Kepler Trust Intelligence

Updated 01 Jan 2025

Kepler symposium

Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

A symposium, in ancient Greece, involved a group of men sitting on couches arranged around a circular room designed for the purpose called an andron, each taking turns to discuss a topic put forward by their host – the symposiarch – who would also choose the wine, and dictate the pace at which the assembled company would drink it.

The Roman equivalent followed a similar pattern and its Latin name, convivium, captures the atmosphere of this social occasion so well that we use it to this day to describe an event or atmosphere which according to the OED is ‘friendly, lively and enjoyable’.

To pull off a good symposium, the Greek playwright Euboulos advised that for sensible men three kraters (bowls) of wine should be sufficient. The next three, he said, would induce bad behaviour, rudeness and shouting, seven would provoke a fight, by number eight the furniture would be broken, while depression and eventually madness would set in at the ninth and tenth.

Having consumed a sensible three kraters of wine to mark the rapidly approaching death of the old year and the birth of the new, it was in convivial spirits that the team at Kepler Trust Intelligence sat down to hold a symposium of our own, the aim of which was to identify the trusts we think are likely to deliver the best (share price) returns in 2025.

Naturally, none of this is meant as advice – and you should regard our choices more as the latest instalment in an amusing annual tradition than a serious attempt to predict the future, for which we all know past performance and the wisdom of analysts is no guide….

Pascal Dowling – JPMorgan UK Small Cap Growth & Income

My bet for 2025 is JPMorgan UK Small Cap Growth & Income (JUGI). Led by veteran UK equities manager Georgina Brittain and co-manager Katen Patel. The trust delivered a stellar performance earlier in the first half of 2024 and saw its discount narrow sharply after it absorbed stablemate JPMorgan Mid Cap (JMF). It was trading close to par when we last covered it in September.

Since then however the discount has slipped out to 12.4% as confidence in the UK’s long awaited recovery has slumped under a barrage of anti-Labour newsprint and simultaneous barrage of myopic decisions, own goals and poor communication (or more concisely: poor leadership?) from the Labour Party itself.

Whilst I have mixed feelings about VAT on private schools and taxes on farmland, these to my mind are not particularly important to the UK’s economic success in the grand scheme of things (which is perhaps why they might’ve been best left alone). What is important is the impact of higher national insurance contributions on corporate profitability, and the potential for unemployment to rise – squeezing confidence further and potentially driving us towards a recession.

So far, so downbeat – perhaps I should be the Prime Minister – but with the proviso that the national insurance hike could prove to be my undoing, I remain convinced that the UK is in a better position than it has been for many, many years – if only by dint of not being an absolute political basket-case.

America’s too expensive, China’s bust, the German government collapsed last month, Spain hasn’t had a functioning government for a decade and poor old France is on the verge of its sixieme republique – quite possibly under the leadership of Mme Le Pen who, like her far-right counterparts in Denmark, Austria and Italy, is definitely not a massive racist with protectionist instincts when it comes to international trade.

In the words of one of our recent short-lived (though to her credit not outlasted by a salad vegetable) prime ministers Old Blighty, at least relative to its European peers, is in the unusual position of being a strong and stable destination for investors’ money. It is also, thanks to almost a decade in the wilderness under an increasingly deranged ruling party, cheap.

This combination of cheap valuations and an unusually stable environment for investment in a volatile world is a compelling one and that – in my view – hasn’t changed on the back of a piss-poor start from Starmer & Co, though there’s time yet, of course.

Pascal Dowling

pascal@keplerpartners.com

Pascal is a partner at Kepler Partners LLP and launched Kepler Trust Intelligence when he joined Kepler in 2015. Prior to this he managed FE Trustnet, one of the UK’s largest investment research websites, for ten years. In a former life Pascal was a financial journalist and he has written extensively about investment trusts and other investments for the trade and national press.

