Witan Investment Trust’s Andrew Bell argues policy makers are right to look at UK listing rules, but certain standards should be preserved
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Welcome to Morning Star. If you were paying close attention to Investment Trust last year, you might be very keen to find out what’s going on with them in 2024. So I’m pleased to say kicking off our coverage for this year is a special guest in the studio.
With me today is Andrew Bell, chief executive of the Wootton Investment Trust. Andrew, thanks for your time today And talk to me first about performance in 2023 and what were the particular contributors or detractors to performance? Well, a year ago the whole world was in a big funk
About how we were certain to have a recession because of rising interest rates and so forth. There’s a lot of gloom and markets were quite cheap. And contrariwise, we actually put on quite a lot of gearing at the end of 2022.
So one of the drivers for our performance last year was that we were geared throughout the year and in a year of rising markets that helped returns the the two headwinds that we had were first of all, the massive concentration of performance within the
The US market, particularly where I think about 60% of the rise in the market was driven by the Magnificent Seven tech stocks. Brilliant if you’re a tech manager. More difficult if you have a more diversified portfolio. And the other side was the widening of discounts
Within the investment trust sector, because we do invest about ten or 15% of Britain’s assets in investment trusts in specialist categories. And clearly, in a year when the when discounts were widening and there was very little demand for investment trust, generally negative investor sentiment that held us back.
So we generated I mean, our results are due out in March, but most of it’s already in published information. We our total return was just under 13% and total return terms slightly behind the benchmark, but well ahead of inflation And the Trust’s two star rates by Morningstar.
What in your mind is the key benefit of running a multi-manager approach? I think you’ve got three things, really. One is you’ve got diversification by manager. So if one manager’s having a memory of a year, you the whole portfolio isn’t going to be sunk below the waterline.
The second is it’s easier to steer the portfolio if it’s a big it’s a big effort. If if an investment trust board loses confidence in its manager, there’s a big hurdle to decide to change. The manager of 100% of the portfolio, much easier to change the portfolio, ten or 15% of the portfolio.
So if you have lost if you’ve either lost confidence in a particular manager or found a better idea, it’s easier to change and adapt as you go along. And the other side is horses for courses. Not every not every global manager is going to be as good in
Japan as they are at European smaller companies. So you can appoint specialists to do what their best start. Okay. And in terms of the UK, I mean, I think you alluded perhaps to the contrast between, you know, you character investing and US equity investing in Magnificent Seven.
But you know, one of the holdings in the trust is relics. What are the other opportunities that you see in the UK specifically at the moment? Well, the UK is I mean, Relics is an interesting one.
I’m not at all an expert of it, but I know one of our managers is will train. And in a recent factsheet they alluded to the fact that I think Rolex is the strongest performing of the original Footsie 100 stocks from 40 years ago
And at £100 it turned into 35,000 or something wonderful. And and you know, and so they hold it in the international portfolio they manage for us. I think the the thing that’s become a bit of a standout over the last 12 months or so is the degree to which policy makers
And regulators are beginning to fret over the fact that the UK stock market has become so cheap. It’s not just an investment issue. I think people have recognized that stock market’s there to raise raise growth capital for companies and if the market is really not very receptive
So that the good companies go somewhere else and the other companies can’t raise money because pension funds and insurance companies have spent the last 20 or 30 years reducing exposure to UK equities. That is a policy problem. And so a market which has become it’s become cheap relative
To international comparators, even if you accept that it’s a different sector mix and it’s become under owned by domestic institutions for the regulatory reasons I alluded to and under owned by internationals, because they felt that, you know, right or wrong, they felt that Brexit was was an own goal
From the UK’s point of view. So why bother allocating to such a small, small market? So if it’s under owned by domestic and foreign investors, it’s become relatively poorly valued. Nobody quite knows what the catalyst is, but it does look like a source
Of very cheap stocks and it’s one of those things once it starts moving, it’s it could actually end up being chased because people suddenly realize they’ve overlooked this pool of bargains, and particularly the small domestic stocks. Now, I’m not particularly recommending those, but it is a fact that the domestic stocks
Are lowly rated compared to the UK market, which is lowly rated compared to international competitors. When will it change? Who knows? Sure. And you know, this, as you said, became a policy problem. And we had plenty of announcements not just about, you know, equities
And markets last year, but also about other areas of UK finance, all with a kind of UK growth growth growth bent, shall we say. And Jeremy Hunt has made no secret of his desire to really get things moving, so to speak, in the city.
And one of the things that, you know, regulators and central government are working on is a is a listings regime change, essentially. What was your reaction to that and do you feel confident that it’s now heading in the right direction? I think you’ve got to be careful not to throw the baby out
With the bathwater, because one of the reasons a lot of foreign companies wanted to list in the UK was because it had a respected, you had a set of requirements in order to be listed. And that was that was, that was a quality threshold.
And so if you abolish the quality threshold, you know, the danger is you’re going to end up with a lot of poor quality companies coming along or the market gets poorly rated because people think, I don’t trust the accounts, I don’t think that is happening.
But what about some of the I think the the the default seems to have moved from instead of having a set of rules that you must comply with, say, well, you don’t have to comply with these, but you do have to explain.
