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Investment Trust Insider: playing the Neil Woodford arbitrage
by James Carthew on Jul 03, 2012 at 00:01
As the fun and games continue in the eurozone, investors looking for safe havens in the investment trust sector often face the difficult decision of whether to pay a premium for defensively positioned funds.
Capital Gearing , which I wrote about a couple of weeks ago, is already back on an 11% premium, making it one of the best performing investment companies over the past month.
I raised some money from my portfolio by selling Jupiter Special Situations (index trackers drove up the price of this stock after it went into the All-Share Index at the start of June). Casting around for a new home for some of the proceeds, I alighted on Perpetual Income & Growth.
Managed by Mark Barnett since July 1999, this fund has built up an impressive track record but often trades on a premium. Right now the shares are at asset value, however, so I took advantage and bought some.
Compared to funds stuffed full of index-linked bonds or holdings in gold bullion, a UK equity income & growth fund might not sound that defensive. Barnett has long recognised, however, that the UK is in the doldrums, and is likely to remain so for some time, and has positioned his portfolio accordingly.
With a market cap of around £550 million, Perpetual Income & Growth (Pigit) is just over half the size of its stablemate, Edinburgh Investment Trust (managed by Neil Woodford). It trades on a 4% yield (dividends are paid quarterly) against Edinburgh’s 4.6% yield but, for now at least, it looks much cheaper – trading at asset value rather than a 6% premium for the larger trust.
Edinburgh, under Woodford’s stewardship, has a slightly better long-term track record but, so far in 2012, Pigit is ahead in net asset value (NAV) performance – up by 3.4% versus 2% for Edinburgh and 1.7% for the UK market. It has half the number of holdings compared to Edinburgh (61 versus 124) but the portfolio is less concentrated, with the top 10 accounting for around half the fund, while in Edinburgh’s case it represents almost three quarters.
The biggest difference between the two is that Barnett has more than a quarter of the fund invested in FTSE Mid 250 stocks, whereas for Edinburgh they are just 10% of the portfolio.
The objective of the fund is to provide capital growth and real growth of dividends. Over the last 10 years, dividends have more than doubled, rising from 5p in the year to 31 March 2003 to 10.4p in the last accounting year, while the NAV is up by 130%.
Barnett takes a long-term view and consequently the portfolio turnover is low. He is no index hugger. The fund has some big bets relative to the UK market – a big overweight to consumer goods (actually a much bigger overweight in tobacco stocks), and overweights to pharmaceuticals, industrials, telecoms and utilities offset by low to no exposure to miners, oil, banks and IT companies.
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