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David Kempton: cheap investment trusts among the uncertainty

With Europe in the doldrums, David Kempton turns his attention to some heavily discounted investment trusts with assets outside the troubled region.

 
David Kempton: cheap investment trusts among the uncertainty

Concerns about Europe are a real cloud hanging over world markets, and massively exceed the other current perceived risks at the moment. 

China continues to gently back-pedal, but the economy is still only less than half of the size of the US, so there remain 20 years of catch-up, notwithstanding the ageing population. Usefully, though, a move towards pension-planning awareness is increasing local buying of equities. 

Middle Eastern threats remain, but even Israel’s aggression towards Iran has seemingly moderated, at least until after the November US election.

Europe weighs on the wider world

Meanwhile, back in Europe, we influence the world with our deliberations. Last week I visited three European countries and saw real anger among young Spanish workers, 50% of whom are unemployed; continued jollity in Italy where cash prevails and credit cards are unwelcome, leading to constant visits to busy ATMs; and Ireland, the erstwhile Celtic tiger, showed an admirable resignation to its realities. 

The French election on 6 May hangs over us and could be really entertaining, if it hadn’t such serious consequences. The rhetoric is wonderful, with socialist presidential challenger Francois Hollande being referred to as ‘unfit to captain a pedalo’ by one critic. He, meanwhile, refers to Sarkozy as ‘a dodgy bloke’, but the aftermath from Sunday could be dire. 

Hollande has shown open hostility towards Germany, and calls for common euro-area government bonds. With no ministerial experience at all, a clash with German chancellor Angela Merkel would be inevitable, which would probably destroy what’s left of French financial credibility, even if it is currently the fifth richest country in the world. 

Could Sarkozy really be the first incumbent president in 50 years to lose the first vote, effectively to a man whose policies would be quite disastrous for France?

While Spain imposes more austerity, causing even more pressure on its banks as house prices collapse, and Italy struggles with its astonishingly cumbersome labour laws, is it inconceivable that, following a Hollande success, Germany and its stronger neighbours might be forced to break away, as Hollande talks the weaker members and their banks into the advantages (to them) of a weak euro?

Under this scenario, Germany and its strong neighbours would be forced to break away with a stronger currency, and to make their BMWs in China, Poland and the US.

My investment trust picks

With all this terrible European insecurity I have been looking again at some of the deeply discounted investment trusts, focused primarily on a different continent.

I have mentioned the North Atlantic Smaller Companies trust before, a core holding of mine, and often consider adding to it.  The investee companies are very diligently researched, but many of them are unquoted, which concerns investors. In my view, having looked at them, they are probably undervalued. The fund manager now has £35 million of his own money invested in it, and the trust has an unwarranted 27% discount.

Impax Asian Environment Markets * sits at a 14% discount. The underlying companies are Asia-Pacific based, all in the renewables and environmental sectors, with an average price-to-earnings ratio (P/E) of nine and growth of 20%, giving a price/earnings to growth figure of 0.5. This makes the trust look far too cheap and clearly a victim of the current dire investment uncertainty.

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19 comments so far. Why not have your say?

chazza

May 03, 2012 at 11:01

David,

I would like to agree with you about Hansa Trust, since I own a chunk of it, but it has lost money and underperformed the FTSE All-share in 3 of the last 5 years, and far from increasing 'by an average of 25% a year for five years', it has actually LOST 15% over 5 years! It holds some very good UK companies, and I agree that the discount is uncommonly large, but buying it is effectively a punt on the recovery of Ocean Wilson's investment portfolio, which has performed poorly of late.

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Manso

May 03, 2012 at 11:16

Talk of the strong leaving the euro is fantasy. I read this site for investment comment not half-baked political views.

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William Phillips

May 03, 2012 at 11:21

Hansa also has an erratic dividend history, running income as a sideline and being prepared to chop the payout with no regard to outside investors' needs. The recent cut came as quite a shock.

Invariably these family funds are run in a more whimsical way (cf Caledonia, Independent and Brunner) and outsiders should accept that they are being taken along for the ride, which will always be more of a mystery tour than with City of London or Foreign & Colonial. Hansa's legal status as an investment trust should not be allowed to obscure these facets.