Thomas McMahon – Geiger Counter

There are two possible approaches to this sort of task. Obviously, nobody can have a strong conviction when it comes to picking one investment over a one-year time horizon. That’s why nobody would dream of putting all their actual money in one fund over 12 months. How you answer depends on your attitude to glory and to shame: do you go for something solid and sensible, and hope that events don’t lead to your pick underperforming by 50bps rather than outperforming? Or do you swing for the fences, and pick something that has the potential to do exceptionally well or exceptionally badly? Well, sick of finishing in the middle of the pack, I have decided to take the latter strategy this year.

One of the adjacent trades to the AI boom is nuclear energy. Microsoft has struck a deal to reactivate a reactor at Three Mile Island in Pennsylvania to power its AI data centres. Oracle is designing a data centre that would require 1 GW of power which would be supplied by three small modular reactors, while Amazon is funding the development for SMRs and siting a data centre next to an existing nuclear facility. These tech giants recognize that nuclear is going to play a significant role in any post-energy transition grid. If AI comes even close to fulfilling its potential, it will require a huge investment in new energy supply, and for a number of reasons that will involve nuclear.

Geiger Counter (GCL) is a small listed fund that invests in the uranium mining sector. Some stocks in the space have rallied in recent months, notably Cameco, the world’s second-largest producer and largest outside Kazhakstan, while NexGen, GCL’s largest holding has had a decent year. Other stocks have disappointed though, and GCL’s shares have been weak, declining around 10% in 2024 at the time of writing. The shares trade on a discount of over 20% and the trust had 16% net gearing as of the end of October. I think there is a real chance that 2025 is a breakout year for GCL, while if it disappoints, I will have the comfort of knowing I gave it a real shot.

Thomas McMahon

thomas.m@keplerpartners.com

Thomas is Head of Investment Companies Research and joined Kepler in April 2018. Previously he was senior analyst at FE Invest, where he was responsible for fund selection for a range of model portfolios. He covered all asset classes over time, but has particular experience with emerging markets and fixed income as well as UK smaller companies funds. He has a degree in Philosophy from Warwick University and is a CFA charterholder.

William Heathcoat Amory – BH Macro

The word “portfolio” comes from the Italian word portafoglio, which means “a case for carrying loose papers”. The word is made up of porta, which means “carry,” and foglio, which means “sheet” or “leaf”. Not so long ago, a wealth manager would keep each of his or her clients’ investments in a separate notebook or portfolio. A portfolio differs from a single sheet of paper, in that it has many different elements to it. Which feels desperately old fashioned in the current market, where the only show in town is Nvidia.

It is in this context that I am picking BH Macro (BHMG) as my investment trust pick for 2025, with an eye towards diversifying away from the crowded trades such as the US market. BHMG is a feeder fund into the Brevan Howard Master Fund, run by one of the foremost hedge fund managers in the world. As a manager, Brevan Howard is unique in many ways, not least in that it has a closed-end fund that effectively allows investors to access its returns by investing only around £4 (a single share). This is in contrast to most hedge funds, which generally only accept capital in the form of an institutional mandate, with a minimum investment running into the millions.

BHMG performed very strongly in 2020, and again in 2022. It has had a relatively fallow period since then, but with US election and political wobbles in Europe seeing heightened volatility in interest rate, bond and FX markets BHMG has seen returns perk up over the very short term. This fits a long running pattern to returns which sees it typically perform well when market uncertainty rises. There are no guarantees, but as the graph below shows, over the last ten years BHMG has delivered handsome returns in the worst months for world equities. In the context of an elevated US stock market, with Trump’s anticipated tariffs potentially impacting economies all around the world, it feels a fair bet that uncertainty and volatility is set to rise. This could usher in a new chapter for Brevan Howard’s traders, and offer them the potential to deliver strong returns.

