In the fund management business, there can be a potential conflict of interest between the owners of the management companies and their customers whose cash is being invested. And while competition helps keep charges down, a firm’s managers’ first responsibility is to shareholders.
Investment trusts provide the perfect solution to this dilemma, in that a trust’s investors and shareholders are one and the same. Initial capital is provided at IPO time, and the only way to invest is to buy shares.
Global equity
I’ve been examining Pantheon International (LSE: PIN), which released first-half figures today. Pantheon is a little unusual in that it invests in private equity funds with a global reach, which makes it something of a fund-of-funds vehicle.
I’d usually shun such beasts with their dual layers of management costs, but I quite like Pantheon for several reasons. As an investment trust it avoids that top-level conflict of interest, and it gives small investors access to private equity, from which they would otherwise be excluded. But the thing I most like is its impressive performance.
The period saw a net outflow of cash (including distributions) of £137m from the company’s portfolio, and net assets fell to £1,217m from £1,388m. But there were £196m in new investment commitments made in the six months, and on a per-share basis I think things look good.
Net asset value (NAV) per share, a key measure for investment trusts, rose by 2.5% from 2,189p to 2,245p. The share price did grow ahead of that over the same period, by 4.2% from 1,793p to 1,869p, and that narrowed the discount — but it still stood at 16.8%, which looks attractive to me.
The share price has doubled in five years, to 1,860p at the time of writing, while the FTSE All-Share index has gained just 20%, so we’re looking at an outperformer here.
50-year champion
Alliance Trust (LSE: ATST) also has a global outlook, but with a more conventional approach of investing in large international companies rather than private equity. And it’s been a byword for long-term performance for decades.
Alliance Trust has lifted its annual dividend for 50 consecutive years, a record that few can match. Yields have been relatively low at around 2%, but investors have enjoyed solid share price growth too. This time we’re looking at 71% over five years, which again trounces the FTSE All-Share, and an outperformance that stretches back further.
At the halfway stage at 30 June 2017, NAV per share stood at 742.2p with the shares at 700p, representing a 5.7% discount. That’s narrow by investment trust standards and suggests that investors see little risk in Alliance Trust, compared to the smaller and riskier Pantheon with its discount close to 17%, though it has also been affected by Alliance’s share buyback programme.
Attractive returns
First-half total shareholder returns came in at 10.8%, with the firm’s equity portfolio beating its benchmark by 4.2%. That comes at a time of transition to a new investment approach, which essentially consists of adopting a multi-manager approach.
That can result in higher charges, but the transition was apparently at a much lower cost than originally anticipated, and the company is targeting charges of no more than 0.65%.
How well this new approach continues to beat the indices remains to be seen, but right now I’m seeing another long-term buy.