• Since this article was published, we have made some minor changes to the portfolio. See the update here.
I am going to do something I have long promised myself I would never do. I’m going to build you a model portfolio. I’ve always been mildly against doing so on the basis that, what with the strong luck element involved in successful investing, the odds of choosing funds that don’t do as well as we expect them to are high.
I also worry that, while any portfolio we are ever likely to offer is going to be long-term and capital-protection orientated, many of you are more short-term orientated and will find our picks frustratingly dull. We hate to be thought dull.
However, you do keep asking; you swear you’ll take a long-term view; and those of you who have asked directly for a portfolio have promised that you won’t blame me if it all goes wrong. So I have created a portfolio of six investment trusts.
Why investment trusts? Because they have a record of beating unit trusts, and tend to be cheaper; and because their closed structure means they can more easily make long-term value investments.
I’ve also called in a few experts – Simon Elliott from Winterflood, Alan Brierley from Canaccord Genuity, and the team from Rossie House, an Edinburgh-based private client manager (where, for the sake of transparency, I should tell you my husband works). They’ve all offered five suggestions for our portfolio, and I’ve picked the ones I think work best for us. I’ve put those in the table below, but I also want to cover the ones that didn’t make the cut.
First, the Murray International Trust (LSE: MYI), suggested by both Elliot and Brierley. It is run by Bruce Stout. We like Bruce – he is what some call a pessimist and what we call a realist, which makes him perfectly suited to our times. His “macro analysis since 2004 has been almost unparalleled”, says Brierley, and “his views on the deeply embedded problems in the Western economies have proved prophetic”.
And the returns? The best in the market. We’ve suggested that you buy his fund in the past and, while he is a little keener on Asia then we tend to be, we are still fans, as is Elliot, who suggested it as a good alternative to Scottish Mortgage for those looking for income. But its shares are on a premium to net asset value (NAV) of around 8% and even today that’s a bit much for us.
Then there is the Edinburgh Investment Trust (LSE: EDIN). Neil Woodford has a stunning record (he took over in 2008 and the trust is up 65% since). The portfolio, as Brierley puts it, contains “predominantly UK higher-quality, lower-risk companies that can deliver solid earnings and dividend growth notwithstanding what is expected to be a prolonged period of economic stagnation”. There shouldn’t be anything not to like there, but it too trades on a premium (around 3%).
It also bothers me a little that it is as tobacco-dependent as it is. I try not to look at the investments in MoneyWeek from an overly moralistic point of view: you can do that for yourself. But I’m not sure I want too much of my own money invested in companies dedicated to opening up new markets for a product that is proven to lead to an early, unpleasant death for its consumers.
Elliot also suggests the Edinburgh Investment Trust (EIT) sister fund, Perpetual Income and Growth (LSE: PLI), for its exposure to UK equities, its track record of growing its dividend, and the fact that being smaller than EIT allows its manager more flexibility to invest in mid-cap companies than Woodford has.
Other suggestions include Biotech Growth (LSE: BIOG), which has a “strong performance record from investing in a specialist area” that is less sensitive to macro concerns than most, and Standard Life European Private Equity (LSE: SEP). The latter makes sense on the basis that “private equity offers a considerable value opportunity” and this fund, which is on a 40% discount to NAV, offers “managed diversified exposure to the asset class”.
Then there is F&C Commercial Property (LSE: FCPT). This sounds like one to dismiss out of hand, given its high exposure to the bad bits of the British economy. But as Elliot says, it has a high-quality portfolio, being based mostly in London and the southeast, and it offers an “attractive yield”.
We’ve also been tempted by one of the more unusual trusts around, suggested by Rossie House – Law Debenture Corporation (LSE: LWDB). This “combines a diverse investment portfolio of mainly UK shares” with ownership of a separate, stand-alone trustee business. The former has a good performance record and the latter “a solid niche in providing administrative and fiduciary services”.
It also pays a dividend of around 3.7% and comes with a low total expense ratio (TER) of just over 0.5%. If you look it up you will see it is trading on a premium of over 8%, but this just reflects the fact that the trustee business is not included in the stated NAV.
Then there’s the Troy Income and Growth (LSE: TIGT) trust. I recently interviewed manager Francis Brooke a few months ago and tipped the fund back then. Troy hasn’t been managing the trust long (it used to be called the Glasgow Income and Growth trust), but since Brooke took over in 2009 it is up over 70%. That’s good. Next is HICL Infrastructure (LSE: HICL).
This gives investors low-risk exposure to an evolving asset class, says Brierley. It has a long-term target return of 7%-8% and has “delivered superior risk-adjusted returns since launch”.
