Compass - July 2021
As the summer of sport continues, what are Japan’s prospects on the eve of the Olympics?
By Annabel Brodie-Smith
The nation is of course obsessed with Sunday’s big football final. Come on England! But our household is in a similar frenzy about whether Mark Cavendish will win the Tour de France’s green jersey. And more importantly will he match or even beat Eddy Merckx’s long-held record of 34 stage wins? And then there’s the Olympics coming. Hopefully a summer of British sporting triumphs beckons.
Talking of green, the investment company information on our website has a new addition, an ESG tab which turns green when your mouse hovers over it. This tab takes you to our member investment companies’ ESG policies. We’ve found many investors want to know how their investments affect the environment and society, and how the companies they invest in are run. “ESG” is a handy acronym that has been created to discuss these concerns, with the “E” standing for the environment, “S” for social, and “G” for governance.
On the site each of our member investment companies has the opportunity to describe its ESG policy so that you can select the companies that best match your preferences. The disclosures sit alongside the information on investment companies’ performance and portfolios, so you can easily incorporate ESG into your investment decisions.
Currently two thirds (66%) of members have submitted an ESG disclosure, which represents 73% of our member companies’ assets. We expect these numbers to grow as more of our members publish their disclosures. If you’d like to find out more about ESG, please do visit our ESG education page. We have a new animated video ‘What is ESG?’ which explains the relevance of ESG to investment companies, an ESG Q&A and a jargon buster, as well as ESG-related content and articles.
"Currently two thirds (66%) of members have submitted an ESG disclosure, which represents 73% of our member companies’ assets."
Annabel Brodie-Smith, AIC
On a related topic, did you know that there are investment companies that seek to address homelessness, domestic abuse and social exclusion? To find out more about these watch this video where I ask the managers of Schroder BSC Social Impact Trust, Civitas Social Housing and Target Healthcare REIT what they enjoy most about their role. Their answers demonstrate the very real impact these companies can have on vulnerable people’s lives. These investment companies, known as impact investment companies, allow investors to target positive social or environmental outcomes as well as a financial return. Do read this release to learn more about the social impact investment companies.
Now it’s not long until the Olympics which starts at the end of the month in Tokyo but it’s understandably very unpopular in Japan. According to Taeko Setaishi, Investment Adviser to the Atlantis Japan Growth Fund, “The pandemic has trashed previous expectations. Lockdowns, quarantines, restrictions on the sale of alcohol in restaurants and bars have not made Tokyo a fun place to visit.” Read this piece to find out about Japanese investment company managers’ views on the impact of the Olympics, the positive corporate governance reforms and ESG.
This month our investment expert Ian Cowie weighs up the pros and cons of investing in investment companies versus individual shares. Ian has lots of experience of investing in both and has both in his ‘forever fund’. It’s a quarter of a century since Ian invested in his first investment company “ten-bagger” (a share whose price soared 10 times or more), Fleming Indian Investment Trust, now known as JPMorgan Indian. Lucky Ian! Mind you, I’m not far behind him as I started investing in investment companies 23 years ago. But I have no idea whether I have secured a ten-bagger or not – changing platforms doesn’t make it easy.
Finally, Jennifer Hill has seven great tips for investors whose star fund manager has left or is shortly leaving. Scottish Mortgage investors should sleep easy, noting Nick Wood at Quilter Cheviot’s thoughts: “What we look for is a trust with a clear succession plan, where we know exactly what will happen when the time comes for a star manager to move on and for another to step up to the plate.”
Compass is off on its summer holiday in August. Well there’s all that sport to watch. I can’t wait for my two week staycation at my new home, the barn. Of course, there are still boxes to unpack and lots to sort out, including most importantly, the office. I’m still working on the kitchen table…
I’d like to wish you all a lovely summer. Let’s hope the sun shines and we can all get out and about and enjoy ourselves.
Communications Director, AIC
Investing with a difference
The investment companies that invest for social impact as well as financial returns.
The managers of Schroder BSC Social Impact, Civitas Social Housing and Target Healthcare REIT discuss their strategies, the effect on society and the outlook and opportunities in this rapidly expanding area.
Investment companies making social impact investments now manage £3.9 billion of assets, according to Jura Capital and the Impact Investing Institute, having grown from zero ten years ago1. These companies allow investors to target positive social outcomes as well as a financial return.