BHMG’s discount remains wide by historical standards – it is not long ago since early 2023 when the shares were on a chunky premium. At that time, investors had recent memories of BHMG’s very strong outperformance of equities and bonds during 2022. With the board buying shares back, the risks of the discount widening significantly for a sustained period are arguably limited. On the other hand, if BHMG’s NAV returns improve – especially if equity markets struggle to gain ground or perhaps fall, there is a good chance demand for the shares may improve, and the discount narrowing will add a nice tailwind to returns. In a ‘portafoglio’ context (or just seen against my colleagues picks for this year) this would serve as a good reminder that it helps to have some different looking ‘sheets’ in your ‘folder’.

WORST TO BEST MONTHLY RETURNS OF WORLD EQUITIES

Source: Morningstar, Kepler Partners
Past performance is not a reliable indicator of future returns

William Heathcoat Amory

william@keplerpartners.com

William Heathcoat Amory is a co-founding partner of Kepler Partners LLP and leads the Kepler investment trust research team. William has over 20 years of experience as an investment company analyst. Prior to co-founding Kepler Partners in 2008, he was part of the Extel number 1 rated research team at JPMorgan Cazenove.

 Money Week Greencoat UK Wind

“Both infrastructure and renewable energy offer investors potential for income and growth,” says Emma Wall, head of platform investments at Hargreaves Lansdown, adding that they also provide “good diversification to a portfolio that already owns stocks and bonds”.

Greencoat UK Wind (LON:UKW) is an investment trust that invests into renewables infrastructure projects. Understandably, it has taken a bit of a battering this year – shares are down 15.5% year-to-date – as the economic climate has steered investors away from these kinds of longer-term, capital-intensive sectors.

“Inflation and interest rates have proved headwinds for infrastructure. [but] the macro-environment is – slowly – changing,” says Wall.

Infrastructure investments and green energy are likely to be key priorities for the Labour government, with significant investment promised in October’s Budget.

The fall in its share price means that Greencoat is now trading at a 19.6% discount to NAV, despite a dividend yield of 7.8%. Now could be an opportune moment to buy into this sector at a discounted rate.

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But as always best to DYOR.

The funds that the Trustnet team are backing in 2025

02 January 2025

The members of Trustnet’s editorial team pick the funds that they expect will outperform this year.

By Gary Jackson

Head of editorial, FE fundinfo

Funds managed by the likes of abrdn, Rathbones and Artemis are being backed the journalists in Trustnet’s editorial team for 2025, with the question of how to approach the US stock market being the biggest issue.

US equities had another strong year in 2024, thanks to the artificial intelligence (AI) revolution, the US exceptionalism narrative and Donald Trump’s second presidential win. However, there are questions about if recent US winners will continue their run into 2025 and, if not, how the market rally will broaden out into other areas.

Below, the Trustnet editorial team explain how they are approaching this dilemma and the funds they think will outperform over the coming 12 months.

Head of editorial Gary Jackson: abrdn Global Smaller Companies

Thinking about where to invest in 2025, I find myself focusing on global small-caps for a few reasons. Historically, small-cap companies have shown the potential for higher growth compared to their larger counterparts, particularly during periods of economic recovery. With global economies stabilising and the direction of interest rates likely to remain favourable, smaller companies could stand to benefit.

Additionally, small-caps are currently trading at attractive valuations relative to large-caps following their recent underperformance (see chart below), presenting a reasonable entry point for those willing to accept their higher volatility in exchange for long-term growth potential.

Performance of global large-caps vs small-caps over 3yrs

Source: FE Analytics

My preferred fund in this space is abrdn Global Smaller Companies. It offers a well-researched, diversified approach to small-caps, focusing on businesses with strong fundamentals and growth prospects. By targeting quality companies, the fund mitigates some of the risks inherent in small-cap investing, which adds a layer of confidence to this choice.

Manager Kirsty Desson said: “We’re looking for those rare companies that, we think, have what it takes to be a potential large-cap leader of tomorrow, resulting in a high conviction portfolio of around 50 stocks.”

