Vaccine hopes lift forgotten value

by Gavin Lumsden
Key points:

We conclude our 2020 review with a look at the recent rally in ‘value’-style investment trusts and whether they can hope to catch up with growth-focused rivals.

The year’s best-performing sectors are assessed as well as the diverging fortunes of property and technology funds.

And we examine the contrasting fortunes of investment trust providers, one of which had an annus horribilis and the other which enjoyed a year of near miraculous growth.

The flurry of vaccine breakthroughs announced in early November gave the world hope of light at the end of the coronavirus tunnel. World stock markets jumped, no more so than the depressed UK market, whose FTSE All-Share index leaped nearly 13% in the month.

Financial, energy, industrial and other ‘cyclical’ stocks geared to the economy shot up, which was manna from heaven for ‘value’-style investment trusts that buy cheap stocks for a recovery. Amid excited talk of a long-awaited ‘rotation’ to value from the ‘growth’ style that has dominated markets for the past 10 years, UK investment trust sectors curbed their 2020 losses with average year-to-date share declines of 5-10% (see table) and with UK ‘micro-cap’ trusts even squeezing into positive territory.

UK trust sector returns vs indices
Average total shareholder return %
Average net asset value return %
UK All Companies
FTSE All-Share
UK Equity Income
FTSE 350 High Yield
UK Mid Cap
FTSE Mid Cap (ex-investment companies)
UK Smaller Company
Numis Smaller Companies (ex-investment companies)
UK Micro Cap
FTSE Small Cap (ex-investment companies)

Source: Numis Securities 4/12/20

Our weekly Trust Watch spotted remarkable rallies of between 31% and 57% for leading value trusts, including Temple Bar, whose new managers Nick Purves and Ian Lance found themselves taking over the beleaguered portfolio at just the right time.

One of the most impressive recoveries, however, was by Artemis Alpha (ATS), a former ‘best ideas’ trust that had fallen on hard times and which Kartik Kumar (pictured above) had strived to clean up. His turnaround efforts looked to be paying off as the trust, up 13.5% for the year after the November rally, became the only member of the UK All Companies sector to be in positive territory for 2020.

After previous false dawns, value fund mangers crossed their fingers that the rally would be sustained. ‘The rejection of UK equities and value shares in favour of US equities and growth shares which has dominated investor behaviour in 2020 is likely to recede in 2021. Disparity in popularity will remain, but vaccine developments should enable an ongoing reduction in extreme market positioning despite a likely resurgence in Brexit-related headlines which are probably already priced in,’ Richard Staveley of Gresham House Strategic (GHS) told the Association of Investment Companies.

Real estate investment trusts (Reits) exhibited the same binary split between winners and losers as listed equity funds. Concerns about rent collection and the prospects for retail and office properties after millions of people learned to shop and work from home, hurt generalist Reits investing across the main property sub-sectors.

That said, share falls of 14%-51% and average discounts to net asset value of 19% suggested these fears were priced in and that the Reits could bounce back in a recovery next year.

Among specialist Reits, those focused on student accommodation also suffered as lockdowns and travel restrictions did much to negate campus life.

By contrast, Reits in healthcare, supermarkets and warehouses performed very well, with Aberdeen Standard Investments this month buying a 60% stake in ‘Big Box’ specialist Tritax as it sought to expand in an area booming from the surge in e-commerce.

The biggest recovery was in social housing Reits, where regulatory pressures eased, enabling Triple Point (SOHO) to rerate from a 30% discount and issue £55m new shares in an over-subscribed placing for the first time in two years.

Hedge funds have been justly accused in the past of mediocre performance and high charges. 2020 was a year when the sector began to do things right. Bill Ackman (pictured), manager of Pershing Square Holdings (PSH), steered his US equities portfolio into the FTSE 100 this month after achieving a magnificent 75% total return. That boosted its market value to £4.8bn and promoted it into the blue-chip index alongside the much bigger 3i (III) and Scottish Mortgage (SMT) trusts.

Ackman achieved that impressive result with an astute bet on bonds in the March crash. Instead of plummeting like other equity funds, PSH made a $2.1bn gain, enough to shield the portfolio from the savage falls in March, while exploiting the stock market rebound that followed.

Meanwhile, after several years of modest returns, Brevan Howard currency and bond traders took full advantage of increased market volatility. With plenty to get stuck into, as many assets mis-priced in the panic, both the £375m BH Global (BHGG) and £532m BH Macro (BHMG) proved to be safe havens, their shares advancing 24% and 36% up to 4 December.

Both these feats meant the small hedge fund sector was the best-performing in the first eleven months of the year, according to the Association of Investment Companies. Remarkably, its average 55.7% total return pushed strongly performing global trusts into second place, although a look at their widely different 10-year returns indicates how unusually strong hedge funds have been this year.

Best-performing investment trust sectors of 2020 so far
Year to  date average shareholder return %
10-year  average %
Hedge Funds
Technology &  Media
Japanese Smaller  Companies
Asia Pacific
Single Country,  Asia Pacific
North America
Global Smaller  Companies

Source: Association of Investment Companies. Data at 30/11/20

This year’s pandemic has seemingly made biochemists and epidemiologists of us all. The unprecedented speed and collaborative nature of the hunt for a cure to Covid-19 has boosted interest in healthcare stocks, while the industry-friendly result of the US election – with Democrat Joe Biden last month defeating President Trump, but unable to gain control of both Congress assemblies – makes radical reform of drug prices unlikely. This has given investors space to reflect on the powerful demographic and scientific trends underpinning the sector, at a time when low valuations are precipitating a wave of mergers and acquisitions.

