Andrew Bell, Chief Executive, Witan Investment Trust plc, discusses the results of the Witan Investment Trust in 2017, the key drivers behind the performance, dividend policy, changes to Witan's managers and how new ones were selected, what drove returns in 2017 and his outlook for global equities in 2018.
Witan Investment Trust
Witan Investment Trust (UK)
Witan Investment Trust
Global equity markets
PRESENTER: For an overview of Witan Pacific Investment Trust annual results, I’m joined by Chief Executive Andrew Bell. Well, Andrew, Witan’s net asset value total return in the year to the 31st of December 2017 was 19%, outperforming Witan’s benchmark by 3.9%. So can you explain what the key drivers of performance were in 2017?
ANDREW BELL: The principal driver was investment management that our investment managers outperformed by about 2½% after management costs. And the other major contribution was from gearing, where after the costs of borrowing we’re able to add a further 1½%, and putting those together comes to roughly the 3.9% you mentioned.
PRESENTER: Global equity markets enjoyed strong returns in 2017. What do you think were the reasons for this?
ANDREW BELL: Well during 2017 there was an improvement in forecast economic growth and there was a broadening of the recovery from the US to other parts of the world. And the background of improving economic growth and low interest rates was both good for corporate profits and good for investor confidence.
PRESENTER: Witan’s share price also performed well with a share price total return 22.1% in 2017 and the discount reducing from 4% to 1.6%. Witan bought back 2.8 million shares during the year, so what’s Witan’s objective when buying back shares?
ANDREW BELL: The immediate objective is to boost the net asset value by buying back shares for less than the asset’s backing them and also to contribute to a narrower discount from would otherwise apply. And during the course of last year we bought back shares around 4-5% at the beginning of the year but below 2% in the second half of the year and we intend that to send a message about our intentions.
PRESENTER: Witan’s dividend rose by 10.5% to 21p. This is the 43rd consecutive year of dividend increases. So what’s Witan’s dividend policy?
ANDREW BELL: Our dividend policy is that we aim to increase the dividend ahead of the rate of UK inflation. And last year inflation was 3%; we increased the dividend by over 10%. We can’t guarantee to do that every year, but by careful use of reserves and having a portfolio whose underlying dividends are growing, it’s something we’ve been able to do for a long period as you alluded to.
PRESENTER: Witan uses gearing and the company issued debt last year, so please can you tell us why and how Witan uses gearing?
ANDREW BELL: The objective of using gearing is to improve shareholder returns, by being able to invest the borrowed money for a greater return than it costs you to borrow it. Last year, we were able to take advantage of what we think are historically abnormally low borrowing costs to lock in a fixed rate of borrowing for 37 years of 2.74%. Now, we’d be quite disappointed if over the coming third of a century we weren’t able to get a better return on the money than 2.74%. There will inevitably be ups and downs because markets vary, but that was the purpose of our locking in that exceptionally low rate.
PRESENTER: During 2017 Witan made some changes to its managers, adding GQG to manager portfolio emerging market equities and CRUX Asset Management and SW Mitchell to manage European ex-UK equities, so what were the reasons behind the changes?
ANDREW BELL: GQG were appointed because we wanted to increase our exposure to stock picking in emerging markets which had a few very difficult years but in the long term we think have got attractive growth opportunities. In the spring, we consolidated our five global managers into three, which from our point of view meant that we were backing the three managers whose stock convictions we had most confidence in in a more focused way. And in the autumn we appointed two specialists in continental Europe, which was an area that we were becoming more positive on. The economic recovery was gathering steam within Europe and we wanted to get concentrated stock exposure to that in place of the previous manager that we had which invested in the UK as well as Europe.
PRESENTER: What do you look for when selecting a new manager to add to Witan’s portfolio?
ANDREW BELL: It’s very important that the people are talented and free thinking. They have to have experience in the area that we’re looking for, they have to have an investment process which is well thought through and is thorough, and they have to have the conviction to back the conclusions of their investment process with a concentrated portfolio.
PRESENTER: Achieving outperformance requires the portfolio to differ from the benchmark and one measure of active management is known as active share. Witan’s portfolio at the end of 2017 had an active share of circa 77%. Can you explain what this means?
ANDREW BELL: Active share is a measure of the percentage of your portfolio which differs from the composition of the index. So if you had an active share of zero, you would be an index fund. But if you had an active share of 100, you’d have nothing at all in common. So our figure of 77% means that more than three quarters of our portfolio differs from the composition of the index. And therein lies our scope to outperform or underperform you have to be honest because the purpose of, you have to make sure that your active share consists of owning as far as possible more winners than losers. And that’s why we concentrate so hard on trying to pick managers whose processes we think are more likely to pick long-term winners than losers.
PRESENTER: Up to 12.5% of Witan’s portfolio may be invested by the executive team. In 2017 the direct holdings portfolio delivered a return of 27.2% compared with 15.1% for Witan’s benchmark. How is this portfolio managed and what drove returns in 2017?
ANDREW BELL: The portfolio’s managed by the in-house executive team. And we invest up to 10% of the portfolio in collective funds, mainly investment trusts, which are exposed to asset categories which our managers wouldn’t otherwise invest in and which we think are attractive. Over the last few years those have included things like a mining fund, listed private equity funds and specialist healthcare funds with, you know, investing in early stage drug discovery companies. And it gives us a way of picking up opportunities which are out of the mainstream from what normal equity managers would pick. We’ve also introduced a facility to be able to invest up to 2½% of the assets in new managers where they might be newly established, we might not know them very fully so we don’t want to give them a large allocation, but it gives us a chance to catch managers at an early stage of their development and put a small amount of money with them, get to know them, watch them very carefully. And that might either flourish into a longer-term relationship or if it doesn’t then it’s a relatively small commitment.
PRESENTER: What’s the outlook for global equities this year?
ANDREW BELL: I think the outlook for equities is always uncertain. You can always have a correction out of a blue sky. As we saw a month or so ago you had a volatile period and markets dropped 10%. But the fundamental backdrop is that economic growth is still accelerating as we enter 2018. Inflation is beginning to edge up, interest rates are going up in one or two centres, but both are very low by historical comparison. So we expect during the course of 2018 corporate earnings are going to grow quite rapidly. We don’t think that the world faces a risk of a recession. And against that background patient investors should be rewarded for holding equities.
I think you need to be more selective because we’re in a rapidly changing world due to all sorts of effects whether it’d be politics, globalisation, technology, and so not all companies will benefit. So selectivity and stock picking, as we talked about earlier on, and there will be more volatility this year because an environment of rising interest rates means people do need to look over their shoulder at whether eventually interest rates rise to a point where the recovery comes to a halt.
PRESENTER: Andrew, thank you.
ANDREW BELL: Thank you.