Its global reach adds another layer of appeal, providing exposure to regions where small businesses may have unique advantages, such as local market expertise or favourable economic conditions. Around half the portfolio is in the US, where small-caps are among the expected beneficiaries of president-elect Donald Trump’s policies, but also offers exposure to Japan, the UK, Australia, Germany and other countries.

While small-caps are not without their challenges – they tend to be more sensitive to market fluctuations and economic downturns – this is precisely why I’m approaching this decision with balance. I see this as a calculated step to diversify my portfolio, which has plenty of exposure to large-caps, and position it for potential upside in a less crowded segment of the market.

Editor Jonathan Jones: Rathbone Global Opportunities

This year has been one of surprising prosperity for investors despite myriad reasons for markets to collapse. Although there is still trepidation heading into 2025, I am taking the glass-half-full approach and picking something that should do well if the good times keep on rolling.

I already own Rathbone Global Opportunities in my ISA and am picking it here. The fund is managed by Alpha Manager James Thomson and is predominantly invested in the US (71.4% of the portfolio).

Performance of fund vs sector and index over 10yrs

Source: FE Analytics

With Donald Trump becoming president in 2025, things could be on the up in the US. The president-elect has promised huge fiscal spending during his tenure and markets performed well during his first term. Indeed, the S&P 500 made a total return of 21.1% in 2017 (in US dollars).

This fund owns some big tech names such as Nvidia and Microsoft that have thrived over the past 18 months but also owns defensive holdings, giving it a more balanced performance trajectory. Although returns are below par over three years due to its lack of Magnificent Seven positions, next year could be a big one for some of its less heralded companies.

News editor Emma Wallis: Brown Advisory Global Leaders

I’ve waded my way through a multitude of fund managers’ outlooks this year and the consensus forecast is that 2025 should be a good year for equities, albeit nowhere near as good as 2024, so I’m going with an equity fund.

US equities are richly valued and while some managers argue there are good reasons for that, such as strong earnings growth, others warn that the slightest disappointment or earnings miss could be severely published when stocks are priced for perfection.

I am still undecided about whether the US will continue outperforming all other regions or if cheaper areas are a safer bet. So I’ve decided to delegate geographic decisions to the experts by choosing Brown Advisory Global Leaders, managed by Mick Dillon and Bertie Thomson.

I don’t know how much longer the current late-stage bull market will last and if next year will be volatile – quite possibly with Donald Trump at the helm of the US, home of the world’s largest market. But wherever markets and economies are headed, the companies within Brown Advisory Global Leaders, which are solving problems for their customers and taking market share, are well placed to weather any storms.

If markets do sell off, the Dillon and Thomson will be taking advantage and buying more shares in great companies at cheaper prices. They have to. Their investment process includes a drawdown rule whereby if a stock falls 20%, they have to buy more or get out. Staying still is not an option.

Whilst Dillon and Thomson aim to buy stocks when they are cheap, their portfolio is nonetheless quite richly valued and that does concern me. In a real world scenario I would pair this fund with a value manager and a small-cap specialist.

However, I can sleep soundly at night knowing that Dillon and Thomson will do their utmost to perform because they could not be better incentivised. “Bertie and I have only two investments,” Dillion told me earlier this year. “We are partners and shareholders at Brown Advisory and we invest in Brown Advisory Global Leaders and that’s it. We’re all in. I’m a big believer in people who eat their own cooking.”

Senior reporter Matteo Anelli: Premier Miton US Opportunities

I am often the annoying anti-consensus person in the room and that shows when I’m picking investments too, although probably (hopefully) looking beyond the Magnificent Seven isn’t anti-consensus anymore.

My pick is Premier Miton US Opportunities, an unconstrained fund concentrated on 40 multi-cap companies that have demonstrated their strength across market cycles. It is a very flexible fund that can target more defensive or cyclical businesses depending on the market environment and, most importantly, isn’t invested in the same US companies that everyone already owns.

