The summer is invariably a quiet period for the stock market and with the added complication of the effects of the credit crunch and an apparent peak in commodity prices, this year, it was even quieter than usual.

Simon Elliott, head of investment company research at WINS Research, observed that ‘The FTSE All Share finished August strongly and ended the month up five per cent on a total return basis. However, the investment trust (IT) sector was up just 1.5 per cent in the month, thereby lagging the wider market. Discounts widened and, consequently, the full effect of the second half bounce did not flow through to share prices.’

Searching for value
However, as is usually the case when there is a general widening of discounts within the sector, some investors are keen to go bargain hunting. Nick Sketch, IT analyst at Rensburg Sheppards, points out that ‘Some ITs are on very generous discounts. You can go through the sector and find bargain after bargain after bargain. Schroder Japan is on a 17 per cent discount, while TR Property, with its very strong track record is on a 25 per cent discount. Is that really fair?’

He cites one very dramatic example from amongst the UK-focussed trusts. ‘3i Quoted Private Equity is on a 37 per cent discount and has only 25 per cent invested, so 75 per cent of the trust’s assets are in cash. Its share price is 63p but its cash holdings represent 70p a share, so you are, in effect, getting a free warrant on its equity portfolio.’

John Moore, head of the collective investments service at Brewin Dolphin, points to a similar situation that has arisen amongst the ranks of the split capital trusts. ‘Invesco Perpetual Recovery Trust 2011 is a straightforward split, with just ordinary shares and zeros and no bank debt. It is basically a FTSE 100 fund with a value bias. It has zero dividend preference shares in issue that are due to expire in October 2011.’

He adds, ‘If they are repaid in full, you will get 141.1p and you can currently buy them at around 106p. The current level of cover is 15 per cent, which means that the value of the portfolio can fall by 15 per cent between now and October 2011 and you would still get paid in full.’

Fresh ideas
Elsewhere, trust boards continue to innovate. Henderson Smaller Companies has caused something of a stir by announcing its intention to adopt short selling powers, following changes to the listing rules. At the same time, Henderson are also proposing an enhanced management fee with a greater performance related element.

Simon Elliott notes that ‘Going forward, we believe a number of existing ITs will consider following suit, attracted by the prospect of differentiating themselves and earning higher fees. Although this is understandable, we would be wary of funds making this change,
especially where the manager has no experience in this specialised area of investment management.’

At the opposite end of the spectrum, the generalist trusts seem to be holding up pretty well, demonstrating once again the benefits of having a broadly diversified portfolio.

Indeed, diversification is very much the key to the performance of these funds.
The WINS Research team recently took a look at Scottish American, known as SAINTS, a global generalist with an emphasis on income generation, Simon Elliott observed that ‘For the first three and a half years of Baillie Gifford’s tenure, SAINTS achieved steady outperformance against its benchmark. However, these relative gains have since been lost as the fund has underperformed over the past year, mainly as a result of being overweight banks and underweight mining stocks.’

He adds, ‘In our view, the shift towards a more global equity portfolio and an increase in the exposure to alternative assets makes SAINTS an attractive vehicle for investors looking for a diversified source of income and the potential for capital growth.’

New brooms
However, the main talking points among the generalists over the past few weeks have been the announcements from both Alliance Trust and multi-manager trust Witan that they were appointing new CEOs. In the case of Alliance Trust, this involves an additional role for the existing CIO, Katherine Garrett-Cox, while Witan are splitting out the CEO and CIO roles with the retirement of Jim Horsburgh at the beginning of September.

Robert Clarke has been recruited from Majedie for the CEO role, while the new investment chief is Mark Lynam, who has been advising the trust on a consultancy basis for the past couple of years.

Commenting on these moves, Simon Elliott points out that ‘Both Alliance Trust and Witan have undergone significant changes in their investment approach over the last four years. However, performance for both funds has been dull and they have lagged their peers. Interestingly, the two funds appear to have gone down different routes in selecting new CEOs.’

However, Elliott concludes that ‘In our opinion, the key to the future of both funds lies in improving their performance. We would expect further changes in Witan’s roster of managers, with Southeastern AM (Global) and Wellington Management (Europe) looking vulnerable. In the case of Alliance Trust, Katherine Garrett-Cox is currently reviewing the priorities for the business.’