Around the World in Eight Investment Trusts

When he published Around the World in Eighty Days in 1872, Jules Verne can’t have expected it to serve, a century and a half later, as the template for a financial magazine’s long-running series on investment trusts.

Similarly, when we first thought to loosely trace the path of Verne’s hero Phileas Fogg in an exploration of listed funds in 2012, we didn’t anticipate the metaphor to drag out this long.

Still, the fact it has stuck feels oddly appropriate, considering the close parallels between the period in which the novel emerged, the history of pooled investment vehicles, and the professionalisation of global markets.

Four years before Fogg was introduced to the reading public, a real-life pillar of London society – the solicitor, political mover and philanthropist Sir Philip Rose – founded the world’s first collective investment scheme. Having started out as an investor in the bonds of the era’s “emerging markets”, Foreign and Colonial – now trading as F&C Investment Trust (FCIT) – remains one of London’s best-known and most successfully managed global equity funds to this day.

The Investors’ Chronicle, which launched in 1860, was another product of this Victorian moment. Like Verne and his readers, our title has always been gripped by the idea of a vast world rendered close by technological progress and the steady integration of nations into a global economy – though the fact that 19th century explorers and investors saw things through the lens of colonial possession makes for a complicated legacy.

Of course, the buyers of investment trusts have usually been motivated less by the spirit of adventure than dividends and capital growth. Then again, it’s worth noting that Phileas Fogg’s own circumnavigation is driven less by a sense of wanderlust than to prove members of his gentlemen’s club wrong, and win a £20,000 bet.

These days, ‘gentlemen’s clubs’ have lost the associations of of top-hatted chivalric inquiry and bravado that Verne sought to capture. But in the spirit of tradition, we are embarking on our own parlour game: to journey around the world via eight London-listed investment trusts listed, aided as ever by our trusted stock screen.

This will be our 12th eastward circumnavigation, based on the same rough itinerary.

We begin in Fogg’s home city of London with a UK trust, before heading across the channel in search of a European stockpicker. From there, we stop in mainland Asia, Japan and the less-travelled emerging markets for some exposure to some less familiar investment stories, before crossing the ocean to America – still the first word in growth and market excitement, almost a quarter of the way into the 21st century.

With six pins in our well-thumbed map of the world (and a slew of positive reviews accrued on our Airbnb profile), we follow Fogg home to the UK to add two final trusts: a UK income fund to park the winnings from his bet, and a global trust to reflect on another expedition successfully completed.

Though the exercise is a lighthearted attempt to showcase the depth and breadth of London’s investment trust market, readers would be in their rights to ask what all this globe-hopping serves. After all, it often feels like an increasingly fractious world is getting harder to navigate.

Fear of what lies out there isn’t new. It’s a question that Verne implicitly raises in his description of the public reaction to Fogg’s fictional journey. “People in general thought him a lunatic, and blamed his Reform Club friends for having accepted a wager which betrayed the mental aberration of its proposer,” he writes early on in the novel.

There are a few answers to this charge. For a start, staying home hasn’t always been a winning strategy for UK investors. Since we have been running the screen, the FTSE All-Share has posted a total return of around 88 per cent, compared with 231 per cent from the FTSE World index. And while the Around the World trust structure underplays the mammoth heft of US stocks – which now make up 70 per cent of the MSCI World Index – it at least reflects the statistical likelihood that better returns can be found in markets other than Blighty.

This doesn’t mean UK stocks are destined to lag their global peers in the years ahead. What’s more, the framing of UK versus the world misses the point that most of the FTSE All-Share’s earnings are already generated abroad. But by thinking in global terms, an investor can all but guarantee one of the most important sources of portfolio diversification. And by using the trust structure, she can also get exposure to some of the few geographies where equity indices are either lacking, or struggle to deliver ‘market’ returns.

Our travel agent

On his travels, Fogg must rely on his fixer and travel companion Jean Passepartout. Our own Passepartout, which has served as a 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. Though global in outlook, it is straightforward when it comes to defining an attractive trust: to rank highly, contenders must score well on a combination of three-month share price performance and the Z-score.

The Z-score, which is best thought of as a measure of a stock’s cheapness relative to its trading history, 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 trusts’ 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 price momentum is used as a rough guide to a trust’s market sentiment and recent 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 696 per cent total return. In headline terms, that’s better than both the MSCI World and FTSE All-Share indices.

