A trust for a rapidly changing world

“There are decades where nothing happens, and weeks where decades happen,” Vladimir Lenin is alleged to have once quipped. Whether or not he actually did, the point remains that dramatic changes in the world typically occur very rapidly.

It probably goes without saying that the last few years have been illustrative of this phenomenon. A pandemic, war, inflationary problems, supply chain bottlenecks, have all hit the world like a series of rapid jabs to the face in that time.

Naturally financial markets have not been immune to these events. Prior to the pandemic, growth investors had enjoyed a long period of success. Paying high premiums for listed companies was a winning strategy and one that could make more valuation conscious investors seem like dinosaurs.

But inflationary pressures and commensurate interest rate hikes, as well as the war in Ukraine, have combined to change investors’ appetites dramatically. Whereas they were happy to pay up to meet high valuations 12 months ago, today firms with reliable cash flows, trading at less growth-driven share prices, look much more appealing.

For Momentum Multi-Asset Value (MAVT), this dynamic has provided a mix of opportunity and the potential for some positive momentum. The trust sits in the AIC’s Flexible sector and, as the ‘Multi-Asset’ part of its name suggests, it invests in a mix of UK and overseas equities, credit, specialist assets, and defensive assets, taking a unique approach to the markets by using what its managers call ‘refined value’.

In practice this means applying the logic of ‘value’ investing across a range of asset classes, by taking into account the nuances that exist among them and tailoring valuation metrics accordingly. The objective of this approach is to deliver annualised returns equivalent to the consumer price index plus 6%. The trust has managed to achieve this over the past decade. Over its last ten financial years, which end on April 30th, MAVT has produced annualised total returns of 8.5% on a net asset value basis.

Aside from the fact that this represented substantial outperformance of the trust’s benchmark, investors should keep in mind that this was during a period in which value investing was deeply out of fashion and had serious headwinds working against it. That the managers were still able to deliver those sorts of returns in such tough conditions is impressive and arguably shows they can be relied upon, irrespective of the stylistic trends in play.

That is largely down to the refined value system the managers use. Fund manager Gary Moglione and his team use their own expertise to analyse UK stocks, which they also believe offer some of the most attractive value opportunities on the market today. But the managers also acknowledge they cannot be experts in every field and so invest in other funds for exposure to credit, overseas equities, and specialist assets.

The trust makes full use of its smaller size in both cases. On the UK equities side, for example, the managers favour small and mid-cap companies which are often under researched and inaccessible to large fund managers. The same is true of their holdings in other funds, which are often small in size and thus difficult for other managers to access.

MAVT’s managers are also nimbler in their valuation process, meaning they’re happy to pay higher prices than other value managers might be. For instance, the trust bought shares in Games Workshop this year after its share price fell dramatically, even though the model maker still has a valuation, on a price-to-earnings basis, that’s above the market average.

This doesn’t mean the managers slip into the sort of wild, speculative growth investing that we saw during the pandemic. In fact, they assiduously avoided all of the frothier parts of the markets that we’ve seen during the past couple of years. But they will not rule out companies if they’re trading at higher valuations if they believe the value in question is still there. As that might imply, this also means they won’t buy companies purely because they look ‘cheap’ – something the managers think can easily lead to falling into value traps that are just as dangerous as speculative bets on future growth.

With so many companies falling in value over the past 12 months, MAVT’s refined value approach has meant there have been plenty of opportunities to add companies to the portfolio or top up existing positions. In June alone, for example, the trust’s managers added to existing positions in Games Workshop, Halfords, and life sciences investment trust Syncona.

At the same time, much of the portfolio was set up to withstand an inflationary environment. For example, many of the trust’s specialist assets, which includes things like property and infrastructure investments, have income streams that are linked to inflation. The trust managers were also careful to cut their holdings in positions they thought would be more sensitive to rate rises long before we started to feel the effects of inflation in the final quarter of 2021.

That doesn’t mean the trust has managed to remain immune from the effects of market volatility so far this year. However, the managers have always made it clear the trust is designed to outperform over the typical investment cycle, of between five to ten years. That’s been the case for over a decade now and, with a portfolio set up to handle or even benefit from current macroeconomic trends, it seems plausible it could happen in the decade ahead.