The Merchant of Venice: expert in spreading investment risk

    The Merchant of Venice: expert in spreading investment risk

    Far-flung flings

    27 May 2017

    Looking for something exotic, but wary of investing directly in obscure foreign or small-cap companies? Then investment trusts are your answer.

    Foreign & Colonial, the grandaddy of investment trusts, will be 150 next year. From the start, the point of such trusts was to seek out growth in far-flung places. The rich of the industrial revolution — the jute barons of Dundee, for example — needed somewhere to put their capital, and the new breed of investment companies enabled them to pour it into the global ventures of the day — as you can read in John Newlands’s excellent history, Put Not Your Trust in Money.

    Today, 400 investment trusts give the ordinary investor like me — an amateur enthusiast and, in my day job, the Telegraph’s obituaries editor — a unique opportunity to invest in dynamic businesses abroad or in world-changing inventions.

    Investment trusts can explore these rarefied areas thanks to their structure. They are public companies with a fixed number of shares; their managers can buy and sell when they choose because, unlike unit trusts, they don’t need to sell assets to meet redemptions. They can also borrow, so can pile in when shares are cheap. And they can take high-conviction positions in illiquid projects and young businesses that take time to bear fruit.

    The main route to a bargain in this sector is via ‘discount to net asset value’. But discounts are not so easy to come by — and should always be checked before buying. The share price of an investment company is pushed up or down by demand. If no one wants to buy, it will drop, sometimes below the net value of its underlying assets, or NAV. Sentiment can turn irrationally against a sector, dragging all down as in the old maxim ‘When the whorehouse gets raided, the good girls get taken along with the bad’ — though I’ve often wondered who the ‘good girls’ are in that scenario.

    An example of a trust that may have fallen out of favour for emotional reasons is Woodford Patient Capital. Launched two years ago, its remit was to back early-stage British companies (online estate agent Purple-bricks is a holding, for example), with a long-term approach and a ‘no-win no-fee’ charges structure. But despite the name, many initial buyers were impatient. The Woodford vehicle has, at the time of writing, slid to an 8 per cent discount to NAV, p-ossibly an attractive entry point for a trust described by Mark Dampier of Hargreaves Lansdown as ‘your proverbial “put it in a drawer and forget about it” type of fund’.

    If Woodford’s trust is too racy, plenty of other gifted managers are buying smaller British companies. One such is Rights & Issues IT. It has been quietly run for 33 years by Simon Knott, a chess master and value investor who buys companies with strong balance sheets such as Colefax, the wallpaper group. The portfolio’s annual turnover, at 2 per cent, is the lowest in the sector. The discount — wallowing in the mid-20 per cents last year — has tightened to 10.5 per cent, and the ongoing charge is 0.59 per cent.

    Japanese equities remain cheap, despite rising corporate profits. Baillie Gifford Japan (which I hold) is up 35 per cent this year but stands at a premium to NAV of 2.4 per cent; its sister fund, Baillie Gifford Shin Nippon, focusing on smaller companies, is drifting to a modest discount of 0.4 per cent. Or there’s Aberdeen Japan on a discount of 13.7 per cent. Note that its ongoing charge is 1.29 per cent compared with 0.88 per cent for Baillie Gifford Japan.

    Also well known in this field is Aberdeen Asian Smaller Companies, which has slightly reduced its annual fee, though it is still expensive with ongoing charges of 1.98 per cent. That compares unfavourably with Scottish Oriental Smaller Companies at 1.04 per cent. Both are discounted: Aberdeen at 13.3 per cent, Scottish Oriental at 12 per cent.

    If you’re looking for a reliable income-payer, J.P. Morgan Global Emerging Markets Income trust, overseen by veteran Richard Titherington, yields 3.9 per cent and after a long run at a premium has slipped to a discount of 2.8 per cent. And it’s always good to know whether the manager buys his own trust. Le patron — il mange ici? Alex Darwall has a £20 million stake in his Jupiter European Opportunities, which is up 27 per cent this year, but at a discount of 2 per cent.

    Finally, don’t overlook the- bumper global trusts in the search for weird and wonderful assets. RIT Capital’s idiosyncratic basket of holdings might offer protection in a downturn, but it is on a hefty premium of 6.8 per cent. Another is the £5 billion Scottish Mortgage investment trust, set up in 1909 to provide mortgages to Scots planters on Malayan rubber estates. Manager James Anderson and his team own stakes in their own portfolio worth £54 million: holdings include Amazon, Facebook and Tesla. Exposure to so much pricey tech might be a worry, but holders (including me) are used to volatility, and the trust is cheap with an ongoing charge of 0.45 per cent.

    Investment trusts cover an enormous field, but relieve the part-time investor of the headache of stockpicking. In doing so, they embody the principle of spreading risk that was already familiar to the Merchant of Venice: ‘My ventures are not in one bottom trusted / Nor to one place.’