Kepler Ratings are designed with investment trusts specifically in mind and aim to highlight those which we consider to be 'best in class' based on a clear, easy to understand set of quantitative tests.
Our ratings are designed to capture attractive and persistent performance characteristics and to reward long-term success. Like all quantitative systems they are backward-looking, but we have attempted to reward those trusts which have done well in the context of their own goals and benchmark, and have done so for a sustained period. As the selection system is entirely quantitative, it allows us to set aside all personal biases and views - and all commercial relationships - and look at the universe in a purely objective way.
We are only interested in consistent and long-term outperformance, and these ratings are based on a five-year period. All data is as of December 2021, sourced from Morningstar and JPMorgan Cazenove. We have looked at NAV total return performance rather than share price and these ratings ignore discounts entirely: the aim is to reward those elements of performance under the control of the manager rather than to highlight 'bargains'. We believe that over a long time horizon superior NAV performance should be the key determinant of returns, except in the most exceptional cases.
We have identified the leading trusts for capital growth and for income and dividend growth…
To identify the top growth trusts, we start by looking at performance versus the benchmark. The information ratio is the key metric. This looks at the outperformance of a fund versus its benchmark. It then relates this to the extent of divergence from the benchmark, or the extra risk taken. In other words, it seeks to identify whether the active risk relative to the benchmark taken by the manager has been rewarded with outperformance. We then look at the performance of a fund in rising markets versus the performance in falling markets - the upside / downside capture ratio. We think this has two attractions. The first is it reflects the 'loss aversion' of the average investor.
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Behavioural finance teaches us that investors prize avoiding loss more than they do achieving a quantitatively equivalent gain. This is captured by an upside / downside capture ratio above one, which means that the fund has a tendency to avoid losses by more than it makes gains in rising markets. The second attraction is that it allows us to consider more defensive and aggressive strategies on a more level playing field. A trust which does exceptionally well in rising markets and is level in falling markets could rank the same as a trust which protects very well in falling markets but only keeps up in rising markets.
In order to create fair comparisons between funds we have divided our universe into "super sectors" of asset classes: large and mid-cap equity funds, small cap funds, fixed income or equivalent funds and property funds. This is intended to reflect the fact that generating alpha in particular is much easier in small caps, so comparing small cap managers with large cap managers is unfair. It also overlooks the risks that small caps bring - volatility, liquidity - which mean that it is not inherently superior to large cap investing despite the advantages with regards to alpha. We rank trusts within their super sector on all quantitative metrics. In order to reward persistence, we review performance over a five-year time period, which makes it much harder for a single year to distort results. We also exclude trusts which have had a manager change in the past three years.
Montanaro European Smaller Companies
Pacific Horizon
BlackRock Greater Europe
Scottish Mortgage
BlackRock Throgmorton Trust
JPMorgan China Growth & Income
Baillie Gifford Shin Nippon
Scottish American
River and Mercantile UK Micro Cap
JPMorgan Emerging Markets
JPMorgan Japanese
Fidelity European Trust
Fidelity Japan Trust
Edinburgh Worldwide
Aberdeen Asian Income
Finsbury Growth & Income
JPMorgan UK Smaller Coms
TR Property
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JPMorgan Japan Small Cap G&I
Allianz Technology Trust
This rating is intended to identify trusts which offer a mixture of income and dividend growth. In other words, we want to try and identify those which have generated solid total returns while delivering a high and rising income to investors. We believe that longevity, a low-rate environment and pension freedoms mean that a growing cohort of investors want to draw an income from their investments while remaining invested in risk assets with the potential for growth.
The core selection criteria are for the growth rating, but we have then insisted on a minimum yield of three per cent and dividend growth on average of three per cent over the past five years. To win the rating a trust needs to have a 3% yield and 3% per annum dividend growth over the past five years as a minimum, allowing for higher yielding funds and dividend growth funds to be considered together. We have adjusted the thresholds on our screens modestly to adapt them to the opportunity set, and have again ranked trusts within their super sector. Those trusts awarding an income & growth rating are those which have scored the highest on our total return metrics while meeting the income requirements.
JPMorgan Russian Securities
Henderson International Income
Montanaro UK Smaller Companies
JPMorgan Global Growth & Income
JPMorgan Claverhouse
BlackRock Latin American
Chelverton UK Dividend Trust
BlackRock Income and Growth
Schroder Income Growth
City of London
Lowland
Diverse Income Trust
Utilico Emerging Markets
BMO Managed Portfolio Income
Law Debenture Corporation
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Aberdeen Standard Equity Inc Trust
JPMorgan Elect Managed Inc
Murray International
BlackRock Sustainable American Income
North American Income
We believe one reason the alternatives space is expanding is the need for sources of income in a world where interest rates and the yields on government bonds are very low by historical standards. The attractiveness of annuities, priced off government bonds, has fallen year on year, and increasing numbers of those living off their assets will be seeking higher-yielding alternatives to either in whole or in part replace those products.
Last year we introduced an alternative income rating in order to analyse the top performers in this relatively new and rapidly growing space. We have developed a simple screen which shows those trusts which have at least maintained their NAV and at least maintained their dividend in nominal terms over the past five years. With the alternative income space being relatively young, there are not a huge number of trusts with a long track record, and just applying these two screens whittles the space down to just 12 trusts.
Honeycomb Investment Trust
Axiom European Financial Debt
Starwood European Real Estate Finance
VPC Specialty Lending Investments
BBGI Global Infrastructure
Greencoat UK Wind
Foresight Solar
International Public Partnerships
NextEnergy Solar Fund
HICL Infrastructure
Buefield Solar Income Fund
3i Infrastructure
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Bluefield Solar Income Fund Limited published this content on 20 February 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 February 2022 09:51:07 UTC.