Market casualty regains lost ground

Market falls last August hit Witan investment trust, wiping out gains from the previous year, but the manager was not spooked to change the gearing, a conviction which, so far, has paid off.

Andrew Bell, the chief executive of the Witan investment trust, describes 2011 as “galling” after the trust handed back all the gains it had made the year before by being overly geared into a falling market.

In its annual results two weeks ago it was announced the multi-managed global growth trust saw its net asset value (NAV) fall 10.9% during 2011, compared with a total loss of 7% reported by its composite benchmark. Bell notes this underperformance of 3.9% broadly offset the outperformance of 3.4% achieved in 2010.

“At the start of 2011 the trust was 5% geared and this was gently raised to about 10% through to June as markets seemed predictable and looked decent value,” says Bell. “This led to marginal outperformance in the first half of the year, with the fund up 3.5%, versus 3% for the benchmark.”

However, over the course of 10 days in August global stockmarkets dropped 15-25% after Standard & Poor’s stripped America of its AAA rating, meaning the gearing worked against the fund. (Investment trusts continues below)

“It was galling,” says Bell. “All the outperformnace from 2010 was stripped. However you can’t always anticipate where markets will go, and in the third quarter of last year they proved unpredictably nervous.”

This left Bell – who subject to the approval of the trusts’ board sets the trust’s gearing level – with a tricky decision: stick with the high level of gearing, or reduce it. He says he stuck with it, a call which year-to-date has worked in the fund’s favour, with NAV up 13.8%, versus the benchmark’s gain of 10.5%.

“We haven’t made up all the losses from last year but we are pleased for our shareholders that we have made up much of the ground,” Bell says. “While we are cognisant of the risks, we don’t think the UK is heading into recession and that markets seemed to have been overly emotional.”

In addition to the uplift from gearing, an overweight stance to emerging markets, which again hurt performance in 2011, has year-to-date boosted performance.

With total assets standing at £1.2 billion, the Witan investment trust portfolio is made up of 11 segregated mandates, outsourced to third-party managers, while 10% of the portfolio is run direct by Witan.

Having changed six of the fund’s managers in 2010, last year proved more stable, with only one mandate changing with the trust dropping Varenne as it scaled back its European exposure.

”We don’t think the UK is heading into recession and markets seemed to have been overly emotional”

Bell joined Witan in February 2010 and he says the changes he made were reflective of a shift in the way the trust was being managed, with it moving away from having two index funds to being more active in its approach. It also had several country specialist mandates which were replaced with more global offerings.

The portfolio comprises four UK equity mandates (run by Artemis, Henderson, Lindsall Train and NewSmith Asset Management) which account for 30% of assets. Four global funds (run by MFS, Southeastern Asset Management, Thomas White International and Veritas) account for 40% of the fund, with Marathon running a pan-European mandate (9% of assets) and Comgest running an Asia Pacific mandate (6%). Trilogy Global Advisers run the emerging markets portion of the fund, the only mandate held directly through an Oeic.

“Our goal is to find fund managers who will perform well over multi-year cycles,” says Bell.

Looking ahead to the retail distribution review, Bell says while it is an opportunity, he does not yet know how large or small that opportunity will be.

“We have spent the last decade building Witan into a retail brand, ” he says. “In that time we launched the Jump and Witan Wisdom saving schemes, whose hoard of about 30,000 savers hold about 20% of the trust’s shares.”