Spotlight - February 2020
Managers explain why they’re followers of fashion, we hear about small investments that can make a big impact, and Ian Cowie assesses prospects for Asia.
They say you can’t choose your family. You have even less choice about when they get the flu. Over the past fortnight, all three of my kids have been ill, my wife’s ill, now I’m ill, and pretty much everyone we might have relied on to help has got it as well.
But though a dose of seasonal flu is deeply inconvenient, not to mention unpleasant, I hesitate to complain when the new coronavirus has locked down a whole city, disrupted millions of people’s lives, and already caused over 400 deaths. Ian Cowie’s thoughts this month turn to the impact of the coronavirus on investors.
Life must go on, and one area of our industry that is at its liveliest at this time of year is venture capital trusts (VCTs). VCT managers – always busy people at the best of times – are currently in fundraising mode, zipping up and down the country as they pitch their offerings to advisers. We’ve caught up with some of them about the influence of Brexit on their portfolio companies, where they’re seeing opportunities, and the outlook for the sector, while John Davies of Seneca Growth Capital VCT offers an insight into his investment process.
Meanwhile, fashionistas are dusting off their best frocks and fedoras and preparing to venture out of hibernation for London Fashion Week. What would you know about any of that, I hear you ask? Precious little, I’d admit. But I do know that it’s big business. We’ve collated the views of Nick Train of Finsbury Growth & Income, Catharine Flood of Scottish Mortgage and others on the enduring power of some of fashion’s biggest brands. Lovers of Burberry, Gucci, Louis Vuitton, Next, Moncler and Zara take note.
Finally, we are getting ready for our spring workshop tour, where we will visit 15 locations around the country. A full list of locations and dates is on the next page, and although our booking form is not yet live, you can pre-register by emailing us stating which workshop you wish to attend.
Nick Britton, Head of Intermediary Communications, AIC
Upcoming events around the UK
Investment trust workshops
Providing a comprehensive introduction to investment trusts in a friendly and practical way, the AIC’s two-hour workshops have been very highly rated by previous attendees. We are visiting 15 locations around the UK and you can pre-register by emailing us stating which workshop you wish to attend.
Wednesday 22 April 2020, 14:00-16:15 – Brighton (Hilton Brighton Metropole, Kings Road, Brighton BN1 2FU)
Thursday 23 April 2020, 14:00-16:15 – Tunbridge Wells (The Spa Hotel, Mount Ephraim, Tunbridge Wells, Kent TN4 8XJ)
Wednesday 29 April 2020, 9:45-12:00 – Chelmsford (The Ivy Hill Hotel, Writtle Road, Margaretting, Chelmsford, Essex CM4 0EH)
Thursday 30 April 2020, 9:15-11:30 – London (The AIC Offices, 9th Floor, 24 Chiswell Street, London EC1Y 4YY)
Tuesday 5 May 2020, 14:00-16:15 – Salisbury (Holiday Inn Salisbury-Stonehenge, Mid-Summer Place, Amesbury, Solstice Park SP4 7SQ)
Wednesday 6 May 2020, 9:45-12:00 – Southampton (Meon Valley Hotel Golf & Country Club, Sandy Lane, Shedfield, Southampton SO32 2HQ)
Thursday 7 May 2020, 14:00-16:15 – London (The AIC Offices, 9th Floor, 24 Chiswell Street, London EC1Y 4YY)
Thursday 14 May 2020, 14:00-16:15 – Cambridge (Hotel Felix, Whitehouse Lane, Huntingdon Road, Girton, Cambridge CV3 0LX)
Tuesday 19 May 2020, 14:00-16:15 – Knutsford (The Cottons Hotel & Spa, Manchester Road, Knutsford WA16 0SU)
Wednesday 20 May 2020, 9:00-11:15 – York (Principal Hotel York, Station Road, York YO24 1AA)
Wednesday 20 May 2020, 14:00-16:15 – Sheffield (Copthorne Hotel Sheffield, Bramall Lane, Sheffield S2 4SU)
Thursday 21 May 2020, 9:45-12:00 – Leicester (Leicester Marriott Hotel, Grove Park, Smith Way, Enderby, Leicester LE19 1SW)
Tuesday 2 June 2020, 14:00-16:15 – Exeter (Mercure Exeter Rougemont Hotel, Queen Street, Exeter EX4 3SP)
Wednesday 3 June 2020, 9:00-11:15 – Bristol (Aztec Hotel & Spa, Aztec West, Almondsbury, Bristol BS32 4TS)
Wednesday 3 June 2020, 14:15-16:30 – Cardiff (Clayton Hotel Cardiff, St Mary Street, Cardiff CF10 1GD)
Thursday 4 June 2020, 9:45-12:00 – Tewkesbury (Hilton Puckrup Hall, Puckrup Lane, Tewkesbury GL20 6EL)
Not just a fad
Investment company managers who are right on trend.
