Under the bonnet of the flexible sector

classic car

As investors in investment trusts will know, the focus of most closed-ended funds is a specific asset - mainly either equities (with a global, regional or sectoral focus) or ‘alternative’ assets such as infrastructure, property or private equity.

But there is one sector that caters to the relatively small number of trusts with a more wide-ranging multi-asset mandate. The Flexible Investment sector was introduced in 2016 by the Association of Investment Companies (AIC); as communications director Annabel Brodie-Smith explains, the aim was “to help investors find and compare those investment companies that have the ability to invest in a range of assets”.

That aim reflected the burgeoning interest among self-directed investors and particularly financial advisers looking to outsource clients’ investment requirements through a packaged ‘one-stop shop’ solution.

According to 2020 research from FTSE Russell, “multi-asset funds, together with passive investments, have been the fastest-growing segments of the global asset management business during the last decade”. Even accounting for market movements, multi-asset funds’ share of total worldwide assets under management has risen from 6% in 2003 to 14% in 2020.

The new sector was therefore an important step for the investment company industry, in that it enabled investors to compare closed-ended multi-asset funds with similar open-ended funds.

However, the diverse make-up and range of assets embraced by Flexible Investment trusts makes like-for-like comparisons within the sector pretty meaningless. “Each company stands out for a different style and strategy and they are by no means comparable,” warns Brodie-Smith.

As Andrew McHattie, publisher of the Investment Trust Newsletter, points out: “There is a vein of similarity in that most of the component trusts have some sort of absolute return objective (aiming to deliver positive returns whether or not markets are rising), which usually means they take a multi-asset approach; but the variety means each trust needs to be considered on its individual merits.”  

A closer look at the Winterflood daily data sheet for 16 August gives some idea of the level of diversity within the 21-stock sector.

It contains one of the biggest trusts in the closed-ended universe - the £4.2 billion RIT Capital Partners (RCP) – as well as two others with market capitalisations of less than £20 million. Net asset value performance over the past year, meanwhile, ranges from Miton Global Opportunities (MIGO), which has gained 46%, to JZ Capital Partners (JZCP), which has lost 38%.

That range of objectives, structures and performance is very apparent in the spread of ratings in the sector, observes McHattie. “Some trusts such as Capital Gearing (CGT), JPMorgan Global Core Real Assets (JARA), Personal Assets (PNL) and Ruffer Investment Company (RICA) have been able to sustain premium ratings. But sharing the same space is Hansa Trust (HAN, HANA) with its two sets of share classes on discounts of more than 33%, JZ Capital Partners on a discount of 59%, and Tetragon Financial Group (TFG, TFGS) on a discount of 64%."

It’s important to recognise, however, that there are various and complex special factors at play in these cases, so it is dangerous to take these figures at face value.  “The ownership structure is definitely something to take into account before you consider investing,” McHattie adds.

There’s equal diversity as far as asset allocation is concerned. According to AIC data, while Capital Gearing holds half its portfolio in fixed interest and 18% in property, with just 22% in equities, Caledonia has a third in equities, 24% in private equity and 28% in ‘other’. Meanwhile, Hansa holds almost 85% in equities and most of the rest in hedge funds. RIT and Ruffer are among several that provide no portfolio allocation details at all.

The upshot is that the trusts in this sector do very different things from each other. For example, a number are extremely successful total return holdings, in that they are invested so as to limit the downside when markets are falling while still capturing a decent percentage of upside during bull runs.

McHattie picks out RIT Capital Partners, which makes a point of issuing data to illustrate its success in this respect.  “The trusts Annual Report 2020 says that since its listing in 1988, it has participated in 73% of the market upside but only 38% of the market declines,” he says. That’s reflected in RCP’s share price returns, up 43% over the past year (second only to Miton Global Opportunities) and joint top of the table over three years.

Some of RCP’s closer peers focus more specifically on capital preservation in their approach. Capital Gearing, Ruffer and Personal Assets all have strong reputations as ‘safe havens’, reflected in current high allocations to fixed interest.

To put that into perspective, looking back at the share price performance data for the month of March 2020, when markets crashed as coronavirus shut down economies worldwide, those three stood firmly at the top of the performance table. CGT lost 3% over the month; PNL less than 1%; RICA actually gained almost 2%. In NAV terms the losses were marginally higher and RICA’s gains marginally larger. Over this period the Flexible Investor sector suffered an average share price loss of 15%.

“This sector is not all about maximising returns, but about achieving a healthy balance of risk and reward,” comments McHattie. “PNL, for instance, thinks carefully about the risks, and its investment policy is ‘to protect and increase (in that order) the value of shareholdersfunds per share over the long term’.”

Taking a very different tack, Miton Global Opportunities invests almost entirely in other closed-end investment companies and provides a useful route into some of the alternative asset trusts that might otherwise be too esoteric for private investors.

“Managers Nick Greenwood and Charlotte Cuthbertson root around among the secondary trusts, trying to take advantage of anomalous discount ratings. They have a real eye for value, and their reports are an excellent source of intelligence for research-hounds too,” McHattie says.

Another interesting option, again very different from its peers, is BMO’s Managed Portfolio, a fund of investment trusts run by veteran Peter Hewitt. Shares can be bought in either the Growth or the Income portfolio. But the trust offers the canny benefit that net income in the Growth version is transferred to the Income portfolio in exchange for the same amount of capital, strengthening the income performance of the income portfolio and boosting capital growth for its sibling.

The Flexible Investment sector is something of a corral in which a wide range of trusts have been rounded up for easy inspection. It’s the place to go if you want to find a multi-asset manager - but don’t make the mistake of assuming you can compare like with like, and do make sure you understand what you’re buying.

In order to make a more meaningful assessment of what a trust actually offers, McHattie suggests that as well as looking at the usual performance figures, “it is worth taking a closer look at other metrics, such as volatility, beta, and downside risk”.