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The trust factor

Our private investor diarist, John Rosier, explains how investment trusts have been the biggest contributor to his returns this year
October 13, 2017

Equity markets had a good September. Germany led the way, with the DAX up 6.4 per cent despite Angela Merkel doing less well than expected in the federal election. Russia gained 3.7 per cent, helped no doubt by a resurgent oil price. Brent crude was up 7.5 per cent, finishing the month just above January’s high and at the highest level in over two years. It will be interesting to see if it breaks out decisively from here. The Nikkei 225 was up 3.7 per cent, and the S&P 500 up 1.9 per cent. The S&P 500 ended September at another all-time high and up 12.5 per cent in 2017. 

The FTSE All-Share (Total Return) index bucked the trend, falling 0.4 per cent. Strong hints from the governor of the Bank of England that interest rates would start to move up, possibly as soon as November, were probably behind the weak market. That and the consequent strengthening of sterling. Sterling gained 4.4 per cent against the euro to €1.133 and 3.5 per cent against the US dollar to $1.34. Just talking about interest rate rises might be doing the job for the governor – after all, stronger sterling should dampen inflation pressures.

In other commodity markets, copper gave up some of its recent gains, falling 3.8 per cent to $2.96 per pound (lb). Zinc, in which I now have an interest following Central Asia Metals’ (CAML) purchase of the Sasa mine in Macedonia, gained 0.8 per cent. For gold, after all the excitement of August when it looked as though it was breaking out, September was somewhat of a disappointment. It dropped below $1,300 an ounce (oz), finishing the month down 3.3 per cent at $1,275. Bitcoin continued to be the subject of huge debate – is it a bubble or is it the future? After hitting a new high of $4,892 on the first of the month it finished September down 11.5 per cent at $4,163. At one stage, it dipped below $3,000. That’s proper volatility!

 

Enjoying a biotech boost

September saw the fourth down month this year for the FTSE All-Share (Total Return) Index, but it has been pleasing to see that in three of those months my JIC Portfolio managed a positive return. In September, the JIC Portfolio gained 1.7 per cent, leaving it up 23.0 per cent since 1 January and 161.2 per cent since inception in January 2012. Over the respective periods, the All-Share was off -0.4 per cent, up 7.8 per cent and up 74.4 per cent. Since January 2012 the annualised return of the JIC Portfolio stands at +18.2 per cent, versus +10.2 per cent for the All-Share.

Performance this month was driven by Bioventix (BVXP), which I wrote about in my last column. It gained 24.7 per cent following its positive trading update on 4 September, when it said “both revenues and profits are expected to be ahead of market expectations”. We will have to wait until results on 17 October to see if expectations have run ahead of themselves. Other major contributors to performance were Faroe Petroleum (FPM), up 17.0 per cent, and Diversified Gas and Oil (DGOC), up 16.4 per cent, both benefiting from the stronger oil price and I think a greater appreciation of their undervaluation.

Two of my smaller holdings also performed well. Statpro Group (SOG) gained 14.3 per cent and since I bought a year ago is up 63 per cent on my purchase price; pity I only bought a holding accounting for just 0.5 per cent of my portfolio value. RedstoneConnect (REDS) also saw buying at the lower levels boosting it by 13.5 per cent over the month. Two disappointments were Central Asia Metals, down 10.4 per cent, and AdEPT Telecom (ADT), down 9.5 per cent. Central Asia Metals’ equity placing at a 10 per cent discount to the prevailing price to pay for the Sasa acquisition was behind the fall. I am relaxed, however, as the acquisition looks sensible from a financial and strategic view and should enhance earnings in the coming years.

 

The value of trusts

On several occasions I have been asked “why, if you can pick good stocks do you bother holding investment trusts?” There are a few answers to that, but probably the most important is that I think I can pick good investment trusts as well. Three-quarters of the way through the year and analysis by Statpro Group shows that five of my 11 largest contributors to this year’s 23.0 per cent gain in the portfolio’s value were investment trusts. After Conviviality (CVR) and Bioventix, which contributed 4.7 per cent and 4.4 per cent, respectively, TR European Growth (TRG) comes in third at a +2.8 per cent contribution. Baillie Gifford Shin Nippon (BGS) has added 1.4 per cent, Biotech Growth Trust (BIOG) 0.8 per cent, Fidelity Asian Values (FAS) 0.7 per cent, and India Capital Growth Fund also 0.7 per cent.

The attraction of holding trusts alongside individual companies is that it gives me access to some excellent fund managers in areas where I have little expertise. Picking individual stocks in overseas markets, especially small- and mid-caps, is best left to those with specialist knowledge. The same goes for areas such as biotechnology, where it is best to invest in a diverse portfolio picked by experts. Another attraction of investing in investment trusts is that it diversifies my portfolio away from the UK and sterling and – probably more importantly over the long term – gives me exposure to faster growing areas of the world, such as India.