As catwalks are constructed and outfits chosen, the capital is preparing to celebrate London Fashion Week. From 14 February global fashion brands will showcase over 250 designers and generate orders worth an estimated £100m.
Many of the world’s most iconic brands are fashion brands, and with increasing numbers of wealthy customers in key emerging markets, the long-term prospects for the industry look bright despite current concerns about the coronavirus. How are investment companies approaching this theme and what does a fashion brand add to a portfolio? Ahead of London Fashion Week, the AIC has spoken to investment company managers about their holdings in Burberry, Gucci, Louis Vuitton, Next, Moncler and Zara.
Annabel Brodie-Smith, Communications Director of the AIC, said: “Fashion is a subject close to my heart. Currently, the impact of the coronavirus is very concerning, but emerging markets worldwide present a long-term opportunity. Fashion brands often enjoy remarkable pricing power and customer loyalty. Admittedly, fashions come and go, and what is in vogue today can quickly become old hat. But investment companies, which have stood the test of time for over 150 years, are a good way to back these innovative fashion businesses for the long term.”
Nick Train, Portfolio Manager of Finsbury Growth & Income, said: “According to Interbrand’s 2019 survey of the 100 most valuable brands in the world, there are nine luxury fashion brands that make it into that top 100. Burberry is one of them – rated less valuable than Vuitton and Hermes, for instance – but still in that iconic cohort. Meanwhile, there are only five UK brands of any description in Interbrand’s 2019 top 100 – HSBC, Land Rover, Mini, Burberry and Shell.
“It appears, therefore, that Burberry is not only rare from a global point of view, it is extremely rare in the context of the UK economy and stock market. It is, for instance, the only luxury fashion brand in the FTSE 100. Now, being rare is not enough to make any company a great investment, but it’s a useful start. Of course, a Gucci or a Prada are competitors to Burberry, but neither they, nor any other luxury company, has the same heritage as Burberry. And by definition, none of them can claim the same ‘style anglais’ – because Burberry is the only one that can represent that type of Britishness. It’s a style beloved of Asians – meaning that Burberry offers a wonderful participation in the growing wealth of that region over decades to come.
“Some investors worry that Burberry’s business is volatile, because of its luxury and fashion character and it is true that its sales and profits are not as predictable as, say, a toothpaste manufacturer. But it is important to take a longer-term perspective. Since Burberry listed as a public company back in 2002 its shares have risen more than tenfold, despite the ups and downs. We think its best years are still ahead and the shares become a buy on periodic scares about China.”
Kering – owner of Gucci & Yves Saint Laurent
Catharine Flood, Corporate Strategy Director for Scottish Mortgage, said: “Within the luxury brand end of the spectrum, Kering owns a fine collection of globally recognised houses, including Gucci, Balenciaga and Yves Saint Laurent. Yet perhaps more impressive is the group’s leaders’ willingness to embrace the power of creative destruction for long-term growth and development. Kering’s Chairman and CEO, François-Henri Pinault, has long believed that ‘luxury and sustainability are one and the same’ and the adoption and development of new synthetic materials by the group, despite its deep heritage in natural luxury materials such as leather, demonstrates its willingness to innovate as the world changes.