All of this means most London-listed healthcare trusts have made hay with BB Healthcare (BBH), International Biotechnology (IBT) and Biotech Growth (BIOG) surging between 30% and 61% up to 4 December, the latter featuring in our table of the 15 biggest risers of the year (see bottom of this page).

But the biggest riser has been Arix Bioscience (ARIX), strictly speaking more an investment holding company than an investment trust, its shares have rocketed 84% this year – most of it since early November when US drugs giant Merck bid $2.75bn to buy VelosBio, a private US company backed by Arix that is developing antibody treatments for blood cancers and solid tumours.

The transaction delivered $185m (£142m) of cash, a 12-fold return on the original £12m investment by Arix, which fallen star fund manager Neil Woodford (pictured above) once held in his now defunct Woodford Equity Income fund. Agonisingly, for Woodford’s investors, the main beneficiary of Arix’ success has been Acacia Group, the US buyer of a basket of cheap Woodford stocks from the fund’s administrator, which included Arix, of which it now owns 19%.

For all the talk of a value revival at the end of 2020, it was highly-valued technology, growth stocks that held sway throughout the year. With the consensus of opinion agreeing the pandemic had accelerated digitisation of businesses and made many more people comfortable with e-commerce, social media and internet platforms and mobile telecoms groups thrived, along with the software-as-a-service, cloud computing stocks semi-conductor chip makers that support them.

While sector specialists like Allianz Technology (ATT) sped 73% higher on this bonanza, the trust I’d highlight from the list of biggest share price risers below is Herald (HRI). This UK-focused tech trust managed for 26 years by Katie Potts (pictured) notched up an impressive 42% gain.

For many years the trust has laboured on a double-digit discount, overlooked by investors despite Potts generating a 371% total return over 10 years that beats most UK and global equity trusts, even if it is outshone by Silicon Valley focused rivals Allianz and Polar Capital Technology (PCT). On a tight 2% discount and market value of nearly £1.4bn today, it looks like Herald’s time has finally arrived.

As the Queen herself might have said, 2020 has been an annus horribilis for Invesco’s Henley-based UK equities team. We’ve already highlighted the loss of the Edinburgh and Perpetual Income & Growth trusts earlier this year. This month, however, saw two further blows. Firstly, the £140m Invesco Income Growth (IVI) announced a merger with stable mate Invesco Perpetual Select (IVPU). This follows a disappointing five-year performance under fund manager Ciaran Mallon and will see 30% of the trust’s assets likely leave in a tender offer.

This was followed a week later by Keystone (KIT), a £240m UK All Companies trust whose fund manager James Goldstone had struggled to turn round the portfolio he inherited from Mark Barnett tin 2017, which announced it had dismissed Invesco and appointed Baillie Gifford (see below).

The disappearance and loss of the two trusts means that in just one year, Invesco has gone from having six UK equities investment trusts with £3bn of assets to having just two (including Invesco Perpetual UK Smaller Companies) with assets of only £352m.

‘This is an incredible reversal of fortune in a short period of time and reflects a sustained period of underperformance for the Invesco UK equities team since the start of 2016,’ said Simon Elliott, head of investment companies research at Winterflood Securities.

Baillie Gifford’s clinching of Keystone, which will be co-managed by Kate Fox (pictured) as a closed-end version of its successful open-ended Positive Change fund, will bring the investment trust sector its most high profile ESG (environment, social and governance) focused launch to date.

It also caps an incredible year for the Edinburgh-based partnership with has seen its current eleven-strong investment trust stable grow assets under management to nearly £25bn, underlining its status as the sector’s largest fund manager.

In the past two-and-a-half years Baillie Gifford has expanded its range with the launch of one trust, USA Growth (USA), now worth £822m; and the winning of mandates to run its UK Growth (BGUK), European Growth (BGEU) and China Growth (BGCG), which are collectively worth just over £1bn.

However, it has been the remarkable success of Scottish Mortgage (SMT), the global flagship that caused a stir when it passed a £10bn market capitalisation in May, but which is now closing in on £16bn as we approach the end of the year after a phenomenal 90% rise in its shares.

But the truly impressive achievement of this year is how the long-term growth approach of SMT has been reflected in its other trusts. As backers of disruptive, technology-enabled businesses, Baillie Gifford’s trusts have been perfectly positioned to take advantage of the digital surge the pandemic has provoked.

The result is that at the start of this month, no less than seven of its trusts ranked in the top 15 performers of the year (see table), led by the £539m Pacific Horizon (PHI), which has more than doubled with a 123% gain in the year to 4 December.

Although this is a trend that has been building all year, and many will have seen it coming, it is clearly an extraordinary result and therefore ranks as a major surprise. It’s one that leaves investors scratching their heads wondering how long it can continue, and also whether they have too much exposure to one group that appears to have grabbed the lion’s share of global investment returns this year.

Biggest share price risers of 2020 so far
Change %
Pacific Horizon (PHI)
Baillie Gifford US Growth (USA)
Scottish Mortgage (SMT)
JPMorgan China Growth & Income (JCGI)
Pershing Square Holdings (PSH)
Allianz Technology (ATT)
Fidelity China Special Situations (FCSS)
Edinburgh Worldwide (EWI)
Biotech Growth (BIOG)
Golden Prospect Precious Metals (GPM)
JPMorgan Japanese (JFJ)
Baillie Gifford European Growth (BGEU)
Baillie Gifford China Growth (BGCG)
Baillie Gifford Shin Nippon (BGS)
Herald (HRI)

Source: Numis Securities 4/12/20