opening the door to investment trusts...net asset values (navs) with net dividend (if any)...

Issue 18Investment trust InsIder

Catch up with the ‘Inbetweeners’

Opening the door to investment trusts

Performance fees: friend or foe?

Modi’s magic and the India trusts Ph

oto

by:

eve

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/re

X_

shu

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This material should not be considered as a recommendation relating to the acquisition or disposal of investments. Investment is subject to documentation which is comprised of the Investment Trust Profiles and Key Features and Terms and Conditions, copies of which can be obtained free of charge from J.P. Morgan Asset Management Marketing Limited. Issued by J.P. Morgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No. 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP.

Find out more at jpmorgan.co.uk/globalemi

LV-JPM23958 | 03/15 4d03c02a800223b6

JPMorgan Global Emerging Markets Income TrustThis is the only investment trust that gives investors access to a dividend income alongside the opportunity for long-term capital growth from investing in a diversified portfolio of emerging market investments. (Source: Association of Investment Companies as at 31 January 2015.)

Launched in 2010, the trust is able to invest in any particular market, sector or country in the Global Emerging Markets universe. The value of investments and the income from them may fall as well as rise and you may not get back the original amount invested.

ROLLING 12 MONTH PERFORMANCE TO 31 MARCH 2015

Benchmark: MSCI Emerging Markets Net Index (£) Source: J.P. Morgan/Morningstar as at 31/3/15. Net of charges and any applicable fees, using capital only Net Asset Values (NAVs) with net dividend (if any) reinvested, in sterling. For details see the company’s latest Trust Annual Report & Accounts. © 2015 Morningstar. All Rights Reserved. Past performance is not a guide to the future. Risks: Investment trusts may borrow to finance further investment (gearing). The use of gearing will increase the volatility of movements in the Net Asset Value (NAV) per share. This means that a relatively small change, down or up, in the value of a trust’s assets will result in a magnified fall or rise, in the same direction, of the investment trust’s NAV per share. Investments in smaller companies may involve a higher degree of risk. Exchange rate changes may cause the value of underlying overseas investments to go down as well as up. Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems. Dividend income payments are not guaranteed and may fluctuate.

Source: J.P. Morgan Asset Management as at 31/12/2014 (JPM Global Emerging Markets Income annual report, calculated by dividing total net dividend for relevant year by announced share price the day after). *Source: Morningstar. The current prospective dividend yield is correct as of 10 February 2015. It is indicative and based on mid-market prices, and includes the net declared and net prospective dividends for the current financial year ending 31 July 2015. The yields quoted are provided as a guide and should not be taken for granted as a guaranteed yield. **The Trust was launched in 2010, so 12 month performance data is not available for this period. Annual dividend paid, as reported in the company’s Annual Report & Accounts.

FINANCIAL YEAR-END – TRUST YIELD

% 31/3/14-31/3/15

31/3/13-31/3/14

31/3/12- 31/3/13

31/3/11- 31/3/12

31/3/10-31/3/11

Share Price 8.3 -9.3 17.1 6.5 -

Net Asset value 11.1 -10.4 18.1 5.9 -

Benchmark 12.8 -10.2 7.3 -8.5 -

12 month period ending

Current yield*

31/07/14 31/07/13 31/07/12 31/07/11 31/07/10**

Trust Yield (%) 3.3 3.2 3.9 4.2 4.6 -

Annual dividend paid - 4.90p 4.90p 4.85p 4.70p -


A manageable universeOne reason I like investment trusts is there are

only around 400. That’s a manageable number

compared to the near 7,000 open-ended

investment companies and unit trusts registered

for sale in the UK.

I find the small army of closed end funds – so called, by the way,

because they have a limited number of shares – provides me with

plenty of variety and choice, covering nearly 50 sectors and asset

classes.

Yet even among this shorter list there are funds that can be

overlooked, which is why this month’s issue starts with a review

of the ‘Inbetweeners’. No, not the hit TV comedy series about

teenage boys, I mean those investment trusts that can fall out

of sight because they’re neither shiny, new offerings or long-

established, high-profile trusts .

Our look at 40 of the launches between 2010 and 2013 Gavin Lumsden, Editor

weLcome

reminded me about the strength of investment trusts in finding

solutions sometimes investors didn’t even know they needed!

Alongside trusts investing in UK smaller companies, China and

Latin America are trusts leasing aircraft or buying bombed-out

mortgage bonds and student halls of residence.

While the arrival of esoteric funds has been justified by the

intense search for investment income, it underlines how one of

the biggest challenges facing investment trusts is to stay simple.

I find the small army of closed end funds provides me with plenty of variety and choice, covering nearly 50 sectors and asset classes.


This material should not be considered as a recommendation relating to the acquisition or disposal of investments. Investment is subject to documentation which is comprised of the Investment Trust Profiles and Key Features and Terms and Conditions, copies of which can be obtained free of charge from J.P. Morgan Asset Management Marketing Limited. Issued by J.P. Morgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No. 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP.

Find out more at jpmorgan.co.uk/midcap

LV-JPM23959 | 03/15 4d03c02a800216b1

JPMorgan Mid Cap Investment TrustThe trust provides a rare opportunity to invest in the more domestically focused medium-sized UK companies that make up the FTSE 250 Index. The trust seeks out strong capital growth opportunities throughout the market cycle, whilst aiming to pay steady dividend payments.

The value of investments and any income from them may fall as well as rise and investors may not get back the full amount invested.

