Independent Investment Trust 03 May 2019

The Independent Investment Trust (IIT) aims to offer strong total returns over long periods, through actively managing a diversified portfolio of international companies.

The manager, Max Ward, launched the company in October 2000, following his decision to step down as a partner at Baillie Gifford. Max follows no formal style or process in his investment approach, believing that this can cause managers to be restrained in their approach. Instead, Max looks for cash generative and financially strong companies, delving into the fundamental characteristics of each investment proposition before arriving at a subjective assessment of the potential gains.

As one might guess, Max pays absolutely no attention to an index when building the portfolio and the end result is a company with an active share of almost 100%. The portfolio is made up of just 32 holdings, one of the most concentrated in the AIC Global peer group and almost 100 fewer than the average number among its constituents. With this said, the recent correction in Q4 knocked Max’s confidence in this approach, and has made him rethink the ideal number of holdings and the maximum weightings within the portfolio. Going forward, he expects a slightly greater number of companies in the portfolio, with more attention being paid to the liquidity of holdings and size of the position they represent. Along with the unique concentration of the trust, another major differentiator is the weighting towards the UK. According to JPMorgan Cazenove, 85% of the portfolio sits in the UK, 5x the weighted average in the Global sector. Recently, this has led the AIC to move the company into the UK All Share investment trust sector, although this is yet to take place.

Due to IIT’s concentrated nature, 2018 was a tough year for the company. Almost all of the top 10 holdings underperformed expectations and the final quarter of the year saw the trust lose 27.3% in NAV terms, over double that of the AIC and IA peer groups and almost triple the FTSE All Share. With this said, much of these losses have so far been recovered in 2019. Since the trust’s launch the trust has delivered annualised NAV total returns of 12.32% - over double that of the FTSE All Share 5.18%- and over the past five years the trust has outperformed the AIC Global peer group (96.3%), the IA Global peer group (68.1%) and the FTSE All Share (36.9%) in NAV terms – delivering 122.7%.

IIT now trades on a discount of close to 4%, with the rating having retreated significantly we last covered the trust during the summer of 2018, having traded at a premium of around 25% at that time. Max currently views his holdings as being relatively fully valued, underscored by his current 13% cash position.

The Independent Investment Trust has long been an exceptional, if volatile, performer in the AIC Global investment peer group, demonstrating that truly active managers can deliver exceptional returns. Clearly Max is highly experienced, and the unconstrained approach means the performance is likely to differ quite markedly from peers.

It is interesting to note that the set-back in Q4 has meant that Max has reflected on his approach, and we anticipate seeing the portfolio become less concentrated. This could mean that the NAV is slightly less volatile going forward. Also noteworthy is that IIT is going be moved into the UK All Share peer group, much to Max’s dismay. However, we have been assured this will not impact the way in which the portfolio is run.

The past year has been much more difficult for the trust, due to the poor performance from some of the manager’s ‘biggest bets’ and the large exposure to the out-of-favour UK. This has meant that the trust has de-rated aggressively, having trading on a premium of close to 20% in the summer of 2018, to now trading on a discount close to 5%. This offers investors a good opportunity to invest in a long-term, outstanding performer, which we feel could move back to a premium once some of the uncertainty surrounding the UK subsides.