Investment trusts: the professional picks 2014

GROWTH

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

Sanditon Investment Trust (SIT) is a relatively new and small investment trust specialising in UK and European equities, and the first fund launched by the fund management company founded by experienced investors Tim Russell and Chris Rice. The interesting thing about this trust is that it owns 20 per cent of its manager, Sanditon Asset Management. If Sanditon is successful it could be worth a significant amount, so the stake is effectively a free option.

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

India Capital Growth (IGC) could be a good option due to a combination of factors. The Indian economy struggled until recently due to a hopeless coalition government and political gridlock, but the country now has a majority government and looks to be moving to a pro-market administration that may shrink bureaucracy and get the system working.

Profits growth is low, but I expect that to pick up. India imports much of its oil and has been held to ransom by this when the price is high, but just now this is going in its favour.

India Capital Growth focuses on mid-caps, which is a good area for stock picking. It also trades at a discount to net asset value (NAV) of nearly 24 per cent, which reflects an unhappy history: investment trusts often trade on the past track record of the trust rather than the team managing it now. Its first and second management teams did not do well, and its current team has had to unwind a lot of microcap positions.

Peter Hewitt, manager of IC Top 100 Fund F&C Managed Portfolio Trust (FMPG)

Biotech Growth Trust (BIOG) provides diversified exposure to a sector that offers genuine growth characteristics.

A number of major blockbuster treatments have just been or will soon be launched, for example Gilead with its Hepatitis C treatment. There is also a much more favourable Food and Drug Administration (the US body that approves drugs for use in that country) climate for new product approvals. And mergers and acquisitions activity continues as big pharmaceutical companies look to acquire new products, because their research and development is failing to produce new drugs.

Major biotech companies in the US are producing very strong earnings but are on modest mid-teens price-earnings ratios (PEs).

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

Herald Investment Trust's (HRI) NAV is relatively unchanged year on year, but it has suffered quite a bit over the past six months as small and mid-caps have sold off. But its manager Katie Potts has an excellent long-term record, and while small and mid-caps underperform in falling markets and may continue to for a while yet, this trust is definitely a secular growth story.

UK digital growth is strong as the US is an early adopter of internet technology, and is ahead of the rest of the world in online retail, for example.

Herald Investment Trust is a long-term story and I expect some strong growth going forward, while its shares are on an attractive discount to NAV of around 16 per cent.

INCOME

Richard Curling, manager of Jupiter Fund of Investment Trusts

TwentyFour Income Fund (TFIF) invests in UK and European asset-backed securities and uses the closed-end structure to take advantage of opportunities that are too illiquid for an open-ended fund. It targets a yield of 6 per cent and a net total return of 7-10 per cent. Given the mainly floating rate composition of the portfolio, returns should increase as interest rates rise - unlike many other income investments.

Nick Greenwood, manager of Miton Worldwide Growth Investment Trust

Japan Residential Investment Company (JRIC) offers something generally out of favour but with a reliable income. There is a yield of about 4.5-5 per cent from the underlying portfolio and the trust has a yield of around 6.5 per cent. Japan Residential trades on a discount to NAV of about 5.7 per cent.

Abenomics may fail because the structural hurdles are too great, but it should drive property prices higher, so I expect the trust's NAV to increase while it provides a genuine income.

Peter Hewitt, manager of F&C Managed Portfolio Trust

Murray International (MYI) is a global trust with strong dividend record. It is well diversified, and offers good exposure to emerging market companies with strong balance sheets and cash flows. The trust's investment team favours well-financed companies on a global basis.

Peter Walls, manager of Unicorn Mastertrust

JPMorgan Claverhouse (JCH) had a change in its management in March 2012 after a tough 2011. It also changed and strengthened its management team under William Meadon and has been good since then. The discount has come in quite a bit, but it is still at a reasonable level at 3.8 per cent, while the trust has a 3.7 per cent dividend yield.

It also has an outstanding long-term dividend record, having increased the payout for 41 years in a row and I don't see why this shouldn't continue. It is a fairly mainstream trust but is really focused on good-quality large-cap names. It has good dividend cover, which is a great attribute for an investment trust, together with decent revenue reserves which can help to maintain or increase payouts.

