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Independent: the best and cheapest trust of 2017

18 January 2018

Independent, the best performing investment trust last year with a shareholder return of 71%, is also one of the cheapest after its stellar growth helped cut shareholders’ annual costs to just 0.25%.

Independent (IIT), the best performing investment trust of last year, has also revealed itself to be one of the cheapest after its stellar growth under managing director Max Ward cut shareholders’ annual costs to just 0.25%.

Figures for 2017 had already confirmed Independent beat all of the 400 or so investment funds listed on the London Stock Exchange last year by generating a 71.3% total return including dividends for its delighted shareholders.

This was based on one of the best increases in net asset value (NAV) by an investment trust – 50.3% in Independent’s case – combined with a re-rating in its stock as investors rushed to buy the company Ward founded 18 years ago.

Final results published today gave a slightly different picture, revealing Independent’s NAV leaped by 54.8% and shareholder returns soared 87% in the 12 months to 30 November as the portfolio was powered by a recovery in house builders and a surge in the smaller technology stocks Ward holds. This was its best ever annual report, helped by the shares starting its financial year at a discount of 11% below NAV but ending the 12-month period on a premium of 7% above it.

The year also saw Independent win one of Citywire’s first investment trust performance awards in recognition of its superior three-year returns.

You can see Ward discuss his achievement and career in our recent video interviews.

Low-cost becomes lower cost

A result of Independent’s assets swelling from £220 million to £338.5 million was a further fall in the already low proportion taken by the self-managed fund in annual fees and charges.

Ongoing charges borne by shareholders in the Edinburgh-based trust dropped from 0.34% to 0.25% last year, a record low for Independent and the lowest of any investment trust or investment company in the UK.

This is a feat for any actively managed fund, but particularly for one that has delivered outperformance like Independent, trouncing the FTSE All-Share index which returned 13.4% in the latest financial year. Since launch in 2000, Ward has overseen average annual growth of 13.7%, producing a total portfolio return of 788% that again puts the respective figures for the index of 5.4% and 146% well and truly in the shade.

At their new level, Independent’s charges will not be much more than some ‘low-cost’ index tracking funds whose returns would have been far lower.

Figures from the Association of Investment Companies underline how inexpensive Independent is with the average listed closed-end fund charging 1.29% a year. The Global sector in which it formally sits, despite being wholly invested in the UK, has an average ongoing charge of 0.63%, while UK focused trusts levy 0.73% on average, excluding performance fees.

Independent undercuts other good value investment trusts, such as Scottish Mortgage (SMT), Scottish (SCIN) and Bankers (BNKR), which charge between 0.44-0.47%, according to AIC data.

The only two investment trusts that could beat Independent on costs are Woodford Patient Capital Trust (WPCT) and Aurora (ARR), two UK trusts whose managers waive a normal annual management fee and take shares when their performance is good enough.

According to the AIC, Aurora’s performance fee cost 0.8% in its last financial year. Neil Woodford’s Patient Capital is cheaper than Independent with ongoing charges of just 0.18%, having failed to earn its performance fee. With its shares down 7% last year, there is no doubt as to which one investors would currently prefer.

Can Independent keep it up?

Douglas McDougall, Independent’s chairman – and Ward’s former boss when they both worked at fund manager Baillie Gifford in the last century – said it was nine years since the FTSE All-Share had suffered a negative 12 months to November and that the index had generated an average annual return of over 10% in that period.

‘Common sense would suggest that we are overdue a significant market correction, but in the absence of any clear indication of the timing of such a correction we see little point in trying to anticipate it,’ he said.

Ward likes to run his winners, similar in some ways to the current managers of Scottish Mortgage, which he previously ran in the 1990s. However, he confessed to ‘reluctantly’ taking some profits in Fever-Tree (FEVR) as shares in the tonic business – his biggest holding at 8.6% of the fund – doubled last year. The manager remains convinced of its long-term potential, however, writing:

‘Fever-Tree's international business (probably 40% of total sales) is growing at over 40% per annum and in each of its geographical areas it dominates the premium segment of the mixer market. We think premium mixers will continue to gain market share for years to come because they are starting from a low base and we expect Fever-Tree to be at the forefront of this trend.’

He was less ‘trigger happy’ with Blue Prism (PRSM), the provider of software robots whose shares have soared as companies have sought to automate routine tasks within their businesses. It ended the financial year as Independent’s second-biggest holding at 8.1%.

‘We do not pretend to know what the "right" valuation for the company is, but we continue to believe that it could grow to many times its current size in a relatively short space of time if it maintains its position of leadership in the embryonic market for robotic process automation,’ Ward commented.

Ward did take profits in other successful technology and telecoms holdings, such as FDM (FDM), Gamma Communications (GAMA) and Kainos (KNOS). Nevertheless, with debutants Alfa Financial Software (ALFA) and Frontier Developments (FDEV), a cloud-based computer games designer, doing well, the sector accounted for nearly 26% of the fund by year end.

A long-standing investor in house builders, Ward believes the market continues to undervalue the prospects for Belllway (BWY), Crest Nicholson (CRST), McCarthy and Stone (MCS), Persimmon (PSN) and Redrow (RDW), which benefit from strong demand and government support and which now account for 17.5% of the portfolio.

However, he did sell Berkeley Group (BKGH) in October believing that despite being a high quality business: ‘its dependence on the London market and its policy of selling well ahead have left it with very high profits in the current year, but a more subdued outlook thereafter.’

Investment company news brought to you by Citywire Financial Publishers Limited.


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