38 www.whatinvestment.co.uk WHAT INVESTMENT TRUST

38 www.whatinvestment.co.uk WHAT

Trusts you can trust David Thorpe reveals the winners of this year s What Investment Trust Awards, as selected by a panel of independent judges It is perhaps every investor s dream to locate a fund or stock that is being neglected by the wider world but turns out to be a hidden gem. Working on this year s What Investment Trust Awards has, once again, displayed to me the breadth and range of investment trusts in the UK market, with some of the winners of this year s awards being trusts from small fund houses, and having a small market cap. In many of the ten award categories this year, there at first seemed to be one or two very obvious candidates, before the number crunching revealed a number of other funds of merit. Performance artists In developing the 2015 shortlists, we first examined every fund s total return performance over one, three, five and ten years to 23 April, both relative to their sector and in absolute terms. A higher weighting was given to the performance over the past year, to ensure that we were rewarding the best of the past 12 months, rather than those funds that are continuing to rely on a strong historical performance. We also took care to exclude those funds that have enjoyed a recent period of strong share price performance simply because the trust s preferred style of investing is currently in vogue. With that initial screening carried out, we then handed the shortlists over to our panel of expert judges, whose analysis and verdicts can be found overleaf. Discounting the discount The discounts or premiums at which the trusts trade was not a central consideration for this year. Our central aim is to recognise those trusts that have achieved outstanding performance within their underlying portfolios over the course of the past year, rather than to pick value propositions or reward trusts for simply narrowing the discount at which they trade. However, one thing that the winners do have in common is that they are trading much closer to par than the typical investment trust, with the obvious exception of the winner of the best VCT category. In addition to the mighty minnow investment trusts with small market caps that won, a number of very large and established trusts also graced the winner s circle. Among the giant funds to top their respective charts this year were the Scottish Mortgage Investment Trust, the Fidelity China Special Situations Investment Trust and the Edinburgh Investment Trust. Mark Barnett has had the slings and arrows of outrageous fortune thrust at him since he succeeded Neil Woodford as head of UK equities at Invesco Perpetual, so having his Edinburgh Investment Trust top the charts in its sector will perhaps be particularly satisfying for Barnett. Strategic Equity Capital is a trust managed by Stuart Widdowson. It has a market cap of just 120 million, yet is collecting a What Investment Trust Award for the second consecutive year. It is worth noting that this year was the first in which Widdowson has had sole control of the fund, and won the accolade of Best UK Investment Trust. It is with particular satisfaction that we note the strong, and once-again award-winning, performance of a much smaller trust. Taming the wild beasts To judge by its largest holdings, The Scottish Mortgage Investment Trust should have a particularly volatile performance record. Managers James Anderson and Tom Slater invest in internet companies and many businesses in China, yet have been able to maintain a consistency of performance that must be the envy of their peers, even as the trust moves beyond the 3 billion market cap level to become the largest trust in its sector, and one of the largest in the UK. THE WWHAT www.whatinvestment.co.uk 39

BEST UK Strategic Equity Capital Quite simply, the numbers do not lie when it comes to Strategic Equity Capital. It is the absolute best-performing out of 15 trusts in the AIC UK Smaller Companies sector over one, three and five years. In the past five years, the trust has returned 318 per cent, compared to 127 per cent for the average trust in the sector. Over the past year, the trust has returned 30 per cent, which is considerably more than the 4 per cent We are highly selective investors, focused on finding a small number of smaller companies to invest in average return of other funds in the sector during the same time period. One of the stocks to which Widdowson attributes the strong performance of the trust is Goals Soccer Centres. He believes that this is an investment that is emblematic of the type of company in which he invests, as it operates in a sector of the economy that offers considerable barriers to entry for new firms seeking to enter the market. Charles Cade, head of investment company research at Numis and one of the 2015 judges, commended Strategic Equity Capital for its strong performance, and noted the differentiated approach that it deploys an approach centred on using extensive due diligence. Widdowson commented, During the last year, a major theme that has contributed