ROLLING 12 MONTH PERFORMANCE TO 31 MARCH 2015

% 31/3/14-31/3/15

31/3/13-31/3/14

31/3/12- 31/3/13

31/3/11- 31/3/12

31/3/10-31/3/11

Share Price 1.0 45.1 35.7 4.7 17.8

Net Asset value 6.2 35.2 34.3 2.1 14.5

Benchmark 7.0 22.1 26.0 3.3 17.2

Benchmark: FTSE 250 Index (ex Inv Companies) (£) Source: J.P. Morgan/Morningstar as at 31/3/15. Net of charges and any applicable fees, using capital only Net Asset Values (NAVs) with net dividend (if any) reinvested, in sterling. For details, see the Trust’s latest Report & Accounts. © 2015 Morningstar. All Rights Reserved. Past performance is not a guide to the future. Risks: The Investment Manager seeks to achieve the stated targets/objectives. There can be no guarantee the objectives/targets will be met. Investment trusts may borrow to finance further investment (gearing). The use of gearing will increase the volatility of movements in the Net Asset Value (NAV) per share. This means that a relatively small change, down or up, in the value of a trust’s assets will result in a magnified fall or rise, in the same direction, of the investment trust’s NAV per share. Investments in smaller companies may involve a higher degree of risk.


Modi’s magic and the India trusts that have benefited

Catch up with the ‘inbetweeners’How the many

investment trusts

launched in

2010 - 2013

have fared

thIs Issue

Performance fees: friend or foe?We reveal the best

and worst manager

incentives

Ph

oto

by:

can

adia

n P

ress

/re

X_

shu

tter

sto

ck


INVESTING INVOLVES RISK. THE VALUE OF AN INVESTMENT AND THE INCOME FROM IT MAY FALL AS WELL AS RISE AND INVESTORS MAY NOT GET BACK THE FULL AMOUNT INVESTED.

The Brunner Investment Trust PLCWe focus on where a company’s going, not where it’s from.

www.brunner.co.uk

0800 389 4696

This is a marketing communication issued by Allianz Global Investors GmbH, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, D-60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established a branch in the United Kingdom which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Jeremy Thomas and Lucy Macdonald Portfolio Managers, The Brunner Investment Trust PLC

Today, companies offering reliable dividends and solid growth prospects can be found around the world, not just in the UK. So beyond our core domestic holdings, Brunner has the flexibility to invest half of its portfolio internationally, allowing us to seek out the best opportunities wherever they may be. This global approach has enabled Brunner to pay rising dividends to our shareholders for 43 consecutive years, although past performance is no guide to the future. So if, like us, you value prospects over provenance, call or visit us online and see more of the investment world with Brunner.

The trust seeks to enhance returns for its shareholders through gearing which can boost the trust’s returns when investments perform well, though losses can be magnified when investments lose value.

Now paying

quarterly dividends


catch up with the ‘Inbetweeners’By robert st George


INVESTING INVOLVES RISK. THE VALUE OF AN INVESTMENT AND THE INCOME FROM IT MAY FALL AS WELL AS RISE AND INVESTORS MAY NOT GET BACK THE FULL AMOUNT INVESTED.

The Merchants Trust PLCLeadership. Stability.Income.

www.merchantstrust.co.uk

0800 389 4696

This is a marketing communication issued by Allianz Global Investors GmbH, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, D-60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established a branch in the United Kingdom which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Portfolio Manager Simon Gergel

We want the same from our investments as you do.The Merchants Trust has a long history of focusing on income. Shareholders appreciate the trust’s strong leadership and the stability of its 126 year foundations. They value the income expertise of portfolio manager Allianz Global Investors. And they recognise that Merchants only invests in companies whose qualities match our own: well-run, with strong balance sheets and attractive dividend potential. To view the trust’s dividend history, watch an interview with manager Simon Gergel, or find out how to purchase shares, please visit us online.

The trust is a quoted company listed on the London Stock Exchange. Its share price is influenced by supply and demand which means that the shares may trade below or above the underlying net asset value. Merchants seeks to enhance returns through gearing which can boost returns when investments perform well, though losses can be magnified when investments lose value. Derivatives may be used to manage the trust efficiently.


catch uP wIth the ‘InBetweeners’

Key Points

This article looks at investment trusts launched between 2010 and 2013. These ‘inbetweeners’ don’t get as much attention as new funds or old, established trusts.

While property and infrastructure trusts launched at that time have been a success, some debt funds have had a tougher time.

The babies of the investment trust

world are fawned over: from those

yet to pass their first birthday, like

Fundsmith Emerging Equities (FEET),

to those still blinking in the daylight like

Woodford Patient Capital (WPCT).

The grandparents attract a lot of attention

too, reminiscing about how they achieved

consecutive dividend increases of 40

years or more.

But what about those trusts somewhere

in between, neither established enough to

warrant regular coverage nor young and

exciting? This feature will consider whether

the funds launched between 2010 and 2013

deserve our time and money.

Income keeps coming

The dominant theme among this crop, to

nobody’s surprise, is income. With interest

rates at record lows, investment trusts have

stepped into the breach.

Infrastructure has been one of the main

beneficiaries of this trend: demand for their

shares has been so strong that the average

infrastructure trust trades at a 16% premium

above net asset value (NAV).

Sheldon MacDonald, senior investment

manager at Architas, a fund management

company owned by French financial giant

AXA, attributed these valuations to ‘the

strength of the cash flows and visibility of the

income’ – typically backed by governments

– rather than a bubble.

Simon Moore, head of research at Tilney

Bestinvest, argued that the scarcity of other

sources of yield meant ‘you do have to pay

up for income’. He focused on a trust’s •••

‘Frontier’ markets trusts have done surprisingly well, although one prominent China fund has given investors a volatile ride.


yield, rather than solely on its premium,

and is not perturbed by current valuations

while they still equate to a yield of 4.5%

or more.

