RIT Capital Partners, Personal Assets and Aberdeen Diversified Income & Growth are among the investment trusts that investors seeking more defensive holdings could consider, according to analysts at Numis Securities.
Stock markets have enjoyed a nine-year bull run, while volatility has remained low for an extended period. However, the past few days seen a broad sell-off take hold in many parts of the globe and volatility has spiked as a result.
This has reminded investors of the need to include an element of protection within their portfolios. With this in mind, we find out which five investment trusts the analysts at Numis Securities think could be worth considering for defensive portfolios.
RIT Capital Partners
Numis’ analysts highlighted the £2.9bn RIT Capital Partners trust as its core long-term recommendation for those seeking defensive vehicles. The trust is differentiated from most investment companies by being self-managed, with founder Lord Rothschild continuing to oversee the investment committee.
The process behind the trust looks to identify key macro themes then build a high-conviction portfolio of listed and unquoted stocks to capitalise on these. It also makes use of third-party managers to gain exposure to specialist areas of the market, although this does increase its underlying costs.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
“The portfolio remains defensively positioned, with the emphasis on capital preservation. This is reflected by net quoted equity exposure averaging 43 per cent in H1 2017, down from 46 per cent in 2016 and 55 per cent in 2015 – net of equity hedges,” Numis said.
“The quoted equity portfolio includes long-only funds, hedge funds and a direct stock portfolio. The emphasis within the equity portfolio is increasingly on investments ‘where value creation is driven by some identifiable catalyst or which are exposed to longer-term positive structural trends’, notably the impact of new technologies and Asian consumer demand.”
RIT Capital Partners has ongoing charges of 0.67 per cent, is trading on a 3.4 per cent premium to net asset value (NAV) and yields 1.7 per cent, according to Association of Investment Companies figures. It is 4 per cent geared.
Capital Gearing
Another defensive recommendation is the £213.5m Capital Gearing investment trust, which is managed by Peter Spiller, Alastair Laing and Chris Clothier. Numis rates the management team highly and described the trust’s long-term performance as “exceptional”.
As the chart below shows, the trust has made a total return of 453.40 per cent over the past 20 years, outperforming both the FTSE 350 Equity Investment Instruments index and its average IT Flexible Investment peer by a wide margin in the process. Spiller has been working on the portfolio for all of this track record, having managed it since 1982.
Performance of trust vs sector and index over 20yrs
Source: FE Analytics
“Capital Gearing has a more defensive approach than RIT Capital, with a greater focus on preserving capital. The portfolio continues to be very defensively positioned, with a low allocation to equities and an emphasis on inflation protection in the fixed income portfolios,” Numis said.
“During 2017, however, the weighting in UK index-linked was reduced, with the proceeds invested into US Treasury inflation-protected securities – TIPS – which now make up almost a quarter of the portfolio.”
Capital Gearing has ongoing charges of 0.86 per cent, is trading on a 2 per cent premium to NAV and yields 0.5 per cent. It is not geared.
Personal Assets
The £875.8m Personal Assets trust has been run by FE Alpha Manager Sebastian Lyon since March 2009. The portfolio is managed in the same cautious manner as Lyon’s Troy Trojan fund and is built around ‘four pillars’ of blue-chip equities, index-linked bonds, gold and cash.
Lyon has a long-term approach and has been cautiously positioned for some time, arguing that markets have been distorted by the massive stimulus programmes that were launched after the financial crisis. The portfolio has just 42.4 per cent in equities – largely companies with pricing power in defensive industries such as tobacco stocks, Coca-Cola, Nestlé and Microsoft.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
“Since Sebastian Lyon took over as investment adviser in March 2009 the NAV total return has been 9.2 per cent per annum, which compares with a return of 13.5 per cent per annum for the FTSE All Share,” the broker’s analysts said. “We believe that this is a creditable track record given the fund’s low exposure to equity markets.”
Personal Assets has ongoing charges of 0.95 per cent, is trading on a 1.3 per cent premium to NAV, is not geared and yields 1.4 per cent.
Ruffer
The Ruffer Investment Company, which is headed up by Hamish Baillie with FE Alpha Manager Steve Russell and Duncan MacInnes as deputies, is another defensive pick. Numis noted that, like most of the defensive trusts, performance was muted in 2017 but the long-term track record is “impressive”.
Over 10 years, the £399.5m investment trust has generated a 118.06 per cent total return – which makes it the best performer from the IT Flexible Investment sector. It has also posted the peer group’s lowest maximum drawdown and its second lowest annualised volatility.
Performance of trust vs sector over 10yrs
Source: FE Analytics
The managers believe that the greatest risks in the market are associated with the onset of inflation and, as such, have around one-third of the portfolio in inflation-linked securities with another 5 per cent in gold and gold-mining stocks. When it comes to equities, the largest geographic exposure is to Japan.
In the outlook for 2018, the managers said their cautious positioning is set to continue: “While the portfolio obviously cannot prepare for every eventuality, we are trying to address the difficult questions that others are shying away from and we would like to think that at least some of the major risks are covered, whilst leaving enough on the table to generate positive returns going forward.”
Ruffer Investment Company’s ongoing charges are 1.16 per cent, it is trading on a 0.9 per cent premium and is yields 0.8 per cent. It is not geared.
Aberdeen Diversified Income & Growth
Numis’ final defensive trust pick is Aberdeen Diversified Income & Growth. The analysts said they understand why some investors might be sceptical about the prospects for the trust, given its “chequered history” as British Assets and then BlackRock Income Strategies Trust.
However, it added that early signs since Aberdeen took over in early 2017 have been “promising” while managers Mike Brooks and Tony Foster have established a good track record in an open-ended fund with a similar mandate. Furthermore, a merger with Aberdeen UK Tracker has pushed assets to £399.2m and given the trust critical mass.
Performance of trust vs sector and index under Brooks and Foster
Source: FE Analytics
“The portfolio realignment was largely completed within two months of the change in mandate,” Numis added.
“The portfolio is well-diversified by asset class and there is a clearly defined target asset allocation, achieved via a combination of third-party and in-house managed funds, whilst maintaining a relatively low expense ratio for a multi-asset/multimanager vehicle of circa 1.2-1.3 per cent per annum – including underlying fund charges.”
Aberdeen Diversified Income & Growth has ongoing charges of 0.23 per cent, is trading on a 3.5 per cent discount to NAV and is yielding 4.9 per cent. It is 13 per cent geared.