After a monumental run until the end of 2021, the screen’s compass has been in a spin of late, as investors have fallen out of love with trust format.

Another hidden cost of the Alpha IT screen’s 18-year journey – its own species of visa fees, landing taxes 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, alongside the performance of the MSCI World and FTSE All-Share indices over the same period. In reality, these charges ought to be even higher, to reflect the fees and other assorted management charges that come with trusts.

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 been a mixed success. The big issue has been the (aforementioned) low proportional weighting to a high-flying US stock market, seen by many investors as the go-to global equity benchmark.

2022 performance

Though half of last year’s trusts beat their benchmarks, the big story was to be found in the UK selections. Literacy Capital (BOOK), the buyout-focused trust run by the father and son team of Paul and Richard Pindar, defied the broader gloom cloaking private equity by posting a stellar 26 per cent total return in the period. However, this was more than wiped out by a dismal showing from Harmony Energy Income (HEIT), launched in 2021 to back utility-scale battery energy storage projects in the UK.

Though the trust has delivered on its dividend goals, and largely preserved its reported NAV, rising bond yields and the anticipation of higher-for-longer interest rates has led investors to apply their own (considerably higher) discount rates, resulting in a deep sell-off since April. A recent disclosure of an historic overstatement to NAV probably hasn’t helped sentiment, either.

These outings, together with the other six trusts, brought the total return from Fogg’s picks to 1.5 per cent, and the decade-long cumulative return to 148 per cent. Factor in a 1.5 per cent charge to account for transactional costs, and the total return falls to a pretty hum-drum 113 per cent, compared to 231 per cent from the FTSE World, or a 152 per cent split between the global and the UK indices.

What, then, will this year’s travel itinerary promise? With interest rates apparently peaking, it’s tempting to argue that the outlook for investment trusts is finally brightening. For one, our screen’s travel costs (if not those in the real world) are now remarkably cheap. According to Winterflood Research, despite a positive NAV total return in the average investment trust over the past year, broad share price declines have widened the average discount to 17 per cent. If sentiment is no longer in freefall, then net inflows to trust world may have a multiplying effect.

Second, it’s always useful to remember that investment trust managers normally have options. Many, if they wanted to, could cash in on listed holdings at prices that ‘look-through’ valuations simply fail to reflect. Regardless, their options for deploying capital should always be broader and more flexible than those of company executives confined to a single sector.

With its international focus, our screen has even fewer confinements. So grab your passport, fasten your seatbelt and join us once more for a trip around the world (in eight investment trusts).

Destination 1: UK

Before setting off on our journey, duty binds us to first make a stop on home turf. This year, that stop is the Westminster offices of Harwood Capital, investment managers to Oryx International Growth (OIG).

The fund, which has been going for a decade, has a mandate to make long-term “equity and equity-related investments” in smaller businesses in the UK and the US, though current disclosures point to an almost entirely domestic outlook. Unsurprisingly, given its style, income is a lower order priority.

Equally unsurprisingly – given the lack of focus on dividends and the broader state of UK investment trusts – the fund trades at a yawning discount to net assets. Fortunately, it’s the good kind: not only are Oryx’s holdings liquid, but its investing record has delivered a mark-to-market improvement in NAV over the past year. We can therefore say with confidence that the market has simply been indiscriminate in its selling.

Evidence of those stock-picking chops was demonstrated last month, when the online estate agency OnTheMarket (OTMP) received a 110p-a-share takeover bid from US real estate information and analytics group CoStar (US:CSGP), at an 80 per cent premium to its market value. Oryx, which added the holding after identifying it as a one of several potential acquisition targets last year, reported that the deal would add £2.2mn to the fund’s NAV, and return £5mn in cash.

In fact, recent form suggests there can be few fund managers operating in London with a cannier knack for picking takeover candidates. In the weeks before the OnTheMarket deal, Oryx was a beneficiary of bids for educational support services outfit Tribal (TRB), software provider Smoove (SMV) and auto retailer Pendragon (PDG). Like OnTheMarket, Smoove and Pendragon were recent takeover-themed purchases. Each offer has resulted in improvements to the trust’s valuation that has seemingly passed the market by.

Look back further, and it gets more impressive. During the past 12 months, there have been 53 completed or pending bids for public with a value of at least £20mn, according to Factset. Despite being invested in fewer than 40 listed securities, Oryx has been on the receiving end of seven of these offers. Though the Pendragon bid fell through, tilts for Crestchic, Curtis Banks, The Fulham Shore and Sureserve have helped the group to net cash proceeds of around £40mn. In an otherwise moribund M&A market, this is an outstanding track record.