“While many companies try to identify the threats to their existing businesses, far fewer have a culture which enables them to respond to those challenges. The ability to adapt is crucial to ensuring a company’s longevity and value creation. This is why we look for precisely such traits within the companies Scottish Mortgage holds as we seek to own the small group of extraordinary growth companies which drive long-term equity returns.”
LVMH – owner of Louis Vuitton & Christian Dior
Sam Morse, Portfolio Manager of Fidelity European Values, said: “LVMH is the number one luxury goods company in the world. It has an unrivalled portfolio of brands across fashion and leather goods, for example Louis Vuitton and Christian Dior; wines and spirits such as Hennessy and Moët & Chandon; perfumes and cosmetics like Givenchy; and watches and jewellery such as TAG Heuer and Bulgari. It has consistently delivered good cash flow return on investment coupled with strong growth, and it remains extremely well placed to benefit from the ongoing growth in luxury goods driven by emerging middle classes, particularly in China. Its brand equity, scale and diversification also makes it relatively defensive within its peer group if demand slows.”
Zehrid Osmani, Manager of Martin Currie Global Portfolio Trust, discusses why he holds consumer luxury brand Moncler.
Zehrid Osmani, Portfolio Manager of Martin Currie Global Portfolio, said: “Moncler is a global leader in super premium down jackets with a rich heritage and tradition. We believe that the structural growth potential of the company is compelling, and its ability to innovate is strong. The market, however, seems overly focused on short-term concerns around the slowdown in China and is overlooking the long-term growth opportunity.
“The management has an exemplary track record and is clearly executing its business plan. For example, the CEO and Creative Director are ensuring that the brand remains fresh and that innovation is driving exciting new product ranges which is helping to deliver strong top-line growth. Crucially, Moncler is very protective of their brand and clever management of inventory levels is ensuring that margins remain high.
“Given Moncler’s greenfield growth opportunities and strong creative content, we believe it could achieve a low teens top-line growth, with returns remaining high given the prudent approach to inventories by the management team. We forecast a return on invested capital of around 48% rising to around 58% over our five-year forecast for this company.”
James Goldstone, Manager of Keystone, said: “Once upon a time Next was a store-based retailer that had launched a successful catalogue. Before the internet existed, catalogues were the closest thing to internet retailing and this heritage has enabled the company to evolve into a leading digital multi-brand retail platform and logistics business, combining online and store-based retailing. This is the model for the retailer of the future.
“But the innovation within Next goes beyond logistics – Next is using its digital platform and social media to advertise its products to consumers reaching all age groups. Not only does the company sell its own Next and Lipsy brands but it achieves the same margin selling over 1,000 third-party labels like Armani, Hobbs, Levis and Hugo Boss.
“The shape of the business is markedly different to just four years ago: 51% of sales are now online compared with 39% in 2015. In the 2019 half-year results, 80% of online clothing sales were Next brand, growing at 4% a year, and non-Next brand accounted for 20% growing at 26% per year, a significant transformation by any measure.”
Inditex – owner of Zara & Massimo Dutti
Catharine Flood, Corporate Strategy Director for Scottish Mortgage, said: “Created in 1985 Inditex, owner of Zara, uses an innovative supply chain model to allow it to respond to its customers’ demands in a timely fashion. This contrasts with many of its traditional high street competitors’ more inefficient approach of convincing consumers to buy what they have already produced for a given season. Not only have Inditex’s brands expanded geographically over the years, the group has also embraced the potential e-commerce challenge to its own business. Inditex has developed online stores for its brands as well as selling a selection of their brands through Europe’s largest digital fashion platform, Zalando.”
How VCT investment is making a big impact on post-Brexit Britain.
Brexit has taken place, but there remains much uncertainty about the UK’s future relationship with the EU and how that will affect trade. What impact is Brexit having on the UK’s dynamic smaller companies? Where are managers finding investment opportunities today? What are the economic and environmental benefits of investing in small but ambitious companies?