to our strong performance is the investment in healthcare software companies such as Allocate, EMIS and Servelec. Together they added more than 45 per cent of the performance to the year ended March. We invest in them because they offer sustainable long-term growth potential, in an industry that needs to use technology more to deliver better care to patients and drive efficiencies. They are all market leaders in various niches in healthcare software, and were trading at undemanding cash flow multiples. This was evidenced in Allocate being bid for by a private equity house during the year at a significant premium. He continued, We are highly selective investors, focused on finding a small number of smaller companies to invest in for the long term that pass our rigorous investment and due diligence requirements, rather than investing in a broad basket of stocks i.e. we re not an index hugger trying to manage as much money as possible. SEC s investment approach is not infinitely scalable, and as a result we are focused on delivering superior long-term performance to our clients, not trying to become a large-scale fund management group. Best UK Investment Trust shortlist Invesco Asset Management Select UK Equity Finsbury Growth & Income Edinburgh Investment Trust BlackRock Income & Growth Troy Income & Growth Strategic Equity Capital BEST GLOBAL Scottish Mortgage Investment Trust (see meet the manager, page 26) The performance and consistency of this trust over a very long period of time is quite remarkable. The trust is the absolute best performer out of 35 trusts over one, three and five years. The only year of underperformance was 2011, when there was profound stock market volatility. The largest holdings in the trust are online retailer Amazon, medical firm Illumina and Chinese internet firms Baidu and Tencent. The trust has returned 161 per cent over the past five years, compared with 69 per cent for the average fund in the sector during the same period. The performance and consistency of this trust over a very long period of time is quite remarkable On a one-year time horizon, the trust has returned 42 per cent, compared with 16 per cent for the average trust in the sector. James Budden, director of retail marketing and distribution at Baillie Gifford, commented, This award endorses the genuinely global position of the trust and its well-articulated investment philosophy. Under the direction of James Anderson and Tom Slater, the trust has emerged as a leader in its sector by actively treading 40 www.whatinvestment.co.uk WHAT

the less trodden path taking long-term positions in global companies that are playing a disruptive role in their respective markets. One source of the very strong outperformance of the trust over the past year has been the profit shown on Chinese internet firm Tencent. This company floated on the US market and realised a paper profit of more than 100 million, though the company has not cashed in the shares. In its most recent set of results, the company confirmed that it would be able to maintain a dividend payment through reserves in the coming year. Simon Elliott, head of research at Winterflood Securities, and one of our judges, remarked, The Scottish Mortgage Investment Trust is the outstanding trust in this category. Best Global Investment Trust shortlist Lindsell Train Majedie Investments JP Morgan Overseas Investment Trust Henderson International Income Invesco Perpetual Select Global Equity F&C Managed Portfolio Trust Scottish Mortgage Investment Trust BEST EMERGING MARKETS Fidelity China Special Situations Investment Trust This investment trust was for many years managed by Anthony Bolton, until last year when Dale Nicholls took charge of the trust. The performance at the end of Bolton s tenure was much stronger than at the start. Nicholls took charge of the trust on 1 April 2014, meaning that the performance period given most weight in these awards is almost exactly correlated to the first year of Nicholls s time at the helm of the trust. During the past 12 months a period of quite exceptional economic and market The trust has very strong returns from an actively managed portfolio focused on Chinese growth stocks activity and sentiment shifts around China the trust has returned 70 per cent. Regular What Investment readers will be familiar with the idea that the rise in the value of the US dollar is generally perceived to have a negative impact on emerging markets, and during the past three months those markets have suffered, but this trust has posted a gain of 23 per cent. Over the past three years the trust has returned 118 per cent, but with the periods of volatility that have pockmarked this trust since its launch in 2010, the performance figure over the past five years is a more muted gain of 75 per cent. The largest holdings in the trust at the present time include internet firm Tencent, The Ping An Insurance Group and the China Pacific Insurance Group. The largest sector exposure is to consumer stocks, which probably makes sense in light of the fact that the recent policy initiatives