Peter Walls, a Citywire A-rated fund

manager whose Unicorn Mastertrust

invests in investment trusts, agreed that the

ratings ‘don’t look too outrageous given the

underlying yields’. However, Moore preferred

to buy when trusts issue new shares at a

lower price rather than a high premium.

James Burns, a partner at Smith &

Williamson Investment Management,

highlighted trusts such as ICG Longbow

UK Property Debt (LBOW), Starwood

Euro Real Estate Finance (SWEF), and

Duet Real Estate Finance (DREF) that

have bought books of loans from banks.

‘I still think property debt has further to go

in terms of banks de-leveraging. Obviously

it is a more competitive space now; the

ones launched three or four years ago

had a pretty good time naming the price.’

MacDonald was more cautious on these

cyclical areas of income. He pointed out that

newer trusts based on loans have ‘never

seen a period of stress before’.

Instead, MacDonald favoured trusts such

as GCP Student Living (DIGS) and Ground

Rents Income (GRIO). He acknowledged

that student accommodation had a bad

reputation, but pointed out the problems

had not been with investment trusts but

open-ended funds that had been unable to

let investors withdraw their money during

the downturn. The closed-ended GCP trust

did not face this issue, and offered ‘access

to prime central London property which

is fully let each year’, he said.

Ground Rents is more defensive, with

‘extremely visible, extremely stable’ cash

flows. ‘It’s a nice investment to tuck away,’

MacDonald remarked.

One area of disappointment among

the new income trusts has been the •••


I still think property debt has further to go in terms of banks de-leveraging. Obviously it is a more competitive space now; the ones launched three or four years ago had a pretty good time naming the price. James Burns, Smith & Williamson


floating-rate strategies, such as Alcentra

Euro Floating Rate Income (AEFS)

and NB Global Floating Rate Income

(NBLS). These were designed to prosper

when interest rates rose, which has yet to

transpire. ‘People got very excited about

them, but then the inflationary expectations

came back a bit,’ said Burns. To be fair,

their three-year total returns 23% and 22%

are not disastrous.

Emerging concerns

More pain has been inflicted on investors

in Latin America. Enthusiasm for the region

at the beginning of the decade prompted

the launch of Aberdeen Latin American

Income (ALAI) and JPM Brazil (JPB).

The continent has yet to realise its promise,

however, and is mired in ugly politics without

the support of surging commodity prices.

Fidelity China Special Situations

(FCSS) has delivered an impressive 118%

total return to shareholders over three

years. Neverthless, its path has been

difficult. Launched to great fanfare for

Anthony Bolton, it raced to a double-digit

premium but then slumped to a double-digit

discount following a C share issue and tepid


When you don’t have that defensive characteristic of a sustainable yield, you have to expect some volatility in ratings. Peter Walls, Unicorn Asset Management

performance – ‘a bit of a shock to

the system’, recalled Walls. ‘But when you

don’t have that defensive characteristic of

a sustainable yield, you have to expect

some volatility in ratings.’

Burns is optimistic for its future under

Bolton’s successor. ‘We have seen Dale

Nicholls two or three times over the past

18 months, and we rate him as a manager.

We quite like it as a China play.’

Walls is still giving it a wide berth. ‘I tend

to feel that the equity markets in China are

a little too much of a casino for my liking.’

Moore favoured BlackRock Frontiers

(BRFI) and JPM Global Emerging Markets

Income (JEMI) for being less reliant on single

markets. He noted that frontier markets were

delivering the rapid growth that used

to be expected of emerging markets, •••



while the JPM trust was a ‘good diversifier

of income’ away from a UK or developed-

market bias. MacDonald also backed the

JPM fund. ‘We like the manager [Richard

Titherington] a lot; he has been around a long

time and has a fantastic team around him.’

UK equity trusts investors may hold.

Burns spotted a tactical opportunity in

Aberforth Geared Income (AGIT), available

on a 15% discount but due to liquidate

in 2017. ‘It has a fixed life to it, and so the

current discount will disappear over the

next couple of years.’

The same could be true of Polar Capital

Global Financials (PCFT), due to close

in 2020 and trading on a 10% discount

to net asset value. Walls backed it at launch

and agreed shareholder returns had been

‘a bit of a disappointment’ despite ‘okay’

NAV growth against its benchmark.

‘It has all the characteristics I like, yet it

still has that discount maybe as one or

two holders have lost patience,’ Walls said.

‘I would expect that rating to start edging

in over time.’ •

Traditional, but not boring

Finally, the handful of developed-market

equity funds should not be overlooked.

Burns likes the way Henderson

International Income (HINT) has a non-UK

mandate and so is complementary to core



the cLass of 2010

sharehoLder return sInce Launch to aPrIL 16

UK High Income China Debt Biotechnology Infrastructure Latin America Asset Leasing Reinsurance

CatCo Reinsurance

OppsDec-10

Doric Nimrod Air OneDec-10

John Laing Infrastructure

Nov-10

Aberdeen Latin

American IncomeAug-10

JPMorgan Brazil

Apr-10

GCP Infrastructure Investments

Jul-10

Polar Capital Global

HealthcareJun-10

NB Distressed

Debt (NBDD)Jun-10

FidelityChina Special

SituationsApr-10

AberforthGearedIncomeApr-10

-60

-30

0

30

60

90

120

150

132%

78%

36.90%

128%

58%

-45% -16%

49% 50% 50.2%



the cLass of 2010

sIze (market vaLue)

