Page 17 - DIY Investor Magazine | Issue 34
P. 17

  Rising interest rates means stocks with high free cash flow yields or dividend yields become more valuable relative to those who rely on future growth to justify their share prices. Thus, the UK market has performed relatively strongly by comparison to other markets (see table below) due to having the highest exposure (c. 60%) to value stocks of any major equity market according to JP Morgan.
Trusts such as abrdn Equity Income, Aberforth Smaller Companies (ASIT), and Temple Bar offer a clear value bias. ASIT is one of the year’s best performing UK small cap trusts, albeit by losing less than its peers in a falling market; this follows it’s sector-leading returns of 32.5% in 2021. The trust trades on a 13.8% discount which could provide an interesting entry point. We will update our note on the trust soon.
MSCI World Value 2.2
FTSE All Share 0.5
S&p 500 -1.9
MSCI World -2.4
TOPIX -3.5
MSCI EM -4.3
MSCI World Growth -7.1
FTSE Europe Ex UK -7.1
Source: Schroders
Investors who want a more nuanced approach without going ‘all out’ on value, may consider JPMorgan Claverhouse (JCH), which offers pure exposure to UK equities and a strong focus on the FTSE 100. It has the fifth highest exposure to value (Morningstar) of all UK equity trusts.
The managers take a balanced approach to portfolio construction; whilst offering active management and a consistent track record of outperforming the benchmark, investors are not exposed to any ‘heroics’ (significant out performance one year, under performance in another).
The advantage of exposure to both growth and value stocks is evident in the current uncertain environment. However, JCH employs many advantages of investment trusts, including gearing, and using revenue reserves to smooth dividends.
The board has achieved its policy to increase its dividend
each year over 49 consecutive years, and taking a run of years together, to pay dividends that at least match inflation. Investors may consider a combination of aiming to protect and increase the real value of the dividend over time, added to active management in a resurgent UK equity market a good medium- term combination to beat inflation.
The clearest driver of near-term inflation has been commodities such as crude oil, fertiliser, sunflower oil, and wheat; many indirect drivers, such as the desire for a low carbon economy, are also linked to commodities, requiring huge quantities of copper and steel, and specialist metals for batteries).
Producers’ limited ability to react to higher prices with greater supply means this could be a continued source of future inflation.
BlackRock World Mining’s (BRWM) managers observe that mining has historically performed strongly in absolute terms and relative to equity markets during periods with rising inflation expectations; the performance of the trust has been strong – not just YTD, but since the rebound from mining sector’s annus mirabilis in 2016.
Sister trust BlackRock Energy and Resources Income (BERI) has performed even more strongly over the short term, with significant exposure to energy as well as mining stocks, since the board changed the mandate to include energy transition stocks in 2020.
With a ‘target’ of around a third in each, BERI is currently overweight mining (46.4%), in line traditional energy (31.8%) and underweight energy transition (21.9%).
DIY Investor Magazine · July 2022

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