Back to the Future Part 4

Back to the future Part 4 - Investment Trust Special.

30/10/2015

Click to read about best IT's over 30 years @ Thisismoney.co.uk

At the end of the part 3, like Doc Brown, I left you hanging and suggested I might come back with a 4th part at a future date. So today I'm doing that with a trip around the world to look at some investment trusts that might be of interest as a way of playing some of the themes that were explored earlier in the series. If you click the image you will also be able to read an interesting article based on a note from the Investment Trust Analysts at J.P. Morgan which looked at the best performers over the 30 years since 1985. Interestingly the UK All Companies and UK Income Sectors provided some of the best returns which does make one wonder if you really need to venture off into all these esoteric overseas markets? It does however highlight the advantages of a long term investment approach, although 1985-2015 was a pretty good period for investing. Any way despite those caveats lets start in the UK before venturing further afield.

UK Equities
One of the things that came out from the earlier posts was that the UK market, despite the recent concerns after a 6 year bull market, actually seems to be fairly valued and may offer returns in line with the long term average in the future from here based on current starting valuations.

It is difficult to find much of value in Investments trusts or IT's as most of the top performers like Edinburgh Investment Trust (EDIN) and Finsbury Growth & Income (FGT) stand on premiums these days. However in the UK Equity Income sector there are a few that stand on a discount at the moment. A couple of the funds concerned are JP Morgan Claverhouse (JCH) and Temple Bar (TMPL) which are both in that select group of trusts that have increased their dividends for the last 30 years or more. While their recent performance is not up with the best, they have both beaten the All Share over the last 3 and 5 years and currently stand on discounts of around 6% and 5% & have lowish management charges of 0.55% and 0.35% respectively.

European Equities
Some developed European markets such as Italy and Spain came out as looking quite attractive in the statistics I presented in part 3 with potentially better returns than those on offer in the UK. Now I'm not aware of any IT's that offer direct exposure to those markets I'm sure there are some ETF's and Open ended funds that cover those markets if you want to focus down to a country level in Europe. Personally I prefer to play it via more broadly based funds and let the managers allocate where they see attractive opportunities. The best IT (based on past performance) seems to be Jupiter European Opportunities (JEO) but this one sells at a premium as a result and only offers a yield of 0.7%. While another favourite of mine is European Assets (EAT) which invests in smaller European companies and offers a decent 5% yield, but it too trades close to NAV. Other options which currently trade on small discounts include Fidelity European Values (FEV) and JP Morgan European which offers growth (JETG) or income shares (JETI). I cannot recommend, other than on a contrarian basis any Emerging European funds as the two that are available Baring Emerging Europe (BEE) and Black Rock Emerging Europe (BEEP) have both lost money for their poorer unfortunate holders over the last 1, 3 and 5 years!

Asia Pacific Equities
These can be viewed as developed or emerging depending on the market. Some of the larger emerging markets like India and China are covered by IT's. In India you can choose between JPM Indian (JII) and New India (NII) which is managed by Aberdeen Asset Management. These stand on discounts of around 9% and 7% respectively. There was also a recent article looking at the market which asked is India the new China?

Talking of China there are also two IT's you could choose from - the widely publicised launch from a few years ago Fidelity Chinese Special Situations (FCSS) which saw Anthony Bolton make a brief return to fund management. This one has been criticised for its fees but does now stand on a 13.7% discount so may be interesting on that basis if you want to try and play China for the longer term. Alternatively you could look at JPM Chinese (JMC) although this has not performed as well as the Fidelity Trust and currently has a slightly narrower discount of around 12% and is less well known perhaps, but there was a good profile piece here. None of these offer much in the way of yield but if you want some yield and a more broadly based exposure in this region then you could check out Aberdeen Asian Income (AAIF), Henderson Far Eastern Income (HFEL) or Schroder Oriental Income (SOI) which offer yields of 5.1%, 6.6% and 4.1% respectively. Of these Schroder Oriental is the best long term performer but trades on the biggest premium of 4%+ as a result. The value option is the Aberdeen fund as it currently stands on a 3%+ discount probably reflecting its underperformance in NAV terms over the last 1 and 3 years.

Emerging Markets
A more general category for funds which cover all emerging markets. While Terry Smith and his recent Fundsmith Emerging Equities Fund (FEET) was a popular recent launch it does however trade on a premium which puts me off. I prefer the longer standing JPM Emerging Markets (JMG) which currently stands on one of the widest 11.4% discounts in the sector despite being one of the better performers and it also has over 20% in India. If you want income from the same stable is the JPM Global Emerging Markets income fund (JEMI) which has been around for about 5 years and has mostly been on a premium but with the recent market volatility it has unusually moved to a small discount of around 1.5% so it might be worth a look.

If that is too dull, you can get more adventurous and venture into what are known as frontier markets which would take in more of the smaller emerging African, Asian, Eastern European, Latin American and Middle Eastern markets. A couple of choices here would seem to be Advance Frontier Markets (AFMF) & Black Rock Frontiers (BRFI). These have not been around as long, but they do seem to have performed better than (less badly) than the more traditional EM funds in recent years, but who knows going forward.

Aside from that you can get more focussed and go for individual countries or regions if you are really brave. But then again you would need to be a dyed in the wool contrarian value investor to consider JPM Russia Securities (JRS). Russia as we know has its problems and this trust has lost money over the last 1,3 and 5 years too, but Russia did come out at the top of the expected returns list in part 3, so you pay your money and take your choice but I'm not sure I'm brave enough.

Other than that the other disaster area has been in Latin America where again most of the available trusts including JPM Brazil (JPB) have lost money over 1,3 & 5 years, but then Brazil came in at number 2 in the list of expected returns as a result of the depressed valuations. There may be some contrarian opportunities in the broader Latin American trusts - Black Rock Latin American (BRLA) & Aberdeen Latin American Income (ALAI) which trade on discounts of 7 to 9% and offer yields of 6.5 to 9% too respectively. I note also that the BlackRock Trust (the bigger of the two) has more than a years worth of dividends in reserves so they may be the more able of the two to maintain the payout, depending on what happens to their underlying income flows. On their website they also highlight the favourable demographics of the region with the graphic below which ties back into Part 2 of this series. It is mostly invested in Brazil and Mexico so not too risky within the region, so on balance it might be worth further investigation, although I'm inclined to stick with the more broadly based funds rather than the regionally or Country focussed funds which just seem to be too risky to me.

Latin America’s favourable demographics

Conclusion
Well done if you have got this far and I hope you have enjoyed this series of Back to the Future themed posts which have tried to look at lessons from the past and apply them to the present day to see what they might tell us about the future. As discussed there are lots of benefits to thinking about valuations and investing for the long term if you are prepared to ride out short term volatility. I also happen to think that making sure you get a good yield on your investment and reinvesting the dividends is also important for boosting your returns too as shown in the graph below. So I'll leave you with that graph and a link to an article (which you can read by clicking the graph) which discusses those aspects of investment in more detail. After that is the AIC symbol (Association of Investment Companies) and a link to their site where you can get more information and statistics on Investment Trusts if that is of interest to you. Have a great weekend and good luck with your investing in the future where ever you choose to invest.