0

200

400

600

800

1000

CatCo Reinsurance

OppsDec-10

Doric Nimrod AirOneDec-10

John Laing Infrastructure

Nov-10

Aberdeen Latin

American IncomeAug-10

JPMorgan Brazil

Apr-10

GCP Infrastructure Investments

Jul-10


HealthcareJun-10

NB Distressed

Debt (NBDD)Jun-10

FidelityChina Special

SituationsApr-10

AberforthGearedIncomeApr-10

£195m

£970m

£57m £219m

£610m

£26m £43m

£989m

£48m£213m

UK High Income China Debt Biotechnology Infrastructure Latin America Asset Leasing Reinsurance



the cLass of 2011

sharehoLder return sInce Launch to 16 aPrIL

Damille Investments II

Nov-11

Doric Nimrod Air TwoJul-11

HendersonIntl

IncomeApr-11

NB Floating Eate Income

Apr-11

Diverse IncomeApr-11

Duet Real Estate FinanceMar-11

Equity Income Debt Infrastructure Asset Leasing Global fund of funds

-20

0

20

40

60

80

100

-3.30% 10.60%

94%

54.60%

-36.40%

-11.20%

40.2%

BBGIDec-11



the cLass of 2011

sIze (market vaLue)

BBGIDec-11

Damille Investments II

Nov-11

Doric Nimrod Air TwoJul-11

HendersonIntl

IncomeApr-11

NB Floating Eate Income

Apr-11

Diverse IncomeApr-11

Duet Real Estate FinanceMar-11

Equity Income Debt Infrastructure Asset Leasing Global fund of funds

£26m

£330m

£104m

£422m

£50m

£532m

0

200

400

600

800

1000

1200

£1183m



the cLass of 2012


Mining Commercial Property Debt Global fund of funds North America UK Smaller Companies (specialist) Reinsurance

Starwood Euro Real

Estate FinanceDec-12

Blue Capital Global

ReinsuranceDec-12

Sherborne Investors B

Nov-12

BlackRock North

American IncomeOct-12

BACITOct-12

GroundRents Income

Aug-12

PraetorianResources

Jul-12

AlcentraEuro FloatingRate Income

Mar-12

-100

-80

-60

-40

-20

0

20

40

24.80%

-95%

20.80% 20.7%28%

21.9% 21.8%14.8%



the cLass of 2012

sIze (market vaLue)

Mining Commercial Property Debt Global fund of funds North America UK Smaller Companies (specialist) Reinsurance

Starwood Euro Real

Estate FinanceDec-12

Blue Capital Global

ReinsuranceDec-12

Sherborne Investors B

Nov-12

BlackRock North

American IncomeOct-12

BACITOct-12

GroundRents Income

Aug-12

PraetorianResources

Jul-12

AlcentraEuro FloatingRate Income

Mar-12

0

100

200

300

400

500

£192m

£1m£107m

£465m

£98m

£307m

£138m

£253m



the cLass of 2013


Globalworth Real

Estate Jul-13

Doric Nimrod

Air Three Jul-13

JPMorgan Global

Convertibles Income Jun-13

CVC Credit

Partners Euro Oppos

Jun-13

Weiss Korea

Opportunity May-13

GCP Student Living

May-13

NB Distressed Debt -

Extended Life Apr-13

TwentyFour Income Mar-13

Target Healthcare

REIT Mar-13

ICG Longbow

UK Property Debt

Feb-13

Commerical Property Asia Pacific Debt Oil & Gas Asset Leasing Financials

Tritax Big

Box REIT Dec-13

JPMorgan Senior

Secured Loan

Dec-13

Riverstone Energy Oct-13

DP Aircraft Oct-13

Chenavari Capital

Solutions Oct-13


Financials Jul-13

-5

0

5

10

15

20

25

30

35

40

11%14.50%

37.80%

3.10%

24.80%27.90%

14%

9%

15.20%

-4.70%

24%

7.8%

18.70%16.40%

23%

-3%



the cLass of 2013

sIze (market vaLue)

0

200

400

600

800

1000

Globalworth Real

Estate Jul-13

Doric Nimrod

Air Three Jul-13

JPMorgan Global

Convertibles Income Jun-13

CVC Credit

Partners Euro Oppos

Jun-13

Weiss Korea

Opportunity May-13

GCP Student Living

May-13

NB Distressed Debt -

Extended Life Apr-13

TwentyFour Income Mar-13

Target Healthcare

REIT Mar-13

ICG Longbow

UK Property Debt

Feb-13

Commerical Property Asia Pacific Debt Oil & Gas Asset Leasing Financials

Tritax Big

Box REIT Dec-13

JPMorgan Senior

Secured Loan

Dec-13

Riverstone Energy Oct-13

DP Aircraft Oct-13

Chenavari Capital

Solutions Oct-13


Financials Jul-13

£114m £150m

£365m

£245m

£131m £133m

£283m£231m £250m £233m

£183m£134m

£82m

£815m

£732m

£74m


The case for investing

in the Standard Life UK

Smaller Companies Trust

is currently twofold:

Harry Nimmo, its

lead manager, has an

outstanding track record over the medium

and long term, and for the past six

months, the Trust has also been trading

at a discount to net asset value.

Nimmo says having a fixed capital base

enables him to take more of a long-term

view, without having to worry about money

flowing into the Trust or redemptions

going out of the Trust.

Opportunities in smaller small capsAnother benefit is the relatively small

Trust size: the UK Smaller Companies

Trust is only £220 million.

‘That means our Trust can invest in

the slightly smaller small companies with

a market capitalisation of below £200

million – that very interesting £50 million

to £200 million segment,’ Nimmo adds.

In his bottom-up investment process,

he is focused on long-term winners with

strong cashflows and balance sheets

and disruptive business models.

Currently, he is finding opportunities

in smaller emerging pharmaceutical

companies on the veterinary side,

SPONSORED STATEMENT

highlighting animal medicine specialist

Dechra Pharmaceuticals and veterinary

practice chain CVS.

