Belt and Braces

UK

The UK is currently perceived as cheap, home to out-of-favour, downtrodden sectors that have struggled over the last decade. It is weighted towards the more value-oriented sectors, like banking and energy, which have failed to keep pace with the rapid growth of technology stocks over the years. Reviewing the data from the last three years to the end of June 2024, trusts with more balanced approaches and those leaning towards value have performed well. Temple Bar (TMPL), is one of the most value-tilted strategies across the sector, meaning it has benefitted from UK value outperforming UK growth this year. City of London (CTY) also leans a little towards value and has performed well over the period. That said, manager Job Curtis isn’t a pure value player. He emphasises companies with robust balance sheets capable of sustainable cash generation and good growth potential, alongside attractive valuations, as he thinks it supports both dividend and future capital growth, contributing to the trust’s resilience and impressive dividend track record over time.

STYLE EXPOSURE OF UK TRUSTS

Source: Morningstar

Edinburgh Investment Trust (EDIN) tops the table and has from its balanced style over this period. EDIN underwent a change in management in March 2020, where the portfolio was revamped to focus on a growth-at-a-reasonable-price (GARP) approach, which blends elements of growth and value. EDIN’s new manager, Imran Sattar, came on board this year, and much like his predecessors, echoes this focus, preferring to invest in both growth and value companies as well as those with latent recovery potential. This multi-style and flexible process is designed to reduce the volatility of returns through the economic and market cycle, and has resulted in sector-leading performance over the last three years.

We decided to merge both the UK All Companies sector and UK Equity Income sector together, which left us with a large list of UK trusts. For the sake of keeping the data readable, we selected the top five, to keep things consistent for readers, but also highlighted a few trusts of interest further down the list. As we can see from looking at the four trusts following EDIN in the table above, each strategy is titled to value, a pattern followed by most others in the UK peer group.

BlackRock Income and Growth (BRIG) and Murray Income (MUT), on the on the other hand, place an emphasis on balancing quality, income and valuation, adopting more of a blended strategy when investing in the UK, quite different from most peers.

Adam Avigdori of BRIG prefers to stay style-agnostic, meaning the portfolio is not strongly tilted to either growth or value, but a balance of the two. He argues that markets have shifted into ‘goldilocks’ territory, which, in this context of slowing and in cases falling inflation, has signalled the peak for interest rates and certain broad macroeconomic indicators are not expected to deteriorate further. He argues that within this environment, his focus on investing in quality companies that are cash generative, have good growth prospects and sit at reasonable valuations, which in our view demonstrates blending aspects of both styles, could be better placed to drive returns over the long term. Consequently, he argues that purely style-focused strategies might not continue to drive markets as they have in the past.

Charles Luke and Iain Pyle, managers of MUT, echo the belief on quality, arguing it allows them to blend the most appealing aspects of both growth and value strategies. This leads them to target companies with good quality characteristics, including strong business models, robust balance sheets, and compelling ESG characteristics, as well as seeking out businesses with attractive income profiles, given that dividend yield acts as a valuation backstop. They also believe that a focus on high-quality companies demonstrating these traits offers fewer tail risks and a greater margin of safety, which in turn can lead to less volatile and more resilient earnings streams over time.

By emphasizing quality, income, and valuation, both BRIG and MUT aim to navigate market uncertainties and provide stable, long-term returns to shareholders.

Kepler