Up close and personal with three investment trust managers

FundCalibre hosted its inaugural investment trust event on Wednesday 22 May 2018.

Financial journalists from national newspapers such as The Times and The Guardian and specialist titles such as Investment Week, Investors Chronicle and Moneywise, were given the opportunity to meet three Elite Rated investment trust managers and grill them on the outlook for their asset class and the financial stories of the day.

From stock market highs to M&S store closes and week-long MOTs, here’s what they had to say.

Job Curtis, City of London Investment Trust

The UK stock market posted a new all-time high this week, but what is driving the gains, this far into a bull market? According to Job, it’s because investors need an income and UK equities are the only show in town.

“The yield on different UK assets tells the story,” he said. “The interest rate on cash is 0.5%, 10-year government bonds are yielding 1.5% and the UK stock market, as measured by the FTSE All Share, is yielding 3.5%. If you want a yield there is only one place to go.”

While there have been some concerns mooted recently about the dividend cover of the UK stock market (the ability of UK listed companies to be able to pay their promised dividends) Job personally believes that most companies should be able to pay up and there is enough choice to be able to avoid any of which you are uncertain.

The rebound in the oil sector over the past year or so has also helped push the stock market higher, in Job’s view. Royal Dutch Shell and BP are among his largest holdings in the trust. Indeed, nine of the top ten holdings are global in nature – only Lloyds has a UK domestic focus.

Job held Lloyd’s prior to the global financial crisis in 2008 and voted against the company buying HBOS – a deal that eventually led to a government bailout. It is the first time he has invested since but says the bank is now in much better shape.

With ongoing Brexit uncertainty in the UK, he feels companies with a global focus are a better option right now.

The trust has 8.5% gearing at the moment – funded by 32-year borrowing at 2.94%, which Job took out last autumn. “It makes sense to get borrowing while it is this cheap,” he said. “I firmly believe that I can return more than 2.94% per annum for shareholders so, it is worth borrowing the money to invest more.”

Job is not concerned about the recent rise in merger and acquisition activity in the UK. “It is more a sign that our stock market is very good value for overseas buyers, rather than it being a sign that investors are over-confident and it is the top of the bull market.”

Marcus Phayre-Mudge, TR Property Investment Trust

TR Property Trust invests in the shares of property companies in the UK and across Europe. Currently, one third of the portfolio is allocated to the UK, 24% in German companies, 20% in French, 15% Scandinavian and 10% Spanish.

With M&S announcing a number of store closures over the next few years, we asked Marcus what this means for property investments. “The first thing we do following this type of announcement is check which, if any, of our listed property shares own the buildings.” he said.

“Two years after BHS went bust, 70% of stores (by area) are still unoccupied. Some are deliberately so as the owners may be looking for a ‘change of use’ for the building, but it does show the impact. But what investors need to remember is that it isn’t all bad. Firstly the company is cutting its costs and focusing on where it can do better. In M&S’s case, some stores will be very profitable, some ok and some will be losing money. So they can choose which ones they shut. More generally, many investors seem to have bought into the story that secondary shopping centres are dying and only primary areas can survive – but it is very much dependent on the individual locations.”

Looking at the outlook for UK property, Marcus reiterated the fact that, while the capital value of UK property will rise and fall like any market, the income produced is actually very resilient. Since the 1980s – almost four decades – it has stayed at a reasonably high level and been very consistent. The problems with capital values occur when there is over-supply.

“The UK property collapse in the early 90s was a result of the 80s boom – too much money being borrowed and a very relaxed development environment,” he said. “It resulted in too much supply, which is a bad thing in this asset class. The fall in 2008 was due to structured debt and too much money in the wrong hands.

“Today, the banks are no longer keen to lend money speculatively and this acts as a natural break on construction: supply is better controlled.”

Marcus does not believe the UK economy is in great health at the moment, so has been investing in properties and property companies that can do well even in a low growth environment: self-storage, student accommodation, social housing, etc.

He is a lot more positive on European, where he says some economies are growing strongly. “While 20% of UK retail sales are online in the UK, just 2% are online in Italy,” he said. “Italians still like to go shopping and Amazon hasn’t quite made it yet. So shopping centres in the north of Italy are a short-term investment I like.”

“In Germany we hold the biggest owner of apartments – some 400,000. In contrast to the UK, there is only 15% home-ownership in Germany – most people rent. Most tenants are fully employed and there is wage inflation. The company we own has great earnings potential and 4% yield. There is little not to like.”

Praveen Kumar, Baillie Gifford Shin Nippon

Shin Nippon means ‘new Japan’ and, according to Praveen, a new Japan is emerging in more ways than one.

‘Abenomics’ – the name given to Prime Minister Abe’s set of reforms, have played their role over the past few years, as they have enabled some significant structural changes to take place: a mix of measures to introduce inflation back into the system, government spending and growth strategies designed to jolt the economy out of suspended animation that has gripped it for more than two decades – as The Economist described it. To name but two examples, more women have been encouraged to return to the workforce, which is helping to elevate Japan’s labour shortage, and regulations have been relaxed so that doing business is easier.

Coupled with this there is also a increasing crop of young, dynamic Japanese entrepreneurs willing to take risks. “They are either western-educated or have spent time working abroad, and have seen how other countries and businesses operate,” Praveen commented. “They are bringing things back to Japan and, with them, a different way of thinking.”

“Japan is still an inefficient market,” he said. “There are too many middle-men and a number of sectors operate in multi-layers. This makes costs high. So there is still huge scope for disruption.”

For example, a quirk of Japan is that an MOT can take up to a week. The garage has to go to multiple suppliers for quotes on parts and this is all done by phone and fax! BroadLeaf is a company held by the trust which has developed a cloud-based system that allows garages to request multiple quotes at once using a single device. It’s not easy to grow as the company has to convince each garage of benefits – but it is still growing by around 20% per annum. Online disrupters account for around 30%* of the trust’s holdings.

It’s this type of problem-solving company that Praveen is looking for – businesses that will transform how a sector operates or how products are made. Indeed, when he meets a prospective company, the first question he asks is: “What problem are you trying to solve?”

“Labour shortage is another big issue to solve,” he added. “In primary schools there are seven jobs for each teacher available. The average construction worker is 50 years old. Robotics and automation are playing a significant part in this and 17%* of the portfolio is invested in companies offering solutions to this problem.”

*as at 31 March 2018