the e-newsletter for investors in investment trusts · investment trusts have outpaced oeics in...

The e-newsletter for investors in investment trusts

2 3

EDITOR’S LETTERCONTENTS Issue 2 – August 2013

Chart of the Month 4Over the past decade, investment trusts have beaten

open-ended funds across eight major sectors

Inside Track 8There are lots of investment trusts with high yields. Trouble is,

you may have to pay a high premium

The Interview 18Jeremy Tigue, the affable and experienced manager of the giant

Foreign & Colonial Investment Trust, dropped into our studio

and revealed his plans

Fund Face Off 20Smaller companies stars Harry Nimmo and Paul Marriage

square off in our point by point comparison

Manager Moves 28Share buyback activity, the woes of AIFMD, and IPO successes,

are among this month’s roundup

Turn the page, and you will see compelling

evidence for using investment trusts.

Unlike open-ended funds, investment trusts

can borrow to leverage their investments.

Second, discounts of investment trust shares to

their net asset value tend to narrow when

equities in general go up.

So if equities rise over the long term,

investment trusts tend to do better

than funds lacking those advantages.

We do not have a September

issue, so see you again at the

beginning of October.

David Sandham, Editor


4 5

CHART OF THE MONTH

Investment trusts have outpaced Oeics in every major sector over a decade

Source: Winterflood Securities

Investment trusts have beaten open-ended funds over 10 years.

The chart shows their superior annualised performance across eight

major sectors. There are several reasons why investment trusts have

done better, key ones being gearing and narrowing discounts.

10 year performance, annualised %pa

Investment trusts

Oeics

0 5 10 15 20

Investment trusts Global Emerging Markets Peer Group

IMA Open Ended Global Emerging Markets

Investment trusts Asia Pacific ex Japan Peer Group

IMA Open Ended Asia Pacific ex Japan

Investment trusts UK Smaller Companies Peer Group

IMA Open Ended UK Smaller Companies

Investment trusts Europe General Peer Group

IMA Open Ended Europe ex UK

Investment trusts UK Growth Peer Group

IMA Open Ended UK Equity

Investment trusts Global Growth General Peer Group

IMA Open Ended Global

Investment trusts North America Peer Group

IMA Open Ended North America

Investment trusts Japan Peer Group

IMA Open Ended Japan

Data for open-ended sectors is

the IMA sector average, total

returns, with distributions

re-invested gross on the

ex-distribution date.

Investment Company sectors

are represented by a

Morningstar Peer Group Index.

These indices are market cap

weighted, based on share

price Total Return – dividends

are assumed to be reinvested

gross on the ex-dividend date.

Issued by Aberdeen Asset Managers Limited, 10 Queen’s Terrace, Aberdeen AB10 1YG, which is authorised and regulated by the Financial Conduct Authority in the UK. Telephone calls may be recorded. aberdeen-asset.co.uk

Aberdeen Investment Trusts ISA and Share Plan

At Aberdeen, we believe there’s no substitute for getting to know

your investments face-to-face. That’s why we make it our goal to visit

companies – wherever they are – before we ever invest in their shares

and again when we hold them.

With 17 investment companies investing around the world – that’s an

awfully big commitment. But it’s just one of the ways we aim to seek

out the best investment opportunities on your behalf.

Please remember, the value of shares and the income from them can go

down as well as up and you may get back less than the amount invested.

No recommendation is made, positive or otherwise, regarding the ISA

and Share Plan.

The value of tax benefits depends on individual circumstances and the

favourable tax treatment for ISAs may not be maintained. We recommend

you seek financial advice prior to making an investment decision.

Request a brochure: 0500 00 40 00

We explore further.

Visit website > Watch film >


8 9

DEMAND FOR QUALITY INCOME LIFTS PREMIUMS

Jennifer Hill

Almost 100 investment trusts are yielding 3.5% or more, but

almost half of them are trading at a premium to net asset value

(NAV) – reflecting high demand for income from investors.

A total of 92 investment trusts have a yield of 3.5%-plus at

present, data from the Association of Investment Companies (AIC)

shows, and 42 of these (or 46%) command a premium.