At a media roundtable held by the AIC, Will Fraser-Allen, Manager of the Albion VCTs, Dr Paul Jourdan, Co-Manager of Amati AIM VCT and Charlie Winward, Manager of the Northern VCTs, discussed their recent investment activity, the effect of Brexit on smaller companies and their overall outlook for the sector.
Their views have been collated alongside comments from Trevor Hope, Head of Growth Investments at Mobeus Equity Partners, Managers of the Mobeus Income & Growth VCT and Rodney Appiah, Director at Foresight Group, Manager of the Foresight VCTs.
Annabel Brodie-Smith, Communications Director of the AIC, said: “This year marks the 25th birthday of VCTs. Since then-Chancellor Kenneth Clarke launched them in 1995, VCTs have channelled vital investment into the UK’s small companies.
“As the UK departs Europe and embarks on a new course, there has arguably never been a more important time for investment in our most ambitious businesses. Since their inception, VCTs have created more than 27,000 jobs and driven over £1.4 billion of exports. Venture capital investing also can have positive social and environmental impacts, making VCTs an interesting prospect for the increasing number of investors who are looking for returns on their money beyond the financial.”
What will Brexit’s influence be on smaller UK companies?
Will Fraser-Allen, Manager of the Albion VCTs, said: “Unsurprisingly the smaller unquoted companies most impacted by Brexit will be those selling to EU customers and those relying on an EU workforce living in the UK. The software businesses within the Albion VCTs’ portfolios tend to sell globally, with the US being the largest target market. It is reduced access to European software developers that poses the greater challenge, as well as the risk of a broader economic slowdown.”
Dr Paul Jourdan, Co-Manager of Amati AIM VCT, said: “Brexit will bring ongoing uncertainties into the business environment for at least another year, and more likely two to three, whilst a new trade deal with Europe is worked out and then implemented. Of greater importance to small unquoted companies will be the quality of government decision making in general and the emphasis that is put on continuing to cultivate an environment supportive of young and innovative businesses.”
Trevor Hope, Partner of Mobeus Equity Partners, Managers of Mobeus Income & Growth VCT, said: “Successful smaller unquoted companies are by their nature and necessity fleet of foot and are used to reacting to factors outside their control. However, saying that, there are more than 5 million SMEs in the UK, many of which are reliant upon importing services and material as part of their offering, exporting their goods and services and/or requiring the ability to employ non-UK nationals. All of these areas now have a level of uncertainty. Ultimately Brexit may create greater opportunities but in the short term this uncertainty will make an already difficult job that much harder.”
“As the UK departs Europe and embarks on a new course, there has arguably never been a more important time for investment in our most ambitious businesses."
Annabel Brodie-Smith, AIC
Where are you finding opportunities?
Dr Paul Jourdan, Co-Manager of Amati AIM VCT, said: “We're excited about stocks in two sectors in particular: video games and healthcare.
“The video games market continues to grow steadily relative to other leisure areas as the graphic and design possibilities continue to improve. The demand for content shows no sign of abating particularly as Apple and Google enter the market. We think this is a trend set to continue. Amati AIM VCT's exposure is through Frontier Developments, one of the UK's leading video game studios based in Cambridge, and Keywords Studios, which provides a wide range of services to video games developers worldwide.
“The healthcare sector is seeing an extraordinary array of technologies which have been developed over the last 20 years reach commercial stages, which has created a rich seam of innovation. The VCT has a good deal of exposure to this theme through recent investments in companies such as Angle, which is commercialising Parsortix, a device which harvests circulating tumour cells from the blood, creating opportunities for early cancer diagnosis.”
Trevor Hope, Partner of Mobeus Equity Partners, Managers of Mobeus Income & Growth VCT, said: “We are excited by the roll out of 5G – not only the significant improvement in person-to-person communication but also machine-to-machine communications. Access IS is a Mobeus VCT portfolio company which provides data capture technology for transportation and ticketing, with over 200 airports around the world currently using their technology. Access IS are working on innovative solutions for smart cities which will be supported by 5G technologies.”
