Watch List
Funds on the Watch List this week include: SMT, CRS, TENT, SSIT, IVPB, PHI, RCP, FGT, PIN, ROOF, LXI, LMP
Welcome to this week’s Watch List where you’ll find golden nuggets on trust discounts, dividends, tips and lots more…

By
Frank Buhagiar
15 Jan, 2024

BARGAIN BASEMENT
Discount Watch: three

Our estimate of the number of investment companies whose discounts hit 12-month highs over the course of the week ended Friday 12 January 2024 – the same total as the previous TWO weeks.

Only one of last week’s names on the list this time round: JPEL Private Equity (JPEL) from private equity. That leaves two newbies: Digital 9 Infrastructure (DGI9) from infrastructure; and Finsbury Growth & Income (FGT) from UK equity income.

ON THE MOVE
Monthly Mover Watch: something of a shake up

At Winterflood’s list of top-five monthly movers in the investment company space this week. New top performer and two new names to report. Top of the tree, one of last week’s names – Seraphim Space (SSIT) with a 30.6% share price gain. The space investor put out its monthly shareholder letter this week which highlighted how “SSIT saw a 12-month share price decline of c.30%, while its NAV fell by only 7.1% in FY23 (to end-June 2023), shielded in part by the downside protection embedded in its investments via preference shares and only one down round out of 11 funding rounds completed by SSIT’s portfolio companies in FY23.” Share price playing catch-up it seems.

Next up, newbie HydrogenOne Capital Growth (HGEN) in second – shares up 21.6% on the month without a news release in sight. Put this one down to the positive effect of lower yields then or could there be a whiff of corporate activity in the air? HGEN has a sub £100m market cap after all and it’s not as if there hasn’t been any corporate activity in the renewables sector recently. Look no further than fifth-placed Triple Point Energy Transition (TENT) – shares up 18.3% on the month on the back of the mid-December announcement: Proposed Orderly Realisation of Assets.

That just leaves two names to mention – Invesco Select Balanced (IVPB) and Crystal Amber (CRS) in joint third courtesy of both shares being up 18.7%. IVPB going through a restructuring of its own. As revealed in the suitably titled 14 December announcement, Restructuring Proposals, the Board is proposing to consolidate various share classes including Balanced “…into the Global Share Class…The Consolidation would result in the Company having net assets of approximately £182 million…As compared with any of the Company’s current share classes individually, the Board believes this should increase the appeal to investors and would be expected to have a beneficial impact on liquidity, and potentially on the discount of the enlarged Global Share Class.” Crystal Amber (CRS) meanwhile continues to benefit from its ongoing share buyback programme.

Scottish Mortgage Watch: +2.9%

Scottish Mortgage’s (SMT) monthly share price gain as at Friday 12 January 2024 – a reduction on last week’s +4.2%. NAV held up better – up +1.3% on the month compared to +1.6% previously; while the wider global IT sector finished the week up 2.6%, having been up +3.9% seven days earlier.

THE CORPORATE BOX
Insider Watch: 25,000

The number of Finsbury Growth & Income (FGT) shares acquired by Nick Train: “The Company has been notified that on 9 January 2024, Nick Train purchased 25,000 Ordinary Shares of £0.25 each in the Company (‘Ordinary Shares’) at an average price of 838.40 pence per share. As a result of the transaction, Mr Train now holds interests in a total of 5,312,243 Ordinary Shares, representing an aggregate 2.7% of the Company’s issued share capital.”

Combination Watch: LondonMetric (LMP) and LXi REIT (LXI)

Announced “…they have reached agreement on the terms of a recommended all-share merger pursuant to which LondonMetric will acquire the entire issued and to be issued ordinary share capital of LXi…by means of a scheme of arrangement under Part 26 of the Companies Act. Under the terms of the Merger, each LXi Shareholder will be entitled to receive: for each LXi Share held: 0.55 New LondonMetric Shares…”

Comment from LMP Chief Executive Andrew Jones: “This is a compelling transaction which creates the UK’s leading triple net lease REIT and underscores our ambitions to leverage our management platform and access exciting new opportunities across the UK real estate market. The deal gives us access to a very well let triple net portfolio of key operating assets and brings together two highly complementary investment approaches that embrace the qualities of income compounding. The combined £6.2 billion portfolio will have no legacy assets, full occupancy, high occupier contentment and exceptional income longevity with a high certainty of growth – both organically and contractually.”

