A fantasy portfolio comprising the 10 largest conventional investment trusts

12th Oct '20 by pka

37 comments 3075 reads

Some readers may be interested in my experience with a fantasy Stockopedia portfolio that invests in the 10 largest conventional investment trusts.

I set up this fantasy portfolio on 28/11/2018 with a notional initial investment of £100,000. The purpose was to provide a benchmark of a “no thought” investment trust portfolio with minimal trading costs, for comparison against more complicated strategies for creating and trading portfolios, and also for comparison with the performance of my actual portfolio.

This fantasy portfolio comprises an initially equally weighted portfolio of the ten largest conventional investment trusts available on the UK stock market. They were selected by ordering ITs by decreasing market capitalisation based on their share prices, and ignoring any ITs that are not conventional ones which invest in quoted stocks. So ITs investing in private equity, venture capital, property, infrastructure, etc, are ignored as they are not conventional ITs.

On 28/11/2018, a notional £10,000 was invested in each of the following ten ITs: Scottish Mortgage, F&C, RIT Capital Partners, Alliance Trust, Witan, Templeton Emerging Markets, Monks, Polar Capital Technology, Caledonia, and Mercantile. So this fantasy portfolio had an initial total value of £100,000. On that day, the FTSE All Share Index had a value of 3,845 and the MSCI World Index had a value of 2,030.

The rules are to leave the portfolio unchanged until such time as the market capitalisation of one of the ITs in the portfolio is significantly below that of another conventional IT that is not currently in the portfolio, in which case that holding may be sold and the proceeds would then be used to purchase that other IT. No account is taken in these rules of the previous past performance histories of ITs, nor of their discounts or premiums to their Net Asset Values. So it really is a “no thought” portfolio.

These rules keep transaction costs very low, but they do allow occasional discretionary changes at the margin to allow for the replacement of any ITs with poor performance / momentum in the portfolio.

Dividends are ignored in Stockopedia portfolio, so its total value only measures the capital performance of the share prices of its constituents, not their total return.

On 29/6/2020, Caledonia was sold from this portfolio and the proceeds were reinvested in Worldwide Healthcare.

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ken mitchell

17th Oct '20

pka

I don’t think Stockopedia could possibly provide even a fraction of the wealth of information on sites like aic and Trustnet. So Investment Trust fans here just need to make full use of those free sites. They are superb, bir my preference is for aic as they only cover Investment Trusts.

HumourMe

pka,

I agree and would like to see IT info here. I'd also like more powerful screening tools. Unexpectedly, while seeking both, I found what I was seeking elsewhere. My subscription is 2/3 through here and it is currently in the balance whether I go forward with UK only (I was UK/EU) or cease. Good IT coverage here, would probably have prevented me even looking. Everything that you seek has been implemented elsewhere, in one place, so it is possible. Time, resources and will allowing, might see it here too. I suspect not imminently though.

pka

Hi Ken,

I do use aic and TrustNet, but I find my "Investment Trust" folio on Stockopedia much quicker to use than those sites to obtain admittedly a more limited set of information about ITs than those sites.

However, as Macro pointed out here:

https://www.stockopedia.com/content/browse-market-data-investment-trusts-628133/

"Looking at the database from the front page: Select Browse, then Market Data, then Investment Trusts. What I see is a mangled mess of ETFs and Investment Trusts - not a ordered managed database of Investment Trusts."

I have found that Stockopedia option to provide information on ITs quite useless.

Agree with most of that pka.

13th Feb '21

Here is an update on 13/2/2021 of the performance of my fantasy portfolio comprising the 10 largest conventional investment trusts, ignoring dividends but including 0.5% stamp duty on purchases and notional costs of £10 per transaction from an online share dealing platform. Since 12/10/2020, there has been just one change in the portfolio which was due to changes in relative market capitalisation of the candidate ITs.

On 9/2/2021, Finsbury Growth & Income was sold from this portfolio and the proceeds were reinvested in Fidelity China Special Situations.

On 13/2/2021, this portfolio therefore contained the following ten ITs, in order of decreasing market capitalisation: Scottish Mortgage, F&C, Monks, RIT, Polar Capital Technology, Alliance Trust, Fidelity China Special SItuations, Smithson, Worldwide Healthcare and Templeton Emerging Markets.