Rodney Appiah, Director of Foresight Group, Manager of the Foresight VCTs, said: “There are a number of sector themes evident in our portfolio, namely e-commerce, B2B enterprise software and healthcare services. Since Foresight Private Equity’s inception in 1985, investing in tech-enabled businesses has been at the heart of what we do and this continues to be the case today. The impact of technology in driving disruption, accelerating innovation, increasing business productivity and supporting the rapid scaling of UK businesses provides a fertile ground for successful VCT investing and hence guides our sector focus.”
Will Fraser-Allen, Manager of the Albion VCTs, said: “Albion’s focus is on B2B software, healthcare and tech-enabled businesses in the UK. Current themes include Digital Risk Management, where we recently invested in Elliptic, a leading provider of anti-money laundering compliance and forensic investigative services in cryptocurrencies; and Machine Learning and Automation, where recent investment Speechmatics is leading the way in speech recognition and transcription technology.”
What are the economic, social and environmental benefits of VCT investing?
Rodney Appiah, Director of Foresight Group, Manager of the Foresight VCTs, said: “At Foresight, we believe that the incorporation of ESG principles into our investment approach will not only generate attractive economic returns, but also broader long-term benefits for the regional communities in which our investee companies operate. We formally integrate ESG principles into our investment decision-making and investment management practices.
“We believe that VCT funding can be a great enabler for companies to improve their internal processes and create a better workplace for employees whilst also creating new job opportunities within their communities. One of our portfolio companies, Mowgli, a chain of Indian street food restaurants, has nearly tripled its number of employees since investment from 120 to over 300 with the opening of new sites supported by our investment.”
Will Fraser-Allen – Albion VCTs, Dr Paul Jourdan – Amati AIM VCT and Charlie Winward – The Northern VCTs explain the economic, environmental and social benefits of VCT investing.
Dr Paul Jourdan, Co-Manager of Amati Aim VCT, said: “AIM VCTs support companies at the initial stages of a flotation on AIM. Over the last decade AIM has become one of the most successful junior stock markets in the world, and much of this success can be traced back to companies which floated with the support of VCT investors. Some of these, such as Frontier Developments, which we invested in 6 years ago, now employ in excess of 500 staff in the UK.
“Because VCT-supported companies are often deploying new technology, it is inevitable that some of our investments will involve technologies which are aimed at tackling climate change and this is an area in which we are keen to support promising businesses.
"Last year we invested in Velocys, which has developed the technology to adapt the Fischer Tropz gas-to-liquids process to enable the production of jet fuel from waste products. Planning permission for the first full-scale commercial plant is being sought currently at Immingham in the UK, in partnership with Shell and British Airways' parent company, IAG.”
Trevor Hope, Partner of Mobeus Equity Partners, Managers of Mobeus Income & Growth VCT, said: “From an economic perspective, by investing in smaller and younger companies which might otherwise struggle to raise capital, VCTs are supporting their growth which provides a positive impact for the UK including increasing employment, knock-on economic activity and greater tax take.
“MPB, a Mobeus VCT portfolio company which provides a digital platform to facilitate the trading of used photo and camera equipment, has grown its number of employees from 20 to 120 post the Mobeus initial investment in 2016. MPB is also a great example of a ‘recommerce’ business as it is encouraging and facilitating the use of second-hand equipment rather than the production of new cameras and therefore is having a positive environmental impact.”
Rodney Appiah, Director of Foresight Group, Manager of the Foresight VCTs, said: “Foresight understands the importance and value in backing a diverse range of entrepreneurs and we are proud of our track record in this area. At present, of the 1,800 opportunities our team reviews every year, fewer than 5% are founded or led by women, yet around 15% of our portfolio companies have female founders.
