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Three investment trusts for contrarians

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Investing against the grain can be a lonely pursuit, and for fund managers judged on their performance, sometimes it’s easier to fail along with the crowd than stick to a view that goes against consensus.

Three investment trusts for contrarians

What’s more, the nature of considering shares on the back of large share price falls means buying into an unattractive story that has the potential to be uglier still.

The skill here is in differentiating those companies that are cheap for a reason from those set to bounce back - but this takes time. Arguably this is one of the main advantages of using an investment trust to employ this approach. Permanent capital means managers don’t have to worry about constant inflows and withdrawals, and can put capital to work knowing they won’t have to compromise their strategies to meet redemptions. With turnaround stories often carrying unpredictable timelines, this ability to wait should not be underestimated.

Here are three of the most popular value-contrarian investment trusts on fidelity.co.uk this month.

Temple Bar

Shopping in other people’s dustbins doesn’t sound like the most attractive prospect at the best of times. However, that’s exactly how Investec’s Alastair Mundy describes the approach he takes to buying shares for the Temple Bar Investment Trust.

Heading up the trust since 2002, Mundy employs a disciplined investment process focused on making long-term investments in cheap, out-of-favour companies he feels the market has unfairly cast aside.

He begins by running companies with a market capitalisation over £200 million through a screening process to highlight the weakest performing shares. Once identified, the significantly underperforming stocks are examined, with special attention given to their valuation, the strength of their balance sheets and the inherent risk they carry.

A detailed analyst report and subsequent peer review allow Mundy and the team to decide which opportunities have the potential to be added to the trust.

The 92 year old trust has a long-term track record of dividend growth, and in 2019 increased its dividend for the 35th consecutive year. This growth has been achieved despite some years of low dividend growth in the underlying portfolio, notably in 2000 and 2009 when many companies were actually reducing their dividend. Mundy has been able to continue this record thanks to the trust structure, which allows management to conserve surplus income when the going is good, in order to smooth payments to investors in periods when income is hard to come by.

This puts the Temple Bar portfolio among the trusts labelled Dividend Heroes by the Association of Investment Companies (AIC) - a small number of investment companies to have increased their dividends each year for 20 consecutive years or more.

The trust currently holds some of the biggest dividend payers in the UK in the form of GlaxoSmithKline, Shell, BP and a raft of UK banks.

Fidelity Special Values PLC

As investors, we often fall into the trap of identifying a cheap stock but dithering when it comes to deciding if it is actually good value. This is where it can be worth outsourcing the heavy lifting to the professionals, especially with vast analyst teams like Fidelity’s answering the difficult questions for you.

In the case of Fidelity Special Values, the clue is in the name. Manager Alex Wright is a seasoned contrarian, employing a similar approach here to the open-ended Fidelity Special Situations Fund he runs as well.

A look at the current top 10 names in the trust gives a good indication of the contrarian nature of his approach, with holdings in companies and industries many fund managers have avoided completely in recent years.

Noting that competition in the UK banking space is thinning out margins among high street banks, he explains his other holdings in the sector: “Life insurance is something we’ve held in the fund for a while. I think the interesting thing is they have UK-based earnings but actually their models aren’t very tied to the UK economy because they invest in international assets. Unlike the banks who are finding it hard to grow but are producing good dividends, we’re seeing really good dividends from the life insurers as well as growth, and they’re cheap, which is quite an unusual combination.”

The oil majors also feature among the top holdings, with the manager focusing on the opportunity for renewed stability in the sector away from headline oil prices.

He explains: “The reason we like BP and Shell in particular is because of the transformation of their cost bases. When the oil price fell in 2014 both companies really started to look at their cost bases and adjust them but that is taking an exceedingly long time to play out. As a result, even though the oil price has recovered we’re actually seeing cost prices go down. That’s really beneficial for the cash flow generation of these companies and dividends are starting to rise, which we haven’t seen in a long time.”

Lowland

The main aim of the Lowland Investment Company is to provide a rising and predictable level of income for its investors and it has a record of doing just that.

An investment trust focused on the UK, its dividend has grown at a compounded annual rate of 7.3% since 1993 and has risen in cash terms in the vast majority of those years. That’s a great comfort for investors using their investment to provide an income.

To achieve it, the investment trust has an approach that Laura Foll, who co-manages the trust with James Henderson, describes as “a third, a third, a third”. That’s a third in smaller companies, a third in medium sized companies and a third in large companies.

This willingness to look beyond the big dividend payers is evidence of the managers’ mildly contrarian approach. “Small and medium sized companies tend to have a much greater level of sales and earnings growth”, says Foll, “and that usually means they can deliver dividend growth as well.”

The ‘multi-cap’ approach means that the make-up of the Lowland portfolio looks different from the UK market, with a greater weighting in smaller companies and less in the giant multinational companies that dominate the FTSE All Share index. Foll explained that Lowland is about 50% exposed to companies earning their profits in the UK, compared to about 25% for the market overall.

The pair get to know companies through meeting management and making site visits, helping them see why companies might be unloved and, crucially, if there is scope for significant growth.

Like Mundy, the Lowland managers avail of the trust’s ability to preserve income when the going is good, with the aim of maintaining a consistent dividend over the long term. For investors looking to diversify their income sources across the cap scale, while maintaining exposure to the big players, Lowland could be a useful portfolio addition.

Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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What you could do next

Read more about Temple Bar

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.

Read more about Fidelity Special Values

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.

Read more about Lowland

View the factsheet to see price, charges, performance, details on how the investment's managed, and more.