Confidence in London’s investment trusts has been pounded by the global sell-off after a decade-long binge on easy money flooding the market. JP Morgan Global Growth and Income is among a sliver of London-listed investment trusts that trade at a premium to the value of its assets.
Compared with its peers, its performance has been strikingly consistent. Over the ten years to the end of December, it has outperformed its benchmark MSCI All Country World Index in every year bar one. Net of fees, the value of the fund’s assets had risen by a cumulative 247 per cent, versus a return of 191 per cent by the index, and it has extended this record of beating the benchmark over the first two months of this year. Include dividends and any shareholder that backed the fund a decade ago would now be sitting on a total return of almost 230 per cent of their initial investment.
Read “growth” and you may think a bullish performance is at odds with the heavy sell-off in stocks valued for high future returns. Microsoft and Amazon are the two largest holdings and accounted for 10.7 per cent of assets at the end of January. Both endured heavy losses last year as the slowdown in digital spending hurt cloud businesses, while the latter also battled a bloated cost base. But the fund’s managers have steered clear of the heavily lossmaking companies that have been worse off as interest rates have risen and have eschewed the likes of Tesla altogether in the belief that competition from legacy automotive companies will give way to price cuts and margin pressure. That proved a wise move last year as Tesla’s shares plunged by more than 60 per cent.
The fund is now slightly underweight in the technology sector compared with the MSCI All Country World Index. Instead, positions in pharmaceuticals companies have been topped up over the past 12 months, including AbbVie and a new holding in AstraZeneca.
An overweight position in consumer goods and services companies has been established, too, which together with retail accounts for a little under 13 per cent of assets. That includes Ross Stores, the American discount retailer, and Booking.com, the travel website. For the former, the rationale is that such companies can benefit from people trading down, while in the case of the latter it is that they can benefit from the reopening of travel without being burdened with the same level of inflationary pressures as hotel or airline operators. Betting that the downturn in consumer spending will be less severe than expected naturally leaves the fund open to disappointment if a worse pullback materialises. That said, its gearing has been kept low at 2 per cent, which might help in cushioning the impact of any share price falls.
Last August the fund merged with the Scottish Investment Trust, a beleaguered player with a bias towards value stocks. The portfolios of both the Scottish and JP Morgan trusts were aligned in January, when JP Morgan Asset Management took over investment management duties, beefing up the assets to £1.6 billion.
A chunky dividend provides a backstop for shareholder returns in what is likely to remain a choppy market. The trust has a policy to pay out 4 per cent of the net asset value at the end of the last financial year, which stood at 429p a share. At the present price that would leave the shares offering a potential dividend yield of 3.8 per cent.
Since that policy was instituted in 2016, the dividend has been between half and two-thirds covered by the underlying yield of the fund’s holdings. There is scope to invest in companies that pay no dividend at all, but the income element still looks secure enough.
ADVICE Buy
WHY The trust is well diversified and offers a decent dividend to boost total returns
CLS Holdings
Chunky discounts have become firmly embedded within the shares of London-listed office landlords. CLS Holdings is cheaper than most, but that doesn’t necessarily make the FTSE 250 group a bargain.
The question about how demand for office space will hold up after the pandemic is even more pressing in London outside the City and West End. Granted, Britain accounts for just under half of CLS’s portfolio by value, with properties in Germany and France contributing the rest — but a near-doubling in the domestic vacancy rate to 10 per cent is stark enough to warrant asking whether the UK business could be set for a worse decline than the 0.3 per cent estimated rental value recorded last year. Shifting office space in Britain is proving more challenging, something that CLS hopes to surmount by refurbishing properties to lure more tenants.
Then there is the impact of rising debt costs. Only 72.5 per cent of the commercial landlord’s £1 billion debt is fixed-rate, which means higher interest rates will push up its average cost of debt to between 3.19 per cent and 3.29 per cent this year, from 2.69 per cent, admittedly a low base. CLS is hardly alone in facing greater financing costs, but a 5 per cent decline in the underlying value of the portfolio and an increase in debt to finance acquisitions and capital expenditure pushed the loan-to-value ratio up beyond the 40 per cent mark to 42.2 per cent, higher than the leverage that many larger office landlords are operating with.
Analysts at Peel Hunt expect a £5.8 million decline in adjusted pre-tax profits this year to £40.9 million, largely because of higher debt costs. This year, CLS expects to be a net seller of property to shift its loan-to-value ratio back below 40 per cent. The shares are priced at a 54 per cent discount to the net asset value forecast at the end of December. That looks too harsh, but then again shares in big companies such as British Land, Landsec and Great Portland Estates, each of which has lower leverage, also trade more than 30 per cent below the net asset values forecast by analysts at the end of the next financial year.
ADVICE Hold
WHY Higher leverage and the potential for a more severe decline in rental value mean the shares don’t appeal
