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Investment insight: latest review from Brian Tora

 

 As we enter a new decade, which were the investment trusts which sparkled most brightly in the first twenty years of the twenty first century? Brian Tora looks at the detail

So here we are in the third decade of the twenty first century. Is it really more than twenty years since we were all worrying about how the millennium bug might freeze all cash machines and result in planes falling out of the sky? And do you remember that first technology bubble which burst early in the year 2000, causing much upset to markets worldwide? I certainly do. Yet technology remains at the core of investment thinking these days, with the largest companies in the world technology titans.

Top of the investment company pops

Surprisingly, technology did not feature in the top ten of best performing investment companies since the start of the new century. According to a table compiled from the Association of Investment Companies’ statistics, the best performing trust from the start of 2000 to the end of 2019 was TR Property, returning a staggering 1890%. Given the recent upsets in the property market, this seems a remarkable result for an asset class that many will consider falls into the legacy category. Not that any other property trusts featured amongst the winners.

Property, of course, fits in better with a closed-ended fund as the managers will not be under pressure to sell assets to meet investor redemptions. Many of the other top performers in the first twenty years of the twenty first century were invested in more liquid assets, though by no means all. Two private equity trusts feature in the top ten, the better performer, Hg Capital, coming in at number five returning a respectable 1456%. Once again this is an asset class which can suffer liquidity issues, so a closed-ended approach must be the better option.

Aside from the second-best performing investment trust, Worldwide Healthcare which delivered plus 1550%, there is a strong smaller companies bias amongst the best performing trusts over the past twenty years. Asia also features heavily, with Scottish Oriental Smaller Companies, Aberdeen Standard Asia Focus and Aberdeen New Thai making up the remaining constituents of the top six performing investment trusts in this table. Aside from BMO Private Equity, which comes in at number seven, the remaining top ten performers are all smaller companies trusts, focussed principally on the UK.

Liquidity matters

This throws up an interesting point. The regulator is already concerned over liquidity issues in open-ended funds and the administrator of the Woodford funds has highlighted other funds with which it is involved as having potential liquidity issues. Needless to say, these are those engaged in investing at the lower end of the market capitalisation tables where selling to meet redemptions could at times prove tricky.

I have personal sympathy with this concern. For some years I was a non-executive director of a smaller companies’ investment trust within the Aberdeen stable. At our regular board meetings, the managers provided us with three valuations of the underlying portfolio. The first was the statutory one used to calculate the net asset value. Then came a valuation based on the bid value of the shares contained within the portfolio. Finally came a so-called fire sale value which provided an estimate of what might be raised if, for any reason, we had to liquidate the entire portfolio at once. Unsurprisingly, this value was way below the other two, but this was an investment trust, so surely the third option would never be used. Or would it?

As it happened, this proved a useful measure when a corporate raider built up a stake in the trust with the intention of forcing a liquidation of the portfolio and the winding up of the trust. This was some years ago when discounts on investment trusts were somewhat higher than they are today in general, so the raider’s plan was to unlock the value contained within the discount.

Would that it was that simple. The life of the trust was brought to an end, but not by simply selling the shares it owned. Instead it was split between three entities, which allowed the corporate raider to realise some value from the investment and those who wanted to stay in or bail out to do so at minimum cost. But it did serve to remind me that liquidity is something any portfolio manager must take into account when choosing what sort of vehicle to choose for his or her clients.

Looking ahead

So much for the past, but what might this coming decade have in store for investors? Certainly, risk assets have delivered the goods in the past and might reasonably be expected to do so over a long period in the future. The problems, as always, are picking the right manager and ensuring that your clients’ circumstances are not likely to interfere suddenly with whatever long-term investment strategy you have put in place.

Smaller companies and private equity both seem to remain strong contenders for those able to lock their investments away for a long period, while the long-standing argument that the Far East contains large populations with a strong work ethic anxious to catch up with the living standards of the developed world is as true today as it was when this millennium first started. In other words, expect more of the same. Just be careful to keep a weather eye on things as the decade progresses.

Brian Tora is a consultant to investment managers, JM Finn.

 

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