Another area where Nimmo sees

potential is challenger banks, such as

Secure Trust and Paragon Group. ‘Where

the main high-street banks are struggling,

there are newer, smaller banks coming

to take their place,’ he adds.

The opinions expressed are those of Standard Life Investments as of May 2015. This material is for informational purposes only. This should not be relied upon as a forecast, research or investment advice. The value of an investment can fall as well as rise and is not guaranteed – you may get back less than you put in. Past performance is not a guide to future performance.


Performance fees: friend or foe?By robert st George


THE SCOTTISH AMERICAN INVESTMENT COMPANY

*Source Baillie Gifford & Co, data as at 31 December 2014. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA. BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of The Scottish American Investment Company P.L.C. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.

Time after time.

Baillie Gifford – long-term investment partners

SAINTS’ CORE BELIEF IS THAT INCOME, GROWTH AND DEPENDABILITY MAKE A POWERFUL COMBINATION. SAINTS (The Scottish American Investment Company P.L.C.) was founded way back in 1873 to invest

in American railways but these days aims to deliver dividend growth ahead of any rise in inflation, mainly from a portfolio of global equities, though investments are also made in bonds and property. The Trust seeks out attractive, quality companies which offer long-term growth potential rather than merely providing a high yield. SAINTS pays out a regular dividend every quarter. It has successfully grown its dividend every year for more than 30 years – over the last 10 years SAINTS has increased its dividend by 75% compared to a 29% rise in the Consumer Price Index.*

2010 2011 2012 2013 2014

Total dividend per ordinary share (net) - pence per share*

9.25 9.45 9.8 10.2 10.5

Past performance is not a guide to future returns.

SAINTS is an investment trust managed by Baillie Gifford and is available through Baillie Gifford as a Share Plan and as an ISA. It is also available through a range of investment platforms.

Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested.

For an investment that aims to beat inflation over the medium to long term, call 0800 917 2112 or visit www.saints-it.com


Performance fees: frIend or foe?

Key Points

Performance fees are an additional charge paid by investors when fund managers deliver returns over an agreed level.

Trust Neil Woodford to take

a contrarian position. Just as

performance fees seemed on the

verge of extinction in the closed-ended

world, Woodford revealed that his new

Patient Capital Trust (WPCT) would only

have a performance fee.

The trend has otherwise been to scrap

performance fees. Over the past four

years, more than 30 trusts have abolished

these fees, including giants such as City

of London (CTY) and Standard Life UK

Smaller Companies (SLS).

Bad managers like fixed fees

Yet there is academic evidence that

performance fees should be embraced.

A paper published by academics from

Cass Business School in October last year

found that ‘the most prevalent fee structure

currently in the UK market (a fixed fee as a

proportion of assets under management) is

generally the best structure for the manager

and the worst for the investor’.

The rationale is simple: bad managers

like fixed fees, which are paid regardless

of performance; strong managers are happy

to earn their fee. The Cass professors

therefore advocate the ‘symmetric’ nature

of performance fees: charges should

mirror returns.

Competitive pressure

So, why are performance fees falling

out of vogue? ‘Boards have taken the

view that in the post retail distribution

review (RDR) world they are looking to

simplify fee structures,’ explained Ewan •••

Critics say performance fees make investment trusts unnecessarily complex. Supporters say they benefit shareholders if structured correctly.

This article explains what good performance fees should look like and highlights 30 trusts where manager incentives are questionable.


Lovett-Turner, director of investment-

companies research at Numis Securities.

By preventing open-ended funds from

paying commission to their distributors,

the RDR reforms generally served to lower

their costs. This encouraged some closed-

ended funds to cut their own fees to remain

competitive.

Performance fees also won themselves

few friends because of their structure.

Typical complaints are that they are too

easy to earn or too complex to understand.

Benchmarks and watermarks

So how should a good performance fee

be structured? As Panmure Gordon analyst

Charles Murphy said: ‘It’s not the headline

number; it’s the detail of how it works.’

Most obviously, a trust’s benchmark must

be relevant and updated. The latter point

matters: some trusts have had benchmarks

based on interest rates which have been

easy to beat in the past six years. ‘That

obviously is quite a different proposition

now than it was when most of these were

put together,’ remarked Lovett-Turner.

Second, Cantor Fitzgerald analyst Monica

Tepes seeks high watermarks. These

mean that no bonus is earned while the

net asset value (NAV) or share price is

below its previous peak. For Tepes, this

ensures that ‘underperformance is carried

forward and a manager is not paid for


Boards have taken the view that in the post retail distribution review world they are looking to simplify fee structures. Ewan Lovett-Turner, Numis Securities

short-term outperformance while having

underperformed over a longer time horizon’.

As a practical example, imagine a trust’s

shares falling from £10 to £1. Without a high

watermark, the manager could still claim

a performance fee if the price subsequently

doubles to £2 even though early investors

have lost a fortune.

Clawback and hurdle

An alternative way of dealing with

underperformance is a clawback

mechanism, which requires managers

to repay their bonus when they lag their •••


because simply beating the benchmark by

a few percent ‘is what you are buying with

your base fee’.

A third important consideration is time.

‘The period for measuring a performance

fee is absolutely integral to the whole

process,’ Murphy insisted. ‘One year is not

adequate; three years would be a minimum

and five years would be a lot better.’

NAV or share price return?

Fourth is the question of what performance

should be measured: NAV or share price?


index. However, these can be tricky to

enforce: managers tend to forgo their base

fee rather than actually return any money.

Mark Dwyer, head of emerging-market

closed-ended funds at City of London

Investment Management, preferred

high watermarks. ‘It starts to get overly

complicated with clawbacks, which can

impact the true picture of the NAV [net asset

value of the trust].’

