There is a wide choice of investment trusts to choose from, but too much choice can be confusing - so insider knowledge is invaluable in helping to pick the right funds. We have asked four managers of funds of investment trusts for their investment trust picks in four areas: income, growth, wealth preservation and diversification.
INCOME
Recommended by: Peter Walls, manager, Unicorn Mastertrust
"I am not excited by many income trusts at the moment. Although the average UK income growth trust trades on a discount to net asset value (NAV) of around 2.6 per cent a number still trade on premiums, so there is not much for value investors. However, Standard Life Equity Income (SLET) is on a discount of around 6 per cent. Former manager Karen Robertson had a good following, but has not done so well in recent years. She was replaced as lead manager in May 2012 by Thomas Moore. Mr Moore is also gaining a following (he runs Standard Life Investments UK Equity Income Unconstrained Fund) and I think the discount is unlikely to widen further. The great thing about this trust just now is that it increases your yield - it currently offers around 4.42 per cent, and performance in the year to date has been better."
Recommended by: Peter Hewitt, manager, F&C Managed Portfolio investment trust
"I have a big holding in Perpetual Income & Growth (PLI), which favours dividend yields above those offered by the FTSE All-Share, which is currently around 3.5 per cent. This is a big trust (it has assets of £728m) and has been growing at around 6-8 per cent a year and yields around 3.84 per cent. It has a very clear and consistently applied investment approach focused on dividends. Its management team spends a lot of time analysing companies and looking for steady, consistent cash flows to have a consistent dividend policy. It doesn't have much in banks but has lots of pharmaceuticals. The types of businesses it likes are steady performers, although that means the trust could underperform in a bull market. However, in all other markets it does better and has outperformed the FTSE All-Share over one, three and five years, and has an above-average yield with steady growth. It doesn't deviate so you know what you are getting."
This trust trades at around par.
"The key driver of investment trusts is their asset performance over the long term," continues Mr Hewitt. "Although I would like to buy a great trust at a big discount, don't be put off by a narrow discount or a small premium. Perpetual Income & Growth has been around this level for a long time. You really go down the quality spectrum and rule yourself out of a lot of trusts if you exclude premiums. You don't often find good quality trusts at big discounts."
- Peter Walls, Unicorn MasterTrust
Recommended by: Richard Curling, manager, Jupiter Fund of Investment Trusts
"GCP Infrastructure (GCP/GCPS) has just launched a 'C' share issue so it is an opportune time to invest in this trust as there is more stock available and it yields around 6 per cent. This infrastructure investment trust invests in debt rather than equity, unlike some of its sector peers, so it is arguably lower risk. There is a shortage of long-term debt helping this trust achieve a high yield.
"At the moment, this trust is trading on an 8.5 per cent premium to NAV, but it is worth considering because of the high level of income. You are also buying into a partially inflation-linked, government-backed, long-term stream of income. Given the scarcity of income at the moment this is pretty good. But I would not normally feel comfortable looking at something on a premium this high."
Recommended by: Nick Greenwood, manager, Miton Worldwide Growth Investment Trust
"Many investment trusts offering a good yield are trading on premiums but Juridica Investments (JIL) is on a discount of more than 13 per cent," says Mr Greenwood. "Alternative Investment Market (Aim)-listed Juridica invests in business-to-business litigation and arbitration cases, claims and disputes. It seeks attractive returns by selecting corporate claim assets that meet well-defined underwriting criteria and are indicative of solid economic value. Many of its cases are at a fairly advanced stage, so that it has a mature portfolio and the chance of total failure is less," continues Mr Greenwood. "This should also help the trust to continue to offer a high yield and pay this out in dividends."
The trust currently yields 12.68 per cent, and was tipped as a buy by the Investors Chronicle in May 2012.
Income investment trusts
| Trust | total return (%) | total return (%) | total return (%) | Yield (%) | to NAV (%) | charge (%) |
|---|---|---|---|---|---|---|
| GCP Infrastructure Investments | 10.37 | na | na | 6.09 | 8.53 | 2.33 |
| Juridica Investments Ltd | -3.34 | 12.17 | na | 12.68 | -13.78 | 2.88 |
| Perpetual Income & Growth | 15.89 | 44.95 | 24.62 | 3.84 | 0.16 | 1 |
| Standard Life Equity Income | 17.81 | 26.57 | 12.06 | 4.42 | -5.8 | 0.96 |
Source: Morningstar Performance data as at 19 October 2012 | ||||||
GROWTH
Recommended by: Peter Walls, manager, Unicorn Mastertrust
"It is a struggle to find something special in this area, which is maybe a function of the markets just now. I can't get overly excited about global growth trusts but small-caps are more interesting. They have seen good returns in the year to date, but there is still good discount value in this investment trust sector. I particularly like Throgmorton Trust (THRG) because it has a slightly different strategy. Its managers, Mike Prentis and Richard Plackett, have a good long-term record and employ something of a hedging strategy in being able to employ instruments such as contracts for difference (CFDs). Since the current managers took over [in 2008] the performance record has been very good, but the trust is on a 20 per cent discount."
