The AIC has collated comments from managers about some of their longest holdings and the benefits of the closed-ended structure for long-term investing.
As the industry marks 150 years since the launch of the first investment company, the Association of Investment Companies (AIC) has asked managers to comment on some of their longest portfolio holdings and explain the benefits of the closed-ended structure for long-term investing. The longest holding we are aware of is owned by Bankers Investment Trust, which has held HSBC in the portfolio for 129 years and it is listed in their first report and accounts in 1889.
Annabel Brodie-Smith, Communications Director, Association of Investment Companies said: “Investment companies are an ideal long-term savings vehicle and it makes sense that a lot of investment company managers are also taking a long-term view of their holdings in their portfolios – with one company retaining a holding for almost 130 years. The closed-ended structure of investment companies enables managers to take a long-term view of their portfolio, as they don’t have to worry about inflows and outflows of money like open-ended managers. For income seekers, investment companies can store up to 15% of income received each year to boost dividends when times are tough and this is particularly beneficial for those shareholders seeking a consistent dividend over the long term.”
Manager comments from the Global sectors include: Alex Crooke, manager of Bankers Investment Trust; Bruce Stout, manager of Murray International; Catharine Flood, client service director of Scottish Mortgage Trust; James Dow, co-manager of Scottish American and Alasdair McKinnon, manager of The Scottish Investment Trust. Manager comments from the UK sectors include: Nick Train, manager of Finsbury Growth & Income Trust; Mark Barnett, Head of UK Equities at Invesco Perpetual and manager of Perpetual Income & Growth Trust and Edinburgh Investment Trust; Simon Gergel, manager of The Merchants Trust; Guy Anderson, manager of The Mercantile Investment Trust and James Henderson, manager of Lowland Investment Company. Managers commenting from the North America and Europe sectors are Garrett Fish, manager of JPMorgan American Investment Trust and Tim Stevenson, manager of Henderson EuroTrust.
Global manager comments
Alex Crooke, manager of Bankers Investment Trust said: “The first set of Annual Accounts from Bankers Investment Trust in 1889 contains a fascinating list of portfolio holdings. While dominated by water companies, railroads, breweries and government bonds, a few names stand out. The Liebig's Extract of Meat Co was the owner of Fray Bentos pies and Oxo cubes and the enigmatic Gibraltar Railway Company must have been a limited network. However, one holding from 1889 still remains in the portfolio today and I believe has been held continuously; the Hong Kong & Shanghai Banking Corporation, now simply known as HSBC.
“There are few holdings with this tenure but many other companies we have held for over 30 years. Investment trusts by their nature are suited to a longer time horizon. Investment managers are essentially just custodians for a period of time and we hope to hand over the reins with all in fine order. Longer holding periods mean lower transaction costs and the ability to benefit from a company’s strategy and products over multiple economic cycles.”
Bruce Stout, manager of Murray International Trust said: “Today’s world of commerce, industry, finance and trade may be unrecognisable to that which prevailed in 1907 when The Scottish Western Investment Company (Murray International) was founded in Glasgow with an initial share capital of £500,000, but the investment philosophy has never wavered during over a century of constantly changing and often extremely challenging times. ‘Steel and Railways’ in North and South America represented the vanguard of progress at the beginning of the 20th century, and Murray International’s original investment portfolio had a predominately transatlantic bias too, with a heavy emphasis on the bonds and preference stocks of railroad and tramway companies.
“Fast forward 100 years, and whilst the engines of growth may have changed, the investment spirit to seek out value in emerging markets remains as vibrant as ever. Current holdings such as Grupo Asur, Unilever Indonesia and Taiwan Semiconductor have been held in Murray International’s portfolio for over 10 years. Grupo Asur is the second largest holding and operates airports in Mexico. Through its presence in popular tourist destinations such as Cancun and Cozumel, the company benefits from the continuing rise in visitors to Mexico. Strongly cash generative, this business is well positioned to experience stronger growth as the global leisure industry continues to expand. Although we’ve held these companies in the portfolio for more than 10 years, we continue to do so in the belief that there’s still significant growth opportunities ahead. Murray International’s closed-ended structure helps us to take such a long-term view without any disruptive influences from external events such as short-term market volatility or fluctuating capital flows.”
Catharine Flood, client service director, Scottish Mortgage Investment Trust said: “Scottish Mortgage’s longest holding has been the Swedish industrial company, Atlas Copco, which has been continuously held in the portfolio since 1995. The company is one of Europe's highest quality engineering groups. Its flagship segments are its industrial compressors and vacuum businesses and it also possesses leading positions in industrial tools, and construction and mining equipment; these are combined with a strong after sales service business. Atlas Copco has an excellent record of generating returns, backed by strong cash flow generation and throughout the economic cycle cost controls. It has been a strong contributor to performance, generating a cumulative return of 4,370% for Scottish Mortgage, or 18% on an annualised basis, over the more than two decades for which it has been held*. It is a good example of the returns which are possible from committed long term holdings in strong, growing businesses with durable competitive advantages, which are run by great management teams whose time horizons are aligned with those of our shareholders.”