Murphy believed a minimum level of

outperformance should also be required –

a hurdle rate – before any bonus accrues,

High ‘watermarks’ ensure that ‘underperformance is carried forward and a manager is not paid for short-term outperformance while having underperformed over a longer time horizon’. Monica Tepes , Cantor Fitzgerald

On the one hand the share price is the

return actually delivered to the investor, but

on the other it does not necessarily reflect

how well the manager is performing. ‘The

share-price performance has as much to

do with whether your sector is in fashion

as anything else,’ commented Murphy.

For Dwyer, any performance fee should

therefore be based on NAV. ‘The discount

should be addressed separately via a

discount-control mechanism and falls

under the purview of the board.’

In addition, the performance must

be realised, not theoretical. This applies

particularly to illiquid assets, as demonstrated

by the property sector before the crash.

‘Managers geared up the portfolio, it went

up like a rocket, they took a great big fee out

the top in cash, then the fund went bust,’ •••


on their shareholders’ behalf,’ reported

James de Sausmarez, head of investment

trusts at Henderson Global Investors.

Yet Murphy observed that boards have

their own constraints. ‘To get a really good

deal out of a manager, you have to be

prepared to sack them. And you need

the support of shareholders to do that.’

Take the Edinburgh (EDIN) investment trust:

investors bought it to access Neil Woodford.

They would not have been happy if the board

had sacked him because he would not

remove his performance fee. So instead the

board had to be more reactive, junking the

fee as part of the renegotiation with Invesco

Perpetual after Woodford’s resignation.

Low base fees

So what does the future hold for •••

Oriental Smaller Companies (SST), which

has to beat the MSCI Asia ex Japan index

by ‘a very ambitious’ 10% over a rolling

three-year period, and Woodford’s Patient

Capital Trust, which has to achieve an

annual compound hurdle of 10% with

a high watermark.

Blame the board

Who should be responsible for ensuring

trusts adhere to these standards? The

board, perhaps. ‘Directors take their job

seriously and they do negotiate quite hard

‘The period for measuring a performance fee is absolutely integral to the whole process. One year is not adequate; three years would be a minimum and five years would be a lot better.’ Charles Murphy, Panmure Gordon


summarised Murphy.

‘If you have anything where there is

a reasonable degree of uncertainty as

to what the actual value is, you want to

structure it in a way that the manager has

to sell the asset to collect the fee,’ Murphy

proposes – adding that the base fee should

also be as low as possible.

Finally, total costs including the

performance fee should be capped. Dwyer

suggests 2% as the ‘absolute maximum’.

As examples of best practice, Tepes cited

Citywire AA-rated Angus Tulloch’s Scottish



performance fees? Dwyer doesn’t

believe they have a place in active fund

management. ‘I would only recommend

them for illiquid assets where there is

great uncertainty about the valuation

and you want to incentivise the manager

to deliver realised performance,’ said

Murphy, emphasising again that the

base fee should be as low

as possible.

De Sausmarez echoed the sentiment,

noting that Henderson has abolished

performance fees on mainstream

trusts like Bankers (BNKR) and City

of London, but retained them – with

appropriate structures – for more

specialist mandates like Henderson

Opportunities (HOT).

‘In my experience, if a fund manager

is earning the maximum performance fee

up to the cap, the shareholders are having

such a good time in terms of their NAV

total return they are only too delighted,’

he stated. ‘The key thing is that if the

manager is not delivering, the base

fee is cheap.’

Lovett-Turner accepted they had

a role for smaller trusts. Newcomers like

Sanditon (SIT) investment trust and River

and Mercantile UK Micro Cap (RMMC)

have committed to staying small, such

that to make managing them worthwhile

they must impose a large fixed cost or

take a performance fee.

Paul Locke, an analyst at Investec, was

reluctant to see performance fees disappear

completely for similar reasons. ‘My fear

longer term is that cutting overall fees

too hard will ultimately prove negative for

the sector. You certainly need higher-quality

managers who are in effect rewarded

for their skills, not simply a range of

funds with minimal fee structures.’ •

If a fund manager is earning the maximum performance fee up to the cap, the shareholders are having such a good time … they are only too delighted. The key thing is that if the manager is not delivering, the base fee is cheap. James de Sausmarez, Henderson Global Investors


Performance fees under scrutIny

SOUrCeS: NUmIS SeCUrITIeS, ASSOCIATION Of INVeSTmeNT COmpANIeS


Global trusts Criticism Defence

JPmorgan overseas (Jmo) Only has to beat a 0.5% hurdle over the mSCI World index, no high

watermark, and excess performance carried forward. Low base fee (0.4%) and charge capped

at 0.8%.%.

cayenne trust (tct) A high base fee (1%), non-index benchmark (5% a year) and no cap

on charge. Operates a high watermark and the trust

is liquidating.

miton worldwide Growth (mwGt) Only has to beat Libor plus 2% hurdle and excess performance

is carried forward.

High watermark, 2% cap on total charges and performance fee only paid when share price rises.

north atlantic smaller companies (nas) A high base fee (1%), no hurdle over S&p 500 index and no high

watermark. Performance fee capped at 0.5%.

utilico Investments (utL) fee linked to low government bond (gilt) yields and there is no cap. High watermark and low base fee (0.25%)

until that passed.





UK trusts Criticism Defence

sanditon Investment (sIt) No cap on charge and benchmark just linked to inflation. Performance measured over three years

and high watermark applies.

value and Income (vIn) No cap on charge and no high watermark. Performance measured over three years

abd high hurdle (10% over FTSE All Share).

