2015 Investment Trust Awards: Best Global and Emerging Market Trust

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(SMT) has recovered so spectacularly from its meltdown in the global financial crisis that its shares traded at a premium for much of 2014, a situation that used to be considered unachievable by a large global trust.

Its success means it is now much the largest investment trust (excluding 3i), with assets of over £3 billion.

It topped the global sector in the year to end January, proving that ‘elephants can gallop’, and its three-year total returns are more than 60% better than those of its benchmark, the FTSE All World index.

Manager James Anderson is fiercely committed to a long-term, high-conviction approach. Over 15 years he has honed SMT’s portfolio back to 70 holdings, with the top 30 accounting for 82% by value.

He and co-manager Tom Slater invest on a minimum five-year view, they pay no regard to any benchmarks, and despite the trust’s size they invest in small as well as large companies.

They are also willing to pay high multiples for companies with sufficiently bright prospects. “We look for inspirationally managed companies with imposing competitive advantages and radical growth opportunities,” Anderson declares.

Anderson has been a long-term believer in the power of technology, which is transforming an ever-wider range of industries – from cars and healthcare to media and retail. He has also been keen to capitalise on China’s emergence as an economic powerhouse.

Amazon (AMZN), Illumina (ILMN) and Tencent were the top three contributors to SMT’s returns over the last three years, followed byAlibaba Group (BABA). Anderson invested in Alibaba two years before its 2014 stockmarket debut and has notched up a gain of 393% to date. The trust currently holds small stakes in several other unquoted companies, notably cyber security specialist Palantir Technologies.

Anderson explains that companies created on the back of new technologies often need much less early stage capital investment than their forerunners, so do not need to go public so early. Waiting to invest until they do so can mean missing out on substantial gains, which Anderson wants to avoid.

Tom Slater became SMT’s deputy manager in 2009 and co-manager last year. Two months spent on the West Coast of the US in autumn 2012 opened his eyes to the cutting-edge companies in that region, a number of which have been included in the portfolio.

Like Anderson he is alert to opportunities across the world, and recent purchases have included European-based Zalando and Rocket Internet.

SMT’s gearing is generally in the high teens and its ongoing costs are only 0.5%.

It has also demonstrated its commitment to keeping its share price close to net asset value (NAV), but some investors may regret the board’s 2014 decision to remove its commitment to “real” increases in the dividend, and all should heed the managers’ repeated warning that there will be periods of under- and outperformance and that it is only suitable for investors with a long-term perspective.

HIghly commended: F&C Global Smaller Companies

F&C Global Smaller Companies (FCS) retains its highly commended position from last year. It has been one of the top three globally diversified trusts over 10 and three years, and much of the credit must go to Peter Ewins.

He manages FCS’s UK portfolio, decides its asset allocation strategy with support from the in-house European and US portfolio managers, and has been very good at picking funds to provide exposure to Japan and the Far East.

Smaller companies underperformed in most regions in 2014, but the trust benefited from maintaining its above-average US weighting, and its relatively high Japanese exposure finally paid off. So did the increase in gearing to around 7%.

Ewins’ UK portfolio and Sam Cosh’s European portfolio both beat their benchmarks, and Gordon Happell – who succeeded Robert Siddles on the US team – has worked well with the rest of the team.

Ewins is cautiously confident. “Overall valuations are high, so we need to sell stocks which have limited further upside, but we have been finding plenty of interesting new ideas in both the UK and the US,” he says. He has trimmed the Japanese exposure, but is keeping around 40% in the US as he expects the dollar to remain strong.

“A lot of our US holdings are domestic plays, so the strong dollar should not impact them too much,” he says.

Best Emerging Markets Trust: Blackrock Frontiers

Having pulled so far ahead of every other trust in this category in the two years to end January 2014,BlackRock Frontiers (BRFI) retains our award despite only just making the cut in the past 12 months.

It lagged the MSCI Frontier Markets index in the six months to end July, because manager Sam Vecht reduced his exposure to UAE and Qatar as their stockmarkets rose to giddy valuations prior to their promotion to full emerging market status.

In the following six months the frontier markets index fell back as its two dominant constituents, Kuwait and Nigeria, were hit by the collapsing oil price. Although Vecht and co-manager Emily Fletcher had already started to reduce the trust’s Nigeria weighting it was not immune, and its holdings in Iraq and Ukraine also continued to disappoint.

On the other hand BRFI’s relatively high weightings in Pakistan, Bangladesh and Sri Lanka all benefited from lower oil prices.

Vecht says they have relatively large economies for frontier markets, and their stockmarkets have not been chased up by foreign investors, unlike those in many much smaller and less diverse economies in Africa.

Vecht believes there are still interesting long-term opportunities in Nigeria, but is limiting his Nigeria weighting to 4% as he fears a massive devaluation of the naira.

Kuwait is BRFI’s largest country weighting at 13%, but that is made up of companies operating across a wide swathe of developing markets rather than purely focused on the emirate.

Vecht remains convinced that frontier markets are hugely attractive portfolio diversifers. Individually they are often high-risk, but collectively they are not, as there is such diversity and their correlation with developed markets is low.

Demographics are strong, as is the growth potential. Unlike most developed markets, share price increases over the last four years have been matched by earnings. As a result the MSCI Frontier Markets index looks cheaper than ever, with a forward price/earnings ratio of around 10.

Highly Commended: Utilico Emerging Markets

Keeping its highly commended position from 2014, Utilico Emerging Markets (UEM)  held up well when other global emerging market trusts were in the doldrums, recording the fourth best NAV returns over the past 12 months.

Its holdings have defensive qualities due to involvement in essential services, but “slow and steady” can win the race, as demonstrated by its annualised NAV total returns of close to 12% since launch in 2005. Dividend growth has averaged 4.9% over the past five years, to give a yield of 3.2%.

Charles Jillings, who has headed the management team since launch, expects the collapse in oil prices to benefit China/Hong Kong and Malaysia, which account for nearly half the portfolio geographically. He also expects it to boost traffic at ports and airports.

Jillings says UEM’s energy exposure is more focused on transmission than power generation, so should not be too vulnerable to lower prices.

The infrastructure and utility sectors in emerging markets should continue to bene t from the growth of urbanisation and the middle classes.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.