Last month the AIC held a media webinar to explore investment companies investing with social impact strategies, their effects on society and the outlook and opportunities in this rapidly expanding area.
The webinar featured Jeremy Rogers, Portfolio Manager of Schroder BSC Social Impact Trust and CIO of Big Society Capital, Paul Bridge, CEO of Civitas Social Housing, and Kenneth MacKenzie, Investment Manager of Target Healthcare REIT. Their thoughts have been compiled below with those of Andrew Cowley, Managing Partner at Impact Health Partners LLP, the investment manager to Impact Healthcare REIT.
Annabel Brodie-Smith, Communications Director of the AIC, said: “Over their 150-year history investment companies have always adapted to meet investors’ needs and they continue to do so today. More and more investors want their investments to make a positive difference as well as a financial return and investment companies are perfectly placed to make this happen. The closed-ended structure allows investment companies to invest for the long term in a diverse range of assets, from homeless accommodation to social enterprises, which can have a real impact on people’s lives.”
Paul Bridge, CEO of Civitas Social Housing, said: “The strategy provides high-quality, long-term homes within local community settings for the most vulnerable people in society in order that they can receive appropriate care and support. The objective is to achieve better personal outcomes whilst offering savings for the public purse against the cost of more remote, institutional provision. Typically residents have a long-term significant care need such as a learning disability, mental health issue or autism. Alternatively they will require support as a result of being homeless, having suffered from domestic violence or coming out of hospital care and requiring support before returning home. The average age of our residents is presently 33 and the greatest area of demand is often young people coming out of children’s services and requiring long-term adult provision. At any time, there is much greater demand for appropriate adapted community housing than supply.”
Kenneth MacKenzie, Investment Manager of Target Healthcare REIT, said: “We love our mums and dads, and perhaps especially our grampas and grandmas. We want to have them well looked after and cared for, especially in old age, when frailty and dementia are prevalent. Great care homes do that really well.”
Jeremy Rogers, Portfolio Manager of Schroder BSC Social Impact Trust and CIO of Big Society Capital, said: “In the UK, an increasing number of impact-driven organisations are developing investable solutions to significant UK social challenges, but they can lack access to capital to scale. We invest in the more proven models and managers in private markets that can deliver high social impact alongside good risk-adjusted returns to investors, with low correlation to mainstream markets.
“We target investments benefiting more vulnerable and disadvantaged people, tackling issues such as homelessness, domestic abuse and children on the edge of care. We invest in three asset classes – high impact housing, debt for social enterprises and social outcomes contracts. In each area, our investments receive revenue primarily from government sources, which have historically been resilient through economic cycles. We look for areas where enterprises can generate significant savings for government and society, which can also provide additional revenue resilience.”
Andrew Cowley, Managing Partner at Impact Health Partners LLP, the investment manager to Impact Healthcare REIT, said: “Our portfolio provides crucial infrastructure supporting vulnerable elderly people across the UK. Our tenants use our assets to provide an essential care service, demand for which is not directly correlated with economic conditions. In the UK, we see sustainable growth in demand for elderly care in the main part due to a rapidly ageing population, constrained supply of beds not keeping up with this demand, and a highly fragmented market with demand for dementia care forecast to grow.”
Paul Bridge, CEO of Civitas Social Housing, said: “It is important that the provision of specialist accommodation is delivered in close collaboration with local authorities and families. This is to ensure that the accommodation is adapted appropriately, is well located within a community setting and the rent is fair against the nature of the specialist provision. We rigorously test all these issues prior to the acquisition of existing or financing of new developments and have rejected over £600m of transactions for some or all of these reasons. Demand risk is mitigated by delivering a quality offering that is attractive to both local authorities and families. From a macro perspective it is mitigated by the fact there is very significant
demand as a result of individuals wishing to live within their own communities, and by growth in many of the underlying conditions.”
Jeremy Rogers, Portfolio Manager of Schroder BSC Social Impact Trust and CIO of Big Society Capital, said: “Given the high weighting of government revenue, policy risk is an important factor for our investments. We focus on a number of factors that can help mitigate this. We target issues that can have a transformational impact on people’s life chances, which are a priority across the political spectrum and have historically had more stable funding sources.
“We aim for diversification across policy areas, so the portfolio is not overly exposed to any particular policy change. We look for investments that have contracted revenue and/or asset backing, which can provide an additional mitigant to policy change. Finally, and most importantly, as the government savings from our investments are often multiples of the cost, they have greater policy resilience in a constrained fiscal environment, as we have had for the last decade or so.”