Trio of advantages

Jason Hollands, managing director of business development at

Bestinvest, said: ‘The main challenge at the moment is that

income is so scarce that many good-quality, higher-yielding

investment trusts are trading at chunky premiums.’

Investment trusts, unlike open-ended funds, have the ability to

retain up to 15% of dividends each year to boost payouts when

times are tough; the ability to pay income out of capital; and can

invest in illiquid assets, such as infrastructure and property, which

tend to be strong income generators.

‘Some of the more niche ideas include closed-end vehicles

invested in fully operational infrastructure projects, such as roads,

The popularity of quality investment trusts with high yields has made many of them expensive

Many good-quality, higher-

yielding investment trusts are

trading at chunky premiums

Jason HollandsManaging director of business

development at Bestinvest

INSIDE TRACK INSIDE TRACK


10 11

(borrowing 50% of the value of its assets versus 18% for the

F&C trust), so carries more risk.

Hollands said he ‘could be persuaded to stomach’ a 5%

premium on an infrastructure trust, but would not buy F&C

Commercial Property at a 16% premium. Stephen Peters, an

investment analyst at Charles Stanley said investors should not be

dissuaded to invest on the basis of a 2-3% premium, but that he

would ‘start to think’ if the premium was more than 5% and would

‘certainly start to think’ if more than 10%.

Beyond the high premiums that many trusts are commanding,

infrastructure also carries the risk that it will sell off when fixed-

interest markets fall, while

growth in the commercial

property sector ‘looks curtailed

by the economic outlook’,

according to Tim Cockerill,

head of collectives research at

Rowan Dartington.

Long-only funds

He believes that traditional

equity investment trusts are

‘very much suited to a lot of

hospitals and prisons,’ said

Hollands. ‘These are attractive to

income seekers because they are

underpinned by very long-term

government agreements, with a

degree of inflation-proofing often

written into the contracts.’

GCP Infrastructure Investments

has a 7% yield, but is trading at a

9.1% premium. HICL

Infrastructure has a 5.4% yield,

but a 12.4% premium, while John

Laing Infrastructure yields 5.3%

but commands a 10.6% premium.

Beating inflation

Likewise, commercial property trusts offer inflation-beating yields,

but some of the better ones with high-quality portfolios skewed

towards London and the south-east are trading at premiums.

F&C Commercial Property (5.4% yield) is now trading at a

thumping 15.7% premium. Schroder Real Estate looks a better

bet with a yield of 5.8% and a discount to NAV of 2.8%, but

investors should be aware that it is more highly geared

Growth in the commercial

property sector looks

curtailed by the

economic outlook

Tim CockerillHead of collectives research at

Rowan Dartington

Many income-producing

sectors, such as

infrastructure, all look

expensive prima facie

Stephen PetersInvestment analyst at Charles Stanley

INSIDE TRACKINSIDE TRACK


12 13

investors’, but notes that some of these are also on hefty

premiums. Murray International, which sits in the global growth

and income sector, yields 3.7% but trades at an 11% premium.

However, Neil Woodford’s Edinburgh Investment Trust has a

more modest 2.6% premium (and a yield of 3.9%), while Schroder

Income Growth trades at a 2.6% discount and yields 4%.

‘This type of trust should, in the long term, deliver solid

growth of income and capital, which is a valuable

combination,’ said Cockerill. ‘The risks are simple equity risks,

which have to be judged based on the strategy and any

gearing [4% and 18% respectively for the Schroder and

Edinburgh trusts].’

Split capital trusts

A dozen out of the 92 trusts yielding 3.5%-plus are split capital

investment trusts – vehicles that have different classes of share

designed to generate either income or capital growth, which

plummeted in value amid the 2000-2003 bear market because of

high levels of gearing and substantial cross-holdings.

‘These are very small in terms of assets, incredibly specialist

and best left to the professionals who can truly understand the

risks inherent within them,’ said Peters, who focuses his efforts on

mainstream investment trusts. 0

5

10

15

20

25

Ave Volatility

Ave Yield%

21.5%

16.7% 15.8%14.3%

0% 0.2%2.1%

5.3%

-30

-25

-20

0

-15

-10

-5

5

10

Ave Discount

Ave Yield

%

-25.9%

0.0% 0.2%2.1%

5.3%

-16.6%

-7.8%

-0.8%

Higher yielding investment trusts are on smaller discounts

Source: Charles Stanley

Higher yielding investment trusts are less volatile

Source: Charles Stanley


15

The e-newsletter for investors in Investment Trusts

14

Premium for highest yielders

The highest-yielding quartile of the sector has the lowest volatility,

but is the most expensive, an analysis for Investment Trust Insider

by Charles Stanley shows. By contrast, the lowest-yielding trusts

have the highest volatility, while being the cheapest, as measured

by discounts.

