Demand for trusts prompts Max King to trim exposure

Investec Asset Management’s Max King has cut back his exposure to investment trusts in the belief that massive demand for the trusts’ shares has depleted value in the sector.

Mr King is a major backer of trusts in his £70.5m Investec Managed Growth fund, favouring the vehicles as they often outperform their mutual fund cousins in the long term thanks to their ability to borrow money to ‘gear up’ returns.

Shares of the average trust usually trade at a discount to the value of the trust’s underlying investments, but on average these discounts have now shrunk to their narrowest levels since records began in 1970.

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In some cases trusts’ shares are now worth more than the value of their underlying portfolio investments, leading to a heightened risk of losses if signs emerged that markets are heading south.

This has prompted Mr King to sell out or reduce exposure to some of his favoured products.

As an example, the manager said he had fully divested his position in the JPMorgan American investment trust, which is currently trading at a premium to its net asset value.

He has replaced it with Lyrical Asset Management’s open-ended US Value Equity fund.

Mr King added that much of the new money being invested in his fund was largely being directed into open-ended funds alongside his moves to reduce exposure to trusts that have reached premiums or rallied strongly.

Mr King has also bought the open-ended JPMorgan US Smaller Companies fund and topped up his existing holding in the Findlay Park American fund.

The investment trusts bias of Mr King and his Managed Growth co-manager, Philip Saunders, has led their fund to outperform significantly in recent years.

The fund has delivered a return of 21.9 per cent in the past year, almost double the average return of 11.6 per cent from funds in its IMA Flexible Investment sector, according to data from FE Analytics.

It is in the top decile for performance in the sector for the past year and across five years, while only just missing out for three years, according to data from FE Analytics.

The fund, which is part of Investec’s managed solutions range that also includes Alastair Mundy’s Cautious Managed fund, has nearly doubled in size in the past year thanks to new inflows.

The fund has performed strongly due to its high weighting in equities, and Mr King said the portfolio was still skewed towards the asset class although some of his recent purchases, such as Investec’s own low-volatility GSF Global Endurance fund, betray a more cautious outlook.