Finally, this private-equity fund Pantheon (LSE: PINR) has a strong underlying portfolio “showing increasing signs of maturity and generating significant levels of realisations”. It’s on a discount to NAV of 35%-40%. That’s probably too much.
All these funds are very good. If you want to hold more than the six below, you shouldn’t go far wrong with any of them. If it was worth having a portfolio of 16 trusts, I’d put them all in.
The model portfolio
Personal Assets Trust (LSE: PNL): We’ve been writing about this one for years. It’s big, it’s liquid and it has a discount defence strategy that means that it has so far managed to keep its shares trading around its NAV. Whether that will change if the fund starts drastically underperforming we don’t know and, given that it is one of our top picks, we hope to never find out. Elliot is a great fan too. “With its emphasis on absolute returns, wealth preservation and zero discount policy, we see this as a core defensive holding.”
Rossie House applauds the asset mix – cash, inflation-linked government bonds, gold and conservatively managed large firms. We like the fact that holding PNL gives you automatic exposure to the insurance implied by being in gold. The shares trade on a slight premium (around 1%), but that is probably justified.
BH Macro (LSE: BHMG): This effectively gives you access to the Brevan Howard Master Fund, a defensive US-based hedge fund, which, since launch in 2007, has, as Brierley says, delivered “an outstanding risk-adjusted performance”. Given that its fortunes tend to be inversely correlated with the equity markets and that we are entering a period of even greater risk aversion and volatility than usual, there is likely to be a “fertile environment for the managers to extend this record”. It is also a firm favourite of MoneyWeek regular and Price Report writer Tim Price.
Scottish Mortgage (LSE: SMT): Rossie House likes this one. Baillie Gifford runs a wide range of investment trusts (I’m a non-executive director of its Shin Nippon trust), but this, at £1.6bn, is its biggest. It has a very good manager (James Anderson) with an “excellent long-term track record”, gained from his focus on finding companies with long-term growth potential (of the type often ignored by the average “short-term benchmark hugging” manager).
It is also cheap (the TER is not much more than 0.5%). Elliot is also a fan – he sees the trust as “the key growth equity element in the model portfolio”. While the fund can be volatile, “it should provide good capital growth over time”.
Finsbury Growth and Income (LSE: FGT): Manager Nick Train has beaten the FTSE All-Share index over one, three, five and ten years. That’s a relatively rare achievement. It is also a very concentrated fund with a total of around 25 holdings, low portfolio turnover and a discount control policy that, so far, has kept the share price knocking around the NAV.
The focus on “global businesses with strong recognisable names and a disregard for benchmark strictures has driven very good long term returns”, says Rossie House. The only real irritant is its performance fee. Those who really hate this might buy the Troy Income and Growth fund mentioned above instead.
3i Infrastructure (LSE: 3IN): This is Elliot’s pick for a “more absolute return income-generating pick”. Infrastructure is an increasingly popular asset class, offering 5%-plus yields. “We would highlight this fund due to its investment in operating assets rather than contracts whose values will fall over time.” I’m torn between this and HICL, but accept the argument about operating assets.
RIT (LSE: RCP): An old industry favourite, RIT is chaired and part-owned by Lord Rothschild and has a good long-term record – albeit one that has been less good than usual in the last few years. The investments are diverse (listed firms, hedge funds and private equity are all in there) and it also uses external managers. According to Rossie House, “the recent deal to acquire a stake in Rockefeller Financial Services looks a typically bold and opportunistic move”.
Our favourite investment trusts
(figures as of 13/6/12)
| Inv. Trust | Price (p) | NAV (p) | Prem/disc | Yield | 3 years | 5 years | 10 years |
|---|---|---|---|---|---|---|---|
| BH Macro | 1,945 | 1,942 | 0.2% | N/A | 29.2 | 87.4 | N/A |
| Personal Assets | 34,090 | 33,675 | 1.2% | 1.6% | 50.4 | 41.3 | 95 |
| Scottish Mortgage | 642.5 | 693.4 | -7.3% | 2.0% | 59.2 | 22.2 | 139.1 |
| Finsbury Growth | 330 | 328.2 | 0.5% | 2.9% | 85.8 | 16.8 | 165.5 |
| RIT Capital | 1,135 | 1,211 | -6.3% | 2.5% | 27.8 | 11 | 180.9 |
| 3i Infra. | 123 | 119 | 3.4% | 4.8% | 48.2 | 47 | N/A |
• Disclosure: Merryn’s husband, Sandy Cross, owns RIT Capital in his personal portfolio.