Take an investment trust odyssey

Last Year's Around-The-World Picks

*One-year price total return to 15 Oct 2013

Source: Datastream & Numis Securities

The best performance out of the eight funds my screen picked came from Baillie Gifford Shin Nippon (BGS). Not only did it benefit from its exposure to the soaring Japanese equity market, but it also benefited from its focus on smaller companies. However, while the risks associated with backing a niche trust paid off in the case of Shin Nippon, they royally back-fired with Artemis Alpha (ATS), a UK fund with a heavy focus on resources stocks. In the case of both these funds, despite them achieving top spot in my screen, I did suggest alternative high-scoring funds that represented less risky investments for readers. Gratifyingly, both of the alternatives highlighted (Bailie Gifford Japan and Fidelity Special Values) actually put in a good run over the last year, boasting the top and third best total return performances in their respective investment trust sectors.

Weird and wonderful investment trusts have once again scored big points in the Around The World screen this year. So, rather than just present the top fund selected by the screen and offer an alternative suggestion when a trust is clearly niche, I am detailing the top three trust in each category in the tables provided below as well as giving some extra detail on the top scoring trusts. So while some funds, such as the Smaller Companies Dividend trust, represent very high risk bets which are unlikely to be suitable to many investors, hopefully the top-three screen choices will be able to provide something for most readers.

Once again, the screen follows Mr Fogg's 80-day route around the world starting in the UK, where I've screened all UK growth trusts, before heading to Europe, then to Emerging Markets, followed by Asia, then Japan, then the US before alighting back on these shores with a UK income trust screen. For good measure, I've finished the journey off with a screen for global investment trusts.

The screening criteria are fairly straightforward. The screen ranks trusts based on the potential upside/downside were the discount/premium to revert to the one-year average, combined with the average out/underperformance of the trust based on net asset value (NAV) total return over one, three and five years.

UK growth

Last year's big disappointment from our Around The World screen came from the UK Growth sector, where our screen honed in on a thoroughly unconventional trust - Artemis Alpha. So it is with some trepidation that I report that the screen has gone for another unconventional choice of top fund in the shape of Henderson Opportunities (HOT). The trust, which has a sub-scale market capitalisation and a wide bid-offer spread, pays little attention to the indexes when constructing its portfolio and the top 10 holdings embrace a number of investment themes. The trust also has a stated policy of taking on risk to boost long-term returns. That said, the portfolio is significantly more diverse than Artemis Alpha's, with the top 10 holdings only making up only a little over a quarter of the portfolio, and the trust does not have the same sector-specific risk that Artemis Alpha carried. The fund manager, James Henderson, is well respected and also manages the Lowland Investment Trust which narrowly missed out on being one of the top three UK income funds selected by the screen.

A more conventional alternative to Henderson Opportunities is arguably offered by Invesco Perpetual Select (IVPU), run by Mark Barnett, the Invesco manager who will be left running the show following the departure of the investment team's star, Neil Woodford. That said, the trust is small, trades on a wide bid-offer spread and is unconstrained in its investment remit. Nevertheless, it does have a more blue-chip flavour to its portfolio. The other top-three UK growth trust, Schroder UK Growth (SDU), lost its star fund manager, Richard Buxton, earlier this year.

Source: Numis Securities & S&P Capital IQ

Henderson Opportunities top 10 holdings

Source: Trust

Europe

For the second year on the trot it is Jupiter European Opportunities (JEO) that my screen has given the top spot to in Europe. The victory for the trust was less categorical this year than it was last year. The trust's performance over the last 12 months, while decent, has not exactly been vintage by its standards. As with so many of the funds taking top spot based on my screen's criteria, the Jupiter fund is run by a manager, in this case Alexander Darwall, with a very distinct investment style. Mr Darwall is focused on picking stocks he believes are capable of delivering long-term earnings growth, and as such he tends to be a long-term holder. The kind of characteristics he looks for in companies are businesses that are benefiting structural growth trends or those with a technology that will underpin growth prospects. He is also keen to see that growth that is supported by strong cash generation.

Despite a rather lacklustre year's performance, Jupiter European Opportunities still trades at a premium to NAV. A better 'value option' is JPMorgan European Income (JETI), which currently trades at a 9.5 per cent discount, although part of that reflects the risks associated with its small size. Meanwhile, the other trust in our top three, European Assets (EAT), offers a portfolio of high-conviction bets on small- and medium-sized European companies.

Jupiter European Opportunities top 10 holdings

Emerging markets

Despite the popularity over recent years of emerging markets as an investment theme - at least up until the point that the US started to talk about tapering - there is something of a paucity of choice for investors looking for investment trusts in this area. Only five trusts have long enough track records and broad enough mandates to qualify for our screen, and the one deemed most attractive was Genesis Emerging Markets (GSS). Like other funds investing in the area, the flight of capital and consequent currency weakening that has been caused by tapering fears is hurting performance. However, the management of the trust point to the long-term growth potential in the region, which should persist despite immediate concerns. The investment approach of the fund is based on taking a five-year view and finding opportunities to invest in companies that are priced at less than their intrinsic value. The portfolio contains distinct groups of value and growth plays selected using this approach.

