After a strong 2017, which saw the model portfolio generate a total return of almost 20% versus an 8% gain from its benchmark, Wins removed 12 trusts and added 11 in its annual rebalancing.
As a result, there are now 35 names in the portfolio, versus the 41 names it started 2017, which Wins said reflects tightening discounts last year and the desire to have a tighter list of names. In total, Wins recommended 47 funds over the course of 2017 of which 34 (72%) outperformed in share price terms versus their respective indices during their time in the model portfolio.
UK changes
In the UK it was a case of three trusts in and three out, with Neil Woodford’s Woodford Patient Capital Trust getting a stay of execution despite a difficult year.
The main switches saw Train’s Finsbury Growth & Income Trust swapped for Troy Income & Growth, Alex Wright’s Fidelity Special Value trust replaced by the Aurora Investment Trust, and the River & Mercantile UK Micro Cap removed and the Mercantile Investment Trust added.
“While we continue to rate Nick Train very highly, we have decided to switch Troy Income & Growth, manged by Francis Brook and Hugo Ure, to gain more diversified exposure to UK equities with a higher yield (3.2% versus 1.8%),” Winterflood analysts wrote. “In addition, the risk of premium/discount volatility is alleviated by the fund’s well established zero discount policy.”
While Wins said it continues to believe that Wright’s unconstrained value/contrarian approach is well suited to investment trust structure and acknowledges the performance Fidelity Special Values has produced, it added Aurora “to gain access to Phoenix Asset Management’s fundamentally-driven contrarian investment approach, which has delivered impressive long-term returns for the equivalent open-ended fund”.
The Wins analysts added: “As River & Mercantile UK Micro Cap is now trading at a small premium to NAV, we have switched to Mercantile Investment Trust, which we believe offers a better value opportunity on its current discount of 9%.”
Meanwhile, despite underperforming the UK All Companies peer group by 24%, Wins is sticking with its recommendation of the Woodford Patient Capital Trust.
“We suspect that 2018 will be an important year for the fund with key milestones at some of its holdings, including its largest holding Prothena, which is expected to report the results of a trial product in Q2,” said Wins. “The fund is not a mainstream play on UK equities and performance has been very different from that of the FTSE All-Share, with substantial gearing (19% of net assets) another differentiator; however we believe that it offers attractive exposure to secular growth.
“Neil Woodford is clearly passionate about the concept of ‘patient capital’ and there are signs that the asymmetric return profile that will drive performance is beginning to develop, with the portfolio now more focused on key holdings.
“Having traded at a significant premium to NAV following its launch in 2015, the fund’s shares have been de-rated as performance has lagged the FTSE All-Share, particularly over the last six months, and are currently trading on a 9% discount. We believe that this offers an attractive entry point.”
Global changes
When it comes to making any changes within its model portfolio, Wins stressed it is not attempting to make any macro calls, while weights in individual funds are not intended to reflect conviction, but rather align its asset allocation geographic exposure broadly with that of its benchmark, the FTSE UK Private Investor Balanced Index.
One major addition in the global section of its international allocation was the addition of the Foreign & Colonial Investment Trust (150 years old this year), which replaced the Law Debenture trust. Wins said it views the £3.5bn Foreign & Colonial Investment Trust, managed by Paul Niven, as an “attractive ‘one-stop’ global equity savings product”.
“On a current discount of 4.6% we believe that downside discount risk is limited by its policy to protect a 7.5% discount,” said Wins.
In terms of European funds, Wins removed TR European Growth following the tightening of the trust’s discount last year. In its place it added Alex Darwell’s Jupiter European Opportunities trust, which currently sits on a 3% discount to NAV.
In Japan, Wins switched from Baillie Gifford Shin Nippon to JP Morgan Japanese on valuation grounds, while in Asia Dale Nicholls’ Fidelity China Special Situations Fund was ousted and replaced by JP Morgan Asian. For its emerging markets exposure, Wins switched out of Blackrock Frontiers into JP Morgan Emerging Markets.
Explaining the overall changes, Wins concluded: “Value is thin on the ground, while the risk of discount volatility in the eventuality of more difficult market conditions has increased. We believe that opportunities do still exist and have selected 35 investment companies that we consider offer the potential to outperform their peers and relevant indices in 2018.
“If the recommendations can be characterised into two broad types, it is funds managed by proven managers with strong long-term performance records and funds that offer a value opportunity. “