Jupiter European Opportunities
Recommended by: Peter Hewitt, manager, F&C Managed Portfolio
"The trust I am going to suggest is in a sector some investors would not believe could deliver strong growth, but Jupiter European Opportunities (JEO) has done just that, returning 32.79 per cent over one year and 52.59 per cent over five years, putting it miles ahead of European indices (its benchmark returned 11.58 per cent and –3.36 per cent over the same periods). The trust's manager, Alex Darwall, does this by having a very clear idea of the stocks he wants in the portfolio. He seeks businesses in a particular niche that can defend their margins, products and services. A good example of a holding is Novo Nordisk, the Danish listed insulin producer. This has steady earnings growth over the long term so the share price performance has been very strong.
"Jupiter European Opport-unities has a bit of gearing (debt) so it tends to do better in rising rather than falling markets. But this trust is all about stock selection. It is a pan-Europe trust and has more than 40 per cent in the UK with a bias to northern Europe. The trust trades at a slight premium having been at a wide discount a couple of years ago. I would not be surprised if European markets do quite well in the next year or two. They are the one part of developed markets that are cheap and that would help this investment trust too."
- Richard Curling, Jupiter Fund of Investment Trusts
Montanaro UK Smaller Companies
Recommended by: Richard Curling, manager, Jupiter Fund of Investment Trusts
"Montanaro UK Smaller Companies Investment Trust (MTU) is one of the best smaller companies funds and has a great emphasis on identifying quality smaller companies. It has a great track record over a long period of time. Smaller companies are no longer just about the UK economy as some of them have global exposure and this trust tries to identify ones with a global position. Examples of portfolio holdings include Genus, a global leader in breeding technology, and Devro, a global leader in sausage skins, which has good margins and a global market position. It has a lot of overseas earnings, including from emerging markets, and is a play on rising consumer wealth. Despite Montanaro UK Smaller Companies Investment Trust's strong track record it can still be picked up on a discount to NAV of around 15 per cent."
Recommended by: Nick Greenwood, manager, Miton Worldwide Growth Investment Trust
"I like Artemis Alpha (ATS) because its investment team has a lot of its own money in the fund, which I think is important. This trust also focuses on resources (more than 40 per cent of holdings) and small-caps (more than 70 per cent of holdings) and, to a certain extent, financials - all areas in which the investment team are experienced. Resources and financials are out of favour so now is a good opportunity to get exposure."
Growth investment trusts
| Trust | 1-year share price total return (%) | 3-year share price total return (%) | 5-year share price total return (%) | Yield (%) | Discount/premium to NAV (%) | Ongoing charge (%) |
|---|---|---|---|---|---|---|
| Artemis Alpha | 16.88 | 29.74 | 48.57 | 1.01 | -7.73 | 1.01 |
| Jupiter European Opportunities | 32.79 | 64.9 | 52.59 | 0.53 | 1.5 | 1.19 |
| Montanaro UK Smaller Companies | 19.24 | 67.11 | 39.79 | 1.74 | -15.08 | 1.34 |
| Throgmorton Trust | 20.41 | 69.17 | 25.49 | 1.66 | -20.07 | 1.14 |
Source: Morningstar Performance data as at 19 October 2012 | ||||||
WEALTH PRESERVATION
Recommended by: Peter Walls, manager, Unicorn Mastertrust
"In this area I would opt for a single-manager hedge fund and BlueCrest AllBlue (BABS) is on a discount of nearly 6 per cent but has a very impressive track record. It is one of the few listed hedge funds that even made a positive NAV return in 2008, one of the others being BH Macro. This probably has one of the best strategies and certainly one of the best records. There is still a lot of disenchantment with hedge funds because many have failed to offer capital protection, which may explain the discount. However, with a trust in this sector you should apply the same sort of diversification rules you apply to other areas: don't put all your money in, but rather a small percentage."
Recommended by: Peter Hewitt, manager, F&C Managed Portfolio
"I've got a decent chunk of Ruffer Investment Company (RICA) in my portfolio because I like its approach. It is always difficult to gauge whether managers that claim to preserve wealth really have not losing money as their object, and a number of hedge funds have moved in a similar way to equity markets. But Ruffer and Personal Assets Trust genuinely strive to preserve wealth.