Performance of fund vs sector and index over 10yrs

Source: FE Analytics

Experts are now expecting returns to move away from the US mega-caps into the lower capitalisation companies, which might also benefit from new domestically-focused policies in the US. The fund doesn’t include any of the Magnificent Seven, so has underperformed its peers and market in recent years, but I’d hope this would turn around if and when market leadership in the US shifts.

Reporter Patrick Sanders: Artemis Global Income

As the latest addition to the Trustnet team, I went back and forth on the ‘safe choice’ of picking an index tracker, banking on another year of spectacular US performance. But ultimately, I thought I would go with a fund that stuck out to me over my opening months on the team – Artemis Global Income.

This fund appeals to me for a few reasons. Firstly, after talking with managers Jacob de Tusch-Lec and James Davidson I have a good understanding of their approach to equity income investing. The managers have an interesting and well-diversified stock-picking strategy.

While there is a major US allocation, the high-conviction portfolio also has exposure to Europe, Japan and has even recently pivoted more towards China. Since I’m picking a single fund rather than building a full portfolio, this broad exposure appeals to me and might serve me well if the market broadens out next year as some investors have suggested.

Performance of fund vs sector and index over 10yrs

Source: FE Analytics

De Tusch-Lec and Davidson’s approach has also worked recently and put the fund in the top quartile of the IA Global Equity Income sector over the one, three and five years. With a 4.21% dividend yield placing it within the top five yielding funds in the sector, it matches all the criteria I would look for in equity income.

From wealth management firm Bespoke Investment Group, there have been 27 bear market declines in the S&P 500 since 1929. It should be noted that Bespoke has a very clear definition of what it believes constitutes a bull and bear market. A 20% (or greater) bounce from recent lows that was preceded by a 20% (or greater) decline represents the start of a bull market. Meanwhile, a 20%+ drop from recent highs, which was preceded by a 20%+ rally, signals the beginning of a bear market.

Data from the 27 bear markets the S&P 500 has endured over the past 94 years shows the index has averaged a 35.1% loss. More importantly, bear markets have lasted an average of just 282 calendar days (about 9.5 months).

On the other hand, the 27 bull markets the S&P 500 has enjoyed over the past 94 years have led to an average — I repeat, average — gain of 114.4% !

Furthermore, bull markets have gone on for an average of 1,011 calendar days, or close to three months shy of three years. Put another way, the average bull market has lasted slightly more than 3.5 times longer than the typical bear market since 1929.

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Using good ole hindsight the current S&P bull market started in Oct 2022.

Using the statistical average it could have further to run, although the later you board the train the higher the risk.

One certainty is the current bull market will be followed by a bear market but as always the timing is the unknown.

The 2025 fcast is £9,120.00 and the target is £10,000.

The target may be a bridge too far but the fcast should be met, which will be ahead of the plan.

A reminder of the rules for the Snowball, there are only 3.

1. Buy Investment Trusts that pay a dividend and use those dividends to buy more Investment Trusts that pay a dividend.
2. Any Trust that drastically alters their dividend payments must be sold, even at a loss.
3. Remember the rules.

Investment Trusts are the favoured investment as most have reserves to pay the dividend in times of panic as during the Covid market melt down.

Snowball Effect Investing | Compound Your Wealth Like Warren Buffett

August 29th, 2024 by Bob Ciura

The snowball effect shows the power of compounding.

When you push a small snowball down a hill, it continuously picks up snow. When it reaches the bottom of the hill it is a giant snow boulder.

The snowball compounds during its travel down the hill. The bigger it gets, the more snow it packs on with each revolution. The snowball effect explains how small actions carried out over time can lead to big results.

Source: Calvin & Hobbes

In the same way, investing in high-quality dividend growth stocks can generate large amounts of dividend income over long periods of time. That’s because dividend growth stocks tend to pay rising dividends every year. And then you can reinvest those rising dividends to purchase more shares each year. This results in an increase in the total number of shares you own, as well as an increase in the dividend per share, for a powerful wealth compounding effect.

