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In our update to our quantitative ratings for investment trusts, we make a number of changes to the trusts awarded ratings in both the Growth and Income categories.

Among the new entrants to the growth ratings are Impax Environmental Markets, which is ESG-focused, and Mid Wynd International, which has an ESG tilt to its process.

From the income rated trusts, UK investment trusts continue to figure highly for their long-term performance.

This could be of interest to investors, given the low valuations in underlying portfolios, and given that the sector continues to trade on relatively wide discounts in absolute terms.

The system

Last year we unveiled a quantitative rating system for investment trusts, the first to be based on NAV performance rather than share price in order to better capture strategy and manager performance.

Our ratings are designed to capture trusts with outperformance potential and which have demonstrated an ability to limit losses in down markets while performing strongly in rising markets.

‘trusts with outperformance potential and which have demonstrated an ability to limit losses in down markets while performing strongly in rising markets’

At the heart of our ratings are two metrics.

First, we look at the information ratio to assess a manager’s record of adding alpha to the benchmark returns, relative to the extra risk taken on.

We then look at the upside/downside capture ratio, to identify trusts which have an attractive pattern of performance in rising markets relative to falling markets.

For income trusts we then look at dividend growth and historic yield, and identify those which provide at least 3% on each metric and also maximise our total return screens.

We view investment trusts as the ideal vehicles for long-term investors, and as such all our calculations are over five years.

We also only provide a rating for trusts which have had the same manager for that length of time. Over this five-year period we believe good NAV performance should be more important to returns than discount moves.

A fuller explanation of the scoring system is given here.

We have made one major adjustment this year. Previously we looked at information ratio and upside/downside capture relative to the whole universe.

‘We view investment trusts as the ideal vehicles for long-term investors, and as such all our calculations are over five years’

This year, we have sub-divided the trusts into four categories – large and mid-cap, small-cap, bonds and property – and scaled the scores of the individual trusts relative to those categories.

We believe this gives a fairer comparison, as the ability to generate alpha and the distribution of positive and negative returns are both likely to vary across sectors.

We expected this change to reduce the number of small-cap trusts on the lists, and it has done so, but only to a limited degree.

For example, after the changes the large-cap focused European Opportunities Trust remains in the top 20 and retains its rating.

It would have slipped just outside the top 20 otherwise, with a handful of small-cap trusts generating better metrics in absolute terms.

As well as being fairer, we think this change has made our lists more useful as an idea generation tool, due to the greater diversity of the constituents.

It should be noted that our ratings are not recommendations, as such. Quantitative analysis can only ever be backward-looking.

Furthermore fund managers, markets and economies change over time, so there can be no guarantee that the best performers in the past will be so in the future.

Growth

Our growth ratings are intended to identify those managers which have added the most value to their benchmarks, relative to the extra risk taken on.

We think the information ratio is the ideal statistic to judge the effectiveness of an active strategy, as it adjusts alpha relative to the extra levels of risk taken versus the benchmark.

‘identify those managers which have added the most value to their benchmarks, relative to the extra risk taken on’

We also think the upside/downside capture ratio – which measures relative performance in up markets against relative performance in down markets – fits well with the typical investor’s bias towards ‘loss aversion’; the tendency to prefer avoiding losses more than making gains.

The metric also allows us to assess this pattern of returns on a level playing field across more aggressive and more defensive strategies.

We present the full list below. Among the new entrants is Impax Environmental Markets (IEM). This trust is particularly interesting given the trend of ESG and sustainable investing, and growing interest in such themes in society more broadly.

This has played no role in our selection, which is entirely quantitative, but it clearly shows that ESG strategies can generate superior returns.

‘trend of ESG and sustainable investing, and growing interest in such themes in society more broadly’

It may be that political pressure on business will mean this trend continues. Another new entrant, Mid Wynd International (MWY), also has an ESG component to its strategy.

Sustainability issues figure highly in the managers’ stock selection process; it is one reason they avoid airlines and airports, for example, believing that ‘flight shaming’ will become more prevalent and could hit profitability.

ESG is a hot topic right now, and we have added an ESG section to our trust profiles written from December 2019 onwards.

