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James Carthew: best and worst investment trusts of last year

4 January 2019

James casts his analytical eye over some of the big winners and losers from 2018.

2018 is attracting headlines as the worst year for markets since 2008. However, for the investment trust industry, there was much to celebrate. This was certainly the case for the new issue market and for fundraises in the secondary market; although, perhaps inevitably, buyer fatigue set in towards the end of the year.

I have written on many of the new issues already and will be looking at some of the others in coming weeks. A few were a bit on the small side and I hope to see some of these expand, subject to the state of markets.

The best performing stock, in share price terms, was Lindsell Train (LTI). This is a great trust but its 46.6% share price return was way ahead of the 18.8% return on its net asset value (NAV). Time and again its directors have warned about the dangers of buying the stock on a high premium but there is limited liquidity and the Nick Train fan club seems deaf to reason.

Top 10 investment trusts & companies AIC sector 2018 share price return %
Lindsell Train (LTI)  Global 46.6
Draper Esprit  Private Equity (pre-IPO) 37.9
Syncona (SYNC)  Biotechnology & Healthcare 32.8
Dragon Ukrainian Properties (DUPD)  Property - Ukraine* 27.1
Gulf Investment Fund (GIF)  Country Specialists: Other 25.9
BH Macro - US$ (BHMU)  Hedge Funds 23.7
EIH (EIH)  Private Equity India* 22.5
3i Infrastructure (3IN)  Infrastructure 22.2
HBM Healthcare Investments (HBMN) Private Equity non-UK listed* 21.8
LXI REIT (LXI)  Property Direct UK 21.4

Source: Numis Securities * Numis sectors

Syncona (SYNC), in second place, actually saw its 32%.5% share price rise actually lag the 33.4% advance in its NAV. Key holding, Autolus Therapeutics, is a long way off its peak but its flotation provided a useful confirmation of Syncona’s stock picking skills. However, Syncona’s 34% premium to NAV looks a bit rich to me.

Generally, biotech and healthcare stocks hit the buffers towards the end of the year. Biotech Growth (BIOG), which I hold, slipped 20.5% over the course of 2018. I topped it up close to the bottom, however. Bristol Myers Squibb’s bid for Celgene has given Biotech Growth a great start to 2019 (Celgene was 8.6% of the trust at the end of November – Celgene’s stock price rose by 25% on the news).

Unnoticed by me until now, BH Macro (BHMG) had a great year with its sterling share class up 18% after a long period of indifferent performance (the dollar denominated shares did even better, see first table). The hedge fund sector is deeply out of favour but a steady 11% uplift in BH Macro’s NAV helped attract attention and its discount was eliminated over the course of 2018.

The wild gyrations in currencies that we have seen this year and increased stock market volatility provide more opportunity for hedge funds such as this to make money. Hopefully, it wasn’t on the wrong end of yesterday's 'flash crash' in the Japanese yen.

Bottom 10 investment trusts & companies AIC sector 2018 share price return %
Infrastructure India (IIP)  India Infrastructure* -40.0
Aurelius Equity Opportunities Private Equity non-UK listed* -42.4
Golden Prospect Precious Metals (GPM)  Commodities & Natural Resources -44.1
LXB Retail Properties  Property Specialist Retail* -50.2
Alternative Liquidity (ALF)  Hedge Funds -51.7
CATCo Reinsurance Opportunities C (CATC)  Insurance & Reinsurance Strategies -56.0
Global Resources  Commodities & Natural Resources -64.4
Tau Capital (TAU)  Private Equity Russia* -64.8
CATCo Reinsurance Opportunities (CAT)  Insurance & Reinsurance Strategies -71.8
Origo Partners (OPP)  Private Equity China* -84.2

Source: Numis Securities * Numis sectors

The decision of Gulf Investment Fund (GIF) to broaden its remit beyond Qatar paid off handsomely. Saudi Arabia, Kuwait, Bahrain and Oman were amongst the best performing markets in the world last year, despite the collapse of the oil price in the fourth quarter. Saudi Arabia is being buoyed by expectations that it will be promoted to the MSCI Emerging Markets index. Similar promotions have attracted much speculative capital and led to a big run-up in markets ahead of inclusion, often accompanied by significant underperformance afterwards.

Another company worthy of a special mention is 3i Infrastructure (3iN). The wobble experienced by the infrastructure sector following the Labour Party’s threat to renationalise PFI/PPP type projects seems to have dissipated somewhat but 3i Infrastructure’s portfolio is not much exposed to this area anyway. The sector received an enormous boost when John Laing Infrastructure was bid for in the summer. The bid underlined the gap between the value placed on long-term cash flows by investors in listed companies as opposed to institutional investors in private assets.

At the other end of the performance tables, shares in CatCo Reinsurance Opportunities (CAT) have collapsed on losses from Californian wildfires and other natural disasters. An ongoing investigation into the manager’s conduct may have sealed the fate of this fund and could lead to the demise of the insurance and reinsurance sub-sector (CatCo is the only fund left following the exit of Blue Capital Alternative Income in July).

Many small and illiquid funds occupy the bottom slots in the performance table but, setting these aside, I was struck by the reversal in fortune experienced by TR European Growth (TRG). This trust had a phenomenal run in 2017 but has given much of that back in 2018.

As investors have become more nervous, areas of markets that are perceived to be risky, such as smaller companies, have suffered. TR European Growth’s discount has opened up again. If you think the pessimism in markets is overdone, this trust might be worth a look. By contrast, Montanaro European Smaller Companies (MTE) has held up well in a market less driven by momentum and growth plays.

It is a similar story in Asia where Pacific Assets (PAC), which I hold, turned out to be the only trust in the sector to make money in 2018. Asia and Emerging Markets trusts, which were very unloved for much of 2018 as the trade war rhetoric turned into reality, are off their lows and seem to have stabilised over the last few weeks.

A resolution to the trade dispute with China could provide a real fillip for markets in the first half of 2019. Any good news on the Brexit front would also be helpful. I think markets would welcome even a clearer indication of the direction of travel on this front.

Otherwise, the big stories are likely to be the pace of Chinese growth, a faltering of US growth as the boost provided by Trump’s end 2017 tax cuts fades, and, perhaps, inflation – the debate around which I highlighted in October with contrasting articles on Henderson Diversified Income and Capital Gearing Trust.

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