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Trusty steeds or old nags?

Some of the old-timers in the investment trust industry still have some life in their old legs, judging by the recent resurgence, but James Phillipps says some of the best known trusts are lagging behind. Can they be spurred on to better performance??

The share prices of three of Britain’s oldest investment trusts hit all-time highs this month, leading to speculation that there could be a resurgence of interest in the oldest of investment vehicles.

The Law Debenture and Bankers trusts, both launched in the 1880s, passed the milestone in the first week of January, along with the Scottish Mortgage trust, launched in 1909. Together they manage almost 2.5bn of investors’ money.

As evidence of a wider renaissance in the global growth sector, three international generalist trusts, British Empire Securities, Monks and Alliance, reached record highs in 2006. It is a much needed fillip for a sector that fell out of favour with many investors following a period of poor performance from many trusts.

Three of the best known trusts, the 2bn Foreign & Colonial trust, the oldest investment trust launched in 1868, the 1.2bn Witan trust and 700m Scottish Investment trust, all lag behind their 2000 highs.

These three are typically the heaviest advertisers during Isa seasons but the return to form of Scottish Mortgage is prompting its manager, Baillie Gifford, to step up its marketing push.

Baillie Gifford investment trust marketing manager Robert O’Riordan says the fund house is keen to get the message about the trust’s long-term track record out to investors.

He says: “Performance has been very good over the past four years and we are being very active in promoting Scottish Mortgage to intermediaries, institutions and long-term investors.”

But not all advisers and analysts have been won over by the global growth sector’s turn-round in performance.

Kohn Cougar managing director Roddy Kohn believes that the big international generalists will struggle to regain the support of the adviser community because he says they chose to focus solely on marketing to private investors during the last bull market, burning their bridges with many IFAs.

He says: “It will be a big challenge for investment trusts. They chose to go it alone rather than focus on professional advisers because they know private investors will not be as demanding and are largely not sophisticated enough to ask the right questions.”

Kohn also says the bulk of their recent performance is a consequence of the four-year rally that global equity markets have enjoyed since bottoming put in early 2003.

It is only recently that several of the trusts recording new highs have regained the levels they reached in 2000. Those highs were achieved at the top of the technology boom and the subsequent fallout left many investors nursing heavy losses.

Despite the recovery, many investors have stayed away, opting to chase the attractive headline figures posted by more specialist funds, such as natural resources or property.

The generalists have recognised this and several have restructured in a bid to turn round performance. In the past they attracted investors by positioning themselves as solid, steady vehicles but today’s investor seems to demand more.

Wins Research analyst Charles Cade says: “Performance has been broadly in line with markets and people do not want just beta. The sector has undergone a lot of change as trusts try to add alpha but in a low-risk context.”

Trusts have taken different approaches to improving returns. Foreign & Colonial and Witan brought in external specialist regional fund managers.

Witan outsourced its entire portfolio to a number of third-party managers in 2004. It also hired Mellon to hedge the 700m foreign currency exposure within its overseas equity holdings this month, which it estimates could further boost annual returns by 2 to 3 per cent. Foreign & Colonial tendered out its US and Japan portfolios in 2005.

The returns from these two trusts have been steady, if unspectacular, since the changes. Both are up by 12.1 per cent over one year compared with a sector average of 15.9 per cent. Over three years, Witan has risen by around 61 per cent and Foreign & Colonial by about 60 per cent. These numbers beat the 58.3 per cent FTSE World index three-year return but lag the average global growth trust’s return of 79 per cent.

Witan marketing director James Budden is quick to defend its record. He says: “Our recent performance has been pretty good, beating the FTSE World index, but we get tainted by people’s long-term memory. We outsourced everything but maintained an approach aiming to be ahead of our benchmark without getting more risky, which we believe is what investors want.”

Cade is unconvinced the strategy is really adding value, saying the share prices of both have been propped up by aggressive share buyback programmes designed to rein in discounts.

“The ultimate issue with global growth trusts is how they attract investors. Performance is not driving demand and many are on large discounts so have to keep buying back their own shares, meaning they are shrinking,” he says.

Analysts have been more favourable about changes made by other trusts. Hargreaves Lansdown head of research Mark Dampier says the international generalists that have adopted a more focused and unconstrained approach have generally fared better. He points to British Empire and Scottish Mortgage, which adopted more concentrated, conviction-led approaches three years ago.

But both have lagged the sector over one year despite Scottish Mortgage reaching a record high. It is up by 12.4 per cent and British Empire by 0.3 per cent compared with the 15.9 per cent peer group average. Viewed over three years, performance has been more impressive, with British Empire up by 107 per cent and Scottish Mortgage by 82.9, both beating the average comfortably.

The performance of British Empire, managed by John Pennink, was hurt by a 19 per cent weighting in Japan last year and the markets not favouring his value approach. He says: “Everything has gone up over the last four years and it is difficult to find undervalued assets. Japan has underperformed but still presents opportunities, particularly in the property market, and many people are starting to give up on it now which usually portends something good.”

O’Riordan is keen to stress that Scottish Mortgage’s underperformance last year is not a reflection of the trust becoming more volatile since restructuring. He cautions: “Investors must not confuse risk with deviation from a benchmark.”

Kohn warns that although the landscape of the global growth sector has changed markedly over the last few years, the new strategies have not yet been tested in falling markets.

The international generalists will have to build on recent performance and prove they are all-weather funds before many investors and advisers return to the sector.


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