Peter Hewitt, manager of F&C Managed Portfolio, can scarcely believe the resilience of global markets in the past year but warns there could be some ‘sharp and uncomfortable’ setbacks ahead.
F&C Managed Portfolio is an £113 million investment trust that invests in other investment trusts. It offers two seperately listed portfolios: F&C Managed Portfolio Growth (FMPG) and F&C Managed Portfolio Income (FMPI) both of which braved a series of shocks such as the Brexit vote, Donald Trump's elevation to the White House and the UK's snap election to deliver a good performance against its FTSE All Share benchmark in the year to 31 May.
The £65 million growth portfolio grew 26.4% beating the All Share's 24.5%, the fifth year in a row it has done so, while the £58 million income portfolio could only match the index' total return, but has done better than the benchmark in seven of its nine years since launch.
The trust pays quarterly dividends and in 2016/17 raised its total payout by 4.8% to 5.45p per share, the sixth consecutive annual increase. Based on its end-of-year share price this left the income shares yielding 3.9%, above the 3.5% on the FTSE All Share.
The plunge in the pound after the Brexit vote boosted overseas returns to UK investors but was nonetheless painful for both portfolios which invest in the UK (growth has a 28% weighting and income a 41% exposure to the UK). Much of its UK holdings are in funds investing in medium-sized and smaller company shares, which were initially heavily sold off as investors panicked at the impact Brexit could have on the UK economy, although they recovered later in the year.
‘Although both trusts employ a growth-focused investment strategy, the latter is more concentrated with a bias towards technology companies while the former is more diversified by number and nature of holdings,’ said Hewitt.
River & Mercantile UK Micro (RMMC) recorded a gain of 45% for the trust, ‘due to primarily outstanding stock selection’, said Hewitt.
‘Both funds are defensive in nature and are held to provide an element of protection for the portfolio in a market setback. That they lagged a sharply rising equity market is not unexpected,’ said Hewitt.
He also retained faith in Neil Woodford’s Patient Capital Trust (WPCT), which returned just 4% over the period. Hewitt put this disappointing figure down to the fact the fund invested in private early stage companies.
‘Given the nature of these companies it will take time for them to come through and no doubt there will be failures along the way,’ he said.
‘However, many of the underlying portfolio companies have made good progress and there is reason to believe that for the patient investor there will be significant upside potential.’
In the income portfolio, Hewitt (pictured) increased his gearing (borrowing) through a £5 million loan facility from the Royal Bank of Scotland at 2% annual interest for five years.
He said it would ‘enhance the revenue generating ability of the income portfolio’.
The income portfolio is made up of trusts in the alternatives sector, such as Civitas Social Housing (CSH) real estate investment trust, GCP Infrastructure Investment (GCP) and Renewables Infrastructure Group (TRIG).
Hewitt said the investment companies sector had been ‘generally buoyant’ with investor demand closing the gap between investment trust share prices and the underlying net asset value of their portfolios. Discounts started Managed Portfolio's year at an average 7%, widened to around 10% after the EU referendum before narrowing again to 5.4% by the end of the year.
UK Smaller Companies and Global Emerging Markets were the only sectors showing a combination of value and investor concern where investment trust share price discounts stood at more than 10%, he said.
The outlook for the UK remained uncertain and while the pound could weaken further, Hewitt said a ‘fragile government’ could ‘reverse austerity and embark on a programme of more stimulus’ that would support equity markets.
‘Neither is guaranteed and in the meantime it is clear the UK is slowing with higher inflation squeezing the all-important consumer,’ he said.
The US looks more promising with the recovery continuing, although when president Trump’s planned tax cuts are coming remains unclear.
The US market has led valuations upwards over the last few years and Hewitt said European companies are now following suit and ‘while not cheap [are] attractive on a relative basis’.
Blue chip bias
In contrast investor sentiment in the UK is ‘adverse and confidence is low’ but Hewitt said ‘large global companies based in the UK could benefit from the synchronised recovery evident internationally and any further weakness in sterling’.
‘This would benefit primarily the FTSE 100 index. For UK mid and small-cap companies the environment could become more challenging,’ he said.
For now, Hewitt will continue to invest in ‘sectors which offer genuine secular growth opportunities such as technology, biotechnology and healthcare’.
‘There may well be setbacks and with volatility at such low levels, when these occur they could be both sharp and uncomfortable,’ he said. ‘That said, the global outlook remains constructive for equity markets.’
F&C Managed Portfolio Growth has delivered a 98% total return to shareholders over five years. This is below the 130% average of other global growth trusts, according to Numis Securities, but has been achieved with far less volatility. It beats the FTSE All Share's 65% total return over that period but lags the 106% from the MSCI World index. At yesterday's closing price of 190p the shares stood at a small premium of 0.9% over net asset value (NAV).
Meanwhile the income shares at 137.8p traded at 1.5% above their NAV. Five-year total shareholder returns of 81% are lower than the growth portfolio although still beat the All Share and outpace the 73% average gain in global equity income trusts.
The trust pays F&C 0.65% a year with an additional performance fee of 10% of any portfolio gains over the FTSE All Share. For 2016/17 this left shareholders' ongoing charges at 1.12% in the income portfolio and 1.08% for growth.