of the Chinese government are centred on moving the economy towards consumer-led growth and away from export-led growth. Cade commented, The trust has very strong returns from an actively managed portfolio focused on Chinese growth companies. It has performed well since Dale Nicholls took over as manager after the retirement of Anthony Bolton. Best Emerging Markets Trust shortlist Fidelity China Special Situations India Capital Growth JPM India H JPM Emerging Markets (Highly Commended) Aberdeen New Thai BEST FOR INCOME The Edinburgh Investment Trust Mark Barnett has coped admirably with the pressure and expectation since he succeeded Neil Woodford as head of UK equities at Invesco Perpetual and manager of a range of funds, including the 1.2 billion Edinburgh Investment Trust. This trust has a current yield of 3.47 per cent, but it is the total return performance over the past year that has marked it out as the winner of the Best Investment Trust for Income in our 2015 awards. Over the past 12 months, it has returned 18 per cent, compared with 6 per cent for the average trust in the AIC UK Equity Income sector. Over three years, the trust has returned 59 per cent, and on a five-year time horizon it has returned 123 per cent, compared with 89 per cent for the average trust in the sector. Barnett has kept many of the holdings that are bastions of the investment style 42 www.whatinvestment.co.uk WHAT

pioneered in the UK by Woodford, with the top three holdings being tobacco companies Reynolds American, British American Tobacco and Imperial Tobacco. Commenting on his winning of the award, Mark Barnett remarked, Since I was appointed portfolio manager in January 2014, Edinburgh Investment Trust has continued to perform well, both in absolute terms and relative to its benchmark [the FTSE All-Share Index]. My continuing focus on long-term dividend growth potential resulted in my having significant weightings in tobacco, All of Barnett s funds have at different points this year been at the very top of their respective sectors healthcare, real estate and insurance companies, and this stance proved beneficial to performance. In addition, at the start of 2014 I saw only limited value in the oil and gas sector, becoming a little more positive as the year progressed as the oil price fell, which presented the opportunity to add to my one oil and gas major, BP. My belief that UK bank rates would stay lower for longer than the market anticipated influenced my stock selection, and arguably helped contribute to last year s outperformance. Finally, I have avoided areas with little visibility in earnings and dividends such as mining and banks, but keep these major sectors under review. All of Barnett s funds have at different points this year been at the very top of their respective sectors, and while the outflows from his funds were considerable in the months following Neil Woodford s departure, these have now stabilised. Best Investment Trust for Income shortlist Edinburgh Investment Trust Finsbury Growth & Income Trust H City of London Investment Trust (Highly Commended) Troy Income & Growth BlackRock Income & Growth BEST OVERSEAS Baillie Gifford Japan Managed by Sarah Whitley, one of the very few prominent female fund managers in Britain, the Baillie Gifford Japan Investment Trust has a market cap of 325 million and has delivered top-quartile performance over one, three and five years. The return over the past year has been 40 per cent. Over three years, the fund has delivered 132 per cent, and 143 per cent over the past five years. Cade noted that the trust has made a specialism of investing in the mid- and small-cap areas of its market, which has helped to deliver strong performance. Sarah Whitley successfully seeks out innovative Japanese companies to provide long-term capital growth The trust has returned 187 per cent over the past ten years, compared to 131 per cent for the average fund in the AIC Japan Equities sector in the same period. The trust s largest holding is in Don Quijote Holdings, with a further substantial investment in CyberAgent, a technology company. James Budden, director of retail marketing and distribution at Baillie Gifford, remarked, As Japan experiences a significant period of reform, our active approach allows us to find attractive opportunities within this changing environment. Sarah Whitley successfully seeks out innovative Japanese companies in order to provide long-term capital growth for shareholders. Best Overseas Investment Trust shortlist Aberdeen Japan Investment Trust Baillie Gifford Japan Canadian General Investments BlackRock North American Income F&C European Assets Trust Fidelity European Assets BEST SECTOR SPECIALIST HICL Infrastructure This is a giant trust, with a market cap of 1.9 billion, and invests in what Cade calls social infrastructure projects. Among the areas in which the trust deploys capital at the present time is healthcare, with investments in hospitals, clinics and other such facilities. Over the past year, the trust has returned 17 per cent, while over three years it has returned 48 per cent and over THE WWHAT www.whatinvestment.co.uk 43