Borrowings Watch: Pantheon International (PIN)

Announced “…a private placement of $150m…of loan notes (‘the Notes’)…structured over different maturities of 5, 7 and 10 years, resulting in a weighted average maturity of 6.9 years. The Notes were three times oversubscribed at the pricing point and purchased by five North American institutional investors. When considered alongside the existing £500m equivalent multi-currency revolving credit facility (‘Loan Facility’), the issuance of the Notes means that PIP now has access to an even more diverse supply of liquidity from high quality counterparties…”

The company went on to say that the “As at 11 January 2024, the Company had £20m of net available cash and drawings of £136m under the Loan Facility. Proceeds from…the Notes will be used to partially repay and convert…drawings into longer term funding at a blended US Dollar coupon of 6.4945%. This blended coupon is lower than the all-in interest cost currently payable on the Loan Facility. Following the issuance of the Notes, PIP’s net debt to NAV will remain conservative and unchanged at 5%. The Company expects to finance its new investments and meet its unfunded commitments principally from the cash that continues to be generated by the Company’s portfolio and from short-term utilisations under the Loan Facility.”

Dividend Watch: 10% The amount by which Atrato Onsite Energy (ROOF) proposes to increase its full year dividend by: “…in line with the progressive dividend policy set out at IPO, the Board has increased the target dividend from 5 pence to 5.5 pence per Ordinary Share for FY24, an increase of 10%. The highly contracted nature of our portfolio means the Company’s 12-month forward-looking dividend cover is expected to be in excess of 1.3x.”

MEDIA CITY
Tip Watch #1: Now is not the time to jump ship at Rothschild investment trust

So says The Times’ Tempus Column. The Rothschild investment trust is of course RIT Capital Partners (RCP). So, why would investors consider jumping ship? Because, as Tempus writes: “It’s all change at RIT Capital Partners…First, Ron Tabbouche, the chief investment officer of the RIT-owned fund manager that runs the portfolio, left in November; now, Francesco Goedhuis, the chief executive, is going, because of a family illness. The new broom is Maggie Fanari, at present the head of high-conviction investments at the Ontario Teachers Pension Plan. Well, not that much of a new broom. She has sat on the RIT board as a non-executive director for the past four years. She arrives as a full-timer in March.”

Because of this, Tempus thinks: “It doesn’t sound like the appointment will signal any big change in RIT’s investment philosophy, one that has shifted already since its heyday under Lord (Jacob) Rothschild, when an emphasis on capital preservation was combined with an opportunistic approach to markets and stock selection. The very long-run annual return of 10.7 per cent remains impressive to this day. RIT has turned £10,000 at its launch in 1988 to £345,000 in 2024.”

Having said that “…recent years have been disappointing. RIT has underperformed over one, three and five years and the shares languish at a 25.6 per cent discount to net assets…The big concern is that RIT has pushed very heavily into unlisted company investments, with 39.8 per cent of its portfolio allotted to private equity. The jury is still out on whether it has picked enough successes to offset the inevitable duds and whether it is valuing these unlisted assets conservatively enough…The next year or so will help to establish the wisdom, or folly, of RIT’s private equity foray. Fanari has bags to prove, but, with a bit of luck and a receptive flotation season, she could significantly narrow that yawning discount. This is a case where there is not enough reason to buy the shares, but just enough hope not to sell.”

Tip Watch #2: A compelling comeback play – courtesy of Baillie Gifford

Guess the Baillie Gifford fund the Investors’ Chronicle is talking about in the above article. Scottish Mortgage? No. Keystone Positive Change? That’s another non! Over to the Chronicle for the big reveal: “With a market capitalisation of around £500mn, Asia-focused Pacific Horizon (PHI) is a minnow compared with the biggest Baillie Gifford trusts…It has done plenty to warrant attention, however.” That’s because: “Pacific Horizon was one of the best-performing investment trusts of 2020 thanks to its focus on internet companies such as China giants Tencent (HK:700) and Alibaba (HK:9988) that blossomed during lockdown. Impressively, the portfolio also fared well in 2021, a difficult year for Asian markets, thanks to a well-timed pivot that saw the team drastically reduce exposure to China and focus more heavily on India just before the former embarked on a big regulatory crackdown.”