James Dow, co-manager of Scottish American (SAINTS) said: “Scottish American’s longest continuous holding is SAP, a global software business headquartered in Germany. It was first purchased in 2004, when Baillie Gifford took over management of the trust, and it is still held today. Its software is embedded in the operations of thousands of companies worldwide and is vital to running their business on a day-to-day basis. What has always attracted us to SAP is its potential for long-term growth, combined with the stability of its earnings and the cash generative nature of its business model. Growth in its customer base and the use of its software have required only modest investments in capital expenditure, although the company has periodically made some large acquisitions. The result has been continuous growth in its dividend alongside growth in its earnings.
“This type of investment is fundamentally different from many traditional ‘income stocks’, such as big oil companies, where the dividend is in constant tension with the need for capital to grow. SAP’s dividends have not only grown healthily, they have also proven highly resilient over time. The ordinary dividend has increased every year since 2004, and the dividend yield on our purchase price is now well north of 4%. SAINTS’ shareholders have additionally enjoyed substantial capital appreciation over this period as the earnings and dividends have grown. It is a good example of the type of company the trust seeks to invest in, where there is a strong likelihood of a growing and dependable dividend. This ensures alignment with SAINTS’ own aim to deliver a growing income stream, and a dividend the trust’s shareholders can depend on whatever the economic or business climate.”
Alasdair McKinnon, manager of The Scottish Investment Trust said: “The Scottish Investment Trust has been around since 1887 and over its 131 years has weathered many market ups and downs, bubbles and busts. We look for unfashionable companies that can survive the down-cycles in their industry or environment - whatever the reason for them - and look to make returns when these survival qualities lead to success and recognition from the market. This requires patience - made possible to some extent by the closed-end nature of our investment trust structure.
“Though many of the companies that we held at the inception of the trust in 1887 have now disappeared or been amalgamated into larger entities through the decades, it is quite remarkable to note that we do in fact hold the modern equivalent of one of our first holdings, the Standard Bank of South Africa - having bought Standard Chartered Bank in May of 2016. We’ve held Standard Chartered for just two years to date. However, our longest held bank is French group BNP Paribas – which has been in the portfolio for 16 years. As contrarian investors this is a sector of some interest to us. Despite recovering from the lows of the 2008 crisis, financials, and banks in particular, remain attractively valued with high dividend yields. In a more settled regulatory environment after December’s Basel IV agreement, the outlook for cash returns to shareholders is now clearer. Additionally, lenders tend to benefit from higher interest rates, which improve profitability, so accelerated monetary tightening should be a positive overall. BNP Paribas is currently one of our ‘ugly duckling’ holdings.”
UK manager comments
Nick Train, manager of Finsbury Growth & Income Trust said: “Lindsell Train was appointed investment adviser to Finsbury Growth & Income Trust (FGT) in 2001. One of the first investments we made was into A.G. Barr, the maker of the wondrous IRN-BRU. This was and remains the number 1 soft drink in Scotland, making Scotland, as a result, one of the very few countries in the world where Coke is available but not the top seller. For decades Warren Buffett had been explaining the merits of investing in leading beverage brands – cost of ingredients very low: consumer loyalty to the brands very high. And we chose to follow his general advice by buying Barr, which is still in FGT’s portfolio 17 years later.
“The value of the shares has gone up nearly nine-fold since then, but the statistic I like is this: if you compare Barr’s 2017 dividend payment to our average book cost for the holding we are now earning a dividend yield of about 19% on the original investment. Only long-term equity investing can do this for you and closed-end investment trusts are some of the best designed vehicles for long-term equity investing. Barr has recently cut the sugar content of IRN-BRU so you have no excuse not to keep supping the nectar. We’ll see what that does for the shares over the next 17 years.”
Mark Barnett, Head of UK Equities at Invesco Perpetual and manager of Perpetual Income & Growth Investment Trust and The Edinburgh Investment Trust said: “I have been the portfolio manager of Perpetual Income and Growth Investment Trust for almost twenty years, having first taken the helm in 1999. During this period specific holdings and sector weightings have changed, though one constant has been my focus on finding companies that I believe will provide growing levels of return to investors.
“If I look back on my investments over the past two decades, one clear constant is the tobacco sector. The company has been distinctly overweight the sector for a number of years as this area of the market has proven itself proactive in its response to both shifting consumer trends and an increasingly hostile regulatory environment - remaining a rewarding source of income for the portfolio in a changing investment landscape. Advertising restrictions, smoking bans and stigma could have spelled the end of a less resilient sector, but through consolidation, price hikes and the introduction of new technologies, the sector continues to deliver both earnings and dividend growth to shareholders. Indeed, British American Tobacco (BAT), a major holding, has been a strong income generator for the company over a number of years.
