News of Arsene Wenger’s departure from Arsenal after 22 years as the football club’s manager has drawn parallels in the investment trust world with a trio of management changes presenting potential buying opportunities for investors.
In a highly unusual move last week fund manager Invesco Perpetual resigned from Invesco Perpetual Enhanced Income (IPE) in a row over performance fees. The board of the £125 million bond and loan fund wanted to cut the charges its shareholders pay but Invesco - whose star bond managers Paul Causer and Paul Read have run the portfolio for 17 years - wouldn’t play ball.
This leaves the board having to find a new investment group to generate the trust’s attractive 6% dividend yield. Having dropped 4% to 77p the shares are cheaper and stand 4% above net asset value (NAV) compared to 8% previously. However, buying the shares on a smaller premium over NAV with no information on the new manager is fraught with the same uncertainty facing Arsenal fans.
A more straightforward proposition lies at Artemis Alpha Trust (ATS), a ‘best ideas’ fund from Artemis Fund Managers that has gone badly off the boil in recent years as bets on unlisted companies and resources stocks have not paid off. At 320p the shares trade 18% below NAV, a huge discount that reflects investor disenchantment with the performance under managers Adrian Paterson and John Dodd.
The shares offer a potential recovery situation after the company announced Paterson would retire and be replaced by Artemis’ rising star Kartik Kumar who has cut his teeth helping run its Strategic Assets fund. The board also signalled its desire to improve the trust’s rating by overhauling its fees and giving shareholders the chance to sell shares at NAV in three years time. This could help help to narrow the gap between the shares and their asset value if performance improves.
A quicker turnaround could be in prospect at Schroder UK Growth (SDU), scene of the most dramatic change, where the board sacked Schroders, the fund management group that has overseen the £279 million investment trust’s assets since launch in 1994, two years before Wenger’s arrival in north London.
Shares in the fund jumped at the announcement earlier this month that it was switching to Schroders’ rival Baillie Gifford, an Edinburgh-based fund manager best known for running the top-performing Scottish Mortgage Trust (SMT).
Schroder UK Growth, which will be renamed Baillie Gifford UK Growth, has disappointed investors for years. Like Arsenal its performance has only briefly fulfilled its potential. Even after the recent spike in the share price, at 184.5p the shares are undervalued, standing on a 11% discount below NAV. Should its new managers Iain McCombie, who has a Citywire AA rating, and Milena Mileva revive performance with their plans for another ‘best ideas’ portfolio of around 40 growth stocks, that discount could narrow, providing an extra boost to shareholders.
Although neither is well known to investors, McCombie is an experienced fund manager who has worked at Baillie Gifford for 24 years where he is a partner and chief of investment staff. He co-runs the Baillie Gifford Managed fund. Mileva joined Baillie Gifford in 2009 and has worked alongside McCombie in its UK team since 2012.
Analysts at Numis Securities think they could succeed and slapped a ‘trading buy’ recommendation on the shares. ‘We believe that the new mandate will be popular with private wealth managers and see potential for the fund to trade close to NAV once the change in management is completed,’ said Numis’ Ewan Lovett-Turner.
Carolan Dobson, who chairs the trust and took the lead in dismissing Schroders, and fellow non-executive director Andrew Westenberger expressed their confidence by buying £40,000 of shares on the day of the announcement.
However, there are question marks over whether the change in investment approach and fund manager will pay off. Schroder UK Growth has suffered from a succession of manager and investment changes over the years. It enjoyed a hey-day under former star manager Richard Buxton in 2002-13 but after he left to join Old Mutual slipped down the rankings during the brief tenure of smaller company manager Julie Dean.
Philip Matthews, poached from Jupiter Asset Management to replace Buxton, took on the trust in October 2014 but also failed to generate a consistent winning streak. His more defensive, value investing style was viewed as inconsistent with what shareholders wanted and the shares continued to lag. His future is in some doubt having been taken off his other main fund, the Schroder UK Alpha Plus fund, in January as Schroders mounted a last-ditch effort to hang on to UK Growth. He remains in the UK and European equities team, according to the company.
Schroders was lucky to have held on to UK Growth for so long. Three years ago after the exit of Dean the trust’s board held a ‘beauty parade’ of rival fund managers but decided to give the group one more chance with Matthews in charge. Baillie Gifford was finally chosen this time because they impressed back then.
Even under Buxton, UK Growth’s record was blemished by investing too aggressively during the bursting of the dot com bubble in 2000-03 and in the 2008 financial crisis when the company’s shares fell 44%. As a result, its record is worse than its sister, the Schroder UK Alpha Plus fund, even though the latter is unable to gear or invest borrowed money in the way that UK Growth, an investment trust, can. Since launch in 2002 UK Alpha Plus has generated a total return of 332% with UK Growth trailing on 226%, although both beat the 198.5% from the FTSE All-Share index.
Whether or not Baillie Gifford can rejuvenate UK Growth may partly depend on Schroders in the short term. Nearly a quarter of the trust’s investors hold their shares through its ISA savings scheme and are waiting to hear if they can retain their stakes or must switch to another Schroders’ fund. The latter option could damage the share price if it prompts many to sell. By contrast, sales of Arsenal season tickets will probably improve with Wenger on his way.
This is a slighlty longer version of an article published in the Telegraph on Saturday.