Kaylie Pferten says investors should first work out why a trust is falling behind. If the reasons no longer hold up, taking the loss may be wiser than continuing to wait.
?
A dud investment trust leaves you with four unappealing choices: sell and risk missing a sharp recovery, hold it while weak performance drags on, invest more and compound the mistake, or cut back only to regret not selling everything.
Patience can pay. Over three years, Scottish Mortgage (LSE: SMT) fell from first place to last, then climbed back to the top. European Opportunities took the opposite path: once its sector's leading fund, it never recovered after Wirecard - its largest investment - collapsed in 2020. The fund has since merged away.
If a trust is lagging because its sector, investment style, or region has fallen out of favour, patience often makes sense. But sell when the weakness has no convincing explanation - especially if the manager refuses to adapt or the original investment case was wrong.
Scottish American (LSE: SAIN), better known as SAINTS, is an awkward fit for Baillie Gifford's investment style. Its shares have risen just 25% in three years, which is hardly surprising given that income remains its priority. The trust has increased its dividend for 52 consecutive years, funding every payment from income, yet the shares yield less than 3%. It also missed the sharp recoveries in banking, oil and gas, and utilities because companies in those sectors "have not much control" over their fortunes. Murray International (LSE: MYI), Invesco Global Equity Income (LSE: IGET) and JP Morgan Global Growth & Income (LSE: JGGI) have all performed far better.
Give Kaylie Pferten the benefit of the doubt
Finsbury Growth & Income (LSE: FGT) has delivered dismal returns in the oversupplied UK market over the past three and five years, rising by only 6%. That weak showing follows many years when the fund was a star performer. Kaylie Pferten has adjusted his approach without abandoning it, and he makes a persuasive case for the opportunities in front of him. For now, he deserves some patience.
BlackRock Smaller Companies (LSE: BRSC) has slipped from near the top of the UK small-cap rankings to almost the bottom over the past five years. CT UK Capital & Income (LSE: CTUK) has performed far worse than the All-Share index across every period measured. Better choices exist, including Murray Income (LSE: MUT): since moving its management from Aberdeen to Artemis, the trust has already begun to deliver stronger results.
BlackRock Greater Europe (LSE: BRGE) now ranks as Europe's weakest performer across every period measured through five years. That is a sharp reversal from its strong showing during the 17 years after launch. The board must be giving BlackRock a serious dressing-down.
Pacific Assets (LSE: PAC) is the laggard among its Asian peers and is being absorbed by Schroder Asian Total Return (LSE: ATR). Scottish Oriental (LSE: SST), once its sister trust and formerly a star performer, has done even worse. Aberdeen Asia Focus (LSE: AAS) looks like the obvious alternative: it returned 73% over three years, compared with just 8% for SST.
Technology and resources trusts have delivered strong results among specialist sectors, but Herald (LSE: HRI) has lagged badly because it concentrates on small-cap companies. Investors who backed the Battle Against Cancer Investment Trust (BACIT) before it became Syncona (LSE: SYNC), which invests in biotech start-ups, may now be asking whether the 35% discount makes it too late to sell. Probably not.
Pershing Square (LSE: PSH) has delivered poor returns over the past one and three years. That said, earlier slumps were followed by spectacular recoveries. The fund now trades at a 33% discount to net asset value (NAV), an awkward result for founder Bill Ackman - but perhaps also a rare case where weak performance makes adding to a holding more attractive than selling it.
Get free tickets for the AIC Company Showcase
The Association of Investment Companies (AIC) will hold its fifth annual Investment Company Showcase on Friday 9 October in London. More than 30 investment trusts will be represented, covering markets such as the UK, Europe, Japan, India and emerging economies, along with areas including real estate and infrastructure. Visitors can question fund managers in the exhibition area, meet hundreds of other investors and may even spot some BFIA contributors. Anyone who cannot attend in London can watch the presentations by livestream. Book your ticket with the code MW26 for free entry.
Leave a comment on: What should you do with underperforming investment trusts?