A new global emerging markets strategy and a European small- and mid-cap portfolio have been added to Numis’ Recommended List of investment trusts for the coming year.
In its 2019 recommendations, the broker said: “Despite more volatile market conditions, there were very few changes to our Recommended List over the year.
“In part, this reflects the longer-term nature of our core recommendations. It also reflects the lack of trading opportunities as discounts of equity investment companies remain tight, averaging just 4 per cent.”
However, the firm has added two investment trusts to the list, while removing one. Below, we take a closer look at the moves.
Performance of trust vs sector since launch
Source: FE Analytics
The recently launched Mobius Investment Trust is one of the additions to Numis’ Recommended List, with being included as a ‘core buy’. Numis conceded that this could be seen as a “slightly unusual” move as it is a recent issue trading at close to net asset value (NAV) – currently around 1 per cent – while more established emerging market trusts are on double-digit discounts.
“However, we believe that the discounts of the major global emerging market investment companies such as Templeton Emerging Markets and Genesis Emerging Markets are entrenched due to the nature of their share registers (dominated by value-oriented investors) and we believe that a significant re-rating would probably require some form corporate action,” the group’s analysts said.
“Mobius Investment Trust could suffer some discount volatility, but we believe that it has an effective longer-term discount control policy via an exit at close to NAV after four years (and every three years thereafter).”
Numis also argued that the trust, which is run by emerging markets veteran Mark Mobius alongside Carlos Hardenberg and Greg Konieczny, has a differentiated investment approach to many of its peers and that the management is “highly motivated to succeed”.
The trust will hold a high conviction portfolio of 20-30 small to mid-cap companies across emerging and frontier markets; its fundamental bottom-up research process focuses on resilient business models which are undervalued and mispriced.
Mobius Capital Partners is a new firm but is staffed by experienced emerging market investors. A report by Bloomberg said Mark Mobius invested £15m in the trust at launch, while Konieczny put in £3m; at its initial public offering, the trust raised £100m – against a target of £200m.
Numis said size of the launch was “a disappointing outcome” but added: “We believe that funds launched at a difficult time in the cycle often tend to be the best performers over the long term. If the fund gets off to a solid start in terms of performance, we would expect it to be able to grow through secondary tap issuance.”
As the chart above shows, Mobius Investment Trust has underperformed its average peer with a 3.41 per cent loss. However, its portfolio was not fully invested during this period: Numis noted that 40 per cent of capital had been invested by December, with the largest geographies being Poland, China, Brazil, South Korea and Turkey and the managers expect to be fully invested in early 2019.
Performance of trust vs sector and index under Cosh
Source: FE Analytics
The second addition to Numis’ Recommended List is European Assets, which the analysts said is a ‘trading buy’ due to the potential for a re-rating.
Managed by BMO Global Asset Management’s Sam Cosh, the £350.8m investment trust holds mid- and small-caps across Europe (excluding the UK). The manager’s stock-picking approach focusing on high quality companies with strong market positions that can grow regardless of the economic conditions, with the aim of buying these at attractive valuations.
Since Cosh – who holds FE Alpha Manager status – took over the trust in October 2011 it has made a 179.40 per cent total return, outperforming its benchmark by a significant margin and ranking it second out of four funds in the IT European Smaller Companies sector.
But a difficult period in the run-up to 2016’s Brexit referendum means that European Assets has underperformed over the past three years – making 15.50 per cent. This compares with 44.10 per cent from its average peer and 48.95 per cent from the benchmark.
Explaining its addition to the Recommended List, Numis analysts said: “We can see potential for the fund to re-rate as it rebuilds it performance record, supported by the yield of 6 per cent of NAV, albeit this is paid from capital and has just been cut by 22 per cent, reflecting the fall in NAV in the year.
“In addition, we expect the fund to see a boost in demand from index buyers when it completes it migration from the Netherlands to the UK and takes up a premium listing on the main market (and delist from Euronext) in mid-March. We expect it to be eligible for the FTSE All Share in June, which can lead to index buying of 8-10 per cent of share capital.”
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
In order to make room for European Assets on the Recommended List, Numis has removed JP Morgan European Smaller Companies.
The team still holds the JP Morgan trust in high regard, only it sees more opportunity for re-rating in European Assets.
It added: “2018 was a difficult year for the fund, with the share price down 20.6 per cent on a total return basis, partly due to a widening of the discount. However, the fund has a good long-term record.”