But as the article explains: “…the fund subsequently struggled to escape the impact of higher interest rates, meaning shareholders had to stomach a paper loss of more than 30 per cent in 2022, as well as a modest hit last year. With the shares recently trading on a discount of around 10 per cent to the net asset value (NAV) of the underlying portfolio, investors who believe growth investing will come good again can still point to this name as one of the many bargain buys available in the investment trust space.” The tipster does note that: “The fund comes with some of the usual selling points and drawbacks of Baillie Gifford vehicles. The investment managers favour companies with good structural growth stories and very high risk/reward profiles…that can at least double their share prices over five years, with most of the progress stemming from earnings growth.” While, “…the portfolio often bears little resemblance to the MSCI AC Asia ex-Japan index, which many investment teams in the region use as a comparator.”

The Chronicle concludes by saying: “The trust is clearly not immune to threats. Growth stocks could fall out of favour again, or face diminished returns due to higher rates. China could still have some nasty surprises up its sleeve. But Pacific Horizon remains a dedicated play on the region’s potential growth stars with a very tempting valuation.”

There are only two.

1. Buy Investment Trusts that pay a ‘secure’ dividend and use

those dividends to buy Investment Trusts that pay a ‘secure’ dividend.

2. If any Trust drastically changes their dividend policy it must

be sold even at a loss.

A 360 view of the latest results from EWI, BNKR, RICA

Frank Buhagiar
19 Jan, 2024

Contrarians of the week
“Many of the companies with the greatest potential to deliver change are ones the market is shunning. They’re seen as reckless pre-profitable companies, early in their lifecycle with the temerity to believe that things can be different from how they’ve always been. With the market reflexively punishing such companies and aggressively discounting their potential, those of us who believe in progress, long-term relevance and human ingenuity have become the contrarians.” Edinburgh Worldwide (EWI) Investment Managers.

A period of unprecedented scientific innovation and technological change
Final Results from Edinburgh Worldwide (EWI). Chair Henry Strutt opens his statement with a reminder of what the fund is all about: “The Company’s mission is to invest in innovative businesses that are developing next generation products and services. We are living through a period of unprecedented scientific innovation and technological change. Edinburgh Worldwide (‘EWIT’) is designed to provide investors, who are otherwise unable to access this dynamic asset class, a way to participate in the exciting developments we are seeing across a whole range of foundational technologies from biotechnology and gene sequencing, through aeronautics and space technology, automation and artificial intelligence to semi-conductors, data processing and energy transformation and storage. We have always believed that in order to take full advantage of these opportunities and access the potential for the outsized returns these could generate, requires a five-year investment horizon, and in many cases up to 10 years.”

Problem is: “The…pandemic…, geopolitical tension, the resurgence of inflation…and…aggressive central bank responses have all conspired to drastically shorten investors’ time horizons and increase risk aversive behaviour. These have in turn hit valuations of growth companies particularly hard, with a consequent knock-on effect on…portfolios such as EWIT’s…” How hard? “NAV…per share, when calculated by deducting borrowings at fair value, decreased by 23% and the share price by 27.7%. The comparative index, the S&P Global Small Cap Index…total return, decreased by 4.3% in sterling terms…” And yet, “The portfolio is invested for the most part in companies with solid finances and good economics as well as outstanding future potential. The majority have been performing well operationally and have strong cash positions…” So, the Board “…continues to encourage the portfolio managers to focus on smaller entrepreneurial companies, as we believe these are better able to deploy the best in human ingenuity and imagination to embrace disruptive technologies and processes at scale than larger companies who are inevitably hidebound by legacy practices and business models and layers of bureaucracy and hierarchy.”

Winterflood points out: “As at 31 October 2023, EWI held 14 private companies, accounting for 26.0% of total assets (31 October 2022: 14; 20.1%) vs limit of 25% as at time of investment…Over FY, the private companies saw 130 revaluations, resulting in -1.1% average decrease in share price.”

Numis adds: “We note that the number of portfolio holdings has reduced from 110 at October 2022, to 98 at October 2023, in part reflecting the sale of several lower conviction holdings. In addition, recent performance has improved, with the fund outperforming the index by c.5% post-period end, in part owing to expectations of lower interest rates, although we expect that expectations for rates is likely to continue to be volatile. For sentiment to improve, we believe the portfolio needs to deliver on operational milestones and deliver the growth that the manager is expecting to drive longer time value, independent of interest rates.”

Difference of the week
“I have rarely seen markets so narrowly focussed on a few winners where the decision to own one or two stocks has meant the difference in under or outperforming the index.” Bankers (BNKR) Fund Manager Alex Crooke.