Genesis Emerging Markets top 10 holdings

Asia

Among the Asian funds, smaller companies and income are the two big themes the screen has picked up on. Top of the perch in Asia sits Scottish Oriental Smaller Companies (SST), which is an investment trust managed by one of the big names in Asian equity fund management, Angus Tulloch of First State. Mr Tulloch previously managed the fund between its inception in 1995 to 2000 but only re-took the reins in April this year. While the fund's performance has been very strong this year, Mr Tulloch is finding it hard to find companies to invest in due to his belief that valuations are currently stretched. The fund is building its exposure to India, though, which has had a very rough time of late. The monetary policy of the US also continues to be a key issue stoking uncertainty for Asian equity markets.

The second-placed fund on the screen's list, Aberdeen Asian Smaller Companies (AAS), which comes from another star Asian investment house, was last year's top screening pick. Meanwhile, another Aberdeen fund, Aberdeen Asian Income (AAIF), narrowly lost out on third spot to Schroder Oriental Income (SOI).

Scottish Oriental Smaller Companies top 10 holdings

Japan

Japan has been a star investment theme of the last year as investors have gone mad for the latest attempts to wake the slumbering economic giant using a stimulus policy that has become known as 'Abenomics'. While the policy, spearheaded by Japanese prime minister Shinzo Abe, has been popular with the markets from the get go, it's now also gaining credibility with economic policy watchers as signs emerge that the medicine may be working in the real-world economy. The long-standing presence of Ballie Gifford in the region has paid off for its two Japan funds, which both put in stellar performances during the year. Once again, it is the smaller company and growth focused Baillie Gifford Shin Nippon that our screen gives top spot to. The trust's performance has recently benefited from exposure to internet-related stocks but the funds small size and consequent wide bid-offer spread beefs up the risks associated with an already risky part of the market - small caps.

Sister fund Baillie Gifford Japan (BGFD), which has more medium- and large-cap exposure, actually managed to outperform Shin Nippon over the last year and continues to look an excellent choice for those uncomfortable with pure smaller company exposure that want a larger more liquid fund to buy into. Unlike the Baillie Gifford funds, the third-choice fund from my screen, the teeny Atlantis Japan Growth (AJG) Investment Trust, trades at a discount to NAV and is actually at a wider than average discount at the moment. Signs that the Japanese economy is strengthening are currently encouraging Atlantis to lift its exposure to quality cyclical and recovery plays.

Baillie Gifford Shin Nippon top 10 holdings

US

The US market has been on fire over the last year and small caps were where the best of the action has been. Fortunately, the trust selected by my screen last year as top pick was a small-cap trust, F&C US Smaller Companies (FSC), and the same fund is top of the pops again this year. In fact, the trust is the only one of the five US trusts on the London market that the screen gave a positive score to based on the potential upside from the discount reverting to the average and its past level of outperformance. While the focus on small- and medium-sized companies represents a higher-risk strategy, the trust itself describes the investment approach of manager Robert Siddles as risk adverse. And while the objective is to grow capital by exploiting the famed US entrepreneurial flair, the trust also sets itself the objective of capital preservation and takes a long-term view on its holdings.

JPMorgan's two American trusts pip the number two and three spot in our screen from a choice of only five. These funds draw on the expertise of the fund management company's 85-person strong team analysing US stocks.

F&C Smaller Companies top 10 holdings

UK equity income

The top UK income trust selected by our screen, Small Companies Dividend (SDV) Investment Trust, is a real tiddler with a market capitalisation of only £26m and a bid-offer spread to match. The risks are piled higher not only by the risky asset class it invests in but also by the existence of 8.5m zero dividend preference shares, which have the effect of magnifying the impact of the portfolio's performance (both positive and negative) on ordinary shareholders. We'd advise approaching such a small fund with this structure with caution, but its performance record is undeniably impressive.

The other funds selected by the screen are likely to represent a more palatable choice for most investors. That said, Finsbury Growth & Income (FGT) is managed by star manager Nick Train who has a fairly esoteric investment style. The portfolio is concentrated on about 30 stocks which are long-term holdings bought for the underlying quality of their businesses. Meanwhile, Perpetual Income & Growth (PLI) is run by Mark Barnett, who also runs one of the UK Growth trusts selected by our screen. Mr Barnett is probably best known as the Invesco fund manager that works alongside UK equities mega star Neil Woodford. But with Mr Woodford set to leave Invesco, Mr Barnett will be taking centre stage at the group.

Smaller Companies Dividend top 10 holdings

Global

Lindsell Train (LTI) investment trust, my screen's top global investment trust pick, is far from your typical global fund. The trust's manager categorises it as an absolute return fund, which is fitting in so far as its portfolio bears little resembles to any index. The guiding principle for the fund's manager, Nick Train, is to find high-quality companies and put big long-term bets on them. The large individual stock positions increase risk for shareholders. This has recently been demonstrated by the profit warning induced 20 per cent fall in Unilever's share price - the trust's sixth-largest holding. However, the long-term nature of Mr Train's approach is illustrated by his reaction to Unilever's share price decline - he has been using all the cash he can get his hands on to increase the fund's position in the group. If his judgement on Unilever's underlying quality is correct, this should substantially boost long-term performance even if the impact on short-term performance does not present the pretty picture of steadily-rising NAV that the fund management industry likes to present.

The success of Mr Train's approach has pushed the trust's shares to a truly eye-watering premium to NAV (see table) which is exacerbated by the trust's small size. In addition, risks are substantially increased for any would-be buyers by the gaping bid-offer spread on the shares. Law Debenture (LWDB) Investment Trust, which also features in our top three global trusts, also looks very expensive. That means Ruffer (RICA) is the only trust in our top three were the valuation doesn't look dangerously high. It still trades on a premium to NAV, though, and also has a rather esoteric approach.

Lindsell Train top 10 holdings