Andrew Cowley, Managing Partner at Impact Health Partners LLP, the investment manager to Impact Healthcare REIT, said: “Our top priority is to help protect the wellbeing of the group's tenants, their residents and their healthcare professionals, as well as wider stakeholders, and to responsibly support and deliver value to them over the long term. During the early weeks of the outbreak, we focused on understanding the effects of the pandemic on our tenants' staff and residents, and shared areas of best practice performance amongst our tenant group. We listened to tenants' concerns on the availability of PPE and sourced a bulk order of PPE that was distributed among these tenants that needed the support. As the pandemic environment stabilised, we began discussing ways to support them with occupancy recovery plans, where required. A key theme was the benefit of thermal imaging cameras to help monitor the health of those entering the home. We agreed a funding and roll out programme across all of our homes.”
Benefits of the closed-ended structure
Jeremy Rogers, Portfolio Manager of Schroder BSC Social Impact Trust and CIO of Big Society Capital, said: “Big Society Capital has been investing in high impact opportunities in UK private markets since 2012 – we invest alongside institutions such as pension funds, insurance companies and endowments. Historically it has been more difficult for many investors to access these opportunities. We were really excited to launch the investment trust with Schroders in 2020 to enable broader access to high impact private market opportunities. The listed structure removes barriers for investors when investing in private market funds such as sporadic access, timing of fund openings, high investment sizes and liquidity challenges. In addition, Schroder BSC Social Impact Trust enables access to hard-to-reach high impact investment funds and opportunities. These include funds that are closed to new investors and co-investments only available through BSC’s broader portfolio relationships.”
Most exciting portfolio themes
Kenneth MacKenzie, Investment Manager of Target Healthcare REIT, said: “Modern, purpose-built real estate, with bedrooms all having en-suite wet room facilities, helps our seniors to live in a holistic, generous and loving retirement community, and their carers to have appropriate facilities. The complete anomaly of the sector is that only 27% of the beds have appropriate en-suite facilities.”
Jeremy Rogers, Portfolio Manager of Schroder BSC Social Impact Trust and CIO of Big Society Capital, said: “Across the areas we invest, the central theme is the ability to have significant and lasting social impact, alongside generating significant savings for government and sustainable returns for investors. We are looking for investments that bring together a number of complementary characteristics that drive value. An example of a recent investment is Positive Steps Partnership – this is a Dundee-based charity that been supporting drug users and ex-offenders for over 30 years. Dundee has the highest level of intravenous drug deaths in Europe, and Positive Steps has built significant experience and positive results in working with this group. Our investment is helping it to bring its provision of accommodation and expertise to a greater number of people in need – supported by statutory funding sources.”
Paul Bridge, CEO of Civitas Social Housing, said: “The theme we are most excited about is being able to not only provide quality homes for those most in need with a lower risk to investors, but also being able to produce an outstanding level of social impact. This is demonstrated through independently measured substantial savings to the taxpayer of over £60m a year, outstanding transformations in residents’ life experiences, again independently measured, and the ability to bring large scale institutional quality in terms of asset management, carbon reduction and management.”
1. Asset data correct at 31/05/21. The first social impact investment company was Target Healthcare REIT, launched in 2013. The other seven companies are Civitas Social Housing, Home REIT, Impact Healthcare REIT, PRS REIT, Residential Secure Income REIT, Schroder BSC Social Impact and Triple Point Social Housing REIT. Source: Jura Capital/Impact Investing Institute.
Eyes on Japan
How are COVID and corporate culture transforming opportunities?
In February the Nikkei 225 index reached its highest point in 30 years, buoyed by vaccine optimism and strong corporate earnings. On the eve of the Tokyo Olympics the AIC has spoken to managers from the Japan and Japanese Smaller Companies sectors about the impact of the Games, Japan’s changing corporate culture and where to find the best opportunities.
Impact of COVID on Japan: globalisation being questioned
Taeko Setaishi, Investment Adviser to the Atlantis Japan Growth Fund, said: “I believe that the impact of COVID-19 will prompt significant social and economic structural changes in Japan, creating numerous new investment opportunities. The benefits of supply-chain globalisation are being questioned. The lessons that Japanese management teams have learned from the global scramble for low tech medical supplies like PPE include the need to shorten distances within supply chains and to reduce dependence on hostile suppliers.