Why? ‘Well, the simple answer is that in a world of low interest

rates, investors want income and are prepared to pay more for it,

so high-yielding trusts are unsurprisingly at premiums,’ said Peters.

‘They will only move back to discounts when interest rates rise.

With fewer sellers, the volatility of these sectors has fallen over

time too.’

So seeking income among investment trusts is not simple.

‘Many income-producing sectors, such as infrastructure, all look

expensive prima facie,’ Peters said. ‘So investors in them today

have to be very confident that interest rates aren’t going to rise

anytime soon.’

Among the top 10 yielders are British & American, a ‘very small’

(£28.5 million) trust that holds a number of other investment trusts,

a sizable stake in US biotech business Geron Corporation as well

as a handful of unlisted investments, making it ‘lack credibility as

an investment opportunity for the masses’, according to Peters.

He also sounded a note of caution over two high-yielding trusts

investing in debt – GLI Finance (yield 9.7%) and Duet Real Estate

Finance (8.4%).

The former invests in higher-risk tranches of collateralised

loan obligations.

‘Default rates are at many-year lows – a function of low

interest rates – but this is a complicated fund and very highly

leveraged asset class,’ said Peters. GLI Finance has gearing

of 178%.

Duet, a commercial property lending company, is ungeared,

according to the AIC data, but Peters said: ‘Loans will be

leveraged, so it is implicit in the asset class.’

Aberdeen Investment Trusts ISA and Share Plan

We explore further.Visit website > Watch film >

Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested.


Source: *AIC Global Growth Sector as at 31.05.13. **Baillie Gifford as at 30.06.13. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA and is wholly owned by Baillie Gifford & Co, which is the manager and secretary of Scottish Mortgage Investment Trust PLC.

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http://www.bailliegifford.com/intermediaries


18 19

Jeremy Tigue, manager of the Foreign & Colonial Investment Trust, is

planning to reduce its allocation to private equity, which currently

accounts for about 18% of its £2.7 billion assets. This heavy allocation

sets it apart from competitors such as Alliance Trust, which has only

4% in private equity, and has been a drag on Foreign & Colonial’s short-

term performance, as listed equity markets have raced ahead over the

past year.

‘The target is to come down to 10% over the next five years,’

he said.

Reallocating to income-producing assets will also help him

continue the trust’s proud record of increasing dividends every

year, so far for 43 years.

He also defended the trust’s practice of using both external and

internal mandates within F&C, saying that there would be no

problem replacing mandates if necessary.

THE INTERVIEW

F&C’S TIGUE PLANSTO TRIM BACK PRIVATE EQUITY

Jeremy Tigue


20 21

Paul Marriage

Comparing Harry Nimmo’s Standard Life UK Smaller Companies Trust and Paul Marriage’s Cazenove UK

Smaller Companies Fund

Rachael Revesz

NIMMO AND MARRIAGE SQUARE OFF IN THE

UK SMALLER COMPANIES SECTOR

FUND FACE OFF FUND FACE OFF

CompaComp

Harry Nimmo


22 23

Smaller companies can often outperform. The difficulty, though,

is picking the right ones. For investors looking for the big rewards

that smaller companies investing can bring, renowned fund

managers Citywire A-rated Harry Nimmo, manager of the

Standard Life UK Smaller Companies Trust, and Citywire AAA-

rated Paul Marriage, manager of the Cazenove UK Smaller

Companies Fund, are both excellent choices.

Nimmo also manages the £1.2 billion Standard Life

Investments UK Smaller Companies open-ended investment

company (Oeic), but this was soft closed to new investors, by the

introduction of a compulsory initial charge, in August 2011.

Investment strategy

Standard Life Investments’ Nimmo uses a stock selection

matrix, with factors such as dividend, price momentum and

earnings upgrades.