five years it has returned 77 per cent. A feature of this trust, relative to some of its peers, is that it also has investments in other parts of the globe, rather than The company provides investors with a reliable, inflation-linked yield, with moderate capital growth just the UK. There are exposures to North America and Europe, though the UK is by far the largest territorial exposure at 88 per cent. Tony Roper, a director at InfraRed Capital Partners, which manages the HICL Infrastructure fund, told What Investment, HICL is delighted to have received the Best Sector Specialist Investment Trust award. The company provides investors with a reliable, inflation-linked yield, with moderate capital growth, from a diversified portfolio of 100 underlying infrastructure investments. Its success over the year is derived from a combination of a focused acquisition strategy, solid portfolio performance and timely disposals of select investments to crystallise value for investors. While the market is highly competitive, the board believes that InfraRed has the skills and relationships to make further value-accretive investments, both in the UK and abroad. Best Sector Specialist Investment Trust shortlist HICL Infrastructure Amber Infrastructure Premier Power & Water Bluefield Solar Greencoat UK Wind BEST ALTERNATIVE TwentyFour Income This trust invests in a very specific area of the bond market, investing in a class of bonds known as asset-backed securities (ABS). These bonds are essentially bundles of loans issued by companies to consumers and businesses to finance purchases such as cars or equipment. Ultimately, the loan is secured against the physical asset against which it has been issued. For example, a car financing company might group together hundreds of the car loans it has issued and place them into In the current low-interest-rate environment, riskier debt assets such as ABS are likely to fair very well a bond, which is then traded on the open market. The yield on this fund is 6.7 per cent, and it has a market cap of 363 million at the time of writing. The trust has returned 40 per cent since its launch in 2013, compared with 4 per cent for the average trust in the AIC UK Debt sector during the same time period. That should be seen in the context of many of the trusts in the sector being much more vanilla, and less likely to forage in the ABS end of the market for returns. In the current low-interest-rate environment, riskier debt assets such as ABS are likely to fair very well, but as rates rise there may be a move from investors into safer areas of the debt market. Over the course of the past year, the trust has returned 8 per cent. Monica Tepes, investment trust analyst at Cantor Fitzgerald, remarked, TwentyFour Income seeks to pay out a dividend of at least 6 per cent [the current yield is 6.7 per cent] by investing in a diversified portfolio of UK and European asset-backed securities. This part of the fixed income market has been largely overlooked in the recent liquidity-driven market rally of 2012, and the managers believe it represents attractive relative value. A large majority of the securities are also floating rate, thereby offering upside to future rate rises. Best Alternative Investment Trust shortlist F&C UK Real Estate Investments Picton Property Income Standard Life Investments Property Income Trust Twenty Four Income Real Estate Credit Investments Ignis European Commercial Property BEST VENTURE CAPITAL TRUST (VCT) The Octopus Titan VCT The 203 million market cap Octopus Titan VCT has a current yield of 5.38 per cent. Over the past 12 months it has returned 13.7 per cent, compared with 4 per cent for the average VCT in the 44 www.whatinvestment.co.uk WHAT

AIC Generalist sector over the same time period. On a three-year basis, it has returned 82.7 per cent, compared with 18 per cent for the average trust in the sector. The largest sector exposure of the trust is to technology, media and telecoms, which accounts for 47 per cent of the capital deployed by the trust, while consumer companies account for a further 23 per cent. Best Venture Capital Trust shortlist Downing TWO VCT Mobeus Income & Growth Octopus Titan VCT Triple Point TP Income VCT BEST NEW LAUNCH P2P Global Investments The IPO of this trust made many headlines earlier this year when it was revealed that star fund manager Neil Woodford (left) had made an investment of tens of millions of pounds in the trust. The aim of the fund is to invest in a similar way to a peer-to-peer lending platform in small and medium-sized UK companies, and it currently has a market cap of 487 million. Tepes remarked, P2P seeks both capital growth and an attractive level of income [the current yield is 5.3 per cent] by investing in a diversified portfolio of loans made to SMEs and consumers, which are originated via online lending platforms. The fund may also invest directly in the lending platforms that originate these loans. Simon Champ, chief executive of Eaglewood Europe, which manages the P2P Global Investment