A successful first half for fans of investment trusts

Most of the Japanese specialists outperformed their index
The broader equity market made little progress in the first half of 2018, but those who followed our investment trust recommendations have reason to be pleased, says Max King.

For global equity markets the first half of 2018 was a case of two steps forward, two steps back. The FTSE All-Share index bounced back from a 10% drop in the first quarter to finish the half year down just 0.5% (including dividends). The FTSE World index gained 1%, helped by the drop in sterling and the outperformance of American stocks.
Investment trusts performed better, with the FTSE Equity Investment Instruments index returning 2.8%. Since 55% of this index is made up of equity funds and 45% comprises other asset types whose performance has generally lagged, an equity investor with a few of the better-performing funds could easily have racked up a return of 5% between January and June. An annualised return of 10% when inflation is only 2.4% is more than satisfactory.
Most followers of MoneyWeek recommendations should be happy. In the global sector, returns averaged 3.6%, but Independent, Scottish Mortgage and Monks managed 21%, 18% and 10% respectively. Mid Wynd, Alliance, Witan and Scottish Investment Trust all produced marginally positive performances. Scottish Mortgage’s performance is largely due to its high exposure to technology; in this sector, Polar Capital Technology Trust’s return of 10% was trounced by Allianz Technology with 22%, while Herald, with a broader new-economy mandate but heavily focused on the UK, returned 15%.
Among the more defensive global funds, RIT stands out with a return above 5%. In the international income sector, Henderson International has been disappointing with a return of -4.6% but at least we advised against Murray International, down 10%. Scottish American, a recent recommendation, was only down 1%. Another Baillie Gifford Trust, Edinburgh Worldwide, leads the global small-cap sector with a return of 17%, followed by North Atlantic Smaller Companies at 8%.
Among the UK specialists, Artemis Alpha has bounced back after a dismal five years with a 16% return, but the ever-reliable Finsbury Income & Growth, which achieved 4.8%, is a safer pick. Schroder Income Growth notched up 10% as the discount to net asset value narrowed: investors expect the performance to improve when the management moves to Baillie Gifford. Discount narrowing also explains the 7% return from Fidelity Special Situations. Aurora, a contrarian fund we recently recommended, gained 5.3%.
UK income funds have struggled but another contrarian fund, Alastair Mundy’s Temple Bar, is ahead of the pack with a positive return. Mark Barnett’s Perpetual Income & Growth gets the wooden spoon with a return of −6% – stay away. The performance of his former colleague, Neil Woodford, was rescued by a 13% jump in June, but his Patient Capital Trust fund was still down 1.7% overall. The jump was due to the listing of Autolus, but a larger stake is held by Syncona, a trust that rose 25% in the first half. The healthcare sector appears to be gaining momentum. BB Healthcare, launched in December 2016, gained 10% and sector veteran Worldwide Healthcare 5%.
In the UK small-cap sector, BlackRock Smaller Companies has been the star performer, returning 18%, closely followed by its sister fund, Throgmorton. In the micro-cap sector, the performance of Downing Strategic has been disappointing owing to bad news on a significant early investment, but patience should pay off. River & Mercantile’s UK Micro Cap Trust suffered from the abrupt departure of manager Philip Rodrigs, but the underlying performance (+8%) has been nearly as strong as at Miton UK MicroCap.
Alex Darwall’s pessimistic take on the macroeconomic backdrop has paid off handsomely with a 9% return from Jupiter European, while most competitors posted negative returns. The star performer in the North America sector has been Baillie Gifford US Growth, a new issue during the half year, but already up more than 20%. Jupiter US Smaller companies returned 15%. Most of the Japanese specialists outperformed their index but both JP Morgan Japanese and Fidelity Japan (+6.7%) were ahead of the sector leader over the longer term, Baillie Gifford Japan (+2.7%). Its sister small-cap fund Shin Nippon returned 9%.
Asian markets have been hampered by the strength of the dollar. Few produced a positive return but another Baillie Gifford Trust, Pacific Horizon, gained 14%. Fidelity China Special Situation’s return of 2.5% is also noteworthy with its avoidance of poorly performing state-owned enterprises vindicated. Emerging markets look due a rebound, however, with political risk surely priced in by now and bullish sentiment on the dollar exaggerated. If so, BlackRock Frontiers, −8% in the half-year, looks attractive. The more cautious may prefer the Genesis, Templeton, JP Morgan – or, for those looking for income – the Utilico emerging-markets trusts. All are on double-digit discounts.


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