supplement
For today ’s discerning financial and investment professional
Ever ything you Wanted to Know about Investment Trusts (But Didn’t Dare Ask) Multi-Manager Strategies for De-Risking and Targeted Diversification Asia Pacific – Is It Time to Buy?
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Intro What’s the single most obvious thing that you know about investor behaviour over the last six months? That private clients have been nervous of course worried by a combination of Eurozone indecision, a Chinese slowdown in the face of a correction, and a growing sense that it’s only a matter of time before the US Federal Reserve starts raising interest rates, in order to hold back a resurgent growth rate that most of us can only wish we had in our own markets
What else? That people are potentially tapping into their pension funds in the aftermath of the April pension freedoms, and paying off their mortgages and their overdrafts. So, why would anybody want to commit to equities at a time like this, when prices have dropped by 18% or more? It might surprise you to read the latest data from the Association of Investment Companies (AIC). It suggests that net fundraising among investment companies (which includes investment trusts, offshore investment companies and venture capital trusts) during the first eight months of 2015 was more than the total for any full 12-month calendar year in history. This is a colossal £3.9 billion vote of confidence in a sector that used to be regarded with a little scepticism. Now, for the sake of clarity, investment trusts (‘IT’s) are often referred to as investment companies, and we will use these terms interchangeably throughout this feature.
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Tell-Tale Signs And would you be impressed to know that the demand for investment company shares this Summer was strong enough to push down the average discount rate by 0.4% to 2.9% in August alone? That’s just 0.5% off the all-time record low of June 2015. And, as we’ll be explaining shortly, that’s a pretty convincing vote of confidence in the merits of active management at a time when trackers have been in retreat. (Bear with us if the whole business of premiums and discounts makes your head spin; all will be revealed in the coming pages.) As AIC Communications Director Annabel Brodie-Smith tells us, it’s not the safe-as-milk risk-averse options that are making all the ground. Rather, she says, “it’s the specialist, higher yielding sectors which continue to raise the most money and attract the highest ratings.” I don’t know what that says to you, but what it says to me is that clients are getting more sophisticated and more knowledgeable about investment companies. It probably also reflects the fact that a large proportion of that pension-freedoms cash is
being channelled into incomeproducing funds that, with luck and good management, will keep their owners in deeper clover than the annuities where they would once have had to go. Controlling the Risk Ah, you’ll say, but investment companies are a little tricky, aren’t they? Well, that might once have been the consensus in the days when consumers were wary of the unfamiliar aspects of these vehicles. But what’s this? Many of the strongest-performing, retailfocused investment companies, according to Ms Brodie-Smith, are the very big ones, including Scottish Mortgage and Witan. The essential thing here, according to industry observers, is that investors know they’ve got to take on more risk if they want to beat annuity rates, but that they’d rather leave it to an expert who can diversify the risk while also letting managers do what they’re paid to do. It’s all about getting the right balance and, for many, that will mean using multi-manager funds; relying on experts to select the best managers for benchmarkbeating performance returns. We’re not going to spend the next few pages going through the basics of the multi-manager
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Contents II Introduction Sales of investment trusts have hit record levels this year, says editor Michael Wilson. Partly that’s because the pension freedoms have set canny investors on the trail of index-beating returns. How can multi-manager strategies optimise the returns?
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Back to Basics Our no-nonsense guide to how investment trusts work - or should we call them investment companies? Remember, you’re among friends. No question is too silly to ask
VIII The Multi-Manager Advantage market, but of the whole investment trust/investment company business itself. We’ll be comparing the various ways of achieving an efficient, cost-effective multi-manager operation. But let’s make sure we can walk confidently before we start a baton relay team. Many thanks to everyone who has contributed to this supplement. And please do write in to us at editor@ ifamagazine. com with any comments you may have.
How a dynamically-managed team of active fund managers can enhance performance, reduce risk and respond to opportunities faster. Fund of funds or multimanaged? We compare and contrast
XII The Witan Experience 109 years in the business, and going strong. Chief Executive Andrew Bell explains how the company’s headlining Witan Investment Trust works
XVI Pacific Prospects Nobody said it was going to be easy this year. But dynamic geographical allocation strategies in which China plays a fairly small part have done much to put the Witan Pacific Investment Trust in the right place for a re-emerging region
Mike Wilson Editor
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“Wolde ye bothe eate your cake, and have your cake?”