“The current shortage of semiconductors has reemphasised this issue, with automobile and other equipment assemblers scrambling to secure supplies of scarce semiconductors in order to avoid plant shutdowns. Japanese manufacturers have responded to the problems by reshoring production. Rather than producing in low-cost locations and selling globally, companies such as Canon, Casio and Honda are shifting to a ‘local production for local consumption’ model. These redesigned production and supply chains, with production partially returned to Japan, will require AI-based logistics systems and equipment investment.”
Thomas Patchett, Investment Specialist for Japanese Equities, Baillie Gifford Shin Nippon, said: “COVID has arguably helped to accelerate several trends that were already underway, including that of wider digital adoption. Lockdowns and social distancing caused even the most conservative businesses to capitulate to efficient online alternatives. This has opened up a plethora of possibilities, beyond the obvious areas of e-commerce and online payments. WealthNavi and Lifenet, for example, are democratizing access to wealth management and insurance by offering simple online solutions in industries otherwise dominated by people-heavy distribution channels.
“GA Technology is addressing the antiquated nature of Japan’s highly fragmented ¥40 trillion real estate market, by providing a one stop digital service for renting, buying and selling properties. Opportunities are even emerging for end-of-life service providers; Kamakura Shinsho brings transparency and simplicity to what is an otherwise extremely opaque, old-fashioned and notoriously expensive affair, by aggregating information online.”
Olympics offer few opportunities
Richard Aston, Fund Manager of CC Japan Income & Growth Trust, said: “From a stock market perspective, I doubt there is any meaningful impact either way. The investment for the facilities was, on the whole, completed well in advance of the original opening date in July 2020. However it is a missed opportunity for Japan to showcase its leading technologies and its attraction as a tourist destination. We hope that the World Expo in Osaka in 2025 will go ahead as planned.”
Taeko Setaishi, Investment Adviser to the Atlantis Japan Growth Fund, said: “When Japan was selected to host the 2020 Olympics the popular expectation was for the event to be a sporting festival that showed the world that Japan had recovered from the devastating 2011 earthquake. The initial Olympics-related business opportunities were in the construction and infrastructure sectors. However, profits from those projects have long since been booked, and in fact were lower than usual owing to soaring demand for materials and labour.
“Meanwhile, the pandemic has trashed previous expectations. Lockdowns, quarantines, restrictions on the sale of alcohol in restaurants and bars have not made Tokyo a fun place to visit. The Olympic Committee has limited viewing attendance to a maximum of 10,000 people per event, thus significantly reducing ticket sale revenues that were meant to defray costs. To make matters worse, the Olympics are deeply unpopular with the general population (an 80% disapproval rating), making it difficult for a company associated with the event to ‘cash in’. The most profitable remaining revenue opportunity is probably for TV broadcasters.”
Eiji Saito, Portfolio Manager of JPMorgan Japan Small Cap Growth & Income, said: “We expect little long-term direct impact from the Olympics, and have not changed our portfolio in response to the event. We look for companies with strong balance sheets and good duration, not those trying to play one-off events. Due to the pandemic, overseas visitors are not able to visit Japan so far this year, but in the longer term, we believe Japanese tourism has a large growth potential, which may provide a source of investment opportunities in future.”
Corporate governance reform is biggest cause for optimism
Joe Bauernfreund, Manager of AVI Japan Opportunity Trust, said: “The trend of improving corporate governance and focus on shareholder returns is continuing with force. A lot of attention is drawn to public activism, but that is just the tip of the iceberg with market participants underestimating the power of private engagement and companies' increasing openness to shareholder suggestions. We submitted seven shareholder proposals this year, but withdrew four after satisfactory shareholder-friendly improvements were made by management. While all eyes are on Japan for the Olympics, we think investors should be paying more attention to companies’ efforts to improve shareholder returns and whether the deep discount that many wonderful companies in Japan trade on relative to global peers is still justified.”
Eiji Saito, Portfolio Manager of JPMorgan Japan Small Cap Growth & Income, said: “We have seen improvements in corporate governance, and it increasingly looks structural in nature. We expect the Japanese equity market is likely to be supported by the combination of positive factors such as management’s increasing attention to shareholders’ returns, newly emerging innovative businesses led by younger generations and strong growth in neighbouring Asian countries.”
