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RSMR on investment trusts

Pacific heights

Chris Riley, investment research manager at RSMR, looks at how investors and their advisers can use investment trusts to help unlock value in Asia over the longer term

While prices will fluctuate as a result of fundamental factors in the short run, earnings growth should be rewarded in the form of higher total returns over time. Bearing this in mind, the long-term investor should take the future growth prospects of different equity regions into account when determining which region will host the fastest-growing companies.

"The aim should be to find investment trusts that can add value over existing open-ended funds."

It is no secret, for example, that economic growth in Europe has been lacklustre in recent years. There is a lack of real economic reform, with most of the economies remaining inflexible and inefficient. One seeming bright spot has been the performance of the UK which, having been hit hard in 2008, has seen high levels of real and nominal growth in recent years. This is reflected by the GDP data in the table below, which shows that by 2013, the UK had recovered most of its lost output and indeed was almost back to pre-2008 levels. 

When examining the data more closely however, it becomes apparent that high levels of net migration – as opposed to improved productivity per person – have been a key driver of UK growth. Per capita GDP growth, the second line in the table above, has not been as impressive and will take many years to reach its pre-2008 high. 

Source: Office for National Statistics

Both in the UK and in Europe in general there is a lack of political will to implement the painful reforms necessary to drive high levels of growth per capita. 

Given this backdrop, the focus of the long-term investor moves to Asia, where growth rates have been much higher. The economies in Asia are in the process of liberalising themselves and playing catch-up with the West. On the whole, it is likely to be easier to find companies that can expand and generate strong long-term returns for shareholders in this region.  

We would highlight two trusts that have exposure to Asia and would be difficult for advisers to replicate using funds in the open-ended universe. 

Pacific Assets Trust (PAC.L): David Gait has a strong track record running First State’s Asian and Worldwide Sustainability funds and is the co-manager with Angus Tulloch for the highly successful First State Asia fund. Both the Asia and Asian Sustainability funds are currently soft-closed – and likely to remain so for the foreseeable future – making the investment trust an attractive way to gain exposure to this manager. The trust itself will have a quality bias in common with other funds at First State. The performance fee has recently been removed from this trust, making it price-competitive. 

Fidelity Asian Values (FAS.L): An alternative choice would be Fidelity Asian Values, run by Nitin Bajaj.  Despite being relatively unknown in the UK, Bajaj has a strong track record running an offshore Asian fund and, before that, ran a domestic Indian fund. He takes a small-cap value approach, which is rare in Asia as successful managers tend to focus on high-quality. Bajaj uses the extensive analyst resource at Fidelity to source and research in-depth companies that would be off the radar of other managers. In this regard, the closed-end nature of the trust is particularly useful as it allows him to hold small-caps until sale without maintaining an excessive amount of cash, in fear of client redemptions. The trust does not charge a performance fee and the base fee has recently been reduced. 


Long-term growth in Europe looks set to lag that of Asia and this includes the relative bright spot of the UK, which has produced high growth numbers only with the aid of large migration flows. Asia remains a region that the long-term investor should consider for returns. 

The aim should be to find investment trusts that can add value over existing open-ended funds and the two trusts above meet that criteria. Blending them together is a strong choice as the small-cap value tilt of Fidelity Asian Values tends to offset the quality bias of Pacific Assets Trust to produce a more diversified return for the investor. 

RSMR has put together a number of guides to help advisers. Together with the firms rated funds and supporting factsheets, these guides are free to access by registering for RSMR’s Rated Fund Service here.

Leading fund research and ratings group RSMR has put together a number of guides to help advisers, including one on investment trusts.  The guides, together with the firm's rated funds and supporting factsheets, are free to advisers who have registered for RSMR’s Rated Fund Service here

Style guide

When selecting fund managers, advisers need be mindful of investment styles, says Chris Riley, investment research manager at RSMR, as these can move in and out of favour

As ‘smart beta’ index-tracking products become more popular with investors, we have decided to use this piece to examine two of the most common investment styles that can be used as so-called ‘factor tilts’ – quality and value. The aim will be to look at the performance of these two styles since the financial crisis of 2008 and then to think about the implications for combining active managers.

"Looking at the UK investment trust sector, two trusts that epitomise the two different styles of quality and value spring to mind."

Quality has been a popular investment approach since 2008 as it emphasises earnings stability and capital protection for investors. As a style, quality can be rather hard to pin down but, for our purposes, we have defined it as operating profitability scaled by company book value.

Value is an older and more recognised investment style that aims to invest in cheap stocks relative to their book value, earnings, sales or cashflow. One of the oldest and most conservative measures of value is the current market capitalisation of the company relative to the value of its book equity, which is how we have defined value here.

Cumulative returns to value and quality factors: jan 2009 to Dec 2014
Data sourced from Ken R French Data Library

The chart on the right plots the Fama-French value factor against the Fama-French quality factor. The factor returns are isolated through a regression to ensure that pure factor exposure is obtained in each case.

The years since the financial crisis have been a tough time for value. It underperformed up to the beginning of 2012 but has since rebounded. For its part, quality has performed well over the period. Except for a dip in 2010, it has produced small but consistent returns over time – albeit the return to quality has eroded since 2012. Relative to value-based managers, we would expect managers with a quality style to have outperformed over the last five years, holding other factors constant.

Looking at the UK investment trust sector, two trusts that epitomise the two different styles spring to mind. The Finsbury Growth and Income Trust, run by Nick Train of Lindsell Train, selects high-quality companies with recognised franchises and stable earnings growth and has performed incredibly well since the financial crisis of 2008.

Cumulative Performance: Jan 2009 – Dec 2014
 For period 31/12/08 to 31/12/14; Data sourced from FE 2015

In contrast, the Temple Bar Trust, which is run by Alastair Mundy of Investec Asset Management,  follows a highly contrarian investment philosophy. The manager looks for stocks that have fallen out of favour and can be picked up cheaply. As you can see from the chart on the right, the trust has also performed well over the period, but has underperformed Finsbury Growth & Income.

Advisers looking for exposure to UK equities should always take the style bias of a manager into account. Given the strong run in quality relative to value, investors may wish to blend together managers with these styles in order to smooth their returns over time. Finsbury Growth & Income’s style has been the most in favour over the last five years and so may find it more difficult to replicate the same performance over the next five.

When selecting their fund managers, investors and their advisers need be mindful of investment styles, which can move in and out of favour. Quality has been one of the strongest performing styles since the financial crisis of 2008 and some of this may be reflected in fund manager performance, such as the subsequent strong run enjoyed by the Finsbury Growth & Income Trust. When looking to select a quality-biased manager, investors and their advisers may wish to blend them with a value manager in order to smooth returns through the cycle.

Leading fund research and ratings group RSMR has put together a number of guides to help advisers, including one on investment trusts.  The guides, together with the firm's rated funds and supporting factsheets, are free to advisers who have registered for RSMR’s Rated Fund Service here


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