“A key advantage of holding cash generative stocks such as BAT within the investment trust structure is the company’s ability to store up to 15% of the income each year in reserve. This builds an income ‘cushion’ – helping to ensure the smooth payment of dividends in years where income may be harder to generate. The board of directors controls the company’s dividend per share with this in mind. Incidentally BAT is the portfolio’s largest holding at present and recently issued a 15% rise in its dividend for 2018. With shares in the sector trading at attractive valuations and continuing to provide solid income to shareholders, the sector remains a dominant theme in the portfolio.”
Simon Gergel, manager of The Merchants Trust, which has held Royal Dutch Shell for over 20 years said: “Royal Dutch Shell is the biggest holding in the portfolio. Our investment case in Shell has been based upon its ability to generate substantial cash flows over the oil price cycle, which allows the company to pay a high and progressive dividend to shareholders. Shell has been one of the best investments in the portfolio over the last two years, with a total return of around 90%.”
Guy Anderson, manager of The Mercantile Investment Trust said: “The long-term capital structure of investment trusts means one can invest in lesser-known companies where the shares are less liquid. If such companies then deliver growth as they attract the interest of a wider pool of investors, they may attract a higher rating, thereby enhancing the return to shareholders who bought them earlier in their life cycle. One such smaller company which Mercantile has held for more than 20 years is Vp plc, a specialist equipment rental group operating in a number of markets mainly in construction and infrastructure.
“Its leadership and management continuously develop the portfolio to concentrate on establishing market leadership in specialist, high return sectors. It is an innovator within its chosen markets and takes a long-term view to create substantial value for its shareholders, with around half of the shares being owned by the chairman. Over the last 20 years, it has delivered a total shareholder return of over 2,400%, far in excess of the broader market.”
James Henderson, manager of Lowland Investment Company said: “Wadworth has been in Lowland’s portfolio since 1968. The company is a brewery and pub company based in Devizes in Wiltshire, which started in 1852. It is a family controlled company run on a long-term basis and the brewery produces quality beers such as 6X and has a quality estate of managed pubs which gives it a substantial asset value. The value of the holding has increased 100 times and there have been dividend payments along the way as well. It is the only unquoted operating company in Lowland’s portfolio and it is valued at a discount to the most recent substantial traded price. It has been a very worthwhile long-term holding for Lowland.”
North America and Europe sectors manager comments
Garrett Fish, manager of JPMorgan American Investment Trust said: “There are over 20 holdings in the portfolio today that we have held for 10 years or more, which include Microsoft, Apple and Graco. While the majority of the longer-term holdings are within the large-cap space, there is also good representation from small-caps. The all-cap approach we use in this trust affords us the flexibility to hold on to names, even as they move up the market capitalisation spectrum.
“Microsoft is an example of a large-cap stock that has consistently featured among the largest overweight positions in the portfolio. The company has successfully grown its business all round and has done so within the context of a rapidly changing industrial landscape. Today, not only have the firm’s legacy assets, such as its license software business, held up well, recent earnings highlights included Microsoft’s strong execution in its cloud computing offering, Azure.
“Apple is another example of a longstanding overweight position within the portfolio. While Apple has delivered strong performance over the last decade, its shares remain attractively valued and the next upgrade cycle is expected to be the largest yet. Apple has been at the forefront of innovation over the past decade and disrupted its industry through the introduction of products such as the iPod, iPhone and the iPad.”
Tim Stevenson, manager of Henderson EuroTrust said: “We have held Sodexo in the fund for 20 out of the last 25 years and it is an investment that we continue to view favourably. The contract catering and facilities management industries have grown strongly for a number of years, driven by the increased penetration of outsourced solutions. Put simply, a company such as Sodexo is a far more efficient supplier of services than a government department, a school or a company focused on other core activities; this provides a key raison d’etre for the business. For this reason, Sodexo (and its peers Compass and Elior amongst others) have been steadily gaining market share and benefitting from the structural growth that this provides. When we look forward and try to ascertain the prospects for the business over the medium term, we see very little reason to believe that their competitive advantage will be eroded; the company is also investing heavily in technology and other efficiency measures in order to solidify their market position.
“There have been periods when the business model has come under a bit of pressure and times when the company have looked to invest in the future health of the business at the expense of short-term profits. We tend to look through these short-term issues and focus on the long-term attractions of the industry and the business model. This demonstrates one of the key advantages of the closed-end investment trust structure; a stable pool of capital allows you to stay invested for the long term in your high conviction ideas rather than be forced sellers or buyers as money flows in and out as would be the situation with an open-ended product. A long-term fixed pool of capital is perfect for long-term investors.”
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- * to the end of February 2018
- The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 346 members and the industry has total assets of approximately £173 billion.
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