So it’s more of a caveat emptor thing, which probably doesn’t matter if you’re a 50 year old building company or, you know, oil company or whatever, or a food company, you know, something with an established business, it probably does matter if you’re a rapidly growing small
Start up in the technology space where you probably don’t have the technology, the trading records to be able to meet all the old prospectus requirements. So so I think that that is a benefit, but it’s it’s a slow burn. It’s not going to dramatically
Turn around the fortunes of the UK market on its own, that that will come because of cheapness or a change in willingness to buy the UK. But it’s but over ten years, you know, diverting the things like the Mansion House reforms, the Edinburgh reforms, making the regulations less onerous,
Helping to divert more money towards start ups and growth companies. That should help the rating of the market because taking 25 years to ruin it. Okay deftly put. I’m just to pick you up on what you said about caveat emptor. I mean it’s very interesting that you look at it from the
Perspective of perhaps older companies and at younger companies. How do you feel about the idea of, shall we say, older investors and younger investors? I mean, people who spent less time investing, perhaps encountering, you know, a new regime that perhaps places them in a slightly riskier situation, might be fair to say.
What’s your sense as regards investors themselves? Well, I think don’t invest beyond your confidence or competence is one thing which, you know, the whole origin of investment trusts and unit trusts and leaks has been to give people of limited means or limited time a way of diversifying their portfolio
So that they don’t put it all on in a red room, as it were. And, you know, and or shergar, which then gets kidnaped or, you know, the metaphor is the metaphor exactly enough of the horses. So so I think, you know, I think that that is know,
I think that it’s for the FCA to in loosening some of its requirements to make sure either that the marketing to retail investors who are perhaps less able to do their due diligence is appropriately regulated itself or that or to ensure that the intermediaries who manage portfolios
For individuals are aware of of the benefits of diversification. But but if it’s not a one off shot, if you find that you’ve there will always be scalawags and miscreants and mistakes, whether predictable or not in any market. One of the dangers you need and one of the things you need to do
Is to try and protect people against being caught out by those things. But equally, you can’t protect people against all of those risks because one of the theories about why pension funds were regulated to invest for risk control rather than for return work goes back to the time when Robert Maxwell,
You know, robbed, robbed the pension fund of his of his employees. And the feeling was you needed to find a way of making sure that there were enough assets in the fund to guarantee in all circumstances that the liabilities could be met. And I think that led to an overfocus on risk.
Whereas my view is it’s important to identify where you can make returns and then have an appropriate risk control mechanism on top of it. If you start with minimizing risk, then actually, oddly enough, there’s nowhere where you can make any returns as the as the pension funds found a year ago
When they found that they were overexposed to bonds when they fell out of bed. Okay. I started with investment trusts, so I’ll end with investment trusts. So just finally, you know, lots of people at the end of last year were saying that investment trusts are going to be
One of the real talking points for good or for ill in 2024. And what’s your sense on on that? What’s your what’s your feeling about investment trust as a vehicle in terms of popularity, in terms of flows, inflows, outflows in 2024? I don’t know when the flows will change.
I mean, there is there has been a structural outflow because partly because in the wealth management sector investment, some investment trusts do what the wealth managers do themselves, so they have less need to buy investment trusts. And in some cases because of regulation, they’ve had to given an unrealistic assessment
Of the costs of owning an investment trust in their portfolio to their clients. And so that means that for anything other than very specialist trusts, wealth managers have basically been steadily exiting over the last two or three years because of these MiFID rules.
And, and those also quite because a lot of the areas of specialism like private equity and real estate are areas which have quite high costs, but they also deliver quite have delivered from time to time quite high returns after those costs.
And then really it’s the returns after the cost rather than the cost per say. But that’s because some of those specialists are high cost funds. The wealth managers still haven’t really returned to them, which is why there was a lot of political debate at the moment about trying to rationalize
The requirement to show look through costs on investment trusts, whereas you don’t have to show the look through costs on only Marks and Spencer or Lloyds, Lloyds Bank. And if that can be solved and I think if it will help remove an artificial headwind to the sector.
But the fundamental thing is going to be what happens to the assets, the discounts have been widened for the reasons we’ve been discussing. But what really matters is are you in an area where is this a fundamentally, financially, soundly based company doing something interesting at the right point in the cycle
And it starts going up and people think, hey, I want to have some more of this. And I my my hunch is I’m more bullish than some people, but I think we’re at a turning point where when interest rates start falling,
Even if the economy’s in lumber at the time, it’s a different psychology because time is on your side. Probably next year will be better than this year if interest rates are falling, whereas when interest rates are going up, you’re fearful that the next shoe is about to fall.
So I’m pretty bullish on markets generally, but I can be wrong at least half the time. And I think that as and once investor psychology moves away from being so risk averse, I think you’ll see some flows coming into the sector and the discounts
Will help people who buy the right trust at discounts. Not always worth buying. You have to be sure that the asset base is okay. But I you know, I would be surprised if in the areas of widest discounts there isn’t a tailwind from narrowing in the next year or so. Sure.
And if you take away one thing from that, it’s that it’s all about the assets. It is. Andrew, thank you so much for your time. For more on UK investment trusts, check out any of our editorial websites internationally. But of course Morning Startup UK, for which I’ve been Olly Smith. Goodbye.