Trust Awards 2014: Global

Winner: Law Debenture

Given that nearly three quarters of Law Debenture's investments are currently in UK equities, it might seem an implausible winner of this award. However, portfolio manager James Henderson is adamant that this is compatible with its classification as a global investment trust.

He says the UK stockmarket includes a large number of multinational companies and exporters that offer exposure to growth in the global economy over the next 10 years, which is what he seeks to capture.

But UK equities frequently offer similar earnings growth prospects to their overseas counterparts, with higher dividends and better corporate governance. The latter is critical, as problems with an Indian holding have recently reminded him.

Henderson believes it is easier to concentrate on assembling a reasonably diverse mix of globally oriented companies with attractive prospects than to try to allocate assets between regions on a top-down basis. To bolster his argument, he points out that the FTSE All-Share index has performed closely in line with the FTSE World ex UK index over the past 10 years.

His approach has delivered exceptionally strong returns since his 2003 promotion to lead portfolio manager.

10-year net asset value (NAV) total returns to the end of March were 243%, compared with 129% for the All-Share index, and the trust has outperformed this benchmark and the FTSE World index in each of its past five financial years.

Moderate gearing has helped boost returns and stood at 6% at the end March because Henderson is positive about the global economic outlook and confident there is still plenty of long-term value in the stockmarket.

Henderson believes the US economy is strengthening on the back of shale gas exploration and reshoring (the opposite of outsourcing or offshoring), and European economies are being bolstered by an overdue cycle in capital goods replacement.

This is helping offset the slowdown in developing economies. He says a lot of UK companies are in impressive shape, with buoyant cash flow and strong balance sheets, but they are remaining impressively "disciplined" about takeovers and capital expenditure. This leaves scope for dividend increases.

Although Law Debenture offers an above-average dividend for its sector at just under 3%, Henderson is not constrained by a search for yield. This is because the trust owns a growing independent fiduciary services business that contributes a useful and growing income.

This business is currently included in the NAV at cost, but Winterflood Securities reckons valuing it at around nine times earnings would leave the shares trading close to NAV.

Highly Commended: F&C Global Smaller Companies Trust

Helped by the long-term strength of smaller companies, F&C Global Smaller Companies Trust tops the global sectors in terms of NAV, and total returns over 10 and five years. It won this award in 2012 and 2013. However, a dullish year to March 2014 means it must be content with the highly commended position this year.

It is the only global smaller companies trust eligible for the award and deserves credit for making the most of its opportunities. Its portfolio is managed on a top-down basis, with allocations to the US, the UK, Europe, Japan and "the rest of the world".

Each regional portfolio has outperformed its relevant benchmark index over three years. Asset allocation has been relatively successful: it has one of the global sector's highest weightings to the high-return US market.

The trust has been managed since 2005 by Peter Ewins. F&C's Sam Cosh has managed the European portfolio since 2011. He did well for two years, but lagged last year because he mistrusted enthusiasm for cyclical companies.

Robert Siddles had done a great job for the US portfolio since 2001, so his early 2014 departure for Jupiter Asset Management is a worry. His assistant Nish Patel has taken over and has been joined by Gordon Happell, who was previously a technology analyst at Henderson Global Investors. Ewins says he may give the duo more cash once they have completed their review of the US portfolio.

Ewins says: "Most half-decent smaller companies have been re-rated in the last couple of years, except in emerging markets and Japan. Price/earnings ratios in the US are now typically in the high teens, and in the mid teens in the UK and Europe."