Paul ffolkes Davis, Chairman of Rising Sun Management, the investment adviser to Nippon Active Value Fund, said: “The recent run in the Nikkei, and Japanese securities generally, is welcome and is coming off a low base of underperformance for 30 years. An increasing recognition that, by international standards, the Japanese market is cheap, will not detract from its attraction in the short term. We have a long way to go before any aspect of the Japanese market is fully valued. Apart from the positive fundamentals of many undervalued world class businesses, the Japanese government's own large positions in the domestic stock market and its relentless focus on corporate governance reform (a continuing drive since 2014) mean that the excitement about potential investment returns is only just beginning.”
Richard Aston, Fund Manager of CC Japan Income & Growth Trust, said: “Dividends distributed by companies in Japan have demonstrated a greater resilience during the pandemic disruptions than many of their international peers. These trends are a consequence of the initiatives promoted in the Stewardship Code and Corporate Governance Code which were first introduced in 2014 and 2015 respectively and continue to influence management behaviour in a favourable manner.”
Taeko Setaishi, Investment Adviser to the Atlantis Japan Growth Fund, said: “International and domestic institutional investors alike are expected to respond positively to Japan’s continuing corporate governance reforms. New measures under active consideration include the mandatory appointment of external, independent directors on the boards of Japanese companies.”
Monetary policy and new infection waves present biggest risks
Richard Aston, Fund Manager of CC Japan Income & Growth Trust, said: “The Bank of Japan ETF buying programme has provided support to the market and resulted in a significant exposure to the market. Cautious management of this position will be necessary to prevent market disruption.”
Taeko Setaishi, Investment Adviser to the Atlantis Japan Growth Fund, said: “Setting north-east Asian geopolitics to one side, the major potential risk for Japan over the medium term would be for the country to be swept up in another wave of the COVID-19 pandemic or a more serious variant. This would send the country back into quarantines and lockdowns and delay the recovery in economic and corporate-profit growth. A second, realistic risk for Japan is a fall off a fiscal cliff later this year in response to overly aggressive fiscal and monetary stimulus. This would bring the economic recovery to a halt.”
Eiji Saito, Portfolio Manager of JPMorgan Japan Small Cap Growth & Income, said: “We will continue to treasure hunt for future growth stocks: we have been actively conducting research on companies which have potential to achieve multiple years of growth in sectors such as IT, chemicals, materials and construction. These are likely to benefit from long-term structural trends such as digitalisation and decarbonisation.”
Nicholas Price, Portfolio Manager of Fidelity Japan Trust, said: “Globally, the uncertainty wrought by COVID-19 has shone a light on sustainability – and Japan is no exception. Although Japanese companies generally have lower sustainability scores than their European counterparts, we believe this is not due to any fundamental differences in strategy, but more to do with cultural reasons around disclosure practices and language. By working closely with our sustainable investing team on the ground in Japan, we are able to identify laggard companies that are implementing real change and moving up the governance scale. As these companies improve disclosure, ESG ratings should catch up and the market should adjust valuations accordingly. For investors, this creates an opportunity to benefit from the correction.
“A number of themes present themselves. Certainly, clean energy and environmental efficiency are areas where Japan has some very competitive companies that can supply solutions to meet the regulatory and productivity needs of customers globally. COVID-19 has also accelerated trends in e-commerce and digitalisation. As profits recover, companies will prioritise those areas.”
Why it pays to be active in Japan
Eiji Saito, Portfolio Manager of JPMorgan Japan Small Cap Growth & Income, said: “We are optimistic about the Japanese equity market because the case for active investment in Japan is compelling. Japan is a significantly under-researched market: of over 2,000 companies in the TOPIX, well over 50% are covered by no more than one sell-side analyst. The equivalent number for the US and Europe is around 5%. This leads to pricing inefficiencies which can be discovered by well-resourced and experienced investment teams based on the ground in Japan.”
Thomas Patchett, Investment Specialist for Japanese Equities, Baillie Gifford Shin Nippon, said: “Although Japanese equity markets have only just reached levels last seen 30 years ago, US equities have increased several-fold over the same period. This is despite the fact that Japanese companies have undergone significant improvements and the opportunity set has clearly improved. Furthermore, of almost four thousand stocks listed in Japan, we invest in less than 80. Our portfolio is a high-conviction collection of companies that offer the most exciting growth potential over the long term, and is not a reflection of the Japanese market, or the indices used to assess it.”
