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Cautious, balanced and aggressive funds to hold alongside Scottish Mortgage

06 February 2018

FE Trustnet asks the experts which funds would complement the top performing Scottish Mortgage Investment Trust.

By Jonathan Jones,

Senior reporter, FE Trustnet

Investors in Scottish Mortgage Investment Trust have been richly rewarded over the past decade, but which complementary funds could they hold if they’re worried by a market correction? 

The five FE Crown-rated fund has returned 348.31 per cent in 10 years – the second-best returns in the IT Global sector over the period, more than double the sector average and FTSE All World benchmark.

Perhaps more impressive is the consistency with which the £6.4bn fund has made these returns, sitting in the top quartile of the sector in seven of the last 10 calendar years.

Overseen by industry veteran James Anderson (pictured) and co-manager Tom Slater of Baillie Gifford, the trust has benefited from an overweight position to technology stocks.

Its top four holdings include online retailer Amazon.com, Chinese internet specialist Tencent, e-commerce giant Alibaba and electric and driverless car pioneer Tesla.

However, with the technology sector performing strongly over the past decade, and particularly during the last 12 months, concern has grown over the high valuations of certain companies and whether these levels can be sustained.

And while it has been a top long-term performer, during times of market struggles it has been hit especially hard.

Indeed, during the financial crisis of 2008 the trust lost 44.77 per cent – a bottom quartile return – with a similar result during the eurozone debt crisis of 2011 (15.15 per cent loss).

Below market commentators offer up three funds investors concerned about tech valuations and the potential for a market correction should consider holding alongside the FTSE 100 giant.

 

Monks Investment Trust

First up, for investors looking to stay aggressive but who want diversification within the asset class is Monks Investment Trust, which could make a nice pairing, according to Canaccord Genuity’s director of investment companies Alan Brierley.

Baillie Gifford’s Global Alpha team – consisting of Charles PlowdenMalcolm MacColl and FE Alpha Manager Spencer Adair – was appointed manager in March 2015, during which time the £1.6bn portfolio has made a total return of 87.09 per cent, as the below chart shows.

Performance of fund vs sector and benchmark since managers start

 

Source: FE Analytics

“The manager’s longer-term record is equally impressive and since inception in May 2005, the Global Alpha Strategy has outperformed the MSCI AC World index by an annualised 2.4 per cent,” Brierley added.


The five FE Crown-rated fund is mostly weighted to financials (28.6 per cent), consumer services (20.5 per cent) and industrials (15.9 per cent), with 15.1 per cent in technology, although both Amazon and Alibaba also appear in its top 10 holdings.

Stocks are categorised into four growth profiles: stalwarts, rapid growth, cyclicals and latent (or special situations).

“Monks is a constituent of our model portfolio and we maintain our buy recommendation,” Brierley said.

The trust is 5 per cent geared and has ongoing charges of 0.59 per cent, according to data from the Association of Investment Companies (AIC). Its shares are trading at a premium of 3 per cent.

 

Capital Gearing Trust

For those seeking a more balanced approach, Winterflood Investment Trusts analyst Kieran Drake suggested investors could look at the £213m Capital Gearing Trust.

“I’d suggest something with a different approach to complement the equity growth focus of Scottish Mortgage and [this trust] places an emphasis on capital preservation,” he said.

“It has an impressive record of delivering solid absolute returns, with the NAV up 7.4 per cent per annum over the last ten years compared with 6.5 per cent for the FTSE All Share and with considerably lower volatility than equity markets.”

Indeed, over the past decade, the trust has returned 104.89 per cent to investors with volatility of 8.92 per cent, compared to the FTSE All Share’s 90.74 per cent return and volatility of 13.75 per cent.

Performance of fund vs sector and FTSE All Share over 10yrs

 

Source: FE Analytics

“While the significant allocation to bonds will mean that the fund is likely to lag strong equity market rallies, we believe it is an attractive vehicle for investors looking for low volatility long-term capital growth,” Drake said.

Run by Peter Spiller since 1982 and co-managers Alastair Laing and Chris Clothier since 2011 and 2017 respectively, the trust holds 37 per cent in index-linked government bonds, which he added should provide some protection against inflation

“We would also expect the fund to provide protection on the downside in the event of an equity market decline,” he said.


“In our view Capital Gearing Trust provides attractive diversification to more growth orientated strategies within our model portfolio.”

The trust’s shares are at a 2 per cent premium, according to data from the AIC. It has charges of 0.86 per cent.

 

SVS Church House Tenax Absolute Return Fund

Finally, FundCalibre head of investment trust research Tony Yousefian said for the more cautious investor we would look to pair Scottish Mortgage with the open-ended absolute return fund SVS Church House Tenax Absolute Return.

He said that a 15 per cent weighting to the equities-heavy investment trust and an 85 per cent weighting to the fund should give good total returns while significantly dampening volatility.

The five FE Crown-rated fund sits in the IA Targeted Absolute Return and is managed by James Mahon and FE Alpha Manager Jeremy Wharton.

Since its launch in 2007 it has returned 53.6 per cent to investors with volatility of 3.6 per cent and a maximum drawdown – the most an investor could have lost in a single month if buying and selling at the worst possible times – of 8.8 per cent.

“It is a truly multi-asset, conservatively managed product with a volatility of less than 2.5 per cent over the last three years,” Yousefian said.

“It is an ideal anchor for a cautious investor who would like exposure to Scottish Mortgage but cannot stomach the volatility.”

Chart showing volatility and annualised returns of portfolio vs funds and benchmark over 10yrs

 

Source: FE Analytics

The above split outlined above would reduce the overall volatility of the investment to less than one third of MSCI AC World Index.

“[Additionally,] it also offers with a much better overall risk adjusted return as demonstrated in the attached scatter graph,” Yousefian said.

SVS Church House Tenax Absolute Return has a yield of 0.8 per cent and a clean ongoing charges figure (OCF) of 0.91 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.