Compass - January 2020
After a roaring end to 2019, we look at the decade’s best performing sectors and Ian Cowie celebrates some remarkable returns from UK investment companies.
By Annabel Brodie-Smith
I hope 2020 is treating you well. I had a lovely long Christmas break with way too much food, long winter walks and lots of rest due to Father Christmas’s genius present, the Lego Death Star, which kept the boys busy for hours.
As we enter the 2020s, we are taking a look at the best performing investment company sectors of the last decade. Despite all the political and global worries, I’m pleased to say that a diverse spread of sectors performed strongly with the Biotechnology & Healthcare sector being the star performer up 491%. Defying Brexit uncertainty, two UK investment company sectors are in the decade’s top ten performers. Smaller companies have been storming, with three smaller company sectors in the top ten performers of the last ten years.
Following the Woodford fiasco, there’s been wider recognition of the suitability of the closed-ended investment company structure for hard-to-sell investments. In keeping with this theme, the Private Equity and Infrastructure sectors both delivered particularly strong returns over the 2010s. But it’s not all about alternatives: investors who have gained overseas equity exposure via the Japan, Global and North America sectors have been handsomely rewarded over the last decade.
Of course, there’s no guarantee that this strong performance will be repeated. Investors need to focus on their risk profile and meeting their investment needs, rather than chasing past returns. But it’s a good position to be in at the start of the decade.
UK investors have had plenty of festive cheer with the FTSE All Share up 19% in 2019. Investment company investors have had even more to celebrate, with the UK All Companies sector up 39% and the UK Smaller Companies sector up 38% last year. So it makes sense that investment expert Ian Cowie is delving into UK investment companies after “Clouds of political uncertainty, which had overshadowed British shares for several years, have begun to clear and the sun is shining on the London Stock Exchange again.”
We’re also bringing you the views of Gary Moglione, Manager of Seneca Global Income & Growth Trust, who explains how this investment company offers diversification by investing a quarter of the portfolio in specialist investment companies. These range from specialist property investment companies such as Assura, which provides modern GP surgeries on long term leases, to Hipgnosis Songs Fund, which buys catalogues of songwriters’ rights, featuring work by artists such as Sister Sledge, the Kaiser Chiefs and Dave Stewart.
Finally, you may be interested in a new book which is a good read for investment company investors. It’s ‘The Investment Trust Handbook 2020’, edited by the much respected investment journalist Jonathan Davis. It includes fascinating chapters from investment gurus including managers Bruce Stout of Murray International, Ben Rogoff of Polar Capital Technology and Simon Edelsten of Mid Wynd, as well as a host of others including the AIC’s own Ian Sayers. Most importantly after Christmas, the ebook is free. Watch the interview with the editor Jonathan Davis on the left to find out more.
Hope you have a good start to the year.
Communications Director, AIC
Asset TV interview Jonathan Davis, Editor of the Investment Trusts Handbook
We lift the curtain to reveal the best performing sectors over the past decade
Biotechnology & Healthcare was the top performing investment company sector of the last decade, data from the AIC can reveal. The sector produced an impressive return of 491% from 2010 to 2019, compared to a return of 198% for the average investment company over the same period.
Investment companies focused on smaller companies also delivered strong returns. The UK Smaller Companies and Global Smaller Companies sectors were the second and third best performing sectors of the decade and delivered 379% and 330% respectively. European Smaller Companies (10th) also featured in the top ten.
% is weighted average share price total return. Source: AIC/Morningstar.
Annabel Brodie-Smith, Communications Director of the AIC, said: “It’s encouraging to see a diverse spectrum of investment company sectors perform so strongly over the last decade. While Biotechnology & Healthcare was the top performing sector by some margin, two UK equity sectors made it into the top ten despite the Brexit referendum and subsequent lack of clarity surrounding the UK’s exit.
“The closed-ended investment company structure lends itself particularly well to illiquid alternative investments and over the past decade the Private Equity and Infrastructure sectors have both delivered particularly strong returns. Three smaller company sectors feature in the top ten best performers, demonstrating that investment companies are the best vehicle for holding smaller companies which can be hard to sell in times of stress. In addition, investors who have favoured investment companies to gain overseas exposure via the Japan, Global and North America sectors have been handsomely rewarded.
“It’s always interesting to look back at the best performing companies, but it’s important to remember that past performance is not an indicator of future returns. Investment companies cover a broad variety of sectors, risk profiles and geographical exposure to match a range of investor needs. When investing you should consider your objectives and the level of risk you are willing to take and, if you have any concerns, you should speak to a financial adviser.”
Ian Cowie explains why the sun is shining on UK investment companies
Clouds of political uncertainty, which had overshadowed British shares for several years, have begun to clear and the sun is shining on the London Stock Exchange again. Both the UK All Companies and UK Smaller Companies investment company sectors delivered sparkling total returns of more than 40% over the last year.
Fears that 10% of British companies’ stock market capitalisation might be expropriated, as proposed by a self-described Marxist shadow chancellor, were dispelled by the General Election on December 12. So, too, were many doubts about whether Britain will leave the European Union on January 31, 2020.
While the economic effects of Brexit remain to be seen, stock markets are in business to anticipate the future and there is already evidence of renewed confidence in UK corporate valuations. For example, according to independent statisticians at Morningstar via the AIC, the average UK All Companies’ investment company’s total return over the last 12 months to January 2, 2020, was 41%. The average UK Smaller Companies investment company did even better, rising by 42%.