‘The screening keeps your process tight,’ said Nimmo.

Cazenove’s Paul Marriage said his investment strategy

was unique.

‘We have a little mantra, which I invented about 15 years ago,’

he said. ‘If a company has a differentiated product, margin

growth, cash generation and market leadership, it’s likely we

would invest.’

FUND FACE OFFFUND FACE OFF

Both investment trust and Oeic have trounced the index

Source: Morningstar

Standard Life UK Smaller Companies Trust NAV

FTSE SmallCap (ex Inv Cos)

Standard Life UK Smaller Companies Trust shares

Tota

l R

etu

rn (%

)

Cazenove UK Smaller Companies (B Acc) Oeic

-60

-30

0

30

60

90

120

150

May-13May-12May-11May-10May-09May-08

Both Standard Life UK Smaller Companies Trust and Cazenove

UK Smaller Companies Fund are highly weighted towards

consumer goods and services and industrials, but a key

difference is the market capitalisation of stocks within the


24 25

portfolio, with Marriage being

more interested in very small

companies.

‘We have a little bit sub £50

million, as there’s a lot of

exciting stuff there, which we

try and buy early and hold

long,’ he said.

Nimmo goes smaller, in

market cap terms, in his

investment trust than he does

in his open-ended fund, but he

is alive to the risks.

‘Certainly the trust is more

nimble, but companies below

£100 million provide additional

risk,’ he said.

Performance

While Nimmo benchmarks his

investment trust against the Numis Smaller Companies (ex

Investment Companies), Marriage is benchmarked against the

FTSE Small Cap ex Investment Trusts index.


Whatever the benchmark,

both managers have smashed

their targets.

Cazenove UK Smaller

Companies has returned

115.5% over five years.

Standard Life’s UK Smaller

Companies Trust share price

has risen 143.2%, and its net

asset value has risen 113.0%

over the same period.

Meanwhile, the FTSE Small

Cap (ex Investment

Companies) benchmark rose

43.7% during that time.

Unusual premium

‘Daily priced Oeics have the

major advantage that what

you get is what you see on the

tin,’ said Marriage. ‘With a closed-end vehicle, you often buy on

a discount, so you’re buying in the hope that the discount

goes down.’

%ASOS 5.3

Telecom Plus 5.3

Hargreaves Lansdown 4.5

Paddy Power 4.2

Rightmove 4.0

Moneysupermarket.com 3.7

Abcam 3.6

Xaar 3.2

Domino's Pizza 3.1

Dunelm 3.0

%Xaar 3.9

Perform Group 3.3

John Menzies 3.1

Cranswick 2.7

Esure Group 2.5

Hansteen Holdings 2.2

Pendragon 2.1

Telford Homes 2.0

Smart Metering Systems 2.0

Clinigen Group 2.0

Nimmo and Marriage both focus on industrials and consumer services

Standard Life UK Smaller Companies Trust Cazenove UK Smaller Companies


26 27

Comparable UK investment

trusts include Invesco

Perpetual UK Smaller

Companies on a discount of

13.2%, Henderson Smaller

Companies at 17.6%, and

BlackRock Smaller Companies

at 11.3%.

Nimmo said the premium

showed investor approval.

‘I think the premium is

recognition that we run quite a

defensive portfolio and actually

difficult market conditions are

ok for us,’ he said.

‘I’m really encouraged

by that.’


Looks for quality companies with a sustainable competitive advantage and particular prospects for growth.

For a sustainable, competitive advantage visit

The Scottish Mortgage Investment Trust.

Baillie Gifford Savings Management Limited is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA and is wholly owned by Baillie Gifford & Co, which is the manager and secretary of Scottish Mortgage Investment Trust PLC.

The Scottish Mortgage Investment Trust.

visit

Baillie Gifford Savings Management Limited is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA and is wholly owned by Baillie Gifford & Co, which is the manager and secretary of Scottish Mortgage Investment Trust PLC.

OEIC

Cazenove UK Smaller

Companies Fund

Sector: Asia Pacific (ex Japan)

-

Fund size: £639.5 million

Net Yield: 0.3%

Annual management charge: 1.5%

Number of holdings: 76

Total return

1 year: 41.1%

3 years: 124.1%

5 years: 115.5%

Nimmo’s investment trust,

though, unlike the rest of

his sector, is on a premium

of 3.5%.

