When investment opportunities arise against the market trend, buying and holding and having faith are difficult but are essential skills for the fund manager, says Darius McDermott, managing director of Chelsea Financial Services and fund manager on the VT Chelsea Managed Funds.
“The stockmarket is a device to transfer money from the impatient to the patient.”
You ignore the words of the world’s most famous investors at your own peril. Warren Buffett has been investing now for more than eight decades, buying his first stock at age 11 and his first real estate investment at age 14. His process of buying underpriced but solid companies and holding them for the long term has proven to be incredibly successful, with his net worth valued at more than $150bn in 2025.
The VT Chelsea Managed Funds are eight years old this year – but have operated on a similar investment principle. Our aim is simple – it is to help investors reach their various investment goals via the smoothest journey possible. This is why we look to build a series of diverse portfolios that can perform in any economic environment.
But being patient is not always as easy as it seems. As Mike Tyson aptly put it: “Everyone has got a plan until they get punched in the mouth.” Investing is a funny old game. You can do all the research and homework but you sometimes have to wait months or years to see if you’re right (that’s the tough bit!!)
Over the past 18 months we have been steadily building positions in alternative investment trusts, which we believe are significantly undervalued. Following the sharp rise in interest rates and inflation, many investment trusts, which previously traded at 20%-30% premiums to their stated net asset values, are now languishing at discounts of 30%, 40% or even 50%.
Our approach is straightforward – the lower the price and the bigger the discount, the higher the yield and the better risk-reward. While this strategy can be risky with certain types of equities, we are generally confident in the relatively “boring” infrastructure assets that the funds focus on.
Take Assura (AGR), for example, which is held across our four-strong range. It owns GP surgeries and counts the NHS as its largest tenant — about as boring and dependable as it gets. Not long ago, it traded at 85p with a 3.5% yield. Despite steadily growing its cash profits and locking in much of its debt at rock-bottom interest rates (around 1%) until the 2030s, the share price plunged to 36p, pushing the yield to 9.5%. An extraordinary fall for a boring business which has been consistently increasing its cash profits.
As prices fell, the more we bought. For the past year, the market has been suggesting we were wrong. Prices drifted lower, often due to technical selling and investor panic across the investment trust space.
Earliest this month (March 10) as US markets were in freefall, private equity giants KKR and StonePeak made a bid for Assura at a substantial premium to the share price. Months of pain and underperformance were wiped out in a single day. A day later (March 11) another position, Care REIT (previously Impact Healthcare), held in three of our portfolios, received a takeover offer, sending its share price soaring over 30%. Private equity is clearly waking up to the deep value in this sector.
The key lesson is that discipline and patience can be rewarded. We believe we have a good mix of idiosyncratic investment trust holdings – ranging from renewables to selected real estate investment trusts – we expect more activists and institutional investors to get involved in the sector and we believe this will be a huge driver of returns in the future.
Other themes at play
We also have numerous themes at play in the portfolio. One of the changes we made last year to counteract the geopolitical uncertainty was the purchase of the Future of Defence ETF in our portfolios. This ETF offers investors exposure to the companies generating revenue from NATO and NATO+ ally defence and cyber defence spending.
The energy transition to a lower carbon world cannot happen without an increased use of metals – the likes of electric vehicles are dependent on this (all electrification needs mining). We also need to consider the importance of metals for the likes of artificial intelligence (AI). AI can’t commoditise commodities and if you want more AI, you need more data centres (computing power) and that requires more commodities. We also have exposure to private equity in the portfolio.
Bonds still offer an attractive all-in yield, but spreads remain tight. From an equities perspective we have become mindful of US exposure, but we have seen clear valuation opportunities in the UK across large, medium and smaller companies. Larger companies have benefitted the portfolio, small-caps continue to struggle – but we feel the opportunity is a good one as they are trading at very cheap valuations versus history.
Ultimately, we are not paid to try not to lose money, we are paid to make money. Holding your nerve under pressure is par for the course – but it’s far from easy!
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
Valu-Trac Investment Management Limited is the authorised corporate director (ACD) and investment manager of the VT Chelsea Managed Funds. Valu-Trac is authorised and regulated by the Financial Conduct Authority (FCA). Valu-Trac’s FCA registration is 145168. Chelsea Portfolio Management Services Limited will be the investment adviser for the VT Chelsea Managed Funds.
Main image: jon-tyson-PXB7yEM5LVs-unsplash