When the Nobel Prize-winning scientist Albert Einstein was asked to identify the most powerful force in the universe, he is said to have replied: “compound interest”. It’s no joke to say that the mathematical phenomenon of compounding – or the ability for gains to grow on gains and income to arise from income – provides a powerful tool for anyone seeking to accumulate wealth. However, you will need time to make it work.

Dividends earned £10,976 beating both the fcast and the target.

An update tomorrow on the 2025 fcast.

A healthy New Year to all.

Goldman Sachs analysts, for example, project the S&P 500 may only generate an average annual return of 3% over the next 10 years due to high valuations and the resulting concentration of value in the index’s biggest holdings.

JPMorgan analysts believe the index will deliver an annual return of just 6% over the next decade.

U have 100k to invest for your retirement in ten years time.

If u buy a S&P tracker and let’s be optimistic and use the 6% growth figure, your 100k could be worth
£179k, could be more could be less.

If u use the 4% rule that would give u income of £7,160 pa, u would need a cash buffer but at the present time u could earn 4% on that cash buffer.

If u buy an annuity, lets be generous again and use a 6% figure, income of £10,174 pa

Canada Life figures show the 65-year-old with a £100,000 pension pot could buy an annuity linked to the retail price index (RPI) that would generate a starting annual income of £3,896. That’s up from £2,195 in the New Year following a 77% spike in rates this year.
Oct 22

It could be less and u have to surrender all your capital but it’s only your retirement u are gambling with.

If u invest in a portfolio of income producing Trusts u could earn 8% and if u compound the dividends at 7% u would have income of 16k pa.
If u leave the funds uncrystallized 25% of that would be tax free and all future dividends would also be 25% tax free. U could pass on your fund to your nearest and dearest but remember those wee cats and dogs.

It’s only your retirement u are gambling with so it depends if u are a gambler or an investor. GL

Dividend Wealth Journal:

The Power of Dividends in Bear Markets
Investing in dividend stocks is a favourite strategy of mine and it might be even more important if we see a Bear Market.

A lot of famous people are telling us a major correction is coming soon.
Are they right?

Not necessarily. They’ve been predicting a huge crash for two years now.

But if we do see a crash, wouldn’t it be great if we didn’t care?

How do we do that?

Dividends.

Here’s why dividends are great during Bear Markets.

1. Consistent Income in Uncertain Times

When stock prices decline, dividend-paying companies still give us regular cash payouts. This income stream can help us deal with the blow of falling portfolio values, offering a tangible return even in a declining market.

For long-term investors, dividends provide a source of steady income that can be reinvested to buy more shares at lower prices. This compounding effect enhances returns over time, helping to offset the losses incurred during a bear market.

2. Lower Volatility

Historically, dividend-paying stocks have less volatility than non-dividend-paying stocks or the market. During bear markets, this reduced volatility translates to smaller declines, helping us preserve more of capital.

For example, during the financial crisis of 2008, high-quality dividend-paying stocks declined far less than the broader market. This stability, relatively speaking, makes them a valuable addition to our portfolios during periods of high market uncertainty.

3. Outperformance in Historical Bear Markets

Looking back at past bear markets, dividend-paying stocks have consistently outperformed market indexes. For example:

During the 2000–2002 dot-com bust, high-dividend-paying stocks declined far less than the tech-heavy NASDAQ index.

In the 2008 financial crisis, dividend-paying stocks provided more stability and a quicker recovery compared to non-dividend payers.

These patterns show us the resilience of dividend stocks during market downturns.

4. Psychological Benefits of Dividends

In a bear market, fear and panic often drive investors to sell, locking in losses. Dividend stocks provide a psychological advantage by giving out consistent income, which can help us stay calm and maintain a long-term perspective.

Knowing that we’re earning a return, even as prices fall, makes it easier to avoid emotional decisions and stick to your investment strategy.

Final Thoughts

Bear markets are challenging, but dividend stocks offer a way to weather the storm. Their consistent income, defensive nature, and lower volatility make them a great choice for preserving wealth and generating returns in down times.