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Investment Trust Watch: star fund flies under the radar

Investment Trust Watch: star fund flies under the radar

It's proving to be another strong year for Scottish Mortgage (SMT), the UK's biggest investment trust, and one of the best long-term performers.

Only a handful of trusts have delivered a bigger net asset value (NAV) return than the 39.2% James Anderson and Tom Slater have managed since the turn of the year.

But among those is Independent (IIT), a trust dwarfed by the FTSE 100 behemoth, and run by a former Scottish Mortgage manager, Max Ward.

Ward has just edged his former trust this year, returning 42.2%. So its perhaps no surprise that the shares are looking pricey, with a discount that flirted with double figures at the start of the year having turned to a 6% premium.

That gives the shares a Z-score of 2.1, placing them in the list of 'expensive' investment trusts compiled by Numis Securities.

Just to recap, a Z-score is a measure used by analysts to put a premium or discount on an investment trust into the context of its previous 12 months. Roughly speaking, an investment company or trust with a Z-score of -2 or below is ‘cheap’, while a score of 2 or more is viewed as expensive.

'Expensive' trusts Share price premium (-discount) to NAV % 12-month average premium (-discount) % Z-score
Pantheon International - Redeemable (PINR) -17.2 -24.7 3.0
Dolphin Capital Investors (DCI) -67.4 -76.8 2.8
Templeton Emerging Markets (TEM) -11.2 -13.3 2.5
JPMorgan Global Emerging Markets Income (JEMI) -0.3 -3.4 2.4
Shires Income (SHRS) -4.2 -10.4 2.4
Hansa Trust A (HANA) -29.0 -32.1 2.4
Funding Circle SME Income C (FCIC) 4.0 2.1 2.3
Dunedin Enterprise (DNE) -23.7 -31.1 2.3
Aberdeen Smaller Companies Income (ASCI) -16.0 -21.0 2.3
Schroder Asian Total Return (ATR) 0.5 -3.9 2.3
Aberdeen Diversified Income & Growth (ADIG) -2.0 -8.0 2.2
CVC Credit Partners Euro Opps - £ (CCPG) 4.2 -0.3 2.2
Scottish Oriental Smaller Cos (SST) -8.7 -12.5 2.1
Independent IT (IIT) 6.0 -3.9 2.1
AcenciA Debt Strategies (ACD) 0.1 -5.7 2.0

Source: Numis 5/10/17

That rerating has amplified his strong performance, with the shares up 62.6% since the turn of the year. Shares in Scottish Mortgage have meanwhile struggled to maintain their traditional premium to NAV this year, despite the fund's strong performance.

We flagged their 'cheapness' in this column two weeks ago, and despite a near-5% rise since, they trade marginally below NAV, in contrast to the average 2.5% premium they have enjoyed over the last 12 months.

That has seen the shares lag the fund's NAV returns this year, although investors are unlikely to be complaining about a 35.2% rise.

This year has marked a return to form for Ward, after shareholders were left with flat returns last year, following the hit to house builders from the Brexit sell-off.

This year's returns have also helped Ward re-establish his lead over the trust he used to manage. Since Independent launched at the beginning of the millennium, the shares are up nearly 500%, versus a 390% rise for Scottish Mortgage over the same period.

But investors in both trusts have had a rough ride at times on the road to those stellar returns. Shares in both slumped by nearly 70% during the financial crisis, with Ward's stakes in house builders and banks tumbling in value.

While both trusts share high conviction approaches that have proved exceptionally rewarding to shareholders over the long term, Ward's hunting ground is much closer to home than that of his former trust.

Independent is listed under the Association of Investment Companies' Global sector, but the reality is this a UK shares-focused fund.

House builders remain a key component of the portfolio: at the end of July, they accounted for over a fifth of the trust.

And while the recovery in their shares from Brexit lows has provided a boost this year, that has been overshadowed by the performance of two stocks in particular.

Fever-Tree Drinks (FEVR), a maker of soft drink mixers, is by far the trust's biggest holding, accounting for 13.7% of the portfolio.

Ward invested in the company in late 2014, as it listed on the stock market. Since its initial public offering (IPO) less than three years ago, the shares are up 1,200%.

The trust's stake was worth £5.4 million in November 2014; a year later it was worth more than double that, despite sales of £4 million, which Ward admitted 'now look very foolish'.

Ward continued to trim profits from his stake, selling a further £1.3 million of shares in the 12 months to the end of November last year, but seized on stellar results this March to ramp up his holding, buying a further £3.8 million-worth of shares.

By the end of July, a stake that had been acquired for a net outlay of around £3.9 million was worth £43 million.

'At the moment, the risk of selling too early, a sin we have already committed on more than one occasion, looks at least as big as the risk of selling too late,' said Ward alongside half-year results for the six months to the end of May.

'The stock market was unusually slow to recognize the implications of this at the time of the annual sales announcement, offering us a chance to add to our already large holding on advantageous terms,' he said.

'It can be argued that the shares are now generously valued in relation to market expectations, but such expectations have been hopelessly low in the past.'

But even Fever-Tree's rocketing share price has been eclipsed by the progress of Blue Prism (PRSM), which makes robotic automation software for businesses, this year.

Since its IPO just over 18 months ago, the shares are up 886%. Ward spent £1.5 million on its shares in the first half of 2016. By the end of May, despite having trimmed just over £400,000 of profit, the stake was worth £17.8 million.

As with Fever-Tree, Ward is not looking to bank his profits just yet.

'As always with investments that become fashionable, there is a danger that the share price may have run ahead of itself, but the scale of the opportunity confronting the company argues in favour of maintaining the position,' he said.

Its not the first time Blue Prism has appeared in this column. Philip Rodrigs, manager of the River and Mercantile UK Microcap (RMMC) investment trust, is also a backer, helping shares in his fund rise 53.7% this year.

The current managers of Scottish Mortgage often espouse the power of 'asymmetric returns', that the maximum an investor can lose from a holding is 100%, while the potential gains are limitless, in explaining their growth-focused strategy.

As long-term investors in Amazon (AMZN.O) and Alibaba (BABA.K), they have the record of backing leading global companies at a relatively early stage to bolster this argument.

And their predecessor appears to have found some pretty astounding asymmetric returns of his own. 

'Cheap' trusts Share price premium (-discount) to NAV % 12-month average premium (-discount) % Z-score
Sanditon Investment (SIT) -5.2 0.3 -3.1
Masawara (MASA) -40.6 -33.6 -3.1
Empiric Student Property (ESP) -4.0 5.1 -2.9
RM Secured Direct Lending (RMDL) 3.2 4.3 -2.9
-0.2 2.5 -2.8
CATCo Reinsurance Opportunities Fund (CAT) -13.6 -0.6 -2.5
Qannas Investments (QIL) -20.7 -3.5 -2.4
Ashmore Global Opportunities - £ (AGOL) -32.9 -21.4 -2.3
Myanmar Investments (MIL) 35.4 49.0 -2.3
NB Distressed Debt - Extended Life (NBDX) -18.0 -10.6 -2.3
Pershing Square Holdings (PSH) -23.9 -18.2 -2.1
HICL Infrastructure Co (HICL) 4.4 11.2 -2.1
Edinburgh IT (EDIN) -8.5 -4.8 -2.1
JPMorgan Elect - Managed Growth (JPE) -3.8 -2.5 -2.1
NB Distressed Debt - Global (NBDG) -19.0 -15.6 -2.0

Source: Numis 5/10/17

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