Blackrock throgmorton (thrG) Can earn a 1% performance fee even if trust's net asset value falls (2%

cap when NAV grows). High watermark applies.

strategic equity capital (sec) High base fee (1%) and excess performance carried forward. Performance measured over three years,

high watermark and 1.75% cap.

crystal amber (crs) Very high base fee (2%), non-index benchmark and no cap. High watermark and performance fee

paid in shares.

marwyn value Investors (mvI) Very high base fee (2%), no hurdle and no cap. High watermark, very specialist mandate.

sherborne Investors B (sIGB) High base fee (1%) and no cap. High watermark, tiered according

to returns.





Other trusts Criticism Defence

Blackrock Greater europe (BGre) Low watermark and no hurdle over index. Performance measured over three years

and total charges capped at 1.15%.

Blackrock frontiers (BrfI)High base fee (1.1%), no hurdle over index, no high watermark and

payable if returns negative. Total charges capped at 2.5% (1% if

returns negative).

JPmorgan emerging markets (JmG)performance rolled forward and accrued, but not paid, when net

asset value falls. Fees offsettable against future

underperformance and capped at 0.75%.

ashmore Global opportunities (aGoL)High base fee (2%), low watermark, non-index benchmark

and no cap. Has to deliver 6% return a year and trust

is liquidating.

africa opportunity (aof) - africaHigh base fee (2%), benchmark linked to low 'Libor' rate and

no cap. Operates high watermark.

Biotech Growth trust (BIoG) fee earned quarterly and is not capped. Has a difficult index to beat.

worldwide healthcare (wwh) fee earned quarterly and is not capped. Difficult index to beat.

Global resources (GrIt) High base fee (1.5% on first £100m of assets), non-index benchmark,

no high watermark and no cap. Lower base fee (0.75%) on assets

above £100m.


SCOTTISH MORTGAGE INVESTMENT TRUST

*Source: Morningstar, share price, total return as at 31.03.15. †Ongoing charges as at 31.03.14. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA. BGSM is an affiliate of Baillie Gifford & Co Limited, which is the manager and secretary of Scottish Mortgage Investment Trust PLC. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.

Picking stocks with precision.

Baillie Gifford – long-term investment partners

SCOTTISH MORTGAGE WAS ORIGINALLY LAUNCHED TO PROVIDE LOANS TO RUBBER GROWERS IN MALAYSIA IN THE EARLY 20TH CENTURY. Scottish Mortgage Investment Trust plays a ‘long game’ with a focused list of around 70 stocks. Our aim is to

meticulously seek out truly innovative organisations (the obvious and the unexpected) and stick with them over the long term. We believe this strategy gives us a strong competitive advantage in identifying companies with real potential for significant sales growth – often as a result of their intelligent deployment of transformational technology.

By being patient investors in an impatient world, we give ourselves time to add value. But don’t just take our word for it, over the last five years Scottish Mortgage has delivered a total return of 139%* compared to 61%* for the index. And Scottish Mortgage is low-cost with an ongoing charges figure of just 0. 50%.†

Standardised past performance to 31 March each year*:

Past performance is not a guide to future returns.

Scottish Mortgage Investment Trust is managed by Baillie Gifford and is available through our Share Plan and ISA.

Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested.

For a free-thinking investment approach call 0800 917 2112 or visit www.scottishmortgageit.com

2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

Scottish Mortgage 24.2% -2.9% 18.5% 28.9% 29.6%

FTSE All-World Index 8.4% -0.2% 17.1% 6.8% 19.2%

GLOBALScottish MortgageInvestment Trust


Modi’s magic and the India trusts that have benefitedBy Jennifer hill


modI’s maGIc and the IndIa trusts that have BenefIted

India was one of the best-performing

markets last year, with stocks rallying

strongly since prime minister Narendra

Modi’s decisive election victory in May.

In his government’s first full budget in

February, finance minister Arun Jaitley

unveiled business-friendly measures aimed

at attracting greater investment for the

economy, including an unprecedented

corporate tax cut, as well as benefits

for the poor, such as a universal social

security scheme.

Charles Tan, an investment companies

analyst at Cantor Fitzgerald, believes

economic reform could herald the beginning

of a longer-term bull market in Indian

equities. For him, the opportunity for India

lies not in one budget or central bank

meeting, but in a ‘combination of reforms

and favourable macro tailwinds that promise

to lift the country onto a higher growth

trajectory over the longer-term’.

‘Fiscal policy is set to be stimulative, not

because they will throw more money at the

problem, but because Modi is determined

to crack down on corruption and allocate

resources more efficiently so that the

infrastructure gets built and people’s

lives are improved.

‘Monetary policy is set to be supportive

as inflation has fallen to an all-time low and

is set to stay low as long as the US shale

revolution keeps the global oil supply high

and China’s slowdown keeps demand

growth for oil low.

‘There are also ongoing talks to open

up the Indian economy to more foreign

investment, and to encourage •••

Key Points

India’s stock market has surged since the election of prime minister Narendra Modi a year ago who has lifted restrictions on foreign investment and tightened tax policy.

While there are signs the rally may have eased in the short term, the long-term prospects look good as the country’s finances and people benefit from the fall in oil prices.

There are three single country India investment trusts and around a dozen Asia Pacific and emerging market trusts with significant holdings in the country.


market-based reforms, all of which

are positive for economic growth.’

India’s economy is tipped to grow at

a rate of more than 8% during 2015-16.

While it has grown considerably over the

past decade, its gross domestic product

(GDP) growth has lagged China’s by some

margin – 145% versus 353%, according to

International Monetary Fund (IMF) estimates.

Ed Marten, founder of investment trust

research company QuotedData, said: ‘At

the same time, India’s population has been

growing much faster so its GDP per capita

is about a fifth of China’s.

‘Clearly, India has a long way to go

to catch up with its neighbour, but at the

moment the IMF is forecasting that India’s

GDP growth won’t be much higher than

China’s over the next five years.’

