Investment trusts: The professional picks

GROWTH

Peter Hewitt, manager of F&C Managed Portfolio Trust (FMPG)

"For growth I like an investment trust that is actually in the UK Growth & Income investment trust sector and yields 2.43 per cent: (IC Top 100 Fund) Lowland Investment Company (LWI). Its manager James Henderson gets my vote because historically he is a great performer and around two-thirds of this investment trust is in small and mid caps - these are my theme for capital performance next year.

"Lowland's policy is to invest in a broad spread of predominantly UK companies of differing sizes with normally not more than half by value coming from the largest 100 UK companies, and the balance from small- and medium-sized companies.

"James Henderson is also optimistic about industrials going forwards (these account for 27 per cent of Lowland's portfolio). And he is a very good stock-picker.

"Lowland could be a strong performer next year: if there is a sharp bear market it could do worse, but with low interest rates and economic growth picking up this trust should be good for a year or two."

Peter Walls, manager of IC Top 100 Fund Unicorn Mastertrust (GB0031269367)

"I like JPMorgan Mid-Cap (JMF) run by Georgina Brittain and William Meadon. Its performance record is pretty solid and the portfolio contains some well-known stocks outside the FTSE 100. If you feel that the UK economy is continuing to recover, that area of the market looks quite interesting."

Nick Greenwood, manager of Miton Worldwide Growth Investment Trust (MWGT)

"India is definitely out of favour and should remain so for at least another six months. But once the election (next year) is out of the way it is normally a good time to buy Indian equities. Indian investment trusts have lagged as this area is desperately out of favour but people will like India again one day. India has a more developed equity culture than many other emerging markets and the current distaste for BRICs (Brazil, Russia, China and India) should allow an advantage for on-the-ground traditional stock-pickers.

"India Capital Growth (IGC) in particular is overlooked and on a deep discount to NAV of 26.43 per cent. The current management team are the third incumbents in India Capital Growth's short but disastrous life and had a tough time turning around the legacy portfolio. This is a classic example of when a trust discount reflects the track record of the vehicle rather than that of the current managers."

Richard Curling, manager of Jupiter Fund of Investment Trusts (GB0004795034)

"Montanaro UK Smaller Companies Trust (MTU) is run by specialist small-cap managers and has an excellent long-term track record. Recently, however, performance has been disappointing because of their rigorous discipline in sticking only to high-quality businesses that have underperformed some of the lower-quality, more highly-geared cyclical stocks. "This has led to the discount widening out so that the trust now trades on one of the widest discounts in the sector (13.19 per cent). But I still have every confidence in the manager and believe the current blip in performance represents an excellent opportunity to buy into a portfolio of high-quality long-term UK growth stocks."

INCOME

Peter Hewitt, manager of F&C Managed Portfolio Trust

"I like Diverse Income Trust (DIVI) because, although it only yields 2.79 per cent, it has around three-quarters of its assets in mid-, small- and micro-cap shares - despite being in the UK Growth & Income investment trust sector. I'm relatively optimistic for those segments of the market next year. Although the trust doesn't offer a huge yield it grows the dividend at a good rate every year and has recently grown in size after absorbing Miton Income Opportunities Trust (Diverse Income Trust now has total assets of about £242m).

"Gervais Williams is also a top fund manager, especially in the small-cap arena, and this trust is something a bit different in the income space."

Peter Walls, manager of IC Top 100 Fund Unicorn Mastertrust

"There is not a great deal of value out there at the moment, the average UK Growth & Income investment trust is trading on a discount to NAV of only about 0.9 per cent, and the average Global Growth & Income investment trust is on a premium of about 1 per cent. However, an exception is Midas Income & Growth (MIGT) managed by Alan Borrows. Its long-term record has been disappointing but over one and three years it has improved. The fact that it's on a 10.76 per cent discount to NAV and still offers a yield of 4.14 per cent is interesting. Part of the reason for the wider discount is because it is quite small with a market capitalisation of around £51m, and maybe getting too small to buy back shares to control the discount. But it has a solid performance and a good manager so is mispriced relative to the rest of the sector."

Nick Greenwood, manager of Miton Worldwide Growth Investment Trust

"Alpha Real Trust (ARTL) has a NAV of 106.7p, but this is probably out of date (property portfolios are only revalued a few times a year) and it is starting to pay out dividends. If you buy it at a deep discount of 52.44 per cent you will get a much higher yield than the risks you take on from buying the shares. The management team's policy seems to be to allow the share price to languish while using the trust's cash pile to retire any stock which becomes available, thereby ratcheting the NAV higher as a result and increasing management control. The team are clearly good at what they do and no doubt once sufficient loose holders have exited, the vehicle will get taken private at a level closer to NAV. In the meantime, the recently adopted policy of distributing cash flow by way of a dividend should generate some useful returns."

Richard Curling, manager of Jupiter Fund of Investment Trusts

"Diverse Income Trust (DIVI) is a relatively small and new trust run by two very experienced managers and has so far produced excellent performance. I like the fact it is multi cap rather than mainly focused on large caps like most income funds. I also like the emphasis on finding dividends that can grow significantly rather than just concentrating on high yield with little income growth. In my view, this trust would make an excellent long-term holding."