“From an environmental perspective, Foresight’s approach incorporates a tried and tested framework to improve the environmental footprint of the businesses we back. This can be achieved through established and adopting environmental policies, improved recycling and resource management, supporting responsible suppliers and helping to identify sustainable operating practices.”
Outlook for the sector
Will Fraser-Allen, Manager of the Albion VCTs, said: “VCTs have recently celebrated their 25th birthday and reflecting over those years the industry can be proud. VCT money has created thousands of successful companies and more than 27,000 jobs, adding millions to the UK economy. Over the next 25 years, VCTs will be critical to fostering even more business opportunity and success that can, despite Brexit, create growth and jobs for the smaller companies in the UK technology sector that are the future of our economy.”
Trevor Hope, Partner of Mobeus Equity Partners, Managers of Mobeus Income & Growth VCT, said: “My outlook for the VCT sector remains generally positive. As a model for encouraging investment by individuals into what must be considered a relatively higher-risk financial product, it continues to attract strong levels of capital. VCTs are delivering on their remit of investing that capital into younger companies that might struggle to raise risk capital elsewhere. If VCT managers can continue to show positive returns to shareholders whilst also supporting the development of the UK’s future industry leaders then I believe the industry will be in a good place.”
Rodney Appiah, Director Foresight Group, Manager of the Foresight VCTs, said: “The UK remains an excellent place to start, scale and sell a business, with broad pools of talent and an entrepreneurial culture. As a regional investor, we know that entrepreneurial ambition is not confined to London & the South East. We believe the VCT funding environment, supported by fund managers like Foresight, plays a key role in supporting investment activity across the UK. Notwithstanding Brexit, our outlook for the VCT market remains positive.”
Seneca’s John Davies on the strategy behind Seneca Growth Capital VCT.
Since we launched our VCT offering in August 2018, we haven’t been hanging around. We’ve raised more than £6 million, made five investments and paid dividends in 2019 totalling 3.0p.
Seneca Partners, the managers of Seneca Growth Capital VCT, have extensive experience in growth capital. We have raised and deployed more than £60 million of EIS and VCT growth capital funds into 45 SME companies across 85 funding rounds since we undertook our first EIS growth capital investment in 2012.
One of our differentiating features is our base in the North West. As a result of this, we enjoy strong regional deal flow, particularly in the North of England, which means we get to see some deals that other investors don’t see. This can be useful, especially at a time when many VCT investors are seeking to increase the diversification of their VCT investment portfolio.
Another unusual feature is that Seneca’s growth capital team invests across both unquoted and AIM-quoted companies. We intend that our VCT will also invest in both markets (most VCTs specialise in one or the other). Being able to access AIM deal flow provides another source of opportunities and allows us the flexibility to invest wherever we see the best opportunities.
Our VCT is focused on providing growth capital to well-managed businesses with strong leadership teams that can demonstrate established and proven concepts in addition to growth potential. All five of the investments made by Seneca’s VCT since launch have been co-investments alongside EIS funds we also manage. We believe this allows the VCT to participate in a higher number of investments of a larger scale into more established businesses than would have been possible on a standalone basis.
Investors choosing to invest with Seneca this year will, of course, get exposure to the existing five investments that have already been made in addition to the new investments that Seneca’s VCT will make this year. The five existing investments made by Seneca’s VCT include one AIM-quoted company and four private companies and in our view all have exciting futures:
- SilkFred is a fast-growing online marketplace for independent ladies’ fashion brands. The business was founded in 2011 with the aim of creating an efficient marketplace for emerging fashion designers to bring products to market and establish their brand in the sector. The business now works with about 600 independent brands, selling to over 500,000 customers.
- Fabacus Holdings is an independent software company that has developed a technology solution aimed at bringing transparency to supply chain networks, with an initial focus on resolving the interaction and information flow between global licensors and their licensees.
- Old St Labs is a provider of cloud-based, supplier collaboration tools for large, blue-chip customers, enabling them to manage key supplier relationships and strategic project work. The core product, Vizibl, seeks to make supplier collaboration much more straightforward, with a key focus on compliance, cost savings, increasing efficiency and driving growth across their clients.
