Last month we looked at how investment trusts in our Morningstar Global Large-Cap Blend Equity category fared against their open-end peers in 2011. This followed the changes we made to the way in which we classify investment trusts. In this article, we’re going to look at trusts that fall in the other Morningstar Global Large-Cap equity categories: Value and Growth.
Like their blended fund peers, growth funds also struggled last year and the average fund in our Morningstar Global Large-Cap Growth Equity category lost 9.98%.
There are only three global equity investment trusts we have classified as growth funds and they are all managed by Baillie Gifford. All three have different managers but nonetheless all three funds struggled in comparison with their category peers. One reason for that is gearing, but let’s take a closer look at each fund individually.
Growth Funds
Edinburgh Worldwide (EWI)
This investment trust held up the best of the three on a relative basis, but it still lost 12.75% on an NAV basis. Manager Mark Urquhart kept gearing in excess of 10% throughout the year, which is what we’d expect to see, given the board’s view that a neutral position is gearing of 10%. So Urquhart focuses on stock selection rather than spending too much time on working out the extent to which the fund should be geared. While he’s done a good job of this over his tenure (the fund is rated Bronze) we’ve seen before the negative impact it has in down markets—2008 was another recent example. But to give this some context, the fund outperformed considerably in 2009—and by considerably, we’re talking nearly 35 percentage points—and 2010 saw it gain nearly 5 percentage points more than its average category peer. That’s too bumpy a ride for many but for the more risk-tolerant investor it can sit well in a portfolio alongside a core fund. We note with interest that Urquhart’s OEIC, Baillie Gifford Long Term Global Growth, performed bang in line with its average category peer. That highlights well the effect gearing can have in down markets and the need for investors to take a long-term view.
Monks Investment Trust (MNKS)
Falling in the middle of the pack was Monks, run by the firm’s CIO Gerald Smith—this fund is rated Silver by Morningstar. It has structural gearing in place through two debentures and last year it posted a loss of 13.4%. Net gearing was generally lower than at EWI throughout 2011 as Smith is more tactical with its use than Urquhart. Indeed, through the summer he took it right down to 93% by selling index futures to protect against the impact of the Eurozone and US debt crises. Unfortunately this wasn’t enough to cushion the fund and its strong bias to emerging markets more than offset this stance.
Scottish Mortgage Investment Trust (SMT)
Hot on the heels of MNKS was Scottish Mortgage, run by former CIO James Anderson. Anderson heads the team of which Urquhart is a member and it’s a similar story here as at EWI. The fund had a very strong 2009 after a troubling 2008 and Anderson is an investor who takes a genuinely long-term view—something investors would be well advised to do more of, in our opinion. For sure, 2011 was disappointing, with the fund down 13.5% in NAV terms, but our conviction here is high—the fund carries our Gold rating.
Fund Discounts
Let’s now look at how the funds’ discounts moved last year. All three are currently trading at a discount that's slightly wider than their 12-month average, but the differences aren’t huge. That suggests some stability for shareholders, even though none of the funds operate a formal discount control mechanism. We think the current discounts increase all three funds’ appeal too.
Value Funds
Turning now to those funds with a value bias, we have four investment trusts classified in this way and the picture here is both better and worse.
Securities Trust of Scotland (STS)
We’ll start with the better. The average fund in the category lost 6.86% in 2011 and Securities Trust of Scotland managed to post a gain of 5%. This should be kept in context, though: the fund changed its mandate in July to become a global equity income fund rather than just UK-focused and its management transferred to Alan Porter. Porter’s OEIC, Martin Currie Global Equity Income, gained a modest 0.7% last year, which is perhaps a better representation of his performance overall. Nonetheless, it’s pleasing to see an investment trust rank so highly in its Morningstar category in such a difficult year (it places comfortably in the top decile). Gearing is used actively, although it’s been reduced following the restructure, and the board operates a formal discount control mechanism. Given the popularity of global equity income vehicles generally, it’s no surprise to see this fund trading at a modest premium right now. It carries our Bronze rating.
F&C Managed Portfolio Income (FMPI)
Then there’s F&C Managed Portfolio Income, which ended the year just basis points behind the category average. This is a fund of investment trusts that’s run by Peter Hewitt from F&C. Hewitt took part in our most recent Best Advice Closed-end Fund Forum webinar on global equity income so you can hear more from him here. The fund is trading at a modest discount to its NAV, having been at a premium of 5% some 12 months ago. Like STS, income is a prominent feature here so for many investors, the safety of that dividend payment is paramount. In fact, the board has just announced an offer for subscription because of that premium.
Edinburgh Partners Global Opportunities (EPG)
Next on the list is Edinburgh Partners Global Opportunities whose fund size was boosted by the acquisition of Anglo & Overseas in early 2011. Fund manager Dr. Sandy Nairn kept net cash in the early part of last year and gradually introduced a modest level of gearing in the late summer. This, and an increasing exposure to Japan in the early part of the year, contributed to the fund’s year-end loss of 9.55%. The SICAV fared little better, losing 8.75%. The fund’s discount is nearly 1.5 percentage points wider than was the case 12 months ago, but it’s still only a modest 3%. We have yet to rate the investment trust but the SICAV carries our Bronze rating. Dr Nairn is also a non-executive director at UK mid-cap equity fund Mercantile Investment Trust (MRC).
British Empire Securities (BTEM)
The final trust that is categorised as Global Large-Cap Value Equity is British Empire Securities. This fund is run by Asset Value Investors, with John Pennink at the helm since December 2002. 2011 was not a good year for shareholders here: the fund’s NAV lost 14.38%, more than double that of the average fund in the category. Over Pennink’s tenure, the fund has lost more than its peers in down markets but performed much better in up markets (2006 being the only exception). The fund is trading at a discount that’s some 1.25% higher than this time last year and indeed its three-year average, too. The discount volatility is also higher than its peers; over the last 12 months the fund has traded at a premium of 2% right through to a discount of 9%. That might be too much for some investors to stomach but for the more risk-tolerant it can provide opportunities.
Conclusion
All in, it wasn’t a great year for the global large-cap growth or value equity investment trusts. But years like 2011 can sometimes provide opportunities for those willing to stomach a little bit of extra risk with a long-term view.