On 13/2/2021, this portfolio had a capital value of £148,268 (i.e. capital growth of +48.3% since 28/11/2018). The FTSE All Share Index was at 3,755 (i.e. -2.3% growth since 28/11/2018). The MSCI World Index was at 2,819 (i.e. +38.9% growth since 28/11/2020).

Therefore this fantasy portfolio has significantly out-performed the FTSE All Share Index and out-performed the MSCI World Index over the two-and-a-quarter-year period from 28/11/2020 to 13/2/2021, ignoring reinvested dividends. This out-performance was mainly due to the following three ITs whose holdings had grown significantly above the initial holding of £10,000 in each: Scottish Mortgage (£28,487), Polar Capital Technology (£20,871) and Monks (£18,670). These three ITs had significant percentages of their own portfolios in technology stocks, which had performed particularly well over this period.

There may be an element of luck in these out-performances, for having those three ITs in the original selection. Another possible reason is that only two of the 14 ITs that have been in the portfolio at some time (Mercantile and Finsbury Growth & Income) are predominantly invested in the UK stock market (which has performed relatively poorly over this period). The remaining 12 ITs invest on a global basis including the UK or (in the cases of Templeton Emerging Markets and Fidelity China Special Situations) solely outside the UK.

Another possible reason for the out-performances is there is an element of share price momentum in this portfolio, because the smaller ITs in this portfolio that have performed relatively poorly have been replaced by ITs whose market capitalisations have moved them into the top ten.

Whatever the reason for the out-performance of the relevant indices over two and a quarter years, it is encouraging bearing in mind it is a portfolio with such simple rules and a very low turnover of its constituent stocks.

14th Feb '21

I mentioned in a previous comment on 14/10/2020 that I have been experimenting with a form of momentum investing applied to investment trusts. For this purpose, I set up a Fantasy Fund on Stockopedia on 7/6/2020 with a notional initial investment of £1 million. It comprised an initially equally weighted portfolio of 10 investment trusts available on the UK stock market which have market capital values >= £200 million, bid-offer spreads < 200 basis points, and share price %200 day Moving Averages > 0, ordered by decreasing %200dMA. There was no restriction put on the type of investment trust - conventional ITs as well as ITs investing in private equity, property, infrastructure, hedge funds, commodities and multi-assets were all considered as candidates for the portfolio.

The rules I use for this Fantasy Fund are: An IT MAY be sold from the portfolio if its share price %200dMA reduces to less than zero, or if it can be replaced by an IT not currently in the portfolio with a more than 30% higher value of its %200dMA. Proceeds of any sales should be reinvested in the best IT not in the portfolio that satisfies the criteria. If there Is no such IT, proceeds should be held as cash. If there is a choice between two ITs that satisfy the criteria nearly equally, an IT which provides greater diversification to the underlying assets of the portfolio and/or which has a more steadily rising share price should be preferred. If a holding grows to > 20% of the portfolio's total value, it MAY be top-sliced to rebalance the folio. Discounts to Net Asset Value and dividend yields are ignored in these rules.

The hope is that these rules will take advantage of the absolute momentum of the share prices of ITs, in order to improve the total return of the portfolio and reduce its riskiness (by causing the portfolio to be out of equities during prolonged bear markets).

This Fantasy Fund has now been going for 8 months, so it is still not statistically valid to draw any definite conclusions. Over those 8 months, 7 ITs have been sold from the portfolio and replaced by 7 other ITs, in accordance with the rules. 5 of the original ITs are still in the portfolio. So far, this Fantasy Fund's performance has been very encouraging, although it has been more volatile than the FTSE All Share Index. Over those 8 months, it has increased in value by 45%. This means it has out-performed (in capital returns) the FTSE All Share Index by about 21%, out-performed the MSCI World Index by about 17%, and out-performed my fantasy portfolio of the 10 largest conventional ITs (described in my article) by about 12%. It remains to be seen whether these out-performances will continue over longer periods of time.

Of course, the out-performance of my IT portfolios of the MSCI World Index over the last 8 months might be partially caused by the cumulative effect of gearing by ITs and the tendency of discounts to Net Asset Value to narrow over that period, during which there has been a bull market on world stock markets. These factors are likely to go into reverse when stock markets are falling, so my IT portfolios might under-perform during major bear markets.

