This article is part of the special series, Investing with ISAs.
Lists of 'dog funds' occasionally circulate through the industry, but when a fund is included on a 'dog' list that does not necessarily mean that investors should run the other way. A spell of underperformance could simply be a cyclical issue rather than a real structural problem. Some of these 'dog funds' have the potential to recover, which would make them 'pedigree dogs'.
This article will look at three investment trusts whose returns in 2012 disappointed compared with their peers, but we think there is a case for optimism over the long-term. We believe these could be the 'pedigree dogs' of the investment trust industry.
Pedigree Dogs
#1: The Gold-rated Edinburgh Investment Trust (EDIN) had a weak year relative to its competitors; gains were less than half those of its Morningstar category average fund.
Invesco's Neil Woodford took over at this trust in September 2008 and it's worth noting that last year was a tough year for all of his funds. They struggled in part because of his funds' investments in tobacco stocks; a long-standing core position in his funds. Woodford’s track record at his open-end funds shows his style tends to be very in-favour or out-of-favour as his long-term views are borne out.
The Edinburgh Investment Trust is a fixed pot of assets of around £1.3 billion—a far cry from his behemoth £9.9 billion Invesco Perpetual Income fund (
Analyst Research). Yet Woodford's approach to stock selection is the same across all his funds. So the investment trust is a great way to access Woodford’s skills without any concern over fund size muddying the waters.
#2: The Gold-rated BlackRock World Mining Trust (BRWM) has also had a tough couple of years. In 2011 it lost more than 23% and in 2012 it lost 5%. Returns at the Gold-rated BlackRock Global Funds World Mining SICAV (Analyst Research) were a little worse both times. This hasn’t changed our conviction in managers Evy Hambro and Catherine Raw and we still hold them in high regard. We always advocate the need for long-term investing, particularly when looking at very specialist or niche funds and the mining funds fit this requirement well.
In 2012, this trust was hurt by weakening iron ore prices, although this was compounded by poor returns from mid- and small-caps, slowing GDP growth in China, its underweight position in gold and a host of macroeconomic uncertainties which depressed many parts of the market. Further, the Glencore-Xstrata merger continues to rattle on, when a resolution had been expected in mid-2012—the deal was first announced in February 2012 and the dispute between the two parties isn’t helping sentiment.
An additional feature at the BlackRock trust that isn’t available in the SICAV fund is the use of gearing. This gearing was used to buy royalties on iron ore sales from London Mining’s Marampa licence in Sierra Leone—this is an innovative way of using the loan facility and could soon be revenue-enhancing at the trust.
A Different Kind of Beast
#3: The Henderson Asian Growth Trust (HAGT) is a slightly different story from the previous two examples. The fund was rated Neutral by Morningstar until the announcement in December 2012 that the board had appointed Schroder as the new investment manager, at which time the rating was put Under Review.
This news followed a period of lacklustre performance overall at the trust under manager Andy Beal’s stewardship, who took the reins in September 2005. Granted, Beal outperformed his average Morningstar Asia ex-Japan category peer from that time to 31 December 2012 by more than 1% annualised, but returns were patchy. The year of 2011 in particular was a very disappointing year for shareholders, due to Beal’s positive stance on China, coupled with investors seeking defensive names rather than growth. Also a pro-gearing stance through falling markets that summer meant that the fund lost nearly 5 percentage points more than its average category peer and nearly 10 percentage points more than the MSCI AC Asia ex-Japan index.
We can’t help but feel the Henderson trust's board carries some responsibility for this performance since they set the gearing parameters in which Beal operated and indeed they are the overseers of the fund. It's worth noting that these parameters changed at the start of 2012 so as to avoid a repeat of the problem. Nonetheless, the board is seeking shareholder approval to change the remit of the fund, to one of total return, to avoid losses such as those seen in 2011. If approved on March 15th, management will pass to Robin Parbrook and King Fuei Lee of Schroders.
While Morningstar analysts do not currently rate the Schroder ISF Asia Total Return SICAV fund, which both of these Schroders managers run together, we still know these managers well. We have given a Bronze rating to the Schroder ISF Asian Equity Yield Fund (Analyst Research), which is run by King Fuei Lee, and we have given a Bronze rating to the Schroder ISF Asian Opportunities Fund (Analyst Rating), which is run by Parbrook.
Since the announcement in December, the investment trust’s discount to NAV has moved in to less than 3% from around 12%. This suggests there is already a healthy amount of optimism over this action and it’s true that the return profile at the co-managed Schroder ISF Asia Total Return SICAV fund is strong. Until we speak with the managers directly, our rating will remain Under Review. A final word of caution: shareholders should be aware this fund will become a different beast under Schroders, should the vote be carried.
Don't Expect Miracles
It’s important to remember that not every fund or fund manager can outperform every single year and that’s why it’s so important to keep a long-term perspective when investing. The weaker years at good funds give an opportunity to buy or add to a holding. Be wary of attention-grabbing headlines and do your own analysis on why a fund has underperformed.