Patient investors
An almost in line full-year performance from Bankers (BNKR). Chair Simon Miller reports a “…net asset value total return over the year ended 31 October 2023 of 5.2% (2022: -11.3%) just narrowly underperforming the FTSE World Index total return of 5.7% (2022: -2.8%) and a share price total return of -0.7% (2022: -13.4%).” The Chair goes on to remind investors that “The Board has long set a twin objective to grow capital and dividends.” However, “The US market is increasingly dominated by zero yielding stocks, which is causing problems for income investors, with five of the Magnificent Seven not paying a dividend. We therefore only own two of these seven companies. Other funds and in particular some in our peer group hold all seven and this is reflected in their performance this year. Our investment style has long focussed on those growth stocks that pay dividends. The size and scale of these companies that probably have little prospect of paying a dividend now means we need to be more flexible with revenue reserves to enable a broader investment pool.”

In terms of outlook, the Chair points out that “Equity markets have been driven higher by a small set of companies supported by investors’ enthusiasm for the transformative power of generative AI. In the rush to invest in the US and these few leaders, the vast bulk of quoted companies are trading on undemanding valuations and look attractively priced for patient investors, like ourselves.” Fund Manager Alex Crooke adds: “We have undoubtedly missed some opportunities in the US market through our preference for dividend paying companies. We intend to widen our focus in the coming year although we will maintain our preference for cash generative companies with well defended market positions. Our stock selection seeks to avoid the overvalued and under invested companies, prioritising higher quality and lower geared companies, offering earnings resilience.”

Winterflood notes: “Underperformance attributed to US underweight (index >68% US), particularly with respect to ‘Magnificent Seven’, as well as weakness in Asian markets, chiefly in China’s property market, which affected consumer sentiment. Share price TR -0.7%, as discount widened from 8.1% to 13.4%; repurchased 60.6m shares. Dividend for the year raised by +10.0% to 2.56p, compared with CPI of +4.6%, while revenue earnings return rose by +16.2% to 2.72p per share. Dividend growth of at least 5% expected in FY24…”

Comment from Numis: “Performance looks weak relative to global markets, with the NAV underperforming over the last three years, which has impacted the long-term performance record… The shares currently trade on a c.12.5% discount to NAV, and we note that this has remained around this level since a temporary pause in buybacks in mid-2023, which have since resumed. Bankers has typically been a low cost…way to access global equity markets, although we can understand if sentiment remains weak given the share price returns in recent years.”

JPMorgan is neutral: “BNKR’s has a strong long-term track record, is one of the larger global funds in the peer group (market cap £1,243m), has low ongoing costs (0.50%) and now trades at one of the wider discounts in its peer group (12.6%). It is making significant share buybacks which is also a positive. But we think an improvement in the relative NAV performance is likely required for the discount to significantly narrow. We remain Neutral.”

Reason of the week
“By far the most obvious reason to be bullish was that most investors were bearish.” Ruffer’s (RICA) Investment Managers Period End Review.

A second bite at the cherry
Ruffer’s (RICA) Investment Manager’s Review gets straight down to performance: “NAV TR…for the six months to 31 December 2023 was 0.6%…NAV TR for the calendar year to 31 December 2023 was -6.2%…The annualised NAV TR since inception of the Company in 2004 is 7.0%, which is in line with UK equities, behind global equities, but with a much lower level of volatility and drawdowns than both.” As the investment managers explain, something unusual happened to the fund early in 2023: “It isn’t often that we find ourselves positioned with the consensus, but at the start of 2023 our bearish positioning was not as contrarian as perhaps we thought. Most other investors were also cautious; we underestimated the ability and willingness of market participants to re-risk and re-leverage their portfolios when recession and liquidity risks did not emerge…There is no hiding from 2023 being a disappointing year, the worst in the history of Ruffer Investment Company. However, zooming out a little does provide some perspective, and shows a more balanced outcome. Taking 2022 and 2023 together, effectively the beginning of the Fed tightening cycle, the NAV TR of the portfolio is 1.3%. As seen in the chart below, global equities are also slightly positive over two years but with a very different journey which points to the usefulness of Ruffer as an uncorrelated diversifier and volatility dampener to multi-asset portfolios…”doceo360 ruffer 19.01.24

