Baillie Gifford Shin Nippon, BlackRock World Mining and Baring Emerging Europe are among six investment trusts which are genuinely uncorrelated to the typical growth portfolio, according to Kepler Trust Intelligence’s Alex Paget (pictured). 
With the correlation of asset classes increasing in recent years, the investment analyst warned that there will be very few places to hide should a market correction rear its head.
As such, he used the FTSE Private Growth Investor index (which reviews the asset allocation and structure of the average fund manager portfolio on a quarterly basis) to determine the current makeup of a typical growth portfolio.
Paget then screened to see which trusts had a correlation of less than 0.6 to the index over five years, excluding UK equity trusts due to many investors decreasing their exposure amid Brexit uncertainty. Trusts with net assets of less than £100m were also discounted from the study, due to their lack of liquidity.
In the below article, the research analyst discusses six lowly-correlated trusts which he believes will remain good diversifiers due to their investment styles and areas of focus.
First up is the five FE Crown-rated Baillie Gifford Shin Nippon trust, which has been headed by Praveen Kumar since the end of 2015. However, he has been an investment manager on the Japanese equity team since 2011.
Over five years, the trust has outperformed its average peer in the IT Japanese Smaller Companies sector and its MSCI Japan Small Cap benchmark by 118.87 and 155.35 percentage points respectively with a total return of 289.91 per cent.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
Paget said: “We view this as the best-in-class option for those seeking exposure to Japanese smaller companies, given the experience of Baillie Gifford’s Japan team and the disciplined approach employed by manager Praveen Kumar.
“Effectively, the team’s main aim is to invest in companies with a durable competitive advantage run by competent and dynamic management teams that are displaying growth in an area of the market which also has attractive growth opportunities.
“In particular, they like companies that have the potential to be ‘disruptive’ – so it is no surprise the portfolio is heavily skewed toward technology.”
That said, the research analyst added that the current risks for the trust currently revolve around Japan and the US tensions with North Korea.
Baillie Gifford Shin Nippon is trading on an 8.5 per cent premium to NAV, is 11 per cent geared and has an ongoing charge of 0.96 per cent.
Next on Paget’s list is Baring Emerging Europe, which is £118m in size and is managed by Matthias Siller, Adnan El-Araby and Maria Szczesna.
The trust has returned 36.4 per cent over five years compared to its sector average and benchmark’s respective returns of 38.77 and 5.93 per cent.
“Clearly, backing a trust that specifically focuses on companies listed in areas such as Russia, Turkey and Poland carries its own risks – but having been significantly out of favour thanks to oil price weakness and various political incidents and geo-political tensions, emerging European stocks have rebounded strongly over the past 12 months or so,” Paget explained.
“Matthias and the team are pure stockpickers, targeting what they see as a relatively unique combination (compared to other regions around the world) of high prospective growth and decent levels of income.”
The research analyst also said the trust is in the top quartile of equity investments trusts for its yield of 2.9 per cent.
Baring Emerging Europe is trading on a 9.6 per cent discount, is 5 per cent geared and has an ongoing charge of 1.55 per cent.
Investing in perhaps one of the higher-octane areas of the market, the £819m BlackRock World Mining trust aims to provide capital appreciation through a diversified portfolio of mining and metal assets from across the globe.
Over five years, the trust has lost 17.35 per cent, which is significantly less than its average peer which is down 45.17 per cent, but is greater than its Euromoney Global Mining benchmark’s loss of 11.22 per cent.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
Paget said: “Evy Hambro and Olivia Markham’s BlackRock World Mining trust is one we highlight that hasn’t boosted a typical growth investor’s overall return over the past five years, though this has been due to the fact that commodity stocks have endured a torrid time for most of those years.
“However, its correlation of 0.4 to the FTSE Private Investor Growth index over five years shows it does offer decent diversification for investors and it’s encouraging to note that the trust has rebounded strongly as mining stocks have come back into favour.”
He pointed out that both managers are more confident on their sector outlook due to greater deleveraging across the industry.
“The board has also addressed the trust’s own dividend issues, and we believe the outlook for BlackRock World Mining’s income profile is now far more positive as a result,” the investment analyst added.
The three crown-rated International Biotechnology trust is headed up by Carl Harald Janson and is deputy managed by Kate Bingham and Ailsa Craig.
Over five years, it has outperformed its average peer and benchmark by a respective 34.79 and 13.09 percentage points with a total return of 199.29 per cent.
“International Biotechnology Trust focuses on the most innovative biotech companies, those at the cutting edge of medical science, which gives it a natural slant away from the kind of generalist pharmaceutical giants that might be found in broader equity portfolios,” Paget explained.
“Correlation to the major indices is, as a result, low and the trust offers an attractive combination of income – targeting a yield of 4 per cent - and capital growth.
“The trust is managed by a highly-experienced team that has a keen focus on avoiding ‘risk events’ – selling out of companies as they approach medical trials, a point at which excitement tends to peak even though the outcomes of these trials can be unpredictable – and they have kept a strong grip on beta, whilst generating more alpha than any of their peers over three years.”
The International Biotechnology trust is trading on a 3.1 per cent discount, yields 3.8 per cent and has an ongoing charge, including a performance fee, of 1.68 per cent.
Next up is the JPMorgan Indian Investment Trust which, over five years, has returned 84.87 per cent compared with its benchmark’s return of 67.61 per cent and its sector average’s return of 142.94 per cent.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
Paget said that, similarly to Japanese stocks, Indian equities have been lowly-correlated to global markets due to its specific domestic drivers.
Out of these, he said JPMorgan Indian has been the least correlated due to its focus on domestic-facing stocks.
“Managers Rukhshad Shroff and Rajendra Nair, who have close to 50 years’ experience between, have a highly-disciplined investment approach and they take full advantage of the huge resources available to them at JP Morgan,” the research analyst explained.
“The crux of the strategy is to buy and hold well-run companies with attractive growth profiles without over paying for them and while portfolio construction is largely driven by bottom-up stock selection, the managers do take the macro environment into consideration.”
Of course, Paget noted that the trust’s results will be relatively dependent on the strength of the Indian economy given it is so regionally specific.
That said, he reasoned that it should therefore offer a decent level of diversification as part of an overall portfolio.
JPMorgan Indian trust is trading on an 11.3 per cent discount, is 8 per cent geared and has an ongoing charge of 1.22 per cent.
The final trust on Paget’s list is Marwyn Value Investors, which has the lowest correlation of all at just 0.01 relative to the FTSE Private Investor Growth index over five years.
He said: “These are experienced investors who aim to identify, invest support and work alongside operational management teams – specifically targeting companies with an enterprise value of £150m to £2bn at the point of investment.
“Though the trust has had effectively no correlation to major equity indices, there are certain risks investors need to be aware of with the portfolio.
“Given its concentrated nature, its performance is entirely driven by the manager’s stockpicking and though this has added significant value at times over the cycle, it can lead to considerable NAV underperformance. This was the case in 2016, for example, when Zegona Communications (which makes up more than 30 per cent of the portfolio) fell 9 per cent in share price terms.”
Nevertheless, Paget said it will offer high levels of diversification and is trading on an attractive discount to NAV at more than 25 per cent.
Marwyn Value Investors, which has outperformed its average peer in the IT Global Smaller Companies sector by 11.92 percentage points with a 54.62 per cent total return, yields 4.9 per cent and has an ongoing charge – including a performance fee – of 3.9 per cent.