John Heywood, 1546
The Witan multi-manager approach – aiming to deliver both income AND capital growth. Some people don’t think it is possible to do both. At Witan we think differently and, since 2004, our specialist investment managers have helped enable Witan shareholders to have their cake and eat it too. Witan is the only fully multi-managed global equity investment trust. Our carefully selected range of fund managers picks the stocks while Witan directs the overall portfolio strategy. The goal is to outperform the relevant equity benchmark and to grow the dividend faster than the rate of inflation. Naturally, this cannot be guaranteed so please read the risk warnings carefully. By playing to the individual strengths of our managers we strive to reduce volatility which can arise from being dependent on a single manager. What’s more, Witan offers exposure to the world’s major equity markets, diversified by manager, geographical region, industrial sector and individual stocks. All of which could help your clients to both have their ‘investment cake’ and eat it… Your clients can invest in Witan Investment Trust plc in a number of ways. Witan’s shares can be traded through many online platforms. Witan is also available for investment via an ISA, share plan and children’s savings schemes. 40 year growth in Witan’s dividends per share versus UK Retail Price Index † 5000 4000
Witan Investment Trust plc is an equity investment. Please remember that past performance is not a guide to future returns. The value of an investment and income from it can fall as well as rise, as a result of currency and market fluctuations and you may not get back the amount originally invested. *
Witan dividend (pence per share) RPI Index
3000 2000
1000 0 1974
1978
1982
1986
1990
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†SOURCE: Datastream. Both data series have been re-indexed to 100.
Visit www.witan.com Available on a number of online platforms *
40 YEARS OF CONSECUTIVE DIVIDEND GROWTH FOR FINANCIAL ADVISERS ONLY. Issued and approved by Witan Investment Services Limited. Witan Investment Services Limited is registered in England no. 5272533 of 14 Queen Anne’s Gate, London SW1H 9AA. Witan Investment Services Limited provides investment products and services and is authorised and regulated by the Financial Conduct Authority. We may record telephone calls for our mutual protection and to improve customer service.
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What’s So Difficult About Investment Companies? Perhaps we shouldn’t be so very surprised that many financial advisers are still a little unsure about investment trusts – how they operate, how they’re structured, and how they behave under different market conditions. The overriding focus of the regulatory system over the last decade has been on evening out the bumps for our clients in any way possible – a pressure which, for many, has tended to mean that we’ve focused on open-ended investments such as OEICs and trackers of all kinds. And that’s a pity for any number of reasons The one thing that most people seem to focus on is that closed-ended products, including investment trusts, can be more volatile than their open-ended counterparts. They depend more immediately on the skills of the active managers who run them. And, unlike open-ended funds, which will simply sell down a portion of their assets whenever the clients decide to make their exits, investment companies tend not to be affected by client demand when making investment decisions.
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They are, after all, investment companies with portfolios of assets whose values are subject to the same market pressures as any other shares. (The word ‘trust’ is a bit of a misnomer when it comes to investment and applies more to the relationship between the independent Board of Directors and shareholders.) When Mr Market is keen to buy, the value of those shares goes up, perhaps disproportionately; when he decides to sell, they come under pressure. Sophistication and Safety Too But the last few years have brought a growing awareness that some of the assumptions we’ve made in the past are not so very true anymore.
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The most important change, from our point of view, is that multi-manager trusts have been able to assemble a dynamic portfolio, so as to spread and diversify the portfolio in ways which do more than just dilute the volatility risk – rather, they are actually well placed to riff on the different characteristics of various markets, products and investing styles. That can provide a combination of two great advantages – firstly, the ability to capitalise on the ‘on the ground’ knowledge that specialist managers can bring to the equation, and secondly the ability to ride out periods of uncertainty, thanks to the risk diversification of a properly multi-managed approach.
Four Things You Didn’t Know Trusts Could Do But there are other surprises that some advisers won’t be fully aware of. The first of these is the ability of an investment trust to ‘smooth’ its returns to investors. Now let’s think about that for a moment. We’ve always been trained to think of investment trusts, with their fixed volumes of share issues, as ‘sealed’ investments. Surely, you might ask, once the assets are in the sealed bag the only way it can grow or shrink is either through the growth (or shrinkage) of its net asset values, or because the market has become agitated enough to drive up (or down) the value
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of the fund– thus increasing or decreasing the discount (or alternatively, the premium) to NAV of those funds? Yet the recent trend toward share issues or buybacks signifies a change of direction for investment trusts, which has decisively shifted our perception of just how flexible they can be. From an investor’s point of view, the ability to issue or buyback can help to smooth its returns; from the manager’s viewpoint, it can improve the attractiveness of the shares to buyers. But, generally, being active in share buybacks and issuance is regarded as responding to the market to ensure liquidity in the company’s shares for its shareholders
and potential shareholders. A second surprise is the ability of investment trusts to hold cash, at least for a year or two. Yes, we know that a newly-launched fund will often keep its money in the bank for a year or so until it’s all been allocated to equities, or whatever. But what about the ability to return a limited proportion of the portfolio to the safe harbour of cash? I can think of some Chinese investment companies that dodged the 2011 downturn quite spectacularly by holing up in cash for a while once the storm clouds gathered. Try doing that with an open-ended fund, and you’ll quickly realise that it isn’t a realistic possibility. A third factor which many advisers don’t take into account is the ability of some funds to leverage. There are invariably mandated limits on how much leverage can be taken on board by investment trusts – with the actual level generally rising when the managers feel that opportunities are attractive, and reducing when things look like taking a downward turn. The Yield Advantage And so, finally, to the question of yield. Now, there are a lot of tracker investors who never see a yield at all – they tend, after all, to be focused rather more on capital growth than on earning a yearly return. In
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any case, with trackers any yield return that might have been is effectively swallowed up by the management costs, so people tend not to notice their absence. Investment trust buyers, however, not only receive dividends but – in contrast to open-ended fund buyers – they can expect to see those dividends being protected by smoothing. The difference is that OEICs are required to distribute the income they generate each year to investors, which means that their income payments are vulnerable when companies’ profits are weak; ITs, however, can hold back cash so as to provide a more reliable yield for income investors. But this isn’t even the biggest advantage of the yield strategy. Because ITs tend to hold for longer periods, reinvesting the dividend can snowball absolute returns surprisingly quickly. And because a company share that’s carrying a good dividend is itself likely to accumulate capital value more quickly, a virtuous circle can develop which can be thoroughly beneficial. There are many thousands of IT investors out there who find that their annual dividend on an investment trust is actually greater than the capital sum that they spent when they bought it.