More from the investment managers: “What’s the lesson of the last couple of years? Some would say ‘HODL’ (hold on for dear life), ignore the noise, have a long-time horizon. We take a different lesson. 2022 gave a taste of what the new regime might look like. The illusion of diversification hurt portfolios with stocks and bonds positively correlated whilst falling, many alternatives were just duration in disguise. It’s no longer conjecture that conventional portfolios are insufficiently protected and diversified…Crucially, our philosophy of aiming to protect and grow capital in all market conditions remains unchanged, and we think the set-up for our portfolio from here is attractive…we have very differentiated positioning to protect against and prosper from the various scenarios we see, and the portfolio today holds powerful offsets which are now even cheaper and more interesting than they were a year ago. This gives investors a golden opportunity, we have seen what inflation volatility can do to portfolios and now we have a second chance to prepare. A second bite at the cherry.”

Numis is positive: “…recent performance has been challenging, and the fund lagged in the mega cap rally in 2023, with unconventional portfolio protections the largest drag on performance. The nature of the portfolio means that the NAV will inevitably lag if equity markets remain strong, but the managers express caution over the direction of travel in 2024. They expect inflation volatility to persist and are sceptical that the battle against inflation has been won. The managers have been active in making portfolio changes, which includes reducing duration through the sale of US TIPS, as well as removing exposure to Gold. The managers highlight attractive opportunities in the UK and Japan, as well as commodity stocks which they believe offer attractive risk premiums. We continue to believe that the fund can be regarded as a portfolio diversifier as Ruffer has an impressive record of insulating against market falls, most notably during 2022, Covid-19 and the global financial crisis. The fund traded on a premium in 2022 and early 2023, and was one of the largest issuers, but the shares have since moved to a discount (currently c.5%).”

Reassurance of the week
“Be assured that the steady progress of human ingenuity is very much alive and well.” Edinburgh Worldwide (EWI)

What history tells us about markets in a US election year

17 January 2024

AJ Bell’s Russ Mould considers how markets have reacted to different presidents.

By Matthew Cook,

Reporter, Trustnet

  

The first Republican Party primary in Iowa has signalled the start of the race to the White House, something investors will be keeping a close eye on in the coming months.

Savers should be closely monitoring policy statements from Republican contenders, according to AJ Bell investment director Russ Mould, particularly with the prospect of a growing presidential rematch between Donald Trump and Joe Biden, a rare prospect not seen since 1956.

He said: “If opinion polls are accurate then America will get its first presidential rematch since 1956. Biden may well welcome that precedent, since that was when Dwight Eisenhower beat Adlai Stevenson for the second time to retain the presidency.”

But how will investors fare in an election year? Historical data reveals a pattern in the US stock market experiencing mild turbulence in the final year of a presidency.

Performance of the Dow Jones Industrials index since 1949

Source: Refinitiv

However, the final year of a Democratic presidency historically yields a double-digit percentage capital return, while Republican numbers are impacted by events such as the 2008 financial crisis, which rather “punctured” the party’s figures, Mould said.

Below, he looks at other factors investors may wish to consider when looking at the outcome of the US election later this year.

Macroeconomics and markets

Past elections highlight the connection between macroeconomic conditions and stock market performance.

While the 1940s, 1950s, and early 1960s recessions did not severely impact stock markets, downturns during the Richard Nixon/Gerald Ford years and the 2001 and 2008-09 recessions under George W. Bush did.

Mould suggested that economic booms in the 1950s and 1980s, coupled with post-crisis recoveries, contributed to positive market performance.

He said: “The economic booms of the 1950s and 1980s and the recovery from the 2007-09 bust (helped by Fed largesse) meant the stock market did well under Harry Truman, Dwight Eisenhower, Barack Obama and Trump.”

“But investors must also account for equity valuations, and this may be an even bigger complication than the tattered state of America’s federal finances.

Starting valuations

Equity valuations present a complex variable, potentially more challenging than the fiscal state of the US. Using the cyclically adjusted price/earnings (CAPE) ratio, current valuations are near historic highs, raising concerns about the market’s future trajectory.

Shiller cyclically adjusted price earnings ratio since 1903

Source: FRED – St. Louis Federal Reserve database and Congressional Budget Office

Previous instances of low valuations during Truman’s, Eisenhower’s, and Ronald Reagan’s presidencies provided room for upside, unlike the high valuations during the Bush era.

Mould noted: “Bush came to power just as the tech bubble had driven valuations that made even the dizzying (and disastrous) heights of 1929 seem modest.