Corruption, bureaucracy and political

infighting have plagued India, and concerns

remain that some members of Modi’s Hindu

nationalist party are undermining his efforts

by focusing on religious squabbles.

The introduction of a goods and sales tax

(akin to VAT) might also thwart the country’s

progress: in Japan, a similar measure

threatens to derail its fragile recovery.

Fears of retrospective taxation of foreign

investors and subdued corporate earnings

season have blown some of the froth

off the stock market recently.

Single-country trusts

There are three UK investment companies

dedicated to India. None of them pays

a dividend but all have enjoyed terrific

performance of late, although their shares

still trade between 12% and 18% below

net asset value.

The best performing since Modi’s election

has been Guernsey-based India Capital

Growth (IGC), which is listed on the •••


‘Fiscal policy is set to be stimulative, not because they will throw more money at the problem, but because Modi is determined to crack down on corruption and allocate resources more efficiently so that the infrastructure gets built and people’s lives are improved.’ Charles Tan,



Alternative Investment Market (AIM). Over

one year to 20 April it delivered a 56%

return to shareholders and led the way over

three years with 71% growth. However, its

performance is far from smooth: over five

years total returns collapse to below 2%.

It focuses on small and medium-sized

companies (almost half of the portfolio is

in mid-caps and one-quarter in small caps)

and is run by David Cornell at Ocean Dial

Asset Management in London. It is the

smallest of the three single-country Indian

closed-ended funds, with net assets (after

debts) of £56 million. Because of the steep

discount its market value is just

£46 million.

The other two trusts, New India (NII),

managed by Aberdeen Asset Management,

and JP Morgan Indian (JII), are far bigger

with market value of £197 million and £576

million respectively.

All are overweight financials, which

accounts for 18.6% of the MSCI India index,

with JP Morgan Indian having the largest

weighting at 37.8%. Managers Rukhshad

Shroff and Rajendra Nair have recently

tilted the portfolio towards financials and

consumer discretionary – adding to cyclical-

orientated banks, such as Axis Bank – and

away from export-facing sectors, such as

consumer staples and technology. It has

notched up one- and three-year returns

of 48.5% and 58% for shareholders, falling

to 31% over five years.

New India managers Hugh Young and

Adrian Lim favour well-capitalised private sector

banks, including Housing Development Finance

Corporation, ICICI Bank and HDFC Bank,

amid increased lending to homeowners and

materials companies, such as Ambuja Cements

and UltraTech Cement. Over one and three

years it is neck and neck with JPMorgan with

returns of 49% and 59% but has done better

over five years with total returns of nearly

50%. •••

‘Clearly, India has a long way to go to catch up with its neighbour, but at the moment the IMF is forecasting that India’s GDP growth won’t be much higher than China’s over the next five years.’ Ed Marten, QuotedData


India Capital Growth’s largest weighting,

meanwhile, is to industrials, with holdings

including Kajaria Ceramics, Max India,

Gujarat Pipavav Port and Exide.

All are concentrated portfolios: India

Capital Growth has 36 holdings, New India

37 and JP Morgan Indian 52.

Tan’s pick in the sector is JP Morgan

Indian for its well-resourced and experienced

team (Shroff has 20 years’ experience in

Indian equities and Nair 15): ‘A high level

of local expertise is essential as the informed

consideration of factors such as politics

and corporate governance are key.’

A more diversified approach

Investors who would prefer a more

diversified exposure to India could consider

JP Morgan Emerging Markets (JMG),

Fundsmith Emerging Equities Trust

(FEET) and Advance Developing Markets

(ADMF), added Marten.

Tan’s favoured Asia Pacific trust

is Aberdeen Asian Income (AAIF).

‘It’s underperformed of late, but on a risk-

adjusted basis and over the longer-term this

trust is a strong and consistent performer,

and has the bonus of a healthy yield [4%]

that pays investors while they wait.’ •



recent Performance from IndIa trusts has Been stronG

sharehoLder returns have BroadLy refLected the underLyInG Growth In net asset vaLue (nav)


0

10

20

30

40

50

60

70

80

NAV (%)Three-year shareholder return (%)

New IndiaJPMorgan IndianIndia Capital Growth

71%

58% 59%

69%

59%63%


the LonG-term Performance of IndIa trusts Is reveaLInG too

IndIa caPItaL Growth has faLLen 40% sInce Launch whILe the country’s stock

market has Beaten the uk’s ftse aLL share


Feb 2012Feb 2011Feb 2010Feb 2009Feb 2008Feb 2007Feb 2006 Feb 2014Feb 2013 Feb 2015

India Capital Growth (IGC) New India (NII) JPMorgan Indian (JII) FTSE All Share MSCI India

-100

-50

0

50

100

150

200


aLternatIveLy … how much asIa PacIfIc and emerGInG market trusts hoLd In IndIa (%)

SOUrCeS: NUmIS SeCUrITIeS


0

5

10

15

20

25

30

35

40

AberdeenAsian

Income

Asian Total Return

SchroderOriental Income

Templeton Emerging

Markets

Hend-erson

Far EastIncome

Fidelity Asian Values

JP-Morgan

Asian

InvescoAsia

AberdeenNew Dawn

Aber-deen Asian

Smaller Cos

Edinburgh Dragon

GenesisEmergingMarkets

SchroderAsia-

Pacific

Martin Currie Pacific

JPMorgan Emerging

Markets

PacificHorizon

Scottish Oriental Smaller

Cos

Pacific Assets

37

30

24 23

18 17 16 1513 13 13 13

7 6 6 2 1 1


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opening the door to investment trusts...net asset values (navs) with net dividend (if any)...

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