IronPyrites

Hi pka

Many thanks for the update. My SIPP is almost entirely invested in ITs :-)

I find the Money Makers weekly podcast by Jonathan Davis and Simon Elliott a helpful summary of IT activity covering results, corporate activity, IPOs etc and occasionally with a bit of 'education' on ITs thrown in.

Usually lasts about 45mins.

https://money-makers.co/money-...

Regards Iron

Howard Adams

Very interesting thread and review of performances, thank you.

Of late I have focussed quite a lot on the Baillie Gifford (BG) stable of ITs (they have 37). As well as looking at their open ended Unit Trusts (they have a lot more of these). I note in your post of yesterday, that two of your top three performers are BG trusts, Scottish Mortgage Investment Trust (LON:SMT) and Monks Investment Trust (LON:MNKS) .

You wrote .....

'This out-performance was mainly due to the following three ITs whose holdings had grown significantly above the initial holding of £10,000 in each: Scottish Mortgage (£28,487), Polar Capital Technology (£20,871) and Monks (£18,670). '

Clearly, several of BGs trusts have performed very well over past months (and years).

For investors who like growth, are biased towards tilting into the new economies (tech, online retailing, EVs, chips, AI, clean energy and many others) their offerings are very interesting.

Their ITs hold unlisted stocks as well as listed ones (the UTs only listed stocks) which I find interesting.

A point of great interest to me has been that through searching YouTube (using 'Baillie Gifford [name of trust]', then more broad searches), I have been able understand, in detail, their investing philosophies, the managers and approaches they have with each trust and their reasons for the forms of diversification they adopt (for each trust). I have found this trawling to be enlightening about how different economies seem to be developing (China versus US versus Europe, for example) and types of business models which seem to be rising to the fore.

Two examples of these vids (which might be of interest to others), are below.

There is this one which presents one of the economic theories BG apply to their investing philosophy. It is about 60 mins:

A second, by way of an example of a presentation about one of the trusts (Scottish Mortgage Trust SMT). This is useful as it elaborates on BG's search for the 'big winners'. as well as why they also invest in unlisted companies.

Disclosure: I do hold several BG trusts.

Clearly, BG are not alone in these types of presentations (and in the end of the day are sales pitches), but these types of resources do provide a useful way to get a closer look into trusts and their managers.

Regards

Howard

Mike888

Hi pka, very interesting post.

Quick question what tool/site did you use to return IT's by Market Cap please.

I tried using the Stocko screen "industry group = collective instruments" order by market cap. But it only returned 93 results (obviously wrong) and didn't include what I would expect. ie missed a bunch of those that you have mentioned which it should have returned,. eg £LON:SMT absent but clearly meets the criteria.

Hi Mike888,

I agree that trying to use the Stockopedia screen "industry group = collective instruments" is a waste of time.

I've created my own Stockopedia Folio called "Investment Trusts", to which I've laboriously added every IT in the UK market that I'm interested in, but with holdings of zero in each IT. I think there are now about 300 ITs in that folio. On the "Quotes" screen of that folio, I have the following items displayed: "Ticker", "Name", "Mkt Cap £", "Spread (bps)", "%200d MA", "%Price Chg 1m", "%Price Chg 6m", "%Price Chg 1y", "%Price Chg 5y", "%52w High", "%50dMA/200dMA", "Yield %", "Risk Rating", "1y Volatility %" and "%Price Chg". I can order the ITs in that folio by any of those items by clicking on the heading of the relevant column. I find that Folio useful, and I particularly like Stocko's charts of historic share prices of Folio constituents and its data on bid-offer spreads (which is not easy to find on other websites).

Unfortunately, Stockopedia does not provide information on the discounts/premia of ITs to their Net Asset Values, which is very important information for ITs. I sometimes use the free AIC website to obtain that and some other useful information on ITs, but I find that website slower to use than my Stockopedia folio.

In case anyone is interested, I currently have the following ITs in my share-price momentum IT fantasy fund, ordered by the decreasing value of the holdings:

Pacific Horizon, Scottish Mortgage, Edinburgh Worldwide, Baillie Gifford US Growth, Allianz Technology, JP Morgan China Growth & Income, Biotech Growth, JP Morgan Smaller Companies, Chrysalis Investments, Baillie Gifford European Growth.