Trusts With a Kepler Growth Rating

Trust	AIC Sector
BlackRock Greater Europe	Europe
BlackRock Throgmorton Trust	UK Smaller Companies
European Opportunities Trust	Europe
Fidelity Asian Values	Asia Pacific Smaller Companies
Fidelity European Values	Europe
Fidelity Japan Trust	Japan
Fidelity Special Values	UK All Companies
Finsbury Growth & Income	UK Equity Income
Henderson European Focus Trust	Europe
Impax Environmental Markets	Environmental
Invesco Perpetual UK Smaller	UK Smaller Companies
JP Morgan Chinese	Country Specialist: Asia Pacific ex Japan
JP Morgan Emerging Markets	Global Emerging Markets
JP Morgan Mid Cap	UK All Companies
Mercantile	UK All Companies
Mid Wynd International	Global
Montanaro European Smaller Companies	European Smaller Companies
Schroder Asian Total Return Investment Company	Asia Pacific
Standard Life UK Smaller Companies	UK Smaller Companies
TR Company	Property Services

Click here to visit the Kepler ratings homepage

Income

Our income ratings attempt to identify those trusts which have an attractive return profile in terms of total return over five years; as well as offering strong dividend growth (above inflation) and a yield of at least 3%.

We think this combination of characteristics is likely to be attractive to investors who are drawing down the income but need the capital to grow too, or those who want dividend strategies for a total return objective.

‘likely to be attractive to investors who are drawing down the income but need the capital to grow too’

It has actually been quite hard to identify many trusts which offer all of these characteristics.

There are not as many as you might assume which have displayed strong alpha generation and strong dividend growth, so those with an income rating are an elite bunch.

One factor behind this may be that we are using market capitalisation indices rather than style indices.

Income portfolios will naturally be tilted to value stocks, which have been suffering a period of underperformance.

It will be interesting to see if the information ratio scores of the higher-yielding trusts improve when (or if) value performs well again.

‘not as many as you might assume which have displayed strong alpha generation and strong dividend growth’

One interesting new entrant is Utilico Emerging Markets (UEM). The trust has performed strongly over the long term, despite not being exposed to the fashionable, higher-growth sectors of information technology and consumer discretionary.

The trust has tended to do better in down markets, which has helped its quant scores. It currently yields 3.1%.

Another emerging market trust to make the cut is JPMorgan Russian Securities (JRS). This trust has been benefitting from a growing dividend culture in Russia, and now yields 3.9%.

At first glance it is less likely to satisfy ESG fans, though, with 51% in the energy sector.

However, the manager Oleg Birulyov argues that developing economies switching from coal to gas will be a major contributor to cutting emissions, and is a more likely next step for those economies than decarbonisation. We will be publishing a full note on the trust in the coming weeks.

UK trusts continue to dominate, however, with 11 of the 20 rated trusts being UK-focused.

This is up three from last year, with Invesco Perpetual Select UK, Temple Bar and Invesco Income Growth gaining a rating.

Despite some discount narrowing in the last couple of months, the yields are still attractive too.

Trusts with a Kepler Income Rating

Trust	Sector	Yield
Aberdeen Asian Income	Asia Pacific Income	4.2%
Acorn Income Fund	UK Equity & Bond Income	5.1%
Baring Emerging Europe	European Emerging Markets	3.8%
BlackRock Frontiers	Global Emerging Markets	4.6%
BlackRock Income and Growth	UK Equity Income	3.4%
BMO Capital and Income	UK Equity Income	3.2%
Chelverton UK Dividend Trust	UK Equity Income	4.5%
City of London	UK Equity Income	4.3%
Invesco Perpetual Select Global Equity Income	Global Equity Income	3.3%
Invesco Perpetual Select UK Equity	UK All Companies	3.5%
JP Morgan Asian	Asia Pacific Income	3.9%
JP Morgan Claverhouse	UK Equity Income	3.6%
JP Morgan European Income Pool	Europe	4.1%
JP Morgan Russian Securities	Country Specialist: Europe ex UK	3.9%
Invesco Income Growth	UK Equity Income	3.9%
Schroder Income Growth	UK Equity Income	4.0%
Schroder Oriental Income	Asia Pacific Income	3.9%
Temple Bar	UK Equity Income	3.8%
Troy Income and Growth	UK Equity Income	3.2%
Utilico Emerging Markets	Global Emerging Markets	3.0%