Trust, commented, P2P Global Investments was the first UK investment trust to identify and capture the potential of the growing peer-to-peer lending sector globally and make this available to investors in a way that diversified their risk. I am gratified that we have been recognised as Best New Launch by What Investment. We aim to continue to deliver an attractive dividend income and capital growth for our investors The peer-to-peer sector is maturing rapidly and continuing to disintermediate areas of the traditional banking model with materially lower costs and more sophisticated credit scoring technology. We are therefore well positioned and aim to continue to deliver an attractive dividend income and capital growth for our investors via exposure to a diversified pool of credit assets and selective equity stakes in some of the global lending platforms. Best New Launch shortlist Acorn Capital Investment Custodian REIT River & Mercantile Micro Cap TwentyFour Select Monthly Income Fund P2P Global Investments BEST INVESTMENT TRUST GROUP Baillie Gifford Having provided two of the ten trusts to have won individual categories in this year s What Investment Trust Awards, Baillie Gifford was always going to be a strong contender for the accolade of Best Investment Trust group. In addition, a couple of the other mandates run by the company notably the Scottish American Investment Trust, which has an income mandate have also performed well during the past year. However, the best group accolade is designed to reflect consistency of performance, which is certainly a virtue that can be ascribed to the wide variety of Baillie Gifford trusts. Invesco Perpetual can claim to feel hard done by, having been pipped to the post in a number of individual categories, and subsequently in the best group category, following what has been another strong year for the Henley-on-Thames-based investment house. The other nominees were JP Morgan and Henderson Global Investors both firms whose range of trusts delivered consistent but not shoot-the-lights-out performance over the past year from a wide range of assets classes. Best Investment Trust Group shortlist Baillie Gifford Invesco Perpetual JP Morgan Asset Management Henderson Global Investors THE WWHAT www.whatinvestment.co.uk 45

Alan Brierley is director of investment company research at Canaccord Genuity Charles Cade is head of investment company research at Numis Judging panel Simon Elliott is head of investment company research at Winterflood Securities Monica Tepes is senior fund analyst at Cantor Fitzgerald To the left are the profiles of the experienced judging panel who selected the winners of this year s awards. All the evidence throughout 2015 has pointed towards the growing popularity of investment trusts among private investors. However, while this magazine will, as always, continue to seek to clear the path to consistent returns for closedended fund investors, old and new, we may be entering a time when the rising tide that has tended to lift all boats starts to ebb away. Therefore, it is more important than ever to research the market and identify those trusts that are likely to provide outperformance in the future and What Investment will endeavour to assist our readers in this pursuit. u Shareholder total returns to 31 December 2014 (unweighted, adjusted, base = 100) 1 year 5 years 10 years Sectors Investment companies OEICs/unit trusts Investment companies OEICs/unit trusts Investment companies OEICs/unit trusts Global 108.4 107.1 167.6 149.8 254.4 206.3 Global Equity Income 103.8 105.0 191.0 155.8 272.5 208.7 UK Equity Income 104.1 103.1 204.4 164.1 276.2 200.2 UK All Companies 98.5 100.7 174.4 160.0 215.3 205.2 North American 110.5 117.9 184.4 189.8 231.7 224.4 Europe vs. Europe ex UK 106.7 99.0 176.5 136.7 303.9 207.6 Global Emerging Mkts 102.0 103.3 116.5 112.7 288.7 271.8 Asia Pacific ex Japan 113.1 109.6 162.0 132.9 388.2 291.9 Japan 108.9 100.4 213.3 137.9 209.6 143.3 Property 101.0 112.9 141.8 142.3 131.1 138.4 UK Small Cap 96.5 98.3 230.3 197.6 292.7 246.5 Japanese Small Cap 101.2 105.2 192.9 172.4 135.3 150.8 Tech, Media & Telecoms 107.3 113.0 215.3 185.7 505.3 246.3 European Small Cap 95.9 98.7 168.8 161.8 240.4 268.3 N American Smlr Comps 103.4 110.0 192.7 208.0 216.3 269.1 Indicates investment company outperformance vs. OEIC / unit trust performance over given time period Indicates OEIC / unit trust outperformance vs. investment company performance over given time period Notes: The investment company data is unweighted share price total return performance figures on a mid-price to mid-price basis. OEIC / unit trust data is unweighted total return performance figures on a bid price to bid price basis. All data to end of December 2014. Table produced for the AIC by Canaccord Genuity. The AIC, and Canaccord Genuity, accept no responsibility for any errors or omissions in this table or for any loss occasioned to any person or organisation acting or refraining from action as a result of any material contained or any omissions. Source: IMA / Morningstar 46 www.whatinvestment.co.uk WHAT