Richard Curling, manager of

the Jupiter Fund of Investment

Trusts, said the premium was

surprising.

‘Nimmo’s sector tends to be

on a very wide discount

historically,’ he said. ‘[For other

trusts in the sector] they are

cheap, they stay cheap and

once you have a history of

cheap, people say: “Well, it

always trades on a discount,

so why bother?”’

INVESTMENT TRUST

Standard Life UK Smaller

Companies Trust

Sector: UK Smaller Companies

Premium/discount to NAV: 3.5%

Market Cap: £200 million

Net Yield: 1.1%

Annual management charge: 0.85% on gross assets

Number of holdings: 66

Total return (shares):

1 year: 46.1%

3 years: 115.0%

5 years: 156.6%

http://www.bailliegifford.com/intermediaries


28 29

MANAGER MOVES MANAGER MOVES

MONKS TOPS BUYBACK LEAGUE Monks Investment Trust, managed by Gerald

Smith, has topped a league table of investment

trust share buybacks in the first half of 2013, after

it snapped up £64.6 million-worth of its own

shares, data from Numis for Investment Trust

Insider shows.

Monks has been buying back shares since the

fund started to underperform in mid-2011, but

buybacks have increased in 2013, hitting a five-year monthly record

in June. With the shares trading on a 14% discount, they could be

at an attractive entry point.

Monks’ Baillie Gifford stablemate Scottish Mortgage was second

in the buyback league, at £35.1 million.

Total investment trust share buybacks in the first half of 2013

were £493.7 million, 5.2% down on £521 million in the same period

last year, when Alliance Trust bought back £106.8 million-worth of

shares. Charles Cade, head of investment companies research at

Numis, said: ‘The slight decrease isn’t really a surprise given that

discounts are tighter.’

Smith: Spent £65m on own shares in 2013

Global growth funds Foreign & Colonial Investment Trust,

Witan and Scottish Investment Trust tend to start buying back

shares when their discounts reach 10%, 10% and 9% respectively,

he said, while others are influenced by discounts among their

peer group.

Buyback top 20 league table 2013 Fund £m

1 Monks 64.596

2 Scottish Mortgage 35.081

3 SVG Capital 33.827

4 Impax Environmental Markets 32.058

5 VinaCapital Vietnam Opp Fund 31.181

6 Fidelity China Special Situations 20.787

7 F&C Investment Trust 19.215

8 BlueCrest AllBlue 17.72

9 JPMorgan Indian 15.746

10 Caledonia Investments 13.135

11 Investors in Global Real Estate 12.227

12 Fidelity European Values 11.552

13 World Trust Fund 10.613

14 Baring Emerging Europe 9.817

15 Pantheon International Part. 9.121

16 Herald 8.242

17 Templeton Emerging Markets 7.71

18 BH Global 7.4422

19 Boussard & Gavaudan 7.341

20 Macau Property Opportunities 6.808

Source: Numis, year to 28 June 2013


30 31

MANAGER MOVESMANAGER MOVES

IMPAX ENVIRONMENTALTARGETS 10% DISCOUNT EUROPEAN DIRECTIVE

WILL PUSH UP COSTS Impax Environmental Markets, which invests in renewable energy,

water infrastructure and waste management, is adopting a 10%

discount target, enforced through buybacks, following

consultations with leading shareholders.

The fund, which has assets of £360 million

and is managed by Bruce Jenkyn-Jones and

Jon Forster, has traded on an average

discount of 17% over the past year.

An Investment Trust Insider source claimed

that one very big seller forced the issue. By

contrast, Alan Brierley, an analyst at

Canaccord Genuity, said: ‘It would be

wrong to say shareholders forced the

Investment trust costs will be forced up by

between one to five basis points by a European

directive, according to Ian Sayers, director

general of the Association of Investment

Companies (AIC).

The Alternative Investment Fund Managers

Directive (AIFMD) requires investment trusts to appoint a depositary

who has more responsibility than a current custodian and is strictly

liable for any loss of assets. Investment trusts have until 22 July

2014 to get compliant with the new rules.