Clearly, I don’t have to buy investment trusts to achieve these benefits as there are plenty of open-ended funds that do the same thing. Investment trusts, however, do have another advantage: if bought at the right time you can benefit from a narrowing of the discount to net asset value (NAV). Taking India again, when I first invested in the India Capital Growth Fund a year ago, the shares stood at a 20 per cent discount to NAV. The board has been actively working to reduce that discount. It has been proactive in marketing the trust to a larger audience, with its excellent India-based fund manager Gaurav Narain presenting to current and potential investors. In addition, the company is seeking to move its listing from Aim to the main market, with the aim of improving its marketability. These efforts are being rewarded; the discount has narrowed to 12 per cent over the past year. And there’s hopefully more progress to come. Fidelity Asian Values is another case in point, with the discount narrowing from the mid-teens a year ago to its current 6.0 per cent. One final attraction of investment trusts is that they can build up revenue reserves during the good times, which can be used to support the dividend during a bear market.

If I didn’t enjoy investing so much I would probably build a portfolio consisting only of investment trusts and have a much more relaxing time. No more waking up to the odd profit warning – Accrol Group (ACRL) last week for instance – which is, alas, part and parcel of picking individual stocks.

 

JIC portfolio, as at 30 September 2017

NameEPICMkt.Cap (£m)% of Portfolio
Conviviality Retail PLCCVR721.58.5
Bioventix PLCBVXP140.77.8
TR European Growth Trust PLCTRG566.77.0
Baillie Gifford Shin Nippon PLCBGS318.15.1
XLMedia PLCXLM291.25.1
Biotech Growth Trust (The) PLCBIOG460.74.9
Avation PLCAVAP141.94.6
AdEPT Telecom PLCADT67.64.6
Central Asia Metals PLCCAML258.84.4
Card Factory PLCCARD10524.3
India Capital Growth Fund LtdIGC109.53.9
Lloyds Banking Group PLCLLOY487323.8
Royal Dutch Shell PLCRDSB188121.43.8
Iomart Group PLCIOM357.43.1
Templeton Emerging Markets Investment Trust PLCTEM2076.43.0
U and I Group PLCUAI232.72.8
Faroe Petroleum PLCFPM360.22.8
JPMorgan European Investment Trust PLCJETI3922.8
Fidelity Asian Values PLCFAS250.52.7
Bloomsbury Publishing PLCBMY120.92.5
Elegant Hotels Group PLCEHG77.31.8
Accrol Group Holdings PLCACRL123.71.8
Cash depositCD 1.5
Diversified Gas & Oil PLCDGOC108.11.5
RedstoneConnect PLCREDS28.91.4
Patisserie Holdings LtdCAKE3451.3
Satellite Solutions Worldwide Group PLCSAT521.0
StatPro Group PLCSOG105.80.8
Geiger Counter LtdGCL 0.8
7Digital Group PLC7DIG11.80.5
Fidelity Asian Values PLCFASS 0.1

 

Bear market reminisces

We are coming up to the 30th anniversary of Black Monday. I remember October 1987 very well not least because I got married. After that, the most exciting event was battling my way to the office on Friday 16 October through the trees felled by the Great Storm. The office was quiet that day and, although there was an eerie sense of foreboding, no one was anticipating the events to come. On the Monday, the market dropped 11 per cent and then a further 13 per cent over the remainder of the week. From the top of the market on 16 July to the bottom on 10 November the FTSE 100 fell 36 per cent. I remember looking to my older, wiser colleagues for guidance, but quickly realised they themselves had never experienced anything quite like this, either.

I now know that every bear market or crash is different. December 1999 to March 2003 was long and painful; the FTSE 100 fell 52 per cent from top to bottom. It was wearing coming in day after day and watching the market fall yet again. Of course, there were periods over the three years when the market rallied, before one’s hopes were dashed as it resumed its downward path. I remember well the day it bottomed. I’d had enough and said to a colleague, “let’s go for lunch”. When we returned, the market had rallied and the long bear market was over.

The problem was that no one rang the bell and it was still some time before we knew for sure that we had indeed seen the bottom. Likewise, no one rings the bell at the top, although it doesn’t stop people trying. Those voices are becoming shriller not least because we are in the ‘crash’ month of October, but because this has been a long bull market and September saw the lowest volatility since records began. While I will be pleased when October is over, I continue to believe calling markets is very difficult and that if you take a long enough view the likes of October 1987 look like a minor blip. While volatility will inevitably spike upwards at some stage, possibly soon, I will continue to focus my efforts on building a portfolio with a long-term perspective in mind.