- Qudini is a B2B software company that provides a software solution for appointment bookings, queue management, event management and task management in the retail sector – enabling businesses to improve shop floor operations by managing staff activity, breaks and performance, and by assigning tasks at store or head office level.
- SkinBioTherapeutics is an AIM-quoted life science company focused on skin health. SkinBioTherapeutics' platform applies research discoveries made on the activities of lysates derived from probiotic bacteria when applied to the skin.
We are pleased with the diversity and opportunity for growth that exists within Seneca VCT’s current portfolio of investments and we’re looking forward to adding new investments in addition to developing this existing portfolio with confidence.
Go East, young man
Ian Cowie on why coronavirus can't steal Asia's crown.
Will the coronavirus mean the world economy - and Asia in particular - catches a cold? History includes an alphabet of health scares from avian influenza, or bird flu, right through to the Zika virus via severe acute respiratory syndrome (SARS), swine flu and many others.
Without in any way wishing to diminish the human tragedy of those directly affected, history also relates how medical advances helped humanity cope. The viruses H5N1, or avian influenza, and H1N1, or swine flu, which the World Health Organisation defined as “pandemic” more than a decade ago, were horrific for those involved but economic activity eventually returned to business as usual.
So it may pay investors to look beyond the headlines and consider the bigger picture. Six in ten human beings live in Asia, which is also home to half the world’s middle class, according to United Nations (UN) data.
The International Monetary Fund estimates that Asia now generates nearly 47% of global economic output. The UN reckons that 21 of the world’s 30 biggest cities are in Asia. No wonder Narendra Modi, the prime minister of India, declared: “Asia has become the main growth engine of the world. We are now living through the Asian Century”. To put that growth in perspective, this continent accounted for less than 20% of global gross domestic product (GDP) in 1950. Japan and South Korea initially led the way but China - the world’s most populous nation, accounting for nearly a fifth of humanity - has overtaken them both.
It’s more than 30 years since the communist leader Deng Xiaoping began to move his country away from Maoist Marxism toward “socialism with Chinese characteristics”, sparking explosive economic progress. That created tensions with America, the world’s biggest economy, but these have recently eased with both nations signing preliminary trade agreements.
Coming down from the clouds, how have all these global trends affected this individual investor? I am jolly glad I bought shares in what was then Fleming Indian Investment Trust at 63p each in June, 1996. They now trade as JPMorgan Indian (stock market ticker: JII) and, despite ongoing coronavirus fears, trade at 730p.
An investor never forgets his or her first ten-bagger. However, I actually made more money out of Baillie Gifford Shin Nippon (BGS) because I began this holding just over a decade ago, when I was investing larger sums than when I was younger.
This Japanese Smaller Companies investment company delivered eye-stretching total returns of 657% over the last decade, according to independent statisticians Morningstar, and 172% over the last five years but made modest gains of 2.3% in 2019. So, instead of topping up BGS, which remains one of my top 10 most valuable holdings, I recently bought some shares in JPMorgan Japan Smaller Companies (JPS).
Unlike BGS and JII, neither of which pays any income, JPS delivers a dividend yield of 4.3%, partly funded from capital reserves. That enhanced dividend policy helped JPS generate a total return of 29% last year.
This investor, who intends to fund retirement through income drawdown and pensions freedom, is also happy to be a long-term holder of Henderson Far East Income. HFEL delivers an inflation-busting dividend yield of 6.4% that has grown by an average of 4.2% per annum over the last five years.
Finally, Fidelity China Special Situations (FCSS) completes the Asia-focussed portion of my investment company portfolio, with a more modest yield of 1.7%, five-year annualised income growth of 27% and total returns of 15% last year.
Despite these facts, it’s notable that FCSS shares remain priced about 10% below their net asset value (NAV); and the same is true at JII. Reasons to be fearful about Asia are obvious but double-digit discounts might provide long-term investors with reasons to be cheerful. History rarely repeats itself but it often rhymes.