WEALTH PRESERVATION

Peter Hewitt, manager of F&C Managed Portfolio Trust

"For wealth preservation I suggest (IC Top 100 Fund) Ruffer Investment Company (RICA) because it does what it says on the tin - it really does preserve wealth. The trust has a good exposure to Japan (17 per cent as at the end of September) and a fair amount of its assets in index-linked bonds (27 per cent). It also has some exposure to gold but not a massive amount (7 per cent). It tends not to lose money (the trust has made positive returns in five out of the six last calendar years including 23 per cent in 2008) - in fact, bear markets are great news for the trust."

Peter Walls, manager of IC Top 100 Fund Unicorn Mastertrust

"This is a tough one because unless you look at the AIC Hedge Fund sector there are not many investment trusts that can preserve your wealth in all circumstances. But one I do like that is delivering long-term growth while preserving capital is RIT Capital Partners (RCP) (an IC Top 100 Fund). This has been out of favour because its long-term record is not good but it has a new spring in its step following management changes a year ago. The trust is also on a 10.72 per cent discount to NAV.

"Lots of people thought that it was a good idea to effectively access the Rothschild family's investment portfolio when the trust was performing well in the past, but this will also be good when markets rise because it will participate in that while it still has some defensive characteristics."

Nick Greenwood, manager of Miton Worldwide Growth Investment Trust

"Alternative Asset Opportunities (TLI) invests in US Traded Life Endowments. The board of this investment trust underestimated the life expectancies of the policyholders, and while this trust launched at £1 a share it is now around 39.5p. Its initial problems were self-inflicted, having chosen to focus its portfolio on a small number of valuable polices taken out on lives of wealthy individuals who statistically live longer. A recent announcement suggested that the mortally experience has been rather disappointing. But the average age on the remaining policies is approaching 90 and even the wealthy die eventually. Its board has extended life expectations now, which is probably an overestimation. The trust is on a discount of nearly 15 per cent, and I think its problems are largely in the past and the NAV is realistic. The portfolio can now be allowed to mature, leaving the NAV as a reasonable guide to what will eventually be returned. This also shouldn't go down with equity markets."

Richard Curling, manager of Jupiter Fund of Investment Trusts

"The Cayenne Trust (TCT) is a small specialist trust managed with the aim of producing consistent positive absolute returns by investing in other investment trusts and closed-end funds. It is run by a highly-experienced manager and has produced some excellent results, outperforming other absolute return funds."

DIVERSIFICATION

Peter Hewitt, manager of F&C Managed Portfolio Trust

"Biotech Growth Trust (BIOG) is well run and, although it is in a very racy sector and can be volatile, it has a high level of diversity via its number of holdings (39 at the end of August). Some of these biotechnology companies are really sizeable now and profitable, which means you can measure them on a price-earnings ratio (PE) basis (the trust has also recently proposed amending its investment policy so that the majority of its holdings do not have to have a market capitalisation of less than $3bn). Some of its holdings have also been taken over because of mergers and acquisitions activity."

Peter Walls, manager of IC Top 100 Fund Unicorn Mastertrust

"I'm going to suggest (IC Top 100 Fund) TR Property (TRY), which is on a 10.30 per cent discount to NAV but offers a 3.28 per cent yield. It has a good track record under its current management team and we have clearly seen from the latest commercial property surveys a turn in the fundamentals of the underlying market, in the industrial and in particular office sectors.

"TR Property offers a far better way of playing this than the direct property trusts, many of which are on pretty hefty premiums to NAV. If you believe non-residential property is improving and that there should be a total return of around 8 per cent from commercial property over the next two years, compared with trusts such as (IC Top 100 Fund) F&C Commercial Property (FCPT) on a premium of 17.75 per cent and Standard Life Investments Property Income Trust (SLI) on 14.55 per cent, TR Property is a sensible way to play the property recovery."

Nick Greenwood, manager of Miton Worldwide Growth Investment Trust

"Taliesin Property Fund (TPF) is a play on German reflation and the German property market. Despite recent strength, the open market value of Taliesin's apartment blocks remain well below replacement cost. Should apartment prices ever reach replacement cost, Taliesin's NAV could reach 2,750p (the NAV is currently 1,570.5p). Interest rates on the continent are being decided by economic conditions at the periphery, which has created the ingredients of a local property bubble even before considering the German public’s reaction to the inflationary effect of any bailout. People think German property prices should rise fast, and they will rise especially fast in Berlin: this city's move from urban wilderness to major European capital within a generation is without parallel. And Taliesin's micro call of buying pre-Second World War apartment blocks has correctly anticipated the local trend."

Richard Curling, manager of Jupiter Fund of Investment Trusts

"TR Property (TRY) (an IC Top 100 Fund) invests in real estate shares and has a good track record and an experienced manager. Property is a clear beneficiary of the asset price inflation generated by quantitative easing and also has good broad based exposure to economic recovery. A 10.3 per cent discount to NAV and a yield of 3.3 per cent represents good value."

A year ago we asked the four same managers for investment trust picks in the same four areas (see their suggestions in The professional picks 26 October 2012). Below you can see how their choices have done.

How last year's professional picks performed