Delegates at our Specialist Investment Trusts event on 29 October heard why specialist trusts fulfil an extremely important portfolio need that no investor should ignore.
Specialist trusts invest in alternative assets such as infrastructure and private equity or in particular sectors such as healthcare and technology. Investors Chronicle editor John Hughman, introducing the seminar, said: "Put simply, we'd suggest it's anything that falls outside of the standard equity trusts, which usually focus on growth and income, or a mixture of the two, but across a range of sectors and geographies. Specialist investment trusts can be especially useful because they can help you achieve exposure to a variety of uncorrelated asset classes, whether on a strategic or tactical basis. Indeed, a tactical allocation to biotech, for example, would have created alpha in recent years."
Annabel Brodie Smith, communications director at the Association of Investment Companies, introduced the specialist investment trust sectors: private equity, hedge funds, property, biotech & healthcare, commodities and natural resources. She also gave an overview of the average premiums or discounts in those sectors, highlighting in particular the large discounts on offer at the time in private equity trusts, commodities and natural resources trusts and environmental trusts.
The next presentation was from IC's investment trust columnist John Baron, whose investment trust portfolios are a shining example of how specialist trusts can be put to work to achieve diversification. He said: "For me, a specialist trust is anything non-geographic. Specialist trusts can be justified in all portfolios, including portfolios looking for income, in that as globalisation gathers apace a focus on themes is going to become more important as a contributor to total returns."
However, Mr Baron emphasised that it is important to look through your specialist holdings to see where you are exposed geographically. "My portfolios would appear to be very underweight international shares and the US. However, if you look at the exposure to themes, you can see that we have holdings that are overweight the US, for example, RCM Technology Trust (RTT) and Worldwide Healthcare (WWH)," he said.
Mr Baron went on to explain why he thought there were good opportunities for investment in the biotech and healthcare, technology and commercial property sectors. "I believe for a whole host of reasons that we are standing in the foothills of an enormous bull run in commercial property," he said.
Delegates also listened to presentations from the managers of two specialist trusts.
Neil King, partner, infrastructure at 3i Investments, gave an overview of how he manages 3i Infrastructure (3IN). He said: "Infrastructure investments tend to have a low correlation with other asset classes, including listed equities and fixed income. The quality and predictability of cash flows tend to result in attractive distributions to shareholders." Mr King explained the different types of infrastructure asset classes and their risk/return spectrums.
3i Infrastructure has 79 per cent of the portfolio in core infrastructure, which tends to be dynamic businesses that own their asset base in perpetuity. These include AWG, the parent company of Anglian Water, Elenia - an electricity distribution network in Finland, Eversholt Rail Group and Oystercatcher - which provides oil and oil-related storage facilities. He also talked about a significant new investment for 3i Infrastructure in Cross London Trains.
Francesco Conte, manager of JPMorgan European Smaller Companies Trust (JESC), gave a briefing on how he co-manages the investment strategy of the largest European smaller companies investment trust. He explained the portfolio's key themes of growth, financials, cyclicals and restructuring, plus how the trust's top 10 holdings reflect a broad range of industries.
He went on to explain why he thinks European small company valuations are still cheap versus history and the long-term trend continues to look positive.
Moira O'Neill, personal finance editor at IC, explained how investors can hold a relatively passive, diversified 'core' portfolio with low management costs and then select 'satellite' holdings in chosen areas of active investments which the investor feels offer superior returns. "For the satellite holdings, specialist investment trusts are preferable to open-ended funds, because they are not forced to sell their assets at potentially disadvantageous prices when investors sell the fund." She also pointed out that while specialist and alternative assets will often be at the top of the league tables, they often languish at the bottom, too, meaning investors need to think about whether they can tolerate the risk of these specialist trusts.
She then went on to give an overview of the specialist trusts that have been selected for the IC's Top 100 Funds, selecting three of these to talk about in detail: HICL Infrastructure (HICL), Worldwide Healthcare (WWH) and RCM Technology Trust (RTT).
Leonora Walters, deputy personal finance editor at IC, gave a presentation about the private equity investment trusts sector. Private equity investment trusts are funds which invest in unlisted companies, often early-stage ones, aiming to increase their long-term value so they can eventually be sold or floated on a stock exchange for a higher price.
"There are two types of private equity trusts: those that invest directly in unlisted companies and those that invest in private equity funds," she said. "Some invest in both."
She went on to give some recommendations for private equity funds: Electra Private Equity (ELTA), HgCapital Trust (HGT), Graphite Enterprise Trust (GPE) and Pantheon International Participations (PIN).
The seminar finished with a lively Q&A panel session responding to delegate questions on discounts, private equity and investment trust management charges. Panelist Peter Walls, manager of Unicorn Mastertrust (GB0031269367), said: "Greater specialisation means greater risk. And attractive discount alone is not a reason to buy. There are many value traps out there in the market. Exotica, by which I mean really specialised funds, should only represent a tiny part of your portfolio."
You can view the videos and presentations taken from our speakers at the seminar here.
