Since launching the Morningstar Analyst Ratings for Investment Trusts in January 2012, we’ve rated some of the largest investment trusts that are listed in the UK. Of the top ten investment trusts by gross assets at the time of writing, six carry a Morningstar Analyst Rating. Only one of these has traded at a premium to its net asset value since the start of 2012 and that’s Murray International Trust (MYI). One year ago, that fund’s premium stood at around 5%; despite the board issuing shares on a regular basis, the premium has persisted. Whilst the reasons are numerous--the fund has a solid long-term performance, with consistency of management and a strong commitment to a growing dividend--it’s no surprise to us that interest in the fund has stayed high since we awarded it our Gold rating.
Divergent Discounts
At three of the six rated funds, we have seen discounts narrow over the past 12 months, while at two they have widened. Let’s deal with the widening discounts first...
The Mercantile Trust (MRC) is a UK mid-cap equity fund run by JPMorgan and in March last year its co-manager Jane Lennard left the firm. That type of uncertainty is bound to rock investor confidence a little, even though long-standing co-manager Martin Hudson is still at the helm. JPMorgan confirmed Lennard’s replacement in August 2012. The fund’s board has been proactively engaged with JPMorgan regarding performance as returns at the fund over the last five years have been lacklustre so until we see signs of improvement, we don’t expect the discount to tighten significantly.
Another fund whose discount has widened is the Templeton Emerging Markets Investment Trust (TEM). This time stability of team isn’t an issue. Dr. Mark Mobius has pioneered Templeton’s emerging-markets team since 1989 and indeed this fund was the first emerging-market fund launched under his management. Long-term returns are solid but 2012 was a bumpy year for emerging-market equities and the fund underperformed its peers. That doesn’t give us cause for concern, though, given their long-term approach to stock selection. Indeed, it could be seen as an opportunity for investors to buy in while the assets are cheaper than their current value suggests, particularly as the fund’s three-year average discount is narrower.
Narrowing Discounts
Now let’s look at those funds whose discounts have narrowed since they received a Morningstar Analyst rating. One year ago, Scottish Mortgage Trust (SMT) traded at a discount to NAV of around 7.5%; at February 15 it was just above 5% and its three-month average discount is less than 5.5%. Run by James Anderson of Baillie Gifford since April 2000, consistency of management has without doubt been a strong positive influence here thus far. Granted, Anderson is off on sabbatical later in 2013 but co-manager Tom Slater is a capable pair of hands and they have worked together specifically on this mandate since 2009. Stock turnover is low as companies are bought with a very long-term mindset. Returns in 2012 were excellent when compared with its Morningstar Global Large-Cap Growth Equity category peers, following a tricky year in 2011 when the fund lost money, and a little more than peers too. That boost in performance has no doubt helped the discount narrow.
Witan (WTAN) is another global equity fund but, unlike Scottish Mortgage, it’s a fund of funds. CEO Andrew Bell has gradually made some big changes to the fund’s composition since taking over in 2010. Now we can start to see the results and they made for a very positive 2012. The fact the discount has narrowed by two percentage points over the last year is encouraging; investors are also recognising the improvements at the fund.
Lastly, we have the Silver-rated Foreign & Colonial Investment Trust (FRCL). This fund had an excellent year in 2012 and once again management consistency is a contributor. Jeremy Tigue has been at the helm of the fund since 1997 and is well versed at using the structural advantages that investment trusts can offer. There are some changes afoot at the fund, to afford greater diversity of income sources as well as to reduce the UK exposure, but none of the changes are contentious to us. These changes make sense for the fund’s mandate. Although the discount has only moved in a little in the past 12 months, we see it as an encouraging sign.
Expectations for 2013
Looking forward into 2013, we think there are long-term investment opportunities to suit every risk profile. Whether it’s a fund with a new incoming manager, such as the Asian Total Return Investment Company (ATR) (previously called the Henderson Asian Growth Trust (HAGT)), or a manager who has proven they can add value in a tough market when compared with peers, such as the JPMorgan American Investment Trust (JAM), there’s likely an investment trust that can fit the bill.
Disclosure: The author owns shares in the Foreign & Colonial Investment Trust.
The original version of this article was published by Investment Week on March 11, 2013.