The Association of Investment Companies estimates that the average level of leverage for UK-domiciled trusts is typically around 7%, and that only a couple of dozen funds will hold more than 15% at any one time. (Witan’s current gearing is around 10%.) On closer inspection, many of the most exposed will be found to be built around non-equity activities such as property, which is inevitably leveraged. (Equity funds are generally far less exposed.) Just nine trusts were holding more than 24% at the end of 2012, according to the AIC, of which all but four were global or country-specific funds
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The Multi-Manager Advantage So we’ve established that investment trusts have a quite different sort of character from the open-ended funds that still tend to preoccupy advisers’ thoughts when they think about their clients’ needs – especially those who prefer a conservative approach. And the cause, as we’ve seen, is price volatility
Being closed-ended, with a fixed number of shares, any one investment trust on its own can become liable to the push-and-pull pressures of the marketplace. If the demand’s strong, the share price may be driven up into premium territory against net asset value; if it weakens, then the shares may trade on a bigger than usual discount to NAV until the mood improves. That’s partly why ITs have traditionally attracted wealthier and less risk-adverse investors than OEICs – indeed, it’s why for many years investment trusts weren’t allowed to advertise directly to the public. But times change. And, with the take-up among private investors rising steadily, the perception that investment trusts are ‘difficult’ is being slowly eroded. We also need to remind ourselves here, of course, that the historical absence of commission payments is a good part of the reason why investment companies haven’t been surfacing onto IFAs’ radars in the past. At the same time, the growing interest in higher-
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yielding investment trusts has lent new impetus to the demand for funds which specifically aim to beat the paltry rates you can get from your bank. Of course, beating the FTSE yield by a significant margin might mean taking on an elevated level of risk - some of the heavier and more old-fashioned industries, for instance, with lower capital growth prospects, or perhaps a light smattering of high-yielding paper which needs keeping under constant surveillance. Using a multi-manager or multi-fund approach can be an excellent way of diversifying your risk whilst still aiming for an optimum return. Strength in Numbers But we’re getting ahead of ourselves. The growth of interest in investment companies of all shapes and sizes is a thoroughly good thing, not least because the post-RDR landscape requires advisers to consider all mainstream forms of investment when talking with their clients, while also abolishing the commission structure that used to put them at a disadvantage against openended investment providers.
Okay, we’ll agree that investment companies were unlikely ever to feature on the menu for widows and orphans – despite the fact that income smoothing may well suit more risk adverse clients and that they have a Board of directors who represent and protect shareholders’ interests. And we’ll add that, even this year, a total investment inflow of around £500 million a month is modest by the standards of the OEICs industry. But the growing popularity of fund of fund or multi-manager approaches that combine dozens or maybe hundreds of separate investments is a telling reminder that the public is catching on to the diversification potential that a multi- manager approach can bring. The Widest Range of Coverage But what all the major providers of multi-manager funds (both open- and closed-ended) will tell you is that the key advantage of multi-manager set-ups is that they draw on the various specialist skills of managers who are getting paid to focus solely on their various spheres of expertise.
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If you want to maximise your chances of navigating the waters of China or Vietnam or Latin America successfully, you’re better off making sure that your investment is run by somebody who’s been doing it for decades, not somebody who operates from a desk in London. If you know that a region, or country of interest is potentially volatile, where else will you find the watchful eye that can spot forthcoming turbulence in the local press and, with luck and skill, allow you to sidestep the trouble at short notice? And isn’t it likely that, by spreading your investment around a small number of specialist management groups, you can improve your chances of achieving an overall return that beats the index, even if one or two inevitably underperform? That’s not all. As you’d expect, some managers are
better than others at particular activities. Some, for instance, will have strengths in corporate debt; others will excel in currency trading (which can be highly critical). Some will be good with large companies and infrastructure projects, while others may have a golden touch with technology investments. A few will bring skills in private equity or absolute return strategies. Others will be selected because they are experts in a specific region. But whichever way you look at it, there’s an obvious advantage in bringing them all together within one investment, which the client can purchase in one transaction.
tolerances. We can expect to see this frankly prejudicial assumption coming under increasing fire in the coming years as the appetite for high total returns evolves.