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Maverick

May 03, 2012 at 11:51

Nobody has ever been able to prove to me that an investment trust at a big discount will outperform in future. As I see it, a trust at a big discount is unpopular, and you cannot fight the market. I think, on the rare occasions when I go into a Poundland shop, that the simple fact something is cheap is not a good reason to buy it.

Go on to the Trustnet website and see how the above four trusts have been performing.

If Europe is going down the drain, then you might look at the Far East. I use Trustnet every month to check which investment trusts have beaten the FTSE All-Share over 1, 3 and 5 years. Over the last 54 months, the results are :

Aberdeen Asian Smaller Companies, 40 appearances

Edinburgh Dragon, 45

Schroder Asia Pacific, 41

Scottish Oriental Smaller Companies, 42

Invesco Asia, 45

Or, if you want to go global :

Murray International, 42

F&C Global Smaller Companies, 37.

By contrast :

Hansa Trust, 16

Impax Environmental Markets, 15

North Atlantic Smaller Companies, 0

Ecofin Water & Power Opportunities, 0

Consistency is one thing, current performance is something else. But it does so happen that the consistent trusts are also performing well now. Don't take my word for it, look at the hard figures in Trustnet.

I rest my case, m'lud.

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Pulpos

May 03, 2012 at 21:08

I also take the same approach as Maverick,finding Trustnet tables quite useful.

Of course,most Asian investments have performed poorly recently and I had to sell my Scottish Oriental at a loss.

We readers have to be careful with "experts" opinion on various possible investmets in published articles.An example: a year ago one expert expressed his high expectations in gold companies such as Red Rock, White Horse and others. As he is an experienced expert and I just a novice investor, I bought those shares. In the 6 or 8 following months their value went down and down

and down (OUCH, indeed). Little was left when I crystalised my losses.

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Raymond Hurley

May 03, 2012 at 21:30

Good advice Maverick.

I will watch for your posts in future

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Maverick

May 04, 2012 at 11:26

Pulpos - Yes, but you have to keep an eye on what is happening now. Aberdeen Asian Smaller Cos has risen 13% since the middle of February, and Aberdeen New Thai 9%. Even Scottish Oriental has started to move up. There is, unfortunately, no substitute for monitoring the markets regularly.

I tend to invest in "chunks" of £2,000-£3,000, so I don't let dealing charges influence my judgment as to whether to sell or stay in. I'm quite happy to sell my Scottish Oriental if it is underperforming, and buy again when it starts to perform. If TD Direct charge me £8.95 per trade, the shares only have to rise by 0.5% and I am starting to make money.

I have a healthy disregard for so-called experts. That's one of the reasons I took the nickname Maverick . . . .

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James Park

May 05, 2012 at 11:50

I'm 63 years old and one thing life has taught me is that there are extremely few experts in all walks of life although there are a lot of self professed ones.

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Islander

May 05, 2012 at 12:24

So where is David Kempton now? Citywire: shouldn’t he come back to this forum and defend his views, now that they have been so comprehensively rubbished by readers? Not to do so damages whatever credibility he has.

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Hilary hames

May 05, 2012 at 13:47

I agree with Islander. I would like to see David Kempton reply.

When I read these articles on Citywire, and I always do, I always read the comments with as much interest as the original article. I am always interested in what Maverick says and there are some other posters who are also very experienced investors

Maverick, you look at just 1,3, 5 year figures, would you consider anything more recent to not be reliable enough in performance terms.

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Alex Peard

May 05, 2012 at 22:47

I don't usually post but agree completely with chazza & William Philips. I have held Hansa & Caledonia for a number of years. The fact that they trade at a large discount to NAV doesn't mean something will happen anytime soon to improve this. Hansa as is said is a play on Ocean Wilson which should come good but Caledonia is another matter. The families who control these trusts do not need to worry about the discount level as non family controlled trusts such as Witan do and don't take active steps to manage it. Where David Kempton gets his 25% increase for 5 years for Hansa is a mystery to me!

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Maverick

May 07, 2012 at 09:48

Hilary - What I am looking for is consistency, but I agree that recent performance is also critical.