Those returns are all the more remarkable when you remember that the Bank of England base rate is just 0.75% and most bank or building society savers’ rates fail to preserve the real value or purchasing power of money against the insidious effect of inflation. The Consumer Prices Index (CPI) is increasing by an annual rate of 1.5% while the Retail Prices Index (RPI) is rising roughly twice as fast.
Fortunately for investors willing to accept the risks inherent in stock markets - share prices can fall without warning and you may get back less than you invest - many investment companies deliver dividend income in addition to their potential for capital growth. The average yield - that is, dividends expressed as a percentage of share prices - from investment companies in the UK All Companies sector is 2.4%, while the average income for shareholders in UK Smaller Companies is 1.9%.
Both streams of cash have risen strongly in recent years. The average annual increase in dividends paid to shareholders by UK All Companies investment companies over the last five years is 8.9%, while UK Smaller Companies shareholders enjoyed income rising at an annualised rate of 13%. Bear in mind that if the former rate of increase is maintained, dividends would double in less than a decade and, if the latter rate of increase is sustained, they would double in fewer than five years.
Several investment companies performed even better than the sector average figures suggest. Schroder UK Mid Cap (SCP) shot the lights out with a total return of nearly 59%, to be the top UK All Companies company over the last year, followed by Mercantile (MRC) and JPMorgan Mid Cap (JMF) with returns of 54% and 44% respectively. This triumphant triumvirate’s five-year total returns were 77%, 108% and 97% respectively.
The top three companies in the UK Smaller Companies sector over the last year did even better. They were JPMorgan Smaller Companies, BlackRock Throgmorton and Standard Life Smaller Companies with total returns of 67%, 60% and 59% respectively. For medium-term comparison, their five-year returns were 144%, 174% and 149%.
It is important to remember that the past is not necessarily a guide to the future. Dividends are not guaranteed and can be cut or cancelled without warning.
However, after several years in which political uncertainty depressed confidence in the London Stock Exchange, many investment companies backing Britain have bounced back strongly. Investors seeking income or growth or a mixture of both should consider whether the recent upward trend might have further to go.
Seneca explains why they look beyond bonds and equities to investment companies
Gary Moglione, Fund Manager, Seneca Global Income & Growth
It is a truth universally acknowledged that an investor in possession of a good fortune must be in want of diversification. Whilst formerly, a traditional allocation between bonds and equities might have served this purpose, such an approach may no longer be sufficient. At Seneca Investment Managers, we believe that following an extended period of strong returns from both of these mainstay markets, a greater degree of diversification is the order of the day.
This is an area in which investment trusts come into their own. Many options for further diversification come in the form of assets which are unsuitable for inclusion in open-ended funds. Recent history has reminded us that neither property nor private equity are well suited to open-ended structures. The illiquid, long-term nature of these assets sits ill with the daily inflows and outflows of OEICs. For these, fixed pots of capital such as investment trusts are far more suitable.
As multi-asset investors we aim to provide our clients with diversification across various asset classes. The investment trust we manage, Seneca Global Income & Growth Trust plc, has both income and growth objectives and it is therefore important that we construct a portfolio with the ability to meet our goals whilst diversifying risk and reducing volatility. In order to do this, we allocate approximately a quarter of the portfolio to closed-ended funds, principally across property, infrastructure, private equity and specialist financials. To implement this approach, we invest in a range of carefully researched trusts which we believe will offer, over the long term, lower levels of correlation with other investments we hold. Many of these trusts have interesting stories to tell.
In the field of aircraft leasing, we own Doric Nimrod Two and Doric Nimrod Three. Returns from both will principally be driven by the ability of Emirates, the airline which leases the relevant aircraft, to meet its lease obligations, whilst the residual value of the aircraft is expected to have a further positive impact on returns. Holding both products diversifies our risk across two different management teams.
For property exposure, we focus on specialist REITs such as Assura, rather than the wider property market. Assura provides modern GP surgeries on long term leases, whose rental streams are ultimately supported by the NHS. We prefer these more niche areas of property to the wider property market at this stage of the cycle.
On a more musical note, we invest in the Hipgnosis Songs Fund, a vehicle which buys catalogues of song writers’ rights, featuring work by artists such as Sister Sledge, the Kaiser Chiefs and Dave Stewart. Returns will depend on growth in emerging market music expenditure, the take-up of global streaming, and the royalties paid by digital platforms.
The drivers of each of these investments are very different, both from one another and from the drivers of more conventional asset classes. What they have is a common focus on generating attractive levels of asset-backed, long term income, whether the asset be an aeroplane, a building or a song catalogue. In addition to diversifying our portfolio by asset class, holdings such as these also diversify the streams of income which support the growing dividend we pay.
There is now a wide range of trusts for investors to choose from offering exposure to a diverse spectrum of assets. If like us you believe a traditional bond/equity mix is no longer sufficient to guard against the vicissitudes of the markets, the specialist investment trust market now offers a real opportunity for careful and selective diversification.
Seneca Global Income & Growth Trust plc
Your Capital is at risk. Before investing you should refer to the Key Information Document (KID) for details of the principle risks and information on the trust’s fees and expenses. Net Asset Value (NAV) performance may not be linked to share price performance, and shareholders could realise returns that are lower or higher in performance. The annual investment management charge and other charges are deducted from income and capital. The Investor Disclosure document, KID and latest Annual Report are available at senecaim.com.The views expressed are those of Gary Moglione at the time of writing and are subject to change without notice. They are not necessarily the views of Seneca Investment Managers Limited and do not constitute investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment. Seneca Investment Managers Limited (0151 906 2450) is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP20 001