"Ruffer Investment Trust's mix of investments are defensive: they include cash, low-risk bonds, in particular index-linked ones, and a decent exposure to gold because its managers fear inflation. They also pay a lot of attention to currencies. This trust also has equity exposure, but its managers pay a lot of attention to the balance of the portfolio, geographical diversity and where the risks are. They never have 100 per cent in equities. Its long-term record has been pretty consistent, although it underperforms in rising markets. For example, the trust has risen around 3.6 per cent over the past year against 13.73 per cent for the FTSE All-Share, but over five years the trust has delivered 81.22 per cent against 10.31 per cent for the All-Share. The investment trust also had a very strong 2008 (its share price returned around 23 per cent that year when some markets plunged more than 30 per cent. If investors are looking to make money over a long time period then finding a home with Ruffer is a good idea."
Recommended by: Richard Curling, manager, Jupiter Fund of Investment Trusts
"Personal Assets Trust (PNL) is one of the few trusts that have a very specific emphasis on wealth preservation, to protect and increase the value of the company. I feel very comfortable investing in a trust run by Troy Asset Management as it is conservative and sensible."
Recommended by: Nick Greenwood, manager, Miton Worldwide Growth Investment Trust
"Jupiter Second Split Trust (JSS) is a split-capital trust with a planned wind-up date in 2014. The fund returns more than cash and has a very cautious portfolio with holdings including cash and bonds, and the manager has a substantial amount of his own money in the fund. This should avoid the risks of a slump in the high-yield bond market in the next year or two."
Investment trusts for wealth preservation
| Trust | 1-year share price total return (%) | 3-year share price total return (%) | 5-year share price total return (%) | Yield (%) | Discount/premium to NAV (%) | Ongoing charge (%) |
|---|---|---|---|---|---|---|
| Bluecrest Allblue Fund GBP | 6.19 | 16.88 | 63.01 | 0 | -5.93 | 0.07 |
| Jupiter Second Split - Geared Ordinary | 2.42 | na | na | 2.83 | -17.6 | 0.9 |
| Personal Assets Investment Trust | 8.63 | 38.24 | 47.69 | 1.58 | 1.5 | 1.01 |
| Ruffer Investment Company | 3.6 | 21.32 | 81.22 | 1.62 | 0.93 | 1.16 |
Source: Morningstar Performance data as at 19 October 2012 | ||||||
DIVERSIFICATION
Recommended by: Peter Walls, manager, Unicorn Mastertrust
"It is difficult to put a space between Genesis Emerging Markets (GSS) and sector peer Templeton Emerging Markets but Genesis has a more diversified portfolio by country and sector weightings, in contrast to Templeton's more concentrated portfolio. For example, Templeton has 52.4 per cent in just two sectors, financials and energy, against Genesis at 33.7 per cent. Meanwhile Templeton's Asia exposure is 63.5 per cent, against Genesis's 49.6 per cent. However Genesis is on a premium of 2.9 per cent in contrast to Templeton's discount of more than 8 per cent."
Recommended by: Peter Hewitt, manager, F&C Managed Portfolio
"I wouldn't buy Murray International (MYI) right now because it trades at a premium to NAV of more than 6 per cent, but it is one for the watch list as this trust offers a 3.9 per cent yield and global growth from a real spread of assets, including emerging markets and Asia Pacific equities, so it should perform differently to the FTSE All-Share. It has also enjoyed a great performance over both the short and long term."
Recommended by: Richard Curling, manager, Jupiter Fund of Investment Trusts
"There are lots of big global investment trusts, but they are not necessarily diversified. Witan (WTAN) is an exception. This investment trust is very much out of favour, but it is doing much better since current chief executive Andrew Bell took charge in February 2010. I particularly like the concept of having specialist external managers to run each area the trust is allocated to. It is unrealistic for anyone to say they are an expert in every area of the equity market. But what is good is that Witan's internal management team still retains control of the asset allocation, even if external managers pick the stocks."
Recommended by: Nick Greenwood, manager, Miton Worldwide Growth Investment Trust
"Macau Property Opportunities' (MPO) share price has suffered because people do not like the idea of buying China property. However the dynamics of the Macau property market are very different to elsewhere in China. Unemployment is very low at around 2 per cent, but the region continues to develop its casino industry so needs to import labour. As there is very little space to build much more this will have an effect on local property prices so it is in a structural bull market. This investment trust's discount to NAV of around 39 per cent is more do with sentiment than anything else."
Investment trusts for diversification
| Trust | 1-year share price total return (%) | 3-year share price total return (%) | 5-year share price total return (%) | Yield (%) | Discount/premium to NAV (%) | Ongoing charge (%) |
|---|---|---|---|---|---|---|
| Genesis Emerging Markets Fund | 12.74 | 24.52 | 44.07 | 0 | 2.91 | 1.69 |
| Macau Property Opportunities | 7.84 | 48.23 | 79.45 | 0 | -39.32 | 3.16 |
| Murray International Investment Trust | 20 | 43.85 | 65.77 | 3.89 | 6.18 | 0.75 |
| Witan Investment Trust | 14.12 | 22.95 | 17.54 | 2.55 | -11.5 | 0.8 |
Source: Morningstar Performance data as at 19 October 2012 | ||||||