I do keep on Moneyextra a watch list of investment trusts, which are the "consistency" trusts plus a few others which don't qualify, perhaps because they don't yet have a 5-year record, or because they have dropped in price but are now recovering. I monitor the Moneyextra list regularly, and this shows which trusts are performing well at present. For example, Baillie Gifford Shin Nippon, Henderson Opportunities and Standard Life Euro Private Equity.

I then take account of both lists in deciding what (and when) to buy.

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Maverick

May 07, 2012 at 09:58

Alex Peard - It's even worse than that. Mr Kempton said Hansa Trust "has increased by an average of 25% a year for five years". By my arithmetic (and assuming he's not compounding) that comes to a rise of 125%.

In fact Trustnet shows Hansa's share price has dropped in value by 26% over 5 years.

Mr Kempton, I think you need to justify your figures.

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William Phillips

May 07, 2012 at 15:43

There are two investment trusts which have been in the top ten of all 200-odd ITs capitalised at £50m or more over one, five and ten years: Aberdeen Asian Smaller Companies, Aberdeen New Thai and F&C Private Equity.

Two have been in the bottom ten for each of these periods: 3i (though officially it's an investment company without trust status) and Candover Investments, both private equity portfolios standing on big discounts because nobody really knows what their unquoted stakes would fetch in a fire sale.

Hansa Ordinary's total return was £333, above average, over ten years but a poor £87 in the past year, after the dividend slash.

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david kempton

May 20, 2012 at 16:16

Bit late on my comment here, since consumed on issues, but take the point of some sensible comment above, but I am frustratingly limited on how much I can write. I agree with Maverick too and the Funds listed, and right now, I want to live in Europe (UK) because my family and mates are here, but I don't want my money here. I agree on Asia, hence my view on IAEM being a good discounted well managed fund investing exclusively in the region. It is down 28% on the year, stands at 14% discount, and with an eye on the underlying stocks, looks a good buying opportunity.

NASCIT still sits at 31% discount because investors fear the unquoteds in the Fund. I have my boots full, having regard for the Manager, and his £35m pa investment. I think something will happen there, and up 40% in 3 yrs.

Hansa is down 12.7% in the year, but up 47% in 3 years. I agree that this is an investment mostly in the oil services industry in Brazil, but I like that and happy to sit with it at a discount of 21%

Ecofin has performed badly, but looks very cheap to me, in the global utilities and water sector, with a 5.7% yield.

You would expect the discount on all of these well run interesting Trusts to protect on the downside. However, I'm not buying anything now whilst we wait to see if Merkel imposes Austerity (good for Bonds, bad for equites) or the weaker members get support for Growth (bad for bonds, very good for equities). Nobody knows where we go from here and it changes by the hour. Rumours abound in Europe of Germany physically printing DM's. I'm firmly in the camp which believes Greece will exit this year and Ireland next.

A real disaster is imminent, but after the uncertainty, even if truly awful, once passed, the bull phase will prevail.

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William Phillips

May 21, 2012 at 16:19

"A real disaster is imminent, but after the uncertainty, even if truly awful, once passed, the bull phase will prevail."

As it did after the bottom of the Great Crash in 1932-- following a world war and 23 years of getting back to where it was in 1929.

But gold has got a little cheaper lately...

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adrian van vliet

Aug 04, 2012 at 12:15

Experts! Sometimes, just sometimes, I have the impression that there may be a commercial reason behind some of the advice? (not uncommon in the US)

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david kempton

Aug 05, 2012 at 09:30

If this last comment is directed at me, it's unfair and erroneous. Where I have any vested interest in the management of a fund, that is always stated in the text. I have usually met the management of any fund in which I personally invest, but only in the interests of diligent assessment. The opinions given are my own and quite unencumbered by any commercial considerations. Obviously I can't speak for others and, in some cases, it would be naive not to think that you're correct, but it's usually pretty obvious and undisguised.

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adrian van vliet

Aug 05, 2012 at 12:42

Hello David,

Of course, nothing personal here. But since you appear to be genuine to me and to find out a bit more about this, I would like to learn from you and everybody else what % of the advice read do you think is commercially motivated?

Adrian

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