Nicholas Price, Portfolio Manager of Fidelity Japan Trust, said: “Japan continues to offer a wealth of under-researched mid to small cap growth companies, where we typically find better business models and returns on equity, and management is more incentivised in terms of shareholder returns. Active managers such as myself, based here in Japan, have the opportunity not only to invest in established global leaders, but also to unearth less well-known companies (including pre-IPO), where lower levels of analyst coverage can often create some great mispriced opportunities.”
An easy choice
Investment companies versus single stocks – Ian Cowie gives his verdict.
Why bother with investment companies when you could just buy shares in individual businesses directly? That question is topical at a time when many newcomers to the stock market are trying to run before they can walk, with day trading all the rage online.
Sad to say, more than a decade since share prices began to trend upward after the global financial crisis, some folk may be over-estimating the rewards and under-estimating the risks of investment. Robinhood, an online American broker, is planning its own initial public offering (IPO) or flotation, despite rising concerns about the “gamification” of investment. The Financial Industry Regulatory Authority recently imposed a record $70m fine on Robinhood for causing “widespread and significant harm” to its clients.
On a brighter note, it’s a quarter of a century since I began to buy shares in investment companies - one of which went on to become my first ‘ten-bagger’ or share whose price soared 10 times or more. So I know from personal experience how investment companies can deliver substantial returns.
However, the flip side of return is risk - or the danger that prices may fall and we might get back less than we put into the stock market. This is an area where investment companies offer important advantages over shares in individual businesses. Investment companies diminish risk by diversification or spreading our money over dozens of different assets to reduce our exposure to setbacks or failure at any one of them.
The principle is the same as not having too many eggs in one basket. If that sounds obvious, then consider how often otherwise successful folk featured in The Sunday Times ‘Fame and Fortune’ interview admit to investing too much in too few individual businesses before they suffered substantial losses and resolved to avoid shares altogether.
More positively, investment companies also enable individual investors to gain access to assets trading in markets that may be far away. For example, that ‘ten-bagger’ I mentioned earlier was called Fleming Indian Investment Trust when I invested at 63p per share in June, 1996.
I freely confess that I knew next to nothing about individual Indian businesses back then and know precious little now. But this small DIY investor was optimistic about the opportunity to participate in the economic development of the world’s largest democracy.
Despite all the recent dismal news about the coronavirus and other difficulties, I remain optimistic - not least because the investment company now known as JPMorgan Indian (stock market ticker: JII) is currently trading at 752p. Similarly, other long-term holdings in Baillie Gifford Shin Nippon (BGS), the Japanese smaller companies specialist; BlackRock Latin American (BRLA); and Jupiter Emerging & Frontiers Income (JEFI) - to name three other investment companies in which I am a happy shareholder - provide professionally-managed exposure to markets which trade while I am asleep.
Closer to home, investment companies can also give individual investors a way into specialist sectors which we expect to generate income and/or growth but where it is impractical to select specific shares or businesses. For example, shopping online is rapidly replacing bricks and mortar retail but all those goods bought on the internet need to be stored somewhere before they are delivered to our doors.
Only the largest investor can obtain direct ownership of a warehouse but Aberdeen Standard European Logistics Income (ASLI) is just one of several investment companies that manage a portfolio of such properties. Since I invested at the initial public offering (IPO) less than four years ago, the shares have delivered double-digit capital gains and currently yield dividend income of 4.2 per cent.
Meanwhile, Polar Capital Technology (PCT) and Worldwide Healthcare Trust (WWH) are both among my top 10 holdings by value after I invested more than a decade ago. Despite my cerebral software dating back to the 1950s and lacking any medical qualifications, both these investment companies enable me to benefit from professional stock selection of technology turning science fiction into fact plus life-changing healthcare innovations, such as the coronavirus vaccines.
What all that has boiled down to over the last decade is total returns of 567 per cent from PCT and 475 per cent from WWH, according to independent statisticians at Morningstar. While the latter’s share price is only marginally lower than its net asset value (NAV), the former’s shares are trading 7.8 per cent below their NAV.
Discounts can widen as well as narrow, so there is no guarantee they offer good value, but such apparent potential bargains are another aspect of investment companies that I find attractive. While I have gone on to invest directly in individual businesses’ shares over the years, I continue to value characteristics only investment companies can provide.