Though Oryx isn’t a major landmark on the investment trust map, its overlooked charms show that some destinations are there to be discovered. By failing to publish regular factsheets, the fund hasn’t helped itself. But just as tourist office isn’t a prerequisite of a great travel spot, prospective trust holders shouldn’t confuse a lack of marketing finesse with investing nous.

Destination 2: Europe

For many travellers, Europe is the ultimate destination, with enough cultural, geographical and culinary variety and wealth to satisfy 151 years of weekend breaks. Fogg, alas, has little time for the continent: after traversing the Channel, he makes a mad dash through the Alps and down to the heel of Italy. All too soon, he is sailing on a Suez-bound ship, with the Eurasian land mass fading on the horizon behind him.

As such, our hot-footed tourist may have forgotten that this year’s European selection – the Janus Henderson-managed Henderson Euro Trust (HNE) – was also our 2022 top trust in the category. Though its £330mn of assets under management are nominally split across some 50 stocks, a habit of letting its winners run has resulted in a rather more concentrated portfolio, framed with a bias to quality and growth names.

Over the past year, the fund has delivered a much better performance than its meagre share price rise implies, and against a pivot to cheaper value names, as big holdings in Danish weight loss drug pioneer Novo Nordisk (Den:NOVO-B), luxury giants Hermès (Fr:RMS) and LVMH (FR:MC), French supermajor TotalEnergies (FR:TTE) and German software star SAP (Ger:SAP) have all contributed to a 13 per cent appreciation in NAV.

However, from fund manager Jamie Ross’ regular commentary you get the distinct impression that, like Fogg, managing a European equity fund is the jump off point for a much wider market perspective. As with the members of the FTSE 100, large European-listed stocks require active and rapidly-evolving views on themes as diverse as Chinese consumer sentiment, global semiconductor demand, and US demand for pharmaceuticals.

As challenging as this remit undoubtedly is, prospective investors will want to grasp how well it is being tackled. In the case of Henderson Euro Trust, outsiders can at least have some comfort in the Kepler Income & Growth tag recently applied to the fund. This kitemark is largely determined by the information ratio, which seeks to measure a fund manager’s ability to outperform a benchmark given the level of risk taken.

Skilled navigation may not always be valued in the short term. But if it is consistent enough, then HNE investors will hope that mean reversion reasserts itself, eventually.

Destination 3: Asia

Three weeks into his journey, Fogg is making good time. But on a train from Bombay to Calcutta, he learns that the Daily Telegraph article that inspired his wager was wrong, and that a 50-mile stretch of track from Kholby to Allahabad had not been built. Undeterred, our hero buys an elephant, hires a guide and trundles on.

Today, Asia can hardly be described as unchartered territory. But navigating the continent’s economies isn’t always as simple as hugging an index.

Fortunately, India’s ripping stock market has made the stock selection challenge that much easier of late for the managers of India Capital Growth (IGC), which pushed its way to the top of our screen following a recent sell-off in its shares. Though the fund isn’t the cheapest out there, its momentum has certainly been impressive on almost any recent measure, having doubled in value over the past three years.

Lest potential investors be given the impression that this is a post-pandemic phenomenon, the long-term track record is even stronger: since the end of 2011, the trust has generated an average annual return of 16.7 per cent, net of fees and costs, according to investment manager Ocean Dial – now part of Martin Gilbert’s AssetCo, under the River & Mercantile brand. The trade-off is a fee of 1.25 per cent of the lower of market capitalisation or net assets, though the lower-bound feature at least acts as an incentive to close discounts when they emerge.

More than perhaps any fund on our journey, IGC can be described as a specialist. Led by a seven-strong team in Mumbai, and focused on a ‘investible universe’ of stocks that is continually refined to a list of 145, Ocean Dial takes an active approach to screening to identify and pop any valuation bubbles that emerge. In an equity market whose average price to earnings multiple has frequently rivalled the S&P 500’s, that’s no mean feat.

The result is a high-conviction portfolio of stocks, focused on banks and consumer discretionary and staples names. Throw in an outlook for India’s economy that remains among the strongest anywhere – regardless of the distinction between ‘emerging’ and ‘developed’ – and you have a fund well-positioned for further growth.