Sayers estimated some investment trusts could raise their prices

as soon as the fourth quarter of this year.

introduction of a discount control mechanism. The board spoke with

many shareholders and it was decided that an active buyback

programme, with a target of 10% in normal conditions, was the best

way of dampening down discount volatility. This strategy has been

employed, and has worked so well, for companies like Foreign &

Colonial, Witan and Scottish Investment Trust in recent years.’

Mick Gilligan, head of research at Killik & Co, pointed to other

funds with a hard discount defence level – BH Macro (10%), BH

Global (10%), Qatar Investment Fund (10%), BlueCrest All Blue (5%)

and BlueCrest BlueTrend (2%) – but said most conventional equity-

based funds don’t disclose this information.

Sayers: Investors will pay more

Jones: Discount should reduce to 10%

n

d

ed


32 33

WEALTH MANAGERSDRIVE POLAR IPO SUCCESS

INCOME DEMANDSTOKES NEW ISSUES

Private wealth managers were the driving force

behind the success of the initial public offering

(IPO) of Polar Capital Global Financials (PCGF),

figures obtained by Investment Trust Insider show.

The lion’s share of the new investment trust’s

investor base is made of up wealth managers.

They account for 74.9% while others

(institutions, IFAs and retail investors) make up

the remaining 25.1%.

Polar presented directly to about 1,000 wealth

managers across Britain and Ireland when

marketing the IPO.

New issues in 2013 have

already reached the total

for last year, as investors’

quest for income stokes

demand for high-yielding

investment trusts.

There have been seven


Yakas: Believes banks will be rerated

Brind: Presented to 1,000 wealth managers

The IPO raised £153 million before expenses,

smashing a £100-million target, and the shares

started trading on 1 July.

‘Polar Capital’s approach is very time and labour

intensive,’ said Stephen Peters, an analyst at

Charles Stanley. ‘They’ve spent a lot of time

speaking to private client investors and

assuaging their fears, instead of relying on big

institutional investors.’

PCGF is managed by Nick Brind and John Yakas.

‘People might be happy to pay more for that extra insurance

policy [depositaries liable for loss of assets], but we’ve never

had a situation where assets held in custody have disappeared,’

he said.

‘So the question is whether customers think it’s worth paying

the extra.’


34 35

DAVID PINNIGERMOVES TO POLAR

LONG-TERM DEBTLOOKS TEMPTING

David Pinniger, one of the managers of International Biotechnology

Trust (IBT), is moving to Polar Capital to work with its healthcare

team.

He is leaving SV Life Sciences (SVLS) Managers to join Polar,

which runs Polar Capital Global Healthcare, which is managed by

Daniel Mahoney and Gareth Powell.

IBT said the process to find his replacement for Pinniger was at

an advanced stage. The portfolio continues to be managed by

Kate Bingham and Ailsa Craig while a replacement is found.

Temple Bar, managed by Alastair Mundy of

Investec Asset Management, has taken on

£50 million of long-term debt, and other

investment trusts could follow.

Many older trusts have been saddled with

expensive long-term debt, which has proved a

drag on returns.

Stephen Peters, an analyst at Charles Stanley,

said Edinburgh Investment Trust was a likely

contender to take on long-term debt at

lower rates. Run by Invesco Perpetual’s

Neil Woodford, Edinburgh Investment

Trust is currently paying a coupon of

11.5% on £100 million of debt that is due

to expire next year.

‘Trusts are used to taking on

long-term debt at much higher

rates of interest – 7%, 8% or

9%,’ said Peters.


y

bt at

tual’s

ent

of

t is due

Mundy: Has borrowed £50m for 15 years at 4.05%

Woodford: Will he be tempted?

launches so far this year – the total number seen during 2012 – with

a string of others in the pipeline, data from the Association of

Investment Companies (AIC) shows.

TwentyFour Income launched in March, JPMorgan Global

Convertibles Income in June and Polar Capital Global Financials

Trust in July. Bluefield Solar Income launched on 11 July, and raised

£130 million.

Chelverton European Equity Income remains at an exploratory

phase. Ralph Singleton left Chelverton in June.

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Sarah Miloudi [email protected] 020 7840 2462

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