In case you hadn’t noticed yet, all of this diversification is working against the traditional view that investment trusts are really just for sophisticated investors with higher risk
Let’s return, however, to the point we made in the last article about how investment trusts are often able to exploit niche opportunities in emerging markets and so
However, it’s not too much of an exaggeration to say that a properly-structured multi-manager approach can work as a fully-fledged risk management tool, allowing the overall managers to adjust their exposure dynamically to the various markets they cover. That’s a benefit which also contributes to the performance of the company’s other projects. A real win-win.. Meanwhile, Deep in the Jungle
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forth. Because ITs don’t suffer from the problem of investors withdrawing their cash at inconvenient times (and thus forcing them to sell when they’d rather hold), the IT structure allows managers to commit to a market for as long as they wish. This is something really rather special for emerging countries, which are often wary of foreign investors departing as quickly as they’ve arrived. It means, in effect, that only closed-ended funds are properly able to break into small but growing markets in Africa or the Far East. But if we want to temper the volatility which can often prevail in such markets, the risk-spreading benefits of a multi-manager strategy become obvious at once. Funds of Funds – The Pros and the Cons For some investment managers and, indeed probably the majority, the art of running a fund of funds is to save on sweat and shoe-leather by simply placing the bulk of their portfolios in a variety of other funds ; some of which may be investment trusts, but which may also include OEICs, bond funds, managed commodity funds and so forth. And why not, you might ask? The clear advantage is that the fund of funds’ overheads come down drastically. When the only really important decisions of the parent Company becomes which funds to allocate to, the whole situation becomes simpler. And more liquid, too, presumably, because they can switch assets without having to bother about the hefty dealing charges that sub-fund holdings need to cover. A single transaction and they are in, or out. But consider this. By taking no direct role in the running or steering of the sub-funds, the fund of funds manager is insulated (for want of a better word) from the investment process. If a crisis should arise, they may find themselves just one of hundreds of investors
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trying to sell that fund at the same time, and they don’t have any priority, which may mean losing precious quarter-hours and having to accept the consequences. Whereas a more handson multi-manager, of the type we’ll be looking at shortly, can choose their moments in confidence and ensure they have sub-managers who are effectively working specifically for them. That’s something that can make a critical difference to performance. What About Charges? There’s also the ‘small’ point of charges to consider. If the provider has simply set up a funds-of-funds approach and bought a little of each of a variety of funds, the way that hedge funds often do, he’s going to have to deal with a whole pyramid of management costs (‘layering of fees’) that could quickly become a drag on growth. (Let’s remember, please, that ITs are invariably actively managed.) 1% here and 1% there can quickly add up to a wedge that wouldn’t bother a high roller with a hedge fund, but which would certainly deter many more modest and risk-averse investors. Very many funds-offunds are running total expense ratios (TER) above 2.5% a year, compared with a typical 1.5% for a standard OEIC. Some, which we won’t name here, are nudging 3% by the time the full Ongoing Charges Figure has been calculated. So let’s start with the welcome observation that several multi-manager funds operate gross expense ratios of between 1% and 2%, and take it from there. How do they do that? It’s All About the Management Structure Principally, by not simply holding sub-funds, which can be expensive, but by ‘farming out’ their assets proportionally among between (typically) three and twelve managers, with each one being responsible for a particular management approach.
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Witan Investment Trust – Multi-Manager Structure (as at 31.12.2014) EQUITY MANDATE
MANAGER
BASED IN
% OF PORTFOLIO
Global
Veritas
London, UK
12.6
UK
Lindsell Train
London, UK
11.8
Global
Pzena
New York, USA
9.8
UK
Artemis
London, UK
9.6
Asia Pacific inc. Japan Matthews
San Francisco, USA
9.7
Global
Lansdowne Partners
London, UK
9.5
Global
MFS
Boston, USA
8.7
Pan-European
Marathon
London, UK
7.3
Direct Holdings
Witan Executive Team
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6.7
UK
Heronbridge
Bath, UK
6.6
Emerging Markets
Trilogy
New York, USA
3.3
Global
Tweedy, Browne
Stamford, USA
3.2
Japan open-ended funds
1.2
Source: WM Company
Witan Pacific Investment Trust – Multi-Manager Structure (as at 31.01.2015)
Aberdeen Asset Management
44.9
Matthews
44.4
GaveKal
10.7
Source: WM Company
Please see the disclaimer at the end of this supplement
For example, the (US) Northern Multi-Manager Large Cap Fund allocates 25% of its portfolio to managers Jennison (with a responsibility for “aggressive growth”); 30% to Delaware (“deep value”); 25% to Huber (“traditional value”) and 30% to WestEnd (“sector and stock concentration”). Other types of funds may require values such as “opportunistic”, “active quantitative value” (whatever that is), “bottom-up” or “relative value”. It all depends on what the fund is trying to achieve. The £170 million (approximately) Witan Pacific Investment Trust employs only three managers (Aberdeen Asset Management 44.9%, Matthews 44.4%% and Gavekal 10.7% as at 31.01.15); but as you can see above, when it comes to the £1.8 billion Witan Investment Trust there are 11 external managers, plus a handful of other funds
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(in a portfolio directly managed by the Chief Executive and Investment Director), just to prove that ITs really can buy pretty well anything. So let’s return to that question we asked earlier. How do the fees and charges stack up? Witan Investment Trust has an ongoing charge of 0.74% of net assets, or 0.96% including the performance fee (both figures to the end of the company’s last financial year ending 31.12.2014), while Witan Pacific Trust carries a 1.06% ongoing charge which rises to 1.12% with the performance fee (both figures to the end of the company’s last financial year ending 31.01.2015). How is that achieved? According to Witan’s Andrew Bell, when you’ve got the best part of two billion pounds under management you’re in a position to make enormous cost
savings; you’re able to negotiate tighter fees than you could with a much smaller AUM. And, of course, there’s the prospect that the management contract will be a long term relationship and not just a brief dalliance that’ll last until the current dance is over. It all goes to making the proposition more attractive to a manager so that fees can be minimised. That leaves the central administration with the task of pulling it all together, monitoring manager performance and taking decisions to augment what the managers are doing with actions of Witan’s own. Plus, of course, taking care of the shareholder relationships through advertising and promotion, newsletters and factsheets, and – last but not least – ensuring overall compliance with The FCA’s rules.
