Fund profile: Witan Investment Trust

A decade ago, a Witan Investment Trust board meeting reached arguably the most far-reaching decision in the company's history - a history that takes in two world wars and the global depression of the 1930s.

Investment performance had been poor, and shareholder discontent was further aggravated by the share price's wide discount to net asset value (NAV).

The latter was alleviated by a share buyback programme, but more significant was the decision to rid the trust of its in-house stockpickers and delegate most of the money management to a string of external managers in the UK and abroad.

Too much was invested in index funds in the first few years. However, Andrew Bell, chief executive of the £1.3 billion trust for the past four years, says: "It has been a great success."

Top performer

Indeed it has. While its larger rival, Alliance Trust, has sputtered along like a tractor on the motorway for much of the decade, Witan - a bedrock holding for thousands of private investors - has accelerated away in the fast lane.

Witan is now a serial top-quartile achiever, and its share price has grown by 74% over the three years to 9 September and 84% over five.

The respective figures for Alliance are 46% and 61%. Despite the attentions of a US hedge fund arbitrageur/activist interloper on its share register, Alliance's one-year gain of 8% is roughly half of Witan's.

Bell, who is also outgoing chairman of the Association of Investment Companies, says of Alliance: "I see the various changes in investment policy introduced by Alliance Trust and the pressure from Elliott International and other shareholders as a parallel with the experience we had a decade ago. It is up to management and the board to act in shareholders' interests and keep trying until they succeed.

"While investment performance does not just happen to order and one must take a sensibly long-term view, buying back shares on discounts wider than their peer group is readily available self-help." Bell notes that Witan's buybacks, when the discount was more than 10%, improved the trust's rating because of the boost to NAV per share.

Bell personally manages 7% or so of Witan's assets - "things I have experience of", such as private equity holdings and distressed debt. The balance is split between 11 external managers, some inaccessible to private investors.

Bell says Witan likes to build long-term relationships with its managers, and the occasional period of poor performance does not necessarily lead to dismissal. Last year, however, five were given the boot.

Management

New agents were appointed for the Far East including Japan, and two new value-orientated global managers were also engaged. All three are US-based and largely unknown to UK investors. However, Matthews (Asia), based in San Francisco, has a US profile "similar to Aberdeen in the UK".

Here, Heronbridge replaced NewSmith as a UK manager. By value, Witan's main UK managers are Artemis and Lindsell Train. The trust also quit its Henderson-managed UK Smaller Companies portfolio - "a call on the asset class".

Bell says the smaller companies portfolio had been well managed by Henderson and had performed well, but on valuation grounds, prices were thought to be high enough. Smaller companies are now represented in other portfolios.

He observes that it took Witan a while to discover the merits of "boutique" fund managers. "We look for people who do it differently," he says. For example Heronbridge, whose partners include Goldman Sachs and Merrill Lynch, adopts the Warren Buffett approach: searching out companies with earnings growth coupled with good cash flows. It offers "a focus for finding companies that will grow over time".

Bell stresses that fee negotiations with its managers are robust. He says: "We don't disclose our fee terms from our managers," some of which are introduced to Witan by specialist consultants.

He adds: "If we get a good deal, no firm wants its other clients to learn about it. But the range is from 0.6% base fee to 0.4%, plus a fee for outperformance. There is a cap on what outperformance can be paid, and if a manager underachieves, the gap has to be made up. 6% is the average outperformance."

Key interests

Some 40% of the portfolio is invested in the UK and 24% in North America. Europe accounts for 16%, and Asia Pacific some 15%.

The trust's approach is scattergun, as the top 50 investments account for roughly 40% of the entire portfolio and the top 25 make up just 26%. The largest investment is Reed Elsevier, which represents only slightly more than 2% of all assets.

Bell feels the US recovery has reached a point where it is self-sustaining without further stimulus. This is an important anchor for the world economy, since confidence is fragile and other regions, particularly Europe, are still struggling.

He says: "Europe looks the weakest region to us, which is beginning to prompt rebellion on the fiscal tightening front, as well as moves by the ECB to consider easing initiatives - by buying corporate bonds, securitised loans from the banks and possibly government bonds, for example - that are unpalatable to Germany. But Germany may swallow its objections as its economy weakens in response to Russian sanctions and greater competition from Japan, fuelled by yen devaluation."

He adds: "Japan is interesting. I believe the authorities will deliver further policy stimulus to offset the impact of this April's tax rise and provide a supportive background for further fiscal tightening next year - part of the task of addressing its substantial sovereign debt overhang.

"Emerging economies are a mixed bag, but as an asset class, I believe the long-term growth story has more sceptics than a few years ago, so this may be a good time to buy, on the basis that it is usually more rewarding to buy what is out of favour than chase the latest craze. You need to be selective, though, as corporate governance standards are less reliable than in developed markets."

The outlook for 2015

Overall, Bell believes the outlook for growth in 2015 looks reasonable. He says: "[Growth will be] acceptable overall, good in the UK and the US, sputtering in Europe and patchy elsewhere. Policy remains pro-growth in most centres.

"Even where rates might start to rise, such as here and across the Atlantic, they are likely to rise slowly and depend on recovery continuing. We are not at the stage where the central banks are taking away the punch bowl at the end of the party, but in some countries the punch will have less brandy in it and more fruit juice."

Equities, he feels, "should have a tailwind from economic growth and corporate earnings, while valuations do not appear too high, given persistently low inflation and interest rates'"

He adds: "There is no cushion from low valuations - bar perhaps in Asia and Japan - but patient investors should be fairly rewarded buying now."

"Government bonds appear poor value, but the day of reckoning may be delayed until economic growth has become firmly established in the two centres still pumping in liquidity: Japan and Europe. At that point, the wisdom of buying long bonds on yields of 1 to 2% will be tested."

Witan is slightly overweight in the US and neutral in the UK. The latter, he says, "looks a good source of reasonably valued global companies, certainly compared with the US." It is underweight Europe, which Bell and his team believe faces a long period of anaemic growth.

He adds: "Most of our asset allocation stems from the stock decisions of our managers. The two exceptions are Europe, where we have a bias to be underweight in favour of emerging markets, and Japan, where we are neutrally weighted because we have deliberately added to our weighting, since our managers only have low exposure through their stock selections. We have used a specialist Oeic and Japanese equity index futures to boost our exposure."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.