“In his case, almost the only way was down and, with the Shiller CAPE multiple back near historic highs, the next president and investors could be forgiven for wondering what may come next – especially if the US economy unexpectedly slows right down or even lurches into recession.”

Does it matter who wins this time around?

Working out the winners and losers based on presidential outcomes is rarely a good strategy. Despite initial apprehensions, markets viewed Trump’s 2016 victory as an opportunity for growth, with US stocks advancing during his term, even amid challenges like the global pandemic.

Mould noted: “It may not pay to get too caught up in the identity of the winner of either the party races or indeed the presidential election, where the thought of an 81-year-old Biden grappling with the 78-year-old Trump for the second time is prompting independents to consider a run.”

Regardless of who wins the upcoming US election there are some major question marks around Federal Reserve policy, and any potential interest rate cuts during 2024

Meanwhile, a $1.7trn budget deficit caused by spending to boost the US economy will also need to be addressed.

Custodian Property Income REIT PLC and abrdn Property Income Trust Ltd on Friday said they have agreed to an all-share merger to create a real estate investment trust with combined assets of £1.0 billion.

It will mark yet another absorption of an abrdn fund, after Fidelity China Special Situations PLC took over abrdn China Investment Co Ltd, Asia Dragon Trust PLC took over abrdn New Dawn Investment Trust PLC, and Shires Income PLC took over abrdn Smaller Companies Income Trust PLC in the second half of last year.

If u are looking for the next merger candidate the list

is below.

Yields

RGL have trimmed their dividend

LBOW no longer pays a dividend

A balanced portfolio of investment trusts for the cautious investor

Figuring out which assets to own and which investors to listen to is a nightmarish task. Hedge your bets instead and go for a balanced approach that has some exposure to equities alongside more defensive and income-oriented funds. Introducing an eight-fund model portfolio for the cautious investor.

By David Stevenson

There’s a strange disconnect at the moment when it comes to investing and markets. Talk to many investors ranging from well-known US market strategists such as John Hussman to hugely popular UK fund managers such as Sebastian Lyons at Troy or Peter Spillar at Capital Gearing and they sound profoundly worried. They are concerned about valuations. They worry about liquidity. And they are concerned about expectations of long-term returns from risky assets like equities.

But the consensus on Wall Street is relentlessly upbeat, there’s been a Santa rally of sorts, and vast amounts of money are flowing into equity funds in both the UK and the US. The US might even have dodged a recession. Working out who is right – the market sages or the crowd – requires the judgement of Solomon and I’d like to propose an alternative – don’t bother and instead hedge your bets, especially if you are worried by the potential for market selloffs.

To explain this statement lest first go back to basics. My core view is that for most investors with a time window of decades, 100% exposure to equities is probably the most fruitful allocation you can make. That thinking informs my suggested Growth portfolio of investment trusts. Trust in the march of the optimists, ride out market volatility, pick good funds, and forget about your portfolio and come back in a few decades. But for many investors, especially those who are either a bit more risk-averse or who are older and approaching that stage of their life where they are looking to lock in any gains, a more pragmatic approach might be better. To be clear, if you are investing as opposed to saving and you have a time window of say 5 years or more, exposure to equities still makes sense, even in a balanced and pragmatic way. If you have a time window is under five years – say you plan to retire in 5 years and cash up fully – then any equity exposure is probably a bit too risky. The best advice given to me by a learned professor of finance was that over five years, equities have in the past been a winner, under five years its best to stick with cash or bonds or other safer options. So, to be clear, in constructing a balanced portfolio I am still assuming that investors still want a bias towards equity exposure but they also want some diversification away from pure stock market growth. In simple terms they want to hedge their bets, but with the ability to capture the upside from owning risky equities.

The classic answer to a balanced approach is to construct a 60/40 portfolio of 60% equities and 40% bonds. I’m not going to argue with decades worth of accumulated market wisdom and say that’s a bad idea – it isn’t and most of the time it has delivered impressive returns. However, implementing that within an investment trust format is fiendishly difficult. Put simply there aren’t more than a handful of bond funds on the market and the few that exist are very focussed on the riskier end of the corporate bond spectrum. There’s nothing wrong with that, it just doesn’t provide all the diversification you might need. An investor could of course construct a workaround and simply switch to bond ETFs or actively managed bond unit trusts for the bond segment of the 60/40 portfolio.