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A Different Way of Doing Things Editor Michael Wilson talks to Witan’s Chief Executive Andrew Bell about life, the universe and getting the very best out of your managers
One of the first things that most investors need to learn about investment trusts is that the shares often trade at a discount to net asset value. That’s to say, the price per share is less than the value of the underlying securities. And the second is that this is a completely normal and healthy state of affairs (in most cases). IT prices are invariably marked down against asset values, so as to take account of the costs that would be incurred if the fund were ever to be liquidated at short notice. (That and the fact that selling off big chunks of equity will invariably tend to drive prices down, so it’s a self-fulfilling prophecy.) How, then, to explain the fact that the Witan Investment Trust has been trading instead at a modest premium instead of a discount in recent months? (1.2% in July, 0.46% in September.) Or, to put it simplistically, that there’s a big enough queue of investors with
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Witan on their watch lists to keep the price buoyant? Heritage Matters It might, of course, be simply that Witan Investment Trust is too big to be considered vulnerable. At around £1.8 billion (September 2015), it’s probably six to ten times bigger than the mediansized fund of its type. It might be that its 109-year history speaks for itself - and that its shareholders are known to be a particularly loyal bunch who have grown up and even grown old with the flagship of the UK investment trust industry. Originally formed in 1909, Witan joined the London Stock Exchange in 1924 and went on to found the Henderson Group, which it floated in 1983, remaining a shareholder of what is now called Henderson Global Investors until 1997. Of course, the multimanager strategy was not there from the very beginning – rather, the company became a multi-manager specialist in 2004. But it’s safe to assume that the venerable company
“But it’s safe to assume that the venerable company with its 109-year heritage would have been regarded as a ‘safe pair of hands’”
with its 106-year heritage would have been regarded as a ‘safe pair of hands’. That kind of a reputation never hurts. A Broad Investing Base 2004 was, of course, another world from the one we inhabit today, and there were challenges ahead, which even the canniest analysts couldn’t foresee at the time. When the crunch came in 2008, the test of the fund’s approach would be a matter of public
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record. And I suppose you could say that the fact that it outperformed its benchmark in eight of the next nine years is a good place to start looking for evidence (albeit, the Company would stress that past performance is not a guide to future performance). The factor that seems glaringly obvious is that Witan (which describes itself as the UK’s “only fully multi-managed global equity investment trust”) maintains a relatively mainstream portfolio. So how does an actively managed fund beat its benchmark? “It’s all about entrepreneurship”, says Andrew Bell. The point is that an active multi-manager employs the various respective managers to do what they’re respectively good at. And for each manager, that might be a different thing. You might say that the overall manager’s function (i.e. Witan’s) is to bring it all together so that each instrument in the orchestra is making its contribution. And to decide when to change the tempo or when to bring on the fortissimo.
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Indeed, if it were very unhappy it could simply switch the management to another team from another manager. And, while there are no reasons to expect any such need, it’s another layer of security for shareholders. How does that work? In effect, each of the managers is allocated a slice of the overall fund portfolio and is given a benchmark against which it must try to outperform. Witan’s central role is to determine the allocations, and also to make available any gearing that might be appropriate to the situation (or none at all). There are a couple of exceptions to this directmanagement rule, says Bell. When it comes to relatively smaller exposures, such as the Emerging Markets element within the Witan Investment Trust, it can prove more cost-
effective to hold the shares in another manager’s funds directly. (It saves, for example, the cost of ensuring adherence to all kinds of compliance and governance issues in out-ofthe-way places.) Otherwise, though, the important point to note is that the appointed managers are running their allocation of Witan’s funds directly on behalf of Witan. Witan also bypasses the managers, in certain circumstances to make direct investments, when there’s an asset class that they would like specific exposure to, or where the external managers do not have expertise. Listed private equity was one example that Bell mentioned to us. Up to 10% of the total portfolio (at the time of investment) can be invested in this way.
Witan Board Harry Henderson
Andrew Bell
Chairman
Chief Executive Officer
Appointed a director in 1988, becoming Chairman in March 2003. He was formerly a partner of Cazenove & Co.
