Recent falls in equities and sovereign debt problems are a concern for some investors, but Peter Walls, manager of the Unicorn Mastertrust Fund, hopes they will provide an opportunity to exploit some value. Unicorn Mastertrust is a fund of investment trusts that has been in the top five out of more than 90 active managed funds over one and three years, and is one of our favourite trusts.
"The defensive stance adopted in May within the Mastertrust Fund has aided relative performance and I am now seeking to redeploy the fund's 10.5 per cent cash weighting," says Mr Walls.
However, he won't be rushing in, but rather "nibbling away" at the cash allocation selectively. He has reduced this by around 4.5 per cent over the past month with purchases including Herald Investment Trust, which focuses on technology stocks.
"We've yet to see a particularly noticeable move in terms of investment trust discounts to net asset value (NAV)," he explains. "Asset values have been falling much faster than pricing and discounts have narrowed. It takes a while for investment trusts to catch up with equities. But I want to see some decent discounts to NAV because we are very value orientated. We don't buy investment trusts at a premium to NAV as a general rule."
Mr Walls has also recently bought shares in private equity investment trust 3i Group, which is on a discount approaching 40 per cent (at time of writing). "There are doubts about whether it will maintain its position in the FTSE 100 ," he says. "If it falls out of the FTSE 100, index funds will be forced to sell it, which could have a further negative impact on its share price. But unless you believe we are in a double-dip recession, this company is attractive at the discount it is currently trading on."
Unicorn Mastertrust has generally not been in emerging markets in the past two years because Mr Walls has found better alternatives. "But a real area of discount value today is in Asia Pacific funds, which include Japan and are on discounts of around 15 per cent, for example Witan Pacific at 14 per cent," he says. "I don't own this, however, and I am not sure I will buy it. But if you want a bit more of a balance with an allocation to Japan then these are reasonable value."
He says there is also some good value in some UK mega-cap stocks which could do well in a more risk- averse period. It might be the time for Neil Woodford (who runs Edinburgh Investment Trust) and more value-orientated investors to move ahead, as investors with an eye to the downside seek safer havens.
Edinburgh Investment Trust is trading at a premium to NAV of 4 per cent. "Right now it is much easier to find good quality and value in direct equities," he adds.
IT application
Unicorn Asset Management's investment process for its equity funds focuses on finding long-term holdings in growing, profitable and cash-generative businesses. Preferred attributes include strong balance sheets, products and services for niche, growth markets and a diversified international customer base. While the equivalent investment trust process draws on elements of this, Mr Walls explains that you cannot have a mirror image of the equity selection approach.
"With the investment trust portfolio we have a bit more of a top-down overlay," he says. This involves understanding the merits of geographic regions and industrial sectors within global markets, and consequently involves more input from market commentary and strategist research.
"But it is all about backing management teams for the long term," he says. "We do not have a high turnover, but hold a core of good managers typically for three years plus. It is only in extreme circumstances that you see a great deal of activity in the Mastertrust Fund's portfolio."
However, Mr Walls argues that there is a case for saying strong balance sheets can have a positive impact on investment trust returns and, for example, he looks at whether investment trusts have sensible capital structures.
"Buying investment trusts forces me to be contrarian because as a value investor I am usually looking at markets where the discounts are widening on investment trusts," he adds. "If I think that market looks set to recover I will buy the investment trust at a wide discount. So, for example, two-and-a-half years ago we were buying into technology trusts, when Polar Capital was trading on a discount to NAV of around 20 per cent and Herald at around 25 per cent. Since then, the Polar Capital discount has disappeared and at times it has traded at a premium. I am aided by investment trusts in thinking differently from the herd."
