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Peel Hunt’s five investment trusts for a truly diversified portfolio

15 October 2018

Head of investment companies research Anthony Leatham is the next to take up FE Trustnet’s challenge to create a blended portfolio using only five trusts.

By Jonathan Jones,

Senior reporter, FE Trustnet

Diversification is one of those buzz words that you hear a lot from advisers and fund managers, but can be notoriously difficult to achieve.

Ideally you would own various assets that do not correlate with one another, but with funds and trusts only showing their top 10 holdings (for the most part), you may inadvertently be double-dipping into stocks.

While you therefore need to think carefully about how many products to own. In this series focusing on how fund pickers would pick a genuinely diversified portfolio, FE Trustnet uses five as its magic number.

So far in this series we have asked fund-of-fund or model portfolio managers which funds they would choose.

Below, we challenged Peel Hunt’s head of investment companies research Anthony Leatham to do the same using only the investment trust universe.

“Whilst we would not necessarily advocate a portfolio of five investment trusts, it has been an interesting exercise in blending asset classes, strategies and styles to achieve an attractive risk-adjusted outcome,” Leatham (pictured) said.

For asset allocation he has used the same template as the MSCI WMA Private Investor Balanced index, which has an asset allocation mix of 60 per cent in equities, 20 per cent in bonds, 10 per cent in real estate and 10 per cent in alternatives.

Starting with equities, Leatham said he would split this in half between UK and international stocks. On the domestic front, his choice is FE Alpha Manager Alex Wright’s Fidelity Special Values.

Since taking over the four FE Crown-rated trust in 2012, it has produced returns of 175.37 per cent, the third-highest in the IT UK All Companies sector.

Performance of trust vs sector and benchmark over manager tenure

 

Source: FE Analytics

“Wright has been at the helm for just over six years now and has delivered 8 per cent annualised NAV [net asset value] total return outperformance of the FTSE All Share index and a total shareholder return that puts it firmly in the top decile of open-ended peers,” he said.

Increased volatility this year has led to dispersion in markets, playing to the manager’s strengths, with the portfolio currently most exposed to financials and industrials. It is also likely to continue to be a beneficiary of M&A activity, highlighted Leatham.

The trust is 14 per cent geared, has a dividend yield of 1.8 per cent and has ongoing charges of 1.06 per cent, according to data from the Association of Investment Companies (AIC).

Its shares are on a 1.9 per cent premium, which Leatham said “is near the top of its trading range but aptly reflects its track record”.


Turning to overseas equities, he suggested that Henderson International Income is a good option for investors with a dedicated UK strategy already in their portfolio.

Managed by Ben Lofthouse since 2011, the strategy is one of the few global equities ex UK portfolios in the investment trust universe.

The portfolio is made up of around 75 stocks with idea generation coming from Janus Henderson’s broader global equity income team.

Leatham said: “He targets stocks that can offer sustainable dividend growth, strong free cash flow generation and attractive valuations.

“Over the last three years, it has delivered 14 per cent annualised NAV total return, yields 3.4 per cent with forecast dividend growth for the underlying portfolio of 7 per cent and currently trades on a 2 per cent discount.” It has ongoing charges of 0.9 per cent.

Moving on to the 20 per cent allocation to fixed income, the Peel Hunt head of investment companies research said he would consider the Sequoia Economic Infrastructure investment trust.

Not a conventional bond fund, the portfolio invests in infrastructure assets – or in other words it provides the finance on new projects.

“In selecting Sequoia for this balanced portfolio, we have purposefully stepped away from government or corporate bonds, an opted for a conservatively managed strategy capable of delivering a secure and attractive yield of 5.5 per cent with the potential for capital appreciation,” Leatham said.

Run by Steve Cook and Greg Taylor, it currently invests in 58 assets across 24 sub-sectors and 12 jurisdictions.

“The portfolio is actively managed and accesses private debt in predominantly operational, demand-based infrastructure projects,” Leatham said.

With 64 per cent floating rate exposure and a five-year average life, Sequoia Economic Infrastructure is also set to benefit from rising interest rates, he noted.

Performance of trust vs sector since launch

 

Source: FE Analytics

Since its launch in 2015 the trust has returned 27.5 per cent, slightly behind the 33.64 per cent of the IT Infrastructure sector. It should be noted it was flat at the around the time of last week’s market sell-off.

The trust is 12 per cent geared and is on a premium of 7.6 per cent. It has ongoing charges of 0.94 per cent, according to the AIC.


Looking at property, Leatham said the 10 per cent allocation could go to LXI REIT, an inflation-protected income and capital growth portfolio of long-lease UK real estate assets.

“Since IPO in February 2017 the team have successfully deployed £293m of equity alongside gearing at attractive yields,” he said.

“The portfolio of attractively valued long-income assets spans nine sectors and 29 tenants with 97 per cent of contracted rental income subject to inflation-linkage or fixed uplifts.

“We like the defensive characteristics of long-lease, inflation-linked yields from a diversified portfolio of real estate.”

Since its launch, the trust has returned 19.71 per cent to investors compared to the IT Property Direct sector average of 7.73 per cent.

“The team has benefitted from pre-let forward-funded opportunities and low transaction costs to maximise value for shareholders,” Leatham said.

The portfolio has a yield of 4.9 per cent with ongoing charges of 1.21 per cent. It is not geared and its shares are on a 1.9 per cent premium to NAV.

Finally, in the alternatives bucket the Peel Hunt head of investment companies research would add the Princess Private Equity trust to his portfolio.

“Princess aims to provide shareholders with long term capital growth – 12 per cent annualised NAV total return TR in the last five years – and an attractive dividend yield of 5.5 per cent,” he said.

It invests in primary and secondary fund investments, direct investments and listed private equity with 51 per cent of the portfolio exposed to Europe and 35 per cent in North America. It also typically has a bias towards mid-cap companies (58 per cent).

“The team have had added significant value from a number of platform companies using a ‘buy & build’ acquisition strategy to turn good companies into global leaders,” he said.

The trust’s shares are trading at a discount to NAV of 10.1 per cent, it is 3 per cent geared and has ongoing charges of 2.6 per cent (inclusive of performance fee).

 

Performance of portfolio vs FTSE All Share since LXI launch

 

Source: FE Analytics

Overall, had investors held this portfolio since LXI launched in February 2017 it would have returned 10.54 per cent compared to a return of 3.88 per cent for the FTSE All Share (although past performance is no guarantee of future gains).

What’s more, investors would have had zero overlap between the two equity trusts (based on end June 2018 portfolios) and would have experienced much less volatility (5.81 per cent versus 9.29 per cent).

For more information on investment trusts, up-to-date performance data and interactive charting tools, click here to visit the FE Trustnet Investment Trusts Centre.

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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.