Appointed a director and Chief Executive Officer from February 2010. Previously he worked at Rensburg Sheppards Investment Management Limited as Head of Research.
Hands-On Management The defining point about Witan’s strategy is that, on the whole, it doesn’t hold third-party funds but appoints managers (currently eleven of them) to manage discrete portfolios. The general effect is rather similar to what you’d get from a fund of funds proposition but, says Bell, it has the additional advantage that it gives Witan the ability to know at any one time exactly what any of its holdings are worth. There’s a particular advantage to this, he says. If the markets should ever stumble, or if any mishap should occur, having direct control of the management chain means that Witan can move faster than if it were ‘just another shareholder’.
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Witan Board James Bevan
Robert Boyle
Catherine Claydon
Director
Chairman of the Audit Committee
Chairman of the Remuneration and Nomination Committee
Appointed a director in 2007. He is Chief Investment Officer, CCLA Investment Management. Previously he was the CIO at Abbey.
Appointed a director in 2007, he is a Chartered Accountant and was a partner of PriceWaterhouseCoopers LLP.
Joined the Board in 2009. Previously she was a Managing Director in the Pension Advisory Group at Goldman Sachs (1992-2007) and Lehman Brothers (2007- 2008).
Suzy Neubert
Richard Oldfield
Tony Watson
Director
Director
Senior Independent Director
Joined the Board in 2012. She is Sales & Marketing Director at J O Hambro Capital Management, which she joined in March 2006.
Joined the Board in 2011. He is chairman of Oldfield Partners, an investment management arm.
Appointed a director in 2006 and appointed Senior Independent Director in 2008. He is a non-executive director of Hammerson plc, Lloyds Banking Group plc, Vodafone Group Plc and the Shareholder Executive.
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Witan Pacific Board Sarah Bates
Dermot McMeekin
Chairman
Senior Independent Director and Nomination and Remuneration Committee Chairman
Took over from previous Chairman Gill Nott on her retirement in June 2014. Prior to being appointed Chairman, Sarah was a Non-Executive Director of the trust for 11 years.
Appointed in May 2012, a Solicitor and Management Consultant who brings over 20 years of on-the-ground country experience across Asia.
Andrew Robsen
Diane Seymour-Williams
Susan Platts-Martin
Independent Non-Executive Director
Independent Non-Executive Director
Appointed in June 2010 and adds to the Board some 30 years of investment experience, including the management of Asian equity portfolios and Asian asset management businesses.
Appointed in July 2014 and brings to the Board considerable knowledge of investment companies and investment management generally, having spent 26 years in a range of senior roles.
Audit and Management Engagement Committee Chairman
Appointed in July 2014 and becoming Committee Chairman in 2015, a qualified accountant with over 15 years of corporate finance experience, including with Asian companies.
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November 2015
The Pacific Scenario And so to the Witan Pacific Investment Trust
With gross assets of around £170 million (as at 31.10.15), the Witan Pacific Investment Trust was initially part of F&C’s operation, becoming focused on Asia during the 1980s and moving to Witan Investment Services in 2005 under a multi-manager arrangement. The idea, as Witan’s Chief Executive Andrew Bell puts it (Andrew is also Managing Director of Witan Investment Services, which provides operational oversight to Witan Pacific), was that Witan Investment Services should ‘oversee operations on behalf of the Board, which has ultimate responsibility. As with Witan Investment Trust, Witan Pacific doesn’t hold third-party funds but appoints managers (currently Aberdeen Asset Management, Matthews Asia and Gavekal, of which more anon) to manage discrete portfolios. The general effect is rather similar to what you’d get from a fund of funds proposition, but, says Bell, it has the additional advantage that it gives Witan
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Investment Services and the Board of Witan Pacific the ability to know at any moment exactly what any of its holdings are worth. Well, that’s almost correct, because Gavekal is the exception that proves the rule. Maintaining only around 10% of the overall Witan Pacific portfolio, Bell says that it has proved more costeffective to hold the Gavekal Asian Opportunities Fund (UCITS) directly. Whereas the Aberdeen and Matthews managers are running the funds directly on behalf of Witan Pacific in segregated accounts. The advantage of doing this is clear. Should something go wrong, or the markets take a dive, then Witan Pacific can quickly take decisive action because it has direct access to the assets. This means that the Board can move very fast – Witan Pacific is not just another shareholder of an open-ended fund. Furthermore, if it was unhappy with any particular aspect of the management process, it could simply switch to another team from another manager. There is no reason to
expect such a need to arise, but the important point is that Witan Pacific, as with Witan, has the ability to move quickly and safely if its wishes, adding another layer of security for shareholders. Moving onto the wider market, Bell (in his capacity as Managing Director of Witan Investment Services and spokesperson for Witan Pacific) has a number of thoughts, including what’s happening with China. He said: “I think a lot of the China angst is more about the Chinese stock market than the economy. The economy, certainly, is slowing, that’s a known story. From 10% growth five years ago to 4% or 5% in five years’ time. And that’s OK too – it’s only the transition which is difficult to manage.” The market was effectively geared towards growth, Bell says, and it’s that climb down from those inflated expectations of growth that has caused most of the damage. “It actually became a complete casino,” he concedes. “And it looks as though there was some official connivance in the way that the situation developed.”
