For the second time in five years, investors are finding themselves in the grips of a global bear market that has punished most asset classes. The reasons underpinning the latest bout of selling have been well covered by market commentators, with QuotedData being no exception. Alongside this, many column inches have also been devoted to the rotation out of growth into value, since inflation expectations began to rise in earnest. This has, for example, left growth equities and small cap equities looking cheap versus their long-term averages. Furthermore, it has left most investment trusts and REITs on wider discounts, particularly those with exposure to longer-duration assets that are inherently more sensitive to interest rate rises, creating opportunities for longer-term investors who are prepared to be patient.
An example I spotted recently is Edinburgh Worldwide, which has one of the more growth-focused strategies in the global smaller companies sector, and is trading at a circa 20% discount to NAV versus a five-year average of 2.5%. This comes at a time when global small cap equities are also trading at a marked discount to large cap equities, when they usually trade at a premium, creating the potential for good upside if they re-rate. This is just one off the cuff example and we think that there are many more opportunities to be found (you will find numerous examples of these in our news stories and research), however, these are obviously not suitable for all investors. What about if you’re looking for a more diversified exposure, some capital protection but with potential upside to recovering markets and maybe some income? There are plenty of investors who have these needs and so I thought it might be worth revisiting the funds of the flexible investment sector, as they offer a lot of these attributes.
Not out of the woods yet
The annual rate of UK inflation, while still high at 10.1% at the end of March, has been broadly trending downwards since October and a similar situation has been witnessed in the US since June last year. While there are signs that inflation is moderating, bringing with it the prospect of a slowdown in the pace and possibly a reversal in interest rate rises, there is still much uncertainty ahead. A quick look at UK PMI figures (an indicator of business confidence) neatly illustrates the concern. While the UK services PMI has been rising strongly in recent months, the manufacturing PMI has been below 50 (indicating an economic contraction) since July last year and has been edging downwards for the last two months. This underlines many investors’ concerns that we’re simply not out of the woods yet.
How about a defensive option? But what about the upside
Given the backdrop, it would be easy to conclude that one of the more defensive funds could be a good choice. For example Personal Assets, Capital Gearing or Ruffer are all very well-known funds with good records of capital preservation in down markets. However, while these funds have certainly been good at preserving investors’ capital, there is an argument to be made that their portfolios are too defensively positioned for the current market environment. History has shown that these funds have been poor at capturing upside when markets rally and, given that we are now a good way in to the downturn in markets and hopefully edging closer to the recovery, having some exposure to this upside when it comes, seems like a sensible bet.
Beyond the big defensive plays
abrdn Diversified Income and Growth is a decent size but its longer-term returns, while positive (2.67% compound over five years) do not stand out relative to peers and, like JPMorgan Global Core Real Assets, it has a narrower focus on unlisted real assets. This arguably limits the opportunity set of both and they might also become less relevant as and when inflation subsides.
MIGO Opportunities has very strong three-year returns and, as a fund of funds, has strong diversification benefits but its one-year numbers are particularly poor. Its long-tenured manager, Nick Greenwood, is leaving Premier Miton for another asset manager and it is rumoured that he might be taking the fund with him. However, in the near-term the discount is tight (just 2.9%) and it would seem sensible to wait until there is greater clarity over its future.
A six-cylinder approach
Looking at RIT Capital Partners (RCP), this fund has a widely diversified, international portfolio with investments across a range of asset classes, both quoted and unquoted (it refers to its six-cylinder approach – the idea being that these are distinctive strategies where there is generally at least one firing to drive the NAV forward). It has seen its discount narrow during the last month from a record level of around 23% to around 16%, but this is still much wider than its longer-term averages (for example, an average 4.8% discount over five years). Interestingly, RCP has generated a compound annual NAV total return of 10.5% over the last three years, outperforming Ruffer (7.3%), Personal Assets (5.9%) and Capital Gearing (5.6%) all by a significant margin. It is the same story for NAV total return over five years with RCP returning 7.1%, against Ruffers’ 6.1%, Personal Assets’ 6.0% and Capital Gearing’s 5.0%. Perversely, these big names are trading at much tighter discounts, despite RCP convincingly beating their performances – Capital Gearing is on a 1.9% discount, Ruffer 1.7% and Personal Assets 0.1%. Personal Asset’s particularly tight discount is due to its very effective zero discount policy.
RCP’s discount emerged following some criticism from the sell side that it had changed its spots and shifted its exposure towards private assets. In our view, that wouldn’t be a problem – we have long said that current private equity discounts appear absurd given their long-term performance records, but this is for another article. However, RCP has strongly rebutted the accusation. The move up in exposure to private assets reflects the strong performance of these assets versus listed assets. The managers have been managing the unlisted exposure by hedging positions; this was not a conscious decision to increase exposure as has been suggested. We think that this discount could prove to be temporary and so might offer an additional opportunity.
A straightforward proposition
Finally, I wanted to have a look at JPMorgan Multi-Asset Trust Growth and Income (MATE), which we just published a note on. Compared to some pillars of the sector that we have discussed above, MATE is a relative newcomer, having only been launched in March 2018. In an uncertain world, it has a straightforward target of achieving an average of 6% compound annual returns, over a rolling five-year period, while factoring the rate of inflation into its dividend policy, something which sets it apart from its peers. Having just passed its fifth birthday, it now has five-year performance numbers, but I am a little reticent to focus on these given that it would have taken time for the managers to build the portfolio and for the trust to become fully invested. However, over three years it has returned 7.7%, outperforming the mainstays that are Ruffer, Capital Gearing and Personal Assets. Admirably, it is also one of the few funds that has not lost value, in NAV total return terms, over the last twelve months – MATE returned 0.5%, while Ruffer lost 2.4%, Personal Assets lost 0.2% and Capital Gearing lost 4.2%. This is probably a factor behind MATE’s discount holding up relatively well, although, at 4.9%, it still looks cheap versus these trusts, and it even offers a continuation vote later this year.