Destination 4: Emerging markets

Everything in life is relative. Does travel instill this lesson in Fogg? It’s debatable, given Verne concludes the novel with the reflection that our traveller has returned with “nothing but a charming woman”. Still, it’s a thought that prospective investors in emerging market specialist Mobius Investment Trust (MMIT) would do well to observe.

Other than sector peer Utilico EM (UEM), Mobius is the only trust we found with a Z-score of -3.1 or below, meaning it is currently priced at three standard deviations from its normal range. That’s the sort of event that in a normal distribution curve happens just 0.3 per cent of the time. If you’re looking to time your entry, knowing you are faced with a three-in-a-1000 opportunity should be a reason for encouragement – at least relatively speaking.

However, Mobius is a neat demonstration of how a trust’s Z-score only tells part of the story. That’s because its discount of 10 per cent hardly makes it cheap to most of the trusts we will encounter on our grand voyage. In fact, it’s the sort of price that many trust managers, boards and investors are currently scrambling for.

What then has been the cause of Mobius’ recent (albeit relative) sell-off? In short, it’s probably the same issues that have gripped investors everywhere during the past few months. We can say this with some confidence. At the end of September, 61 per cent of the trust’s assets by value were in technology, and a sector whose global weighting and propensity for toppy valuations makes for a key barometer for equity market sentiment.

And what of emerging markets? As mentioned, it’s all relative. A full 38 per cent of the fund’s 26 holdings is allocated to Taiwan and South Korea stocks, which may not be everyone’s idea of a ‘frontier’ economy. With a further fifth in India, 5 per cent in China, and 13 per cent split across the UK and US, it might be more appropriate to see this fund as a play on a loose assembly of “dynamic small and mid-sized companies” around the world, rather than emerging markets. But then there’s nothing wrong with that.

Destination 5: Japan

As soon as he lands in Yokohama from Hong Kong, Fogg is looking for his way out on a boat bound for San Francisco. For decades, investors have come to give the land of the rising sun similarly short shrift, identifying its prospects for growth and equity returns as a distant third to a dynamic Asian mainland to the west, and the continent that lies beyond the international date line to the east.

That view has shifted in the past year, as investors have warmed to planned reforms to corporate governance and shareholder engagement, including a name and shame campaign to force executives and boards to address low returns on equity and endemic company discounts to book value. Valuations have since improved, helping to lift Japanese stocks.

That’s good news for Nippon Active Value (NAVF). Despite its acronym, it hasn’t been close to net asset value for the best part of two years. Unlike most investment trusts, however, it has managed to eke out a positive share price performance, despite a 14 per cent decline in the yen against the pound since the start of 2023.

Despite the adage, a rising market tide won’t lift every boat. Last year, our screen managed to select a trust whose share price lagged the index by more than 15 per cent, and there is no guarantee that Nippon Active Value’s recent momentum will be maintained. But a focus on undervalued small cap stocks with “a substantial proportion of their market capitalisation” in cash or liquid assets looks well suited to Tokyo Stock Exchange’s campaign to inject some animal spirits into corporate Japan.

Destination 6: US

Landing on the other side of the Pacific, Fogg is again struck by déjà vu. Just like 2022, the hedge fund titan Bill Ackman’s Pershing Square Holdings (PSH) stands above its US trust peers as the Alpha screen’s pick.

Is it also finally emerging onto investors’ radars? Increasingly, according to Pershing’s European distributor, wealth managers and financial advisers see the fund – and its highly-concentrated, value-oriented strategy – as a differentiated, satellite holding to a core low-cost S&P 500 tracker product.

The first point of differentiation concerns approach. While the tone and style of activism campaigns has been dialled down, Ackman and his team have nonetheless continued to work behind the scenes to agitate for change and strategic improvements in key holdings. This is a feature that few high-charging London-listed funds can claim to emulate, and judging by Pershing’s track record – an annualised total return of 16.1 per cent since the fund was launched nearly 20 years ago – one that shouldn’t be dismissed, despite the associated fees.

Second, Pershing Square is sensitive about valuations. While that meant eschewing stocks that powered the US equity market for much of the past decade, it also meant avoiding the pain that resulted from the same group in 2022. Still, the fund will follow good businesses when the price is right, which explains why it opened a position in Google parent Alphabet (US:GOOG) in March, when the technology giant could be bought for just 16 times’ forward earnings.