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26%
November 2015
5%
Source: BNP Paribas as at 31.07.2015
CHINA/HONG KONG
29%
6% THAILAND
3%
1%
3%
VIETNAM 1%
SINGAPORE
The local market went up by about 150% between last year and the peak in the spring of 2015, Bell notes, and that was completely decoupled from the domestic economy. “So the fact that it’s on the way to halving from its peak doesn’t mean that the economy’s crashing – rather, it means that the stock market bubble has imploded.” Sure, Bell says, the government did try some “cackhanded defences”, such as using its leverage among the banks to force them into supporting the market – altogether, some $300 billion seems to have been deployed just to stave off the image of weakness. But now that it’s abandoned its attempts, we’re probably in a better place. But surely, we asked, China can be a pretty hard market to read at the best of times? Corporate governance isn’t always of the best, and the invisible strings that link the commercial sector to the very powerful regional governments has been a complicating factor? No-one knows this better than Anthony Bolton, the former Fidelity star manager who came out of retirement to form the Fidelity China Special Situations fund – only to see the share plummet far below the issue price, as some portfolio stock picks were hit by scandal and a
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5%
JAPAN
TAIWAN
INDIA
Geographical Spread of the Witan Pacific Trust Portfolio, July 2015
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SOUTH KOREA
11%
THE PHILIPPINES
MALAYSIA
4% INDONESIA
discount opened up. Yes, says Bell, but this was a doubly cruel turn of fate because no sooner had he quit than the fund rose substantially along with the spike in the market. “Having had a relatively trusting attitude, based on his perceptions of good management in the west, he got caught out by a few scallywags, though the fund outperformed the Chinese market both during and after his tenure.” Bell again: “For sure, the world should pay attention to China’s economy, but it’s slowing and not cratering.” And anyway, he adds, most foreigners don’t actually own any shares in the domestic A shares market, which was where the bubble developed and actually, he adds, most Chinese don’t own them either. So the backwash from the Chinese market collapse on the overall Chinese economy will be quite modest, he says. In any case, the growth of the economy has been focused up until now on infrastructure, whereas now it’s moving more toward consumption. One door closes and another opens. And the After-Effects? It was time to ask the difficult question. Are we likely to see the
6% AUSTRALIA
uncertainties in the Chinese market rippling out into other Asian markets? Mr Bell hardly even winced. “No, that’s not a new story, but yes, it’s the most relevant thing for us to be watching.” What’s made it hard, says Bell, is that the China share price collapse has coincided with a halving of the oil price and a drop in demand for commodities – something that provides the mainstay for many other emerging economies, such as Indonesia for example. It’s inevitable that those developments will create a lot of pressure. Meanwhile, Across the Pacific... And now, just to make things more interesting, the US Federal Reserve is close to a decision on raising US interest rates – something that’s likely to strengthen the US dollar. That in turn, he says, is going to unsettle emerging economies that have been taking on dollardenominated debt – because it’ll cost them more to repay
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Federal Reserve is close to a decision on raising US interest rates – something that’s likely to strengthen the US dollar. That in turn, he says, is going to unsettle emerging economies that have been taking on dollardenominated debt – because it’ll cost them more to repay those loans if their currencies have dropped against the greenback. Indeed, they may find themselves short of dollars, which would place them in a very awkward position. Geographical Allocation So let’s look at the Witan Pacific Investment Trust portfolio. The fund is roughly 11% in China and 14% in Hong Kong – but with no direct A share exposure in Shanghai. Instead, it’s all held through the H shares market which is quoted in Hong Kong – and which was insulated to some extent from both the high rises and the steep falls in Shanghai. It’s particularly important to retain a regionally diversified portfolio in this instance, says Bell. But he cautions against simply determining an allocation for a particular market – rather, he says, it’s essential to give the managers in each instance
the dynamic freedom to follow stock-specific opportunities as they arise. That’s something you won’t get from a tracker. And yes, differences of opinion do arise. Aberdeen, which runs 45% of the Witan Pacific portfolio, has really very little exposure to China, whereas Matthews for instance, holds quite a bit. Once again, the advantage of the multi-manager approach comes to the fore, with each manager following what he’s comfortable with. And the Future? And so to the future. As we went to press, the Chinese financial markets (and Hong Kong too) were still noticeably twitchy about the developing situation in the country – partly, it must be said, because of the temporary uncertainty in the States but partly also because it was felt that the Chinese leadership had not played a perfectly acceptable hand very well. The abandoned attempt to support first the stock market and then the renminbi had caused more concern than the 40% fall in equity values itself. And yet, as Bell is quite correctly pointing out, this in
November 2015
itself tells us very little about the relationship between the financial markets and the underlying economy, the latter of which is still barrelling along at 5% or more even at the most pessimistic estimates. There has certainly been a problem in the recent past with the market engaging in excessive leveraging against the country’s true growth rates, but this year’s painful correction should have taken the wind out of that particular balloon. With prospective p/e ratios back down to sensible levels, the time for a re-entry may not be too far away. But the more important thing to remember is that the Witan Pacific Investment Trust is very much a more diversified creature than the headline stories might suggest. Yes, there are concerns about a ripple-out effect in the region, which of course counts the People’s Republic among its prime trading partners, but it’s at times like these that the diversification of a multi-manager approach comes to the fore.