As an alternative, I have put together a slightly different approach which starts with a number of assumptions:

1. A 50/50 split between investment trusts focused only on equities and another 50% on trusts with a more differentiated approach that incorporates bonds along with other bond-like proxies.
2. In the equities portion of the 50/50 split, there is a focus on what’s called equity income. This means funds where the manager is taking a more cautious, defensive approach by relying on sound businesses that also happen to pay out a strong dividend. Share prices can be very volatile but dividends tend to be steady and, in many cases, progressive (they go up over time in a compounding fashion). Bank that dividend cheque and then reinvest it and you have a good chance of building sustainable, compounding long-term returns.
3. I’ve also favoured a handful of funds that take a cautious, more absolute returns approach to investing. Outfits such as the Ruffer Investment Company move across asset classes and will invest in equities – currently below 20% of the portfolio – but their core focus is on capital preservation. I have also highlighted some funds such as BBGI Global Infrastructure which are in reality bond proxies, that pay out an income, and aim for low share price volatility.

With those principles out of the way, let’s spin through the suggested funds in the eight-fund model portfolio. The two big equity exposures are Murray International (I have also suggested the City of London investment trust as a substitute) which has a great track record and invests in global equities with a defensive, equity income-oriented focus. Next up we have AVI Global which is much more style-driven in its global equity investing approach – in this case, that means a value-oriented approach which involves picking undervalued stocks with lots of upside. Sitting alongside these two main global equities funds are two niche funds: the first is a defensive play on utility stocks globally from Ecofin, and the second is Japanese stocks. I’ll explain each in turn. Utility stocks aren’t exciting, but they are very defensive, and they tend to pay out a decent dividend. The challenge comes with picking the utility stocks that aren’t value traps where dividend growth is unsustainable, which is where Ecofin comes in. It has a long and impressive track record of picking the right utility businesses. Japanese equities are a straight value play and there are very few high-quality Japanese managers I’d trust – CC Japan Income and Growth is one of them alongside the substitutes AVI Japan Opportunity and Nippon Active Value. On the alternatives side of the 50/50 divide the core holding is one of the multi-asset funds with capital preservation as the core investment goal: I have identified the Ruffer Investment Company, but you could also pick Personal Assets and Capital Gearing as substitutes. The latter two have slightly higher equities exposure (the last monthly numbers I have seen show Capital Gearing at 27% equities exposure and Personal Assets at 25%) than Ruffer which is low at 17% of the portfolio but all three are currently heavily exposed to bonds, mainly index-linked bonds. I make no comment on this exposure to inflation-linked government securities except to say that if you think we live in a new world of higher inflation and more volatile markets, then this asset is probably a decent bet. All three managers will opportunistically vary their asset mix but as I’ve said, all three are very capital preservation oriented. On a side note, their equity exposure does mean that on an underlying basis, the overall model portfolio exposure to equities as an asset class is probably closer to 60%. One other point worth noting – Personal Assets has a much higher exposure to gold-related assets at around 11% of the portfolio.

Next up we have a classic bonds fund, in our case the Invesco Bond Plus fund with the CQS New City High Yield fund as a substitute. These funds have a focused approach to corporate debt, with careful management of the risk profile and a generous yield of well over 6% – up to nearly 9% in the case of the CQS fund. I’ve also included two small exposures to the broad infrastructure space, where most of the funds tend to have bond-like characteristics – steady income payouts and lower volatility of share price. I’ve selected the BBGI Global Infrastructure fund (HICL and INPP are very sensible alternatives) because of what it says on the label, it is global, and it has a better long-term NAV return track record. The Renewables Infrastructure Group, TRIG, is a diversified investor in renewable assets such as wind farms and battery projects. It boasts a string NAV track record and respected management but like all renewables funds it’s had a tough 12 to 18 months because of increased interest rates and volatile power prices.

Stepping back from the details, I feel confident in suggesting this mix of eight funds boasts first-rate, respected managers with a very decent track record. There’s a sensible balance of exposures ranging from less volatile, bond-focused funds through to income-oriented, global equity funds, some with explicit dividends focus. This model portfolio will undoubtedly underperform all out growth funds (think Scottish Mortgage or Polar Capital Technology) in a bull market which is full of excitement about the future. It will also underperform straight bonds and cash-only portfolios in a big market sell-off – that equity exposure will hurt in a market panic. But on a balanced basis, this should provide you with something approaching a 60/40 equities/bonds exposure via a cautious approach with substantial income upside.