I don’t regard these two routes into the stock market as being competitive, so much as complementary. That’s why both comprise my ‘forever fund’ or life savings and allow me to balance the risks and rewards of investment.
Written in the stars?
Seven tips from Jennifer Hill for when a star manager departs.
Having a ‘star’ fund manager with a strong track record in your portfolio can give a sense of great comfort. The flipside is a feeling of uneasiness upon news of their departure.
The departure in April 2022 of James Anderson, co-manager of the mighty Scottish Mortgage, Britain’s largest investment trust with assets of more than £20 billion, is a high-profile case in point.
So how worried should investors be when a star manager leaves?
1. Avoid knee-jerk reactions
Firstly, never panic, particularly in the investment companies sector, which has unique features that safeguard investors’ interests.
The closed-ended structure means there cannot be a run on the fund that would leave investors exposed. “Redemptions are not a factor – this point can’t be overstated,” says James Sullivan, head of partnerships at Tyndall Investment Management.
Moreover, although investment companies can swing to discounts when a star manager moves on, this may create a buying opportunity (more on this later).
The existence of independent boards is another key benefit. “These ensure the transition to the new manager is right for investors, not just for the appointed investment manager,” adds Sullivan.
2. Understand the investment process
The digital revolution has given professional investors access to a wealth of information, diminishing the importance of a single star stockpicker and putting the emphasis on the robustness of the investment process.
“The fear of a star fund manager departing mattered a lot more when access to market information was gleaned off ticker tape and not Bloomberg,” says James Penny, UK chief investment officer at TAM Asset Management.
"The fear of a star fund manager departing mattered a lot more when access to market information was gleaned off ticker tape and not Bloomberg."
James Penny, TAM Asset Management
“On the whole, in developed markets, the strength and depth of a fund’s team speaks volumes about its ability to deliver consistency. My mentor in the City always told me, ‘when you shoot the lights out, everyone’s in the dark’. In an age where performance consistency is a valuable commodity, that adage rings true in regard to the importance of star fund managers versus strength in process.”
3. See strength in experience
Investors are most at ease when the new lead manager has worked on the trust for some time in a deputy role. James Carthew, head of investment company research at QuotedData, says the “perfect recent example” of this is Roderick Snell taking over from Ewan Markson-Brown at Pacific Horizon, another Baillie Gifford trust, following the latter’s departure for Crux Asset Management.
In the case of Scottish Mortgage, Anderson hands over to co-manager Tom Slater, who again has a longstanding role in running the trust.
“What is key is having a good understanding of the wider investment team and knowing who is responsible for what,” says Nick Wood, head of fund research at Quilter Cheviot. “What we look for is a trust with a clear succession plan, where we know exactly what will happen when the time comes for a star manager to move on and for another to step up to the plate.”
4. Consider style headwinds
If your manager has been replaced due to poor performance, is this down to a lack of manager skill or has their style been out of favour?
Temple Bar lost its long-standing manager Alastair Mundy last year owing to ill health, following a long period of underperformance for his value style, and management of the trust moved from Ninety One (previously Investec) to RWC.
“We have added Temple Bar in one portfolio and like the stocks owned so far, but these are early days,” says IpsoFacto Investor director David Liddell.
5. Watch out for warning signs
Style drift is one warning sign that a new manager may be taking a different direction. “A value manager who starts to buy into momentum would be a classic warning sign,” says Kamal Warraich, an investment analyst at Canaccord Genuity Wealth Management.
“A more subtle warning sign is staff turnover – a key departure sometimes kickstarts a run of departures. Keep an eye on fund flows too, which in extreme cases can force a fund’s profile to change.”
6. Take solace in history
Many investment trusts have become synonymous with a single manager, but have often prospered under a new name.
“Fidelity China Special Situations was launched on the back of Anthony Bolton’s reputation, but Dale Nicholls has so far proved to be the better manager of Chinese stocks,” says Carthew. Similarly, “Brian Ashford-Russell took Henderson Technology Trust to Polar Capital and helped launch that business, but Polar Capital Technology has thrived under his successor, Ben Rogoff.”
7. Seize buying opportunities
Discount widening can create the opportunity to capitalise on the departure of a star manager.
“Increasing your investment in an investment trust because you know the fund has long relied on depth of process and a focus on teamwork, as opposed to a lone manager buying and selling at will, could mean significant alpha generation when the rest of the market realises the fund is absolutely fine without that one precious manager,” adds Penny.