The £1.7bn Witan Investment Trust (LON:WTAN) has recently announced a mixed set of results for 2016. It operates in the global growth sector and has a highly unusual mandate as the majority of the portfolio has been outsourced to ten third-party managers. Over the course of the year it generated a creditable NAV total return of 22.9%, which was only 0.1% behind its aggregate benchmark, yet seven of its managers underperformed.
WTAN aims to generate outperformance of at least 2% per annum and it’s done a pretty good job since the appointment of Andrew Bell as CEO in February 2010. Over the last five years the fund has produced a NAV total return of 108%, which is well ahead of the 83% generated by its global benchmark.
It first adopted this active multi-manager approach back in 2004 with the assets allocated to ten external managers and a directly managed portfolio of collective funds that is capped at 10% of the assets. The thinking behind it was that no single manager was likely to excel in all markets and at all points in the economic cycle, so it would be better to divide everything up.
Bell and his management team have deliberately selected active managers with a range of different styles, investment approaches, and geographic exposures that should be able to add value via stock selection. They also have the scope to tweak the asset allocation using index futures.
This unusual approach has served shareholders well with the managers delivering significant outperformance up to the start of 2016. Last year was a lot more challenging with the strongest returns coming from the directly managed portfolio and the external value managers, which shows the benefit of good diversification.
Diversified multi-manager portfolio
The UK component of the portfolio has been allocated to three separate managers with the first of them, Artemis, concentrating on recovery stocks and special situations. The firm had a poor 2016 and underperformed its benchmark by 7.7%, but despite this it has generated impressive annualised outperformance of 4.3% over the period since it was appointed.
Heronbridge are long-term value managers and beat their benchmark by 0.7% in 2016. In total they have generated 3.1% of annualised outperformance, but the biggest active contribution has come from Lindsell Train. These intrinsic value managers have added an annualised outperformance of 6.4% since appointment even though last year they fell 6.5% short of their benchmark.
Five of the remaining managers have global mandates with three of them – Pzena, Tweedy, Browne, and Veritas – concentrating on fundamental value. The others are Lansdowne Partners, who invest in mispriced mega caps and MFS, who look for stocks that offer growth at a reasonable price.
The strongest contribution in 2016 came from the direct portfolio that is managed in-house by Andrew Bell and James Hart.
Lansdowne Partners had a disastrous year and underperformed their benchmark by a massive 18.3%, yet they have still delivered annualised outperformance of 6.3%. It is a different story for Pzena and Tweedy Browne, with both having lagged behind their benchmarks since appointment.
The other two external managers are Matthews, which uses an income focus to invest in Asia, and Marathon, which aims to take advantage of the capital cycles in the pan-European market. They have both generated annualised outperformance since appointment of 1.9%.
The strongest contribution in 2016 came from the direct portfolio that is managed in-house by Andrew Bell and James Hart. This returned 34.4%, which was well ahead of the 22.9% achieved by its benchmark due to the significant performance of its private equity funds and the holding in BlackRock World Mining.
Changes for 2017
Last year the fund’s benchmark was 40% UK, 20% US, 20% Europe ex UK and 20% Asia Pacific, but there have been several changes that came into effect at the start of 2017.
These saw a reduction in the UK to 30%, with the US rising to 25% and the other 5% being allocated to a new emerging-markets component. The benchmark serves as a reference point for measuring long-term performance, although the portfolio is actively managed and can deviate substantially from these weightings.
A new manager has been appointed to run the emerging markets part of the portfolio. GQG Partners is an independent, employee-owned investment boutique that was created in June 2016. It is based in the US and uses a quality growth approach with an investment horizon of 5 years plus. The firm has been given a segregated mandate with an initial allocation of £70m that is equivalent to 4% of the fund’s net assets.
The Board actively manages the level of gearing, increasing it after periods of market weakness such as in January 2016 and following the Brexit referendum, then reducing it into subsequent periods of strength. This hands-on policy added 1.7% net of costs in 2016 with the gearing at the end of the year being 10.3%.
One of the problems of using external managers is that it can make the whole thing more expensive, but the average base fee last year was 0.49% with an average performance fee of 5% of any outperformance. This resulted in an overall ongoing charges figure of 0.75%.
Dividends, discount and outlook
Revenue earnings increased by 19.5% last year to 22.1p per share due to the growth in dividends received and the fall in the pound that boosted the value of the overseas receipts once translated into sterling. This enabled the Board to declare a final dividend of 6.25p to be paid on 31 March.
When you add in the three interim payments of 4.25p per share it brings the total for the year to 19p, which was 11.8% higher than 2015’s distribution of 17p. The upshot was that Witan has now managed to increase its annual dividend for 42 years in a row.
The 2016 dividend was fully covered by earnings, with £6.5m added to the revenue reserves. These are now worth almost £50m and would be more than enough to cover a whole year’s dividend payments.
Witan aims to increase the dividend ahead of inflation and it has comfortably managed to achieve this with the rise of 107% over the last decade well ahead of the 25% uplift in UK CPI.
The 2016 dividend was fully covered by earnings, with £6.5m added to the revenue reserves. These are now worth almost £50m and would be more than enough to cover a whole year’s dividend payments.
The Board has increased the first three interim payments for 2017 to 4.75p, with the final distribution for the year due to be paid in March 2018. In the unlikely event that the last payment was held at 6.25p it would equate to a total dividend of 20.5p and give the shares a prospective yield of 2.1%.
There is a discount control policy in place with the Board buying back 18.9m shares in 2016 resulting in an increase of 0.6% in the NAV per share. Over the last 12 months the shares have traded at an average discount of 6.23%, but this has recently tightened a little and currently stands at 4.4%.
Witan would make a decent core holding for investors who are looking for capital and income growth from an internationally diversified portfolio. It provides access to a number of well-regarded managers and has built up a proven track record with average NAV total returns of 13.4% per annum since Bell was appointed CEO in 2010. It has reasonable ongoing charges given the multi-manager approach and has started 2017 in positive fashion.