WEALTH PRESERVATION

Richard Curling, manager of Jupiter Fund of Investment Trusts

Capital Gearing Trust (CGT) has been managed by the hugely experienced Peter Spiller since 1982, since when it has achieved 16 per cent compound annual returns. It is invested across a broad range of asset types, and its holdings include direct investments in bonds and other investment trusts. Capital Gearing's objective is to achieve absolute returns and it has an excellent long-term track record in achieving this. You can sleep soundly with this trust and manager.

Nick Greenwood, manager of Miton Worldwide Growth Investment Trust

Ruffer Investment Company (RICA) is out of favour because many people wonder why you should own a cautious fund in a bull market. Ruffer's view - and you have to buy into this - is that there will be inflation rather than deflation. The trust holds gold and has a substantial exposure to index-linked bonds. Its managers are also bulls on Japan. If this works it should pay a lot, and if not Ruffer shouldn't lose too much.

Peter Hewitt, manager of F&C Managed Portfolio Trust

Ruffer Investment Company has a carefully constructed portfolio designed to preserve capital, especially in difficult markets. It has 45 per cent of its assets in equities, of which 16 per cent is in Japan. It has a large exposure to index linked bonds, both in the UK and US, with decent holdings in cash and gold.

The trust has a strong long-term record of protecting capital.

Peter Walls, manager of Unicorn Mastertrust

How do you achieve wealth preservation if bonds are overvalued, property is looking toppy and equities are up with events? Personal Assets Trust (PNL). However this trust has suffered over the past five years of bull markets and has quite a lot of exposure to the least desirable asset class - cash - which accounts for more than a fifth of assets.

It also has 10 per cent in gold bullion, which has had a pretty rocky ride. But its managers stick to their guns through thick and thin, and it is probably as well positioned for wealth preservation as any other fund with that focus. There is a chance that the relative performance of wealth preservation funds will be better in a few months' time.

DIVERSIFICATION

Richard Curling, manager of Jupiter Fund of Investment Trusts

Property remains an interesting area for investment as there are still plenty of opportunities to make money, and TR Property Investment Trust (TRY) is a large, well-diversified fund with an experienced manager who knows how to make the most of these opportunities. Many of the infrastructure and alternative energy funds are also interesting - especially for income - but I am concerned by the premium to NAV that most of these trade at.

Nick Greenwood, manager of Miton Worldwide Growth Investment Trust

Alternative Investment Opportunities (TLI) invests in US-traded life endowments. In its early days the fund bought large policies, but largely from wealthy people who did not die in line with statistics. Now, however, the average life expectancy is about 90 to 91, and while the wealthy live longer they are not immortal. The trust has extended the expected life expectancies of the policy holders but these are now realising and it has recently paid out dividends.

The policies are all in dollars and this currency has moved from weakness to a stronger position, so returns should be better than those the trust was hoping for.

Peter Hewitt, manager of F&C Managed Portfolio Trust

BACIT (BACT) is a unique vehicle. Its portfolio is invested with some of the best managers of both hedge and long-only funds, across multiple asset classes. Capacity is on a gross basis, that is managers agree not to charge fees. The trust targets returns of 10-15 per cent over the long term and aims to achieve them with a much lower level of risk than equities. 1 per cent of the NAV is donated to cancer charities each year, which is the only charge made by the fund.

Peter Walls, manager of Unicorn Mastertrust

Following Electra Private Equity's (ELTA) shareholders voting to reject activist investor Sherborne's (SIGB) attempts to get on the board, the market's reaction has been to assume that its stake of 20 per cent is stock overhang (as Sherborne may sell it) and Electra has swung out to a discount of more than 18 per cent. But you need to look at the relative immaturity of the portfolio and what the drivers of this are, and consider that Electra has always surprised on the upside with regard to valuations.

In terms of its capital structure, its zero-dividend preference shares and convertible bonds will unwind over the next two years (which should cut the cost of its debt), while the question of overall costs may lead to some reduction in its charging structure over time. There may also be more focus on returning capital to shareholders via buybacks or even dividends.

The trust has also delivered strong annual compound growth of 14 per cent.

Read more on Sherborne's action

EDITOR'S NOTE: Six of the recommendations from professionals are also members of the IC's Top 100 Funds: BACIT, Biotech Growth Trust, Murray International, Personal Assets, Ruffer Investment Company and TR Property.

How last year's professional picks performed

Source: Morningstar

Performance data as at 14 October 2014

Performance of new suggestions

Source: Morningstar

Performance data as at 15 October 2014

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