Witan Investment Trust plc – Discrete Performance Discrete Performance† Share Price
Q3 2010 – Q3 2011
Q3 2011 – Q3 2012
Q3 2012 – Q3 2013
Q3 2013 – Q3 2014
Q3 2014 – Q3 2015
(Total Return) -7.1% 18.6% 30.4% 16.0% 5.9%
Net Asset Value** Benchmark*
(Total Return) -8.4%
(Total Return) -5.6%
18.1%
27.1%
8.8%
2.9%
15.9%
19.8%
8.1%
-0.7%
†Source: Datastream & FE Analytics, percentage growth to 30.09.15. Total return includes the notional investment of dividends. *The benchmark is a composite of 40% FTSE All-Share/20% FTSE All-World North America/20% FTSE All-World Europe (ex UK)/20% FTSE All-World Asia Pacific. Source: FTSE International Limited (“FTSE”). FTSE is a trademark of the London Stock Exchange Group companies and is used by the FTSE under license. For more information go to http://www.witan.com/legal-information. **The Net Asset Value figures value debt at market value.
Witan Pacific Investment Trust plc – Discrete Performance Discrete Performance† Share Price
Q3 2010 – Q3 2011
(Total Return) -3.6%
Net Asset Value Benchmark*
(Total Return) -7.8%
Q3 2011 – Q3 2012
Q3 2012 – Q3 2013
Q3 2013 – Q3 2014
Q3 2014 – Q3 2015
11.8%
18.2%
0.1%
-3.3%
13.6%
10.3%
3.2%
-3.2%
(Total Return) -6.8% 7.6% 15.8% 3.9% -3.0%
†Source: Datastream, percentage growth to 30.09.15. Total return includes the notional investment of dividends. *The benchmark for the Witan Pacific Investment Trust PLC is the MSCI AC Asia Pacific Free Index (£)
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DISCLAIMER
This supplement is sponsored by Witan Investment Services. Investments and or investment strategies referred to in the document may not be suitable or appropriate for all recipients. It is your responsibility to seek investment advice before making an investment decision.
This supplement contains marketing communications issued and approved by Witan Investment Services Limited for information purposes only and does not constitute a solicitation or a personal recommendation in any jurisdiction. For a full overview of each Trust’s performance please visit www.witan.com for Witan Investment Trust plc and www.witanpacific.com for Witan Pacific Investment Trust plc. Please remember past performance is not a guide to future performance and the value of an investment and the income from it can fall as well as rise as a result of currency and market fluctuations and you may not get back the amount originally invested. Investment trusts and closed-ended funds are allowed to borrow. This is known as ‘gearing’. In a rising market, it will tend to enhance returns because of the investment fund’s increased exposure to the market. By the same token, however, it will tend to increase losses triggered by a falling market and a sufficiently large fall in value could mean you get nothing back at all. Funds may, however, increase or decrease their levels of gearing to suit market conditions. Since 28th March 2014, is has been the Company’s policy for Witan Pacific Investment Trust not to employ gearing. Any reference to individual securities does not constitute a recommendation to purchase, sell or hold the investment. No reliance may be placed for any purpose on the information and opinions contained in the presentations or their accuracy or completeness. No part of this material may be copied, photocopied or duplicated in any form or distributed to any person that is not an employee, officer, director or authorized agent of the recipient, without Witan Investment Services Limited’s prior permission.
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“Anyone can hold the helm when the sea is calm.”
Publilius Syrus (100 BC)
When markets are volatile, you need a steady hand on the tiller. Witan’s multi-manager approach could offer you a smoother course through choppy waters. Witan is the only fully multi-managed, global equity investment trust. Which offers you a double benefit - we’re constantly striving to perform better than global equity markets and deliver a growing income - and by virtue of being a multi-managed fund we aim to smooth out the volatility associated with a single manager. In essence, Witan offers you diversified exposure to the world’s major equity markets so that you gain diversification by manager, geographical region, industrial sector and individual stock. It’s all designed to help you enjoy a smoother passage to help realise your investment goals. At Witan, we hope many years of plain sailing await you. Anchors aweigh! Contact us today, to find out more.
Witan Investment Trust is an equity investment. Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise, as a result of currency and market fluctuations, and you may not get back the amount originally invested.
Visit www.witan.com
Call 0800 082 81 80
Issued and approved by Witan Investment Services Limited. Witan Investment Services Limited is registered in England no. 5272533 of 14 Queen Anne’s Gate, London SW1H 9AA. Witan Investment Services Limited provides investment products and services and is authorised and regulated by the Financial Conduct Authority. Calls may be recorded for our mutual protection and to improve customer service. Please see the disclaimer at the end of this supplement
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