F&C Managed Portfolio has published results for the year ended 31 May 2015. The NAV total returns for the Income shares were 10.0% and for the Growth shares 12.8% compared to the FTSE All-Share Index of 7.5%. The investment company sector, as measured by the FTSE Equity Investment Instruments Index, returned 13.0%. The annual dividend increased by 4.2% to 5.0p per Income share for the year. The Board says that, in the absence of unforeseen circumstances, they intend to declare three interim dividends, each of 1.2p per Income share payable in October 2015, January 2016 and April 2016. A fourth interim dividend will be paid in July 2016 when a clearer view emerges of income for the year.
In a year which did not favour high yield investments generally, the Income Portfolio managed to outperform the FTSE All-Share Index. This was driven by a number of equity income holdings whose total return over the year (capital growth plus dividends reinvested) was ahead of the benchmark.
In this regard the leader by far was BB Biotech which is an unusual holding for an income portfolio. The fund is Swiss based and listed on the Zurich Stock Exchange in 1993, is large with around £1.7bn of net assets and has an outstanding long term performance record. For the year to 31 May 2015 the share price total return was over 100%. After a prolonged period in the early part of the century, of apparently not much happening, recent years have witnessed an increased number of product approvals and a record number of products in clinical trials. This has been helped by a more co-operative approach from regulatory authorities in the US and Europe and has led to a series of blockbuster products which have addressed previously unmet medical needs. In addition, the pace of industry consolidation has picked up as large pharmaceutical companies have acquired biotech firms to replenish their patent-expiring drug pipelines. BB Biotech has a focussed portfolio and is exposed to a number of major biotech companies where stock valuations are not excessive given the exciting growth prospects. BB Biotech also returns 5% of its share price via a dividend each year which makes it an attractive holding for an income portfolio.
3i Infrastructure rather unexpectedly produced a return of 27% over the financial year. The company owns a number of steady income producing assets e.g. 20% of Anglian Water however one of their other holdings, Eversholt, a leading train leasing company, where they had a 33% stake, was acquired at a substantial premium to the valuation it was held at by 3i Infrastructure. This resulted in a useful capital uplift to its net asset value. The dividend yield is 4.1%.
Majedie Investments rose by 26% over the financial year which highlights the benefit of the decision, last year, to have the investment portfolio managed by Majedie Asset Management (“MAM”). The portfolio is invested in a number of strongly performing UK and Global funds run by MAM and has also benefitted from a holding in the management company which has risen significantly as funds under management have grown.
One of the largest holdings in the Income Portfolio is European Assets Trust and it recorded a share price total return of over 21% for the financial year. European Assets Trust focusses on medium and smaller sized companies in Continental Europe and has had strong performance driven consistently from good stock selection. This continued over the past year. In addition the trust has an attractive dividend yield of nearly 5%.
Long time holding Bankers Investment Trust achieved a total return of over 18% through both good asset allocation and stock selection. The trust also increased its dividend for the 48th consecutive year and has one of the lower yields in the Income Portfolio at 2.5%.
As with the positive contributors there was no one investment theme that dominated the holdings that detracted from overall portfolio performance. The principal laggard was CQS New City High Yield Fund which experienced a share price total return decline of 3.1%. The trust invests in bonds, preference shares, convertibles and some equities with a high yield objective and a secondary aim of some capital growth. Over the long run this has been achieved and the dividend has edged ahead every year in the last ten. However last year it moved temporarily to a premium of over 10% but by the end of this fiscal year that had moved back to a more reasonable 3%. Whilst the net asset value has broadly moved sideways over the past year this fund offers an attractive dividend yield of 7%.
The Income Portfolio has a small holding in the Standard Life UK Smaller Companies Trust 3.5% Convertible Unsecured Loan Stock which fell by 3% over the year. Again this had less to do with the performance of the asset value of the underlying investment company which was reasonable and more to do with a de rating of the convertible share price. At current levels it offers interesting value.
