a Bermuda-based investment company and a majority stake in Wilson Sons Holdings Brasil (BR:PORT3), a sprawling maritime services business headquartered in Rio de Janeiro and founded by two Scottish brothers in 1837, 35 years before Fogg set off on his famous adventure.

At first glance, the trust trades at a massive two-fifths discount to NAV, only slightly below the one-year average. But factor in Ocean Wilsons’ own trading price and assets, and the discount on Hansa’s “look-through” net assets is closer to 55 per cent, according to chief investment officer Alec Letchfield.

As we commented three years ago, there is no obvious catalyst for this gulf to close. While the board has the power to buy back stock, and passed a resolution to purchase up to 12mn non-voting ‘A’ shares at its August AGM, the company says its best chance of “attaining a good rating for the shares is to concentrate on good shareholder returns”.

Even if professional investors appear suspicious of Hansa’s ability to do this (and its governance in general), the trust’s longevity and steady mark-to-market NAV growth cannot be overlooked. Nor is an idiosyncratic approach to investing a bad thing. After all, isn’t a willingness to defy the crowd and chart one’s own course precisely Phileas Fogg's most celebrated quality?

25 Top Z-score Trusts

Find below all the features in our special issue celebrating the investment trust. 

Spotting the true discount bargains - Val Cipriani highlights investment trusts trading at a discount

Where the money has been flowing in a year of turmoil - Dave Baxter looks at how investment trusts have fared in raising funds this year

IC Income Portfolios - one year on - Dave Baxter reveals how our experts' pick of income trusts has performed and what changes are being made

Around the world in eight investment trusts - Alex Newman runs our global investment trust stock screen to produce the best investment ideas for regional diversification

Gearing up and down - Val Cipriani reports on the big gearing movements in the investment trust world over the past year

The professional picks 2022 - Our panel of experts pick their preferred investment trusts for the year ahead

Investment trusts hold up as refinancing risk looms - The sector has largely timed refinancing right

Capital preservation with a personal touch - Personal Assets Trust provides an asset allocation case study for a tough bear market

How cheap is Scottish Mortgage? - Looking beyond the growth trust's price tag

Investment trusts' unlisted headache - Exposures to private companies have brought their share of problems

When discounts signal a new buying opportunity - Our investment trusts system bottomed early in 2009, will history repeat?

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