Join our community of smart investors

Investment trusts: The professionals' choice

We ask the fund of investment trust managers to pick their favourite holdings and we interview the manager of our favourite fund of investment trusts Unicorn Mastertrust
September 22, 2011

A basic premise of any investment portfolio is diversification, whether you invest in shares, funds or investment trusts. If you don't have time to research individual investment trusts, a fund of investment trusts could be a good option, giving you an instantly diversified portfolio of investment trusts. And even if you do want to research investment trust choices yourself, it is worth looking at the underlying holdings of these funds to see what the professionals are buying. As a quick taster, we asked five managers of some of the better performing funds of investment trusts to set out their favourites in the UK investment trust universe.

THE PROFESSIONAL: Peter Walls, Unicorn Mastertrust

FAVOURITE: Herald Investment Trust

Peter Walls is the manager of Unicorn Mastertrust, our favourite fund of investment trusts. It is an open-ended fund of investment trusts and is the top-performing fund in the Investment Management Association's Active Managed sector over the past year, and in the top 10 over three years. It has a total expense ratio (TER) of under 2 per cent. Mr Walls is a value-orientated investor and he sees potential in the following trusts.

"Herald Investment Trust continues to look interesting at a 16 per cent discount to net asset value (NAV) and that technology play is still likely to be valid as a specialist asset class. I favour it as an interesting investment trust with the benefit of a decent discount and good management team."

Herald Investment Trust seeks to achieve capital appreciation through investments in smaller quoted companies, in the areas of technology communications and multimedia. It invests throughout the world.

Mr Walls also likes British Empire Securities and General, a global growth trust and also an IC tip.

"British Empire is on a discount of around 7 per cent, which is wider than it has been for some time, and this investment trust has a good long-term record. It is a nice generalist.

"That said, I have been searching for good value but it is not particularly easy to find among investment trusts at present.”

(Read our full interview with Mr Walls here).

THE PROFESSIONAL: Peter Hewitt, F&C Managed Portfolio Trust

FAVOURITE: Aberdeen Asian Income

F&C Managed Portfolio Trust is a global investment trust with both growth and income portfolios. The income portfolio has done well, delivering a respectable dividend yield of 4.8 per cent and a net asset value (NAV) total return of nearly 18 per cent over one and three years. Peter Hewitt, manager of F&C Managed Portfolio Trust, targets capital as well as income returns.

"If you take a look at the top 10 holdings in the income portfolio you will see most of them add a bit of juice in terms of capital performance, as well as yield. The trust has a good portion of its assets in overseas-focused trusts, with only 46 per cent focused on the UK. If you take a long-term view, these will do better than the UK.

"Two of our star performers are Aberdeen Asian Income and Schroder Oriental Income. They have yields of around 4 per cent and their dividends have been growing quickly. Their capital performance has - and continues to be - strong.

"Having a big holding in growth markets that also throw off a reasonable yield is helpful. Murray International, our 10th largest growth holding, also has some exposure to these, as do Utilico Emerging Markets, Henderson Far East Income and JPMorgan Global Emerging Markets Income.

"That said, I like Law Debenture Corporation run by James Henderson, a manager I rate highly. This has around 30 per cent of its assets overseas and offers a yield of around 4 per cent. This investment trust owns a trustee services business that works for pension funds and charities, and the fees from this really underpin the dividend.

"As a counterweight to this more aggressive trust I hold Perpetual Income & Growth and Edinburgh Investment Trust. Edinburgh (run by Neil Woodford) has done well in recent markets because it avoids banks and oil. Both trusts are defensive, good performers in difficult times and throw off a good dividend.

"Invesco Leveraged High Yield is not as leveraged as you might think and run by Paul Read and Paul Causer, probably two of the best corporate bond fund managers. You might get some capital growth with this trust in due course and the dividend is secure. But I do not have that much in more traditional income areas such as bonds and property funds because the total-return prospects are more interesting in other areas."

THE PROFESSIONAL: Tony Yarrow, TB Wise Investment Fund

FAVOURITE: Henderson Eurotrust

Tony Yarrow, founder of TB Wise Investment, runs funds of funds, including TB Wise Investment Fund, an open-ended active-managed fund focused on investment trusts. Over the past year, this strong performer has been among the top 10 active managed funds.

“In the Europe sector one of my favourites is Henderson Eurotrust, a core holding that performs consistently well. In Europe, we also like Fidelity European Values and TR European Growth.

"We like private equity and you can pick up good trusts in this sector on bad days, for example Electra, which has a very good record and strong management.

"What recent market conditions have also given is liquidity in areas where you do not find it. A good example of this is Montanaro UK Smaller Companies Investment Trust. Its fund manager Charles Montanaro runs it himself and it is full of excellent companies. It is usually hard to buy shares in this investment trust but we managed to get some stock in August."

THE PROFESSIONAL: Slim Feriani, Advance Developing Markets

FAVOURITE: BlackRock Latin American

Slim Feriani runs two of the few funds of funds focused on emerging and frontier markets, and has a preference for listed closed-end funds such as UK investment trusts. "The beauty of closed-ended funds is that they can take a long-term investment approach without the distraction of cash management," he says. "They can be patient and do not have to buy things at the peak of the market or, like open-ended funds, sell their best investments.

"We are generally value sensitive because if you buy at a wide discount you get protection. If markets stabilise the discount narrows and you get a double uplift from both the underlying holdings and the trust's share price.

"One of my two key holdings in the Advance Developing Markets is BlackRock Latin American Investment Trust. This is a bit of an exception because while I believe that a discount is often a good reason to buy an investment trust, this has one of the tightest discounts at around 3 per cent, helped by its strong discount control mechanism. But we bought it because it is one of the few trusts that give you Latin American exposure. It has a good long-term record and around 70 per cent of its assets are in Brazil. We like this market because it is one of the cheapest and most attractive emerging markets.

"Our other key hold is JPMorgan Russian Securities, a well-established trust with a highly respected manager, which over the long-term has delivered the goods. This trust does not hug its benchmark, a feature we like as not many managers are prepared to do this.

"In the Advance Frontier Markets Fund we like Qatar Investment Fund from a top down perspective, as Qatar is one of the best-performing frontier markets. This fund is on a valuation anomaly and managed by a decent team out of Doha."

THE PROFESSIONAL: Patrick Harrington, Jupiter Fund of Investment Trusts

FAVOURITE: Hansa Trust

Patrick Harrington runs Jupiter Fund of Investment Trusts, which is in the top 25 per cent of the Investment Management Association's Global funds sector for performance over one and three years. He aims for long-term capital growth via a concentrated portfolio, which currently comprises 63 holdings.

"Hansa Trust, our largest holding, is trading at a wide discount of 15 per cent, has a good performance record and is exposed to Brazil.

This trust invests in a portfolio of special situations intended to add value over the medium to longer term, mainly on a non-market correlated basis. It has a very big holding in Ocean Wilsons, one of the largest providers of maritime services in Brazil, accounting for 44.4 per cent of the portfolio.

"Ecofin Water & Power (the fund’s sixth largest holding) is a relatively recent purchase and is trading at a very wide discount after asset manager Invesco sold its 30 per cent holding between March and May. But Ecofin has a solid underlying portfolio of utility-type investments.

"I also like Scottish Mortgage Trust and City Natural Resources, because I think these are respectively the best generalist and commodities investment trusts.

"Broadly speaking we are overweight Far East and emerging markets (about a third of the portfolio) and private equity via trusts such as Dunedin Enterprise and Princess Private Equity. This is because of wide discounts and good asset performance."