The JPMorgan Global Emerging Markets Income Trust declined 1.7% in total return terms. The fund suffered from an underweight position in India, one of the best performing emerging markets, due to a lack of yield available from the Indian equity market. Also the fund was underweight China and overweight in its exposure to Russia which held back performance. The trust has an attractive dividend yield of 4.3%.
Long time holding Murray International Trust also relatively lagged, with a marginal 0.1% fall in total return terms. This was also due to emerging market exposure, which had previously served the trust well. However, encouragingly, the dividend was raised by 5% which gives the trust a 4.4% dividend yield.
Lowland Investment Company, a UK equity income trust, also experienced a small 0.1% decline in its total return over the financial year. The trust has an outstanding long term performance record however its strategy of having a substantial exposure to UK industrial companies was the reason for its dull asset performance and was behind a de-rating of the shares from a small premium to a 4% discount. The bright spot amongst the laggards in the portfolio was their dividends, none of which were reduced and in the case of CQS New City High Yield Fund, Murray International Trust and Lowland Investment Company all were raised during the year.
The Growth Portfolio had a strong financial year in terms of performance. As with the Income Portfolio the largest share price rise was achieved by a trust specialising in investment in the biotech sector. Biotech Growth Trust is managed by Orbimed investors in New York and achieved a 77% gain. Another holding, also managed by Orbimed, recorded the second largest rise in the portfolio; Worldwide Healthcare Trust was ahead by 49%. Whereas Biotech Growth Trust is focussed purely on the biotech sector, Worldwide Healthcare Trust has a wider remit with only around 30% exposure to biotech holdings. The balance of the portfolio is in pharmaceuticals, life sciences, medical devices and diagnostics. In broad terms both holdings have benefitted from the trends outlined previously in the BB Biotech summary. Although share prices in the sector have risen, the superior level of earnings growth from companies has meant forward price earnings multiples for many of the major biotech companies remain at attractive levels.
Baillie Gifford Japan Trust had a strong year with a 38% gain. The Japanese stockmarket has been a principal beneficiary of the Bank of Japan’s policy of aggressive quantitative easing. Although this caused the yen to weaken, the Tokyo market was still amongst the top performers last year when returns were translated back into sterling. Baillie Gifford Japan Trust has a preference for medium sized growth companies which have done well and were behind last year’s performance.
Two more Baillie Gifford managed trusts were the next best performers; Scottish Mortgage Investment Trust and Edinburgh Worldwide Investment Trust recorded share price total return gains of 33% and 30% respectively. The former has a highly focussed portfolio and takes a long term approach with a preference for companies with outstanding growth characteristics. Many are beneficiaries of the application of new technologies which disrupt traditional industries and have significant competitive advantages e.g. Amazon, Google, Alibaba, Rocket Internet and Facebook. Edinburgh Worldwide Investment Trust applies the same approach to companies with a market value of less than $5bn, endeavouring to catch the long term winners earlier in their life. Portfolios of both trusts are global in their exposures and have exciting prospects for growth.
As with the Income Portfolio there were no holdings which experienced substantial loss of value over the financial year. Graphite Enterprise Trust experienced a share price total return decline of 2.9%. It invests mainly in private equity funds in the UK and Europe and also has a direct portfolio of unquoted private companies. After a period of good progress in asset value growth, the past year has seen a slower pace in realisations in both portfolios and with a sizeable exposure to Europe the 13% rise in sterling relative to the Euro over the year further limited progress. However the trust is well positioned for future growth and is attractively valued with a share price discount of 15% relative to its asset value.
Aberdeen Asian Smaller Companies and BlackRock Frontiers Investment Trust have also had strong past performance records however poor performance from smaller companies in the Asia Pacific region and also from many frontier stock markets led to small share price declines from both trusts of 2.7%and 0.5% respectively. However the areas they invest in have exciting prospects for growth and as both trusts are well managed the intention is to maintain holdings in both trusts for the Growth Portfolio. The other two negative performers were holdings which are common to both portfolios; Murray International Trust and Lowland Investment Company which are covered above.
FMPG / FMPI : F&C Managed Portfolio sees both pools beat the UK market