Finally, Pershing’s structure allows the New York-based manager to take asymmetric or hedged bets on macro-economic views, using energy options, interest rate swaptions and other products. Recently, this included a large, well-timed bet against US Treasuries. Noting the considerable long-term opportunity on offer, Pershing has also been a big buyer of its own stock. Though this has failed to correct the shares’ steepening discount to NAV, it nonetheless added 0.5 per cent to the trust’s book value in the calendar year to 15 August.

In the meantime, Ackman and co look set to stick by their core holdings. Appropriately enough for our trip, these include the Canadian Pacific Kansas City (Ca:CPKC), owner of the first and only single-line railroad linking Canada, the US and Mexico. Had a modern day Fogg chosen to rest for a night, he could have stayed at a Hilton Worldwide (US:HLT) hotel, and stopped for a bite at North American fast food staples Chipotle (US:CMG) or the Restaurant Brands (US:QSR) franchise Burger King. Defensive, cash-generative and fairly priced, Pershing’s portfolio doesn’t need a soft landing to keep delivering the goods.

Destination 7: UK income

Fogg’s adventure proves so expensive that he is left with little more than £1,000 from his £20,000 winnings.

In today’s money, that would be £112,000, and enough to provide a modest annuity, either via an insurance-style product or a basic dividend-focused portfolio. Diverse Income Trust (DIVI), the highest-ranking UK income fund in our screen, aims to do better than modest. Rather, it seeks to “provide shareholders with an attractive and growing level of dividends coupled with capital growth over the long term”.

To do this, the fund invests across the size spectrum of the London market, including FTSE 100 dividend stalwarts like Tesco (TSCO), BT (BT.A) and Legal & General (LGEN). But in keeping with its focus on growth companies that should one day generate a large cash surplus, around half of its holdings by weighting come from the AIM and FTSE Small Cap indices.

Inevitably, this has meant a de-rating in the fund’s underlying assets. But compared with some of the discoveries on our trip around investment trusts, the presence of a chunky dividend means the fund’s share price is much more anchored to its NAV. Naturally, that dividend has to be competitive with the returns offered by cash and fixed income, which might account for the recent, though still slight, widening in the discount.

The trust is also led by an experienced team in Gervais Williams and Martin Turner, who have been in situ since 2011. Like Henderson Euro Trust, the fund’s Kepler Income & Growth rating suggests the Premier Miton duo have been able to outperform their benchmarks without taking on excessive risk.

Outside of day-to-day investing, the managers have been agitating for a change to the ISA rules that would see a portion of the tax-free wrapper ring-fenced for UK-listed companies. Williams and Turner argue such a move would benefit employment, Treasury coffers and smaller companies in particular.

The “potential to transform investment flows” into the fund’s own niche, should it be announced by the chancellor’s Autumn Statement next week, may also provide a much-needed lift to small cap sentiment.

Destination 8: The world

The origins of Caledonia Trust (CLDN), like this magazine and the investment trust format, hark back to the age captured in Around the World in 80 Days: as a business, its lineage goes back to the Clan Line Steamers, the cargo carrying line founded by Sir Charles Cayzer in 1878.

Some 145 years on, the Cayzer family are still holders of the trust, and hold roles on both the board and in the executive team. “Now, as then, we are guided by strong long-term investment values: we understand before we buy, we buy to hold, and we do not speculate,” states the group in its marketing literature.

This history has also given rise to an eclectic approach to both geographies and assets, and a portfolio split roughly three ways between private capital, quoted equities and other funds.

Though this makes for a less liquid fund than others, investors appear to have applied legitimate concerns toward some assets or sectors – most notably private equity – to a group of assets that includes names as uncontroversial and liquid as Microsoft (US:MSFT) or Spirax Sarco (SPX). Remarkably, given both its size and a 56-year unbroken track record of dividend increases, the trust trades at more than a third below NAV.

Even if the resulting yield is somewhat meagre by the standards of today’s income investor, the dividend’s consistency speaks to an investment outlook that thinks in decades, not quarters of years. While one might quibble over the ambition of a goal to beat the FTSE All-Share’s total returns over ten years, a higher-for-longer interest rate environment may well vindicate the group’s weighting to private credit, where the total return target is an eye-catching 14 per cent.

On balance, this looks like a rare opportunity to buy into a smartly-run and differentiated investment trust heavyweight, at a bargain price.