It is no coincidence that half of these ITs are managed by Baillie Gifford!

In my real SIPP and ISA portfolios, in which I am more conservative in my investment approach and take discounts or premia to NAV into account, I have the following ITs at present:

Aberforth Smaller Companies, Allianz Technology, Baillie Gifford US Growth, Biotech Growth, Blackrock World Mining, Edinburgh Worldwide, Herald, International Biotechnology, JP Morgan Global Emerging Markets Income, JP Morgan Asia Growth & Income, Polar Capital Technology, Schroder Asia Pacific, Scottish Mortgage, TR European Growth.

I also own the multi-asset ITs Capital Gearing, Personal Assets and Ruffer Investment Company as (imperfect) hedges against a bear market.

This is not a recommendation and people should do their own research!

Thanks pka, yes I tend to buy IT's when there is a discount to NAV that stretches beyond their annual deviation. But I've never tried such a simple approach as yours, which TBH is a bit of an eye opener.

Cheers

Mike

Hi Mike888, I think there's a lot to be said for using a simple approach to investment, provided that it works. It saves a great deal of time!

smose

20th Feb '21

Has anyone built a portfolio from ITs with the purpose of getting regular income out of the dividend (like income unit trusts) inside ISA/SIPP as a supplement to pensions? If so, how does portfolio from ITs compares with portfolio from unit trusts?

obviously the underlying capital/IT value at least not eroded. This is an issue with some VCTs. I have over the years built a VCT portfolio with this in mind, but now am also exploring doing likewise with ITs or unit trust under umbrella of ISA.

gus 1065

Morning Smose.

I run a portfolio of various mostly equity based assets including IT’s in both a SIPP and ISAs (and non tax sheltered regular accounts) from which I take a regular income. I don’t specifically segregate the different asset classes and typically accumulate any dividend income within the wrappers and sell assets/withdraw cash as and when needed. This said, I like to monitor the income streams from existing and prospective investments and my experience has been that many IT’s have been reliable income producers. As ever, there is quite a wide range of choice so it’s a matter of selecting a portfolio that’s targeted to what you need. With this in mind, you may find the AIC website a useful resource and in particular the Income Builder section which allows you to create a virtual portfolio and model the expected income stream.

https://www.theaic.co.uk/incom...

Also, if income is your particular focus, take a look at the Dividend Heroes section which identifies the assets which have the best record in terms of dividend payment consistency.

Gus.

Thanks Gus. Such a useful site. I wish I've asked this question earlier. Oh well, better late than never. I'm still building capital in the ISA/SIPP/vantage fund with HL. This will be useful as I transit into retirement in the next 1-2 years.

florence1

21st Feb '21

What now though? Much of this out performance was due to Tesla and FAANG which have probably peaked and are being sold off to realise profits. I think the low hanging fruit has gone and it will prove much harder for anything US tech related. Time forUK equities and other neglected areas to shine perhaps

Smoke

The “find companies” heading on aic website is a very good way in to key information. E,g performance, top 10 holdings, NAV discount, factsheets etc. I use it a lot.

I run an Investment Trust portfolio on Mike Walters subscription website that has been running almost 5 years. It has outperformed the FTSE100 and FTSE250 by a big margin and has just outperformed the high flying AIM index. But that’s more a reflection of the wide range of Investment Trusts than my investment skills. A completely different portfolio could well have done as well or better.

My key tactic is to try and buy good quality Trusts when they are trading at discounts and even better if on an unusually wide discount.

Investment Trusts have huge advantages over the much more popular Unit Trusts/Investment Funds imo.

Here’s the link to the latest Investment Trust portfolio update on Mike Walters site. It is subscription at £70 a year but I think Mike Walters (who used to be Deputy City Editor of the Daily Mail) allows a short free trial. There are quite a few posting there on Investment Trusts including basic information like the case for them and plus points over Unit Trusts.

http://www.michaelwalters.com/board/viewmessage.phtml?&num=332302&last_child=0#332302

A fantasy portfolio comprising the 10 largest conventional investment trusts

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