There are many reasons to hold investment trusts in your individual savings account (Isa) portfolio. One of the most compelling is that investment trusts can give you the opportunity to buy into assets at a discount. Their structure can also make them better suited than open-ended funds for investing in illiquid investments such as commercial property and private equity. This is because they don't have constant inflows and outflows of money - investors buy shares in the trust and there are a set number of these. Being listed means they are arguably more transparent than open-ended funds as they have to file regular reports to the market, although the standards of this vary from trust to trust.
So as well as giving you actively managed exposure to core areas, sometimes for a good price, you can also introduce some unusual assets to your portfolio to diversify the mix.
Below are ten investment trust recommendations from investment trust analysts focused on five strategies: growth, income, wealth preservation, diversification and contrarian.
GROWTH
Biotech Growth Trust (BIOG)
Alan Brierley, director-investment companies, Canaccord Genuity says: "To say the last ten years has been a transformational period, both for Biotech Growth Trust [an IC Top 100 Fund] and the underlying asset class, would be an understatement. The market value has increased from £26m to £462m and we would note that the investment in Biogen (US:BIIB), currently the largest holding in the portfolio, has a value of about £48m. Despite Biotech Growth's share price falling 27 per cent in just over six weeks over March and April last year, the 2014 shareholder total return was still 45 per cent.
"Given the extent of the absolute and relative gains in recent years, it’s only natural to question the sustainability of returns - even US Federal Reserve chairwoman Janet Yellen has opined on whether the sector is exhibiting bubble tendencies. However, although secular growth is an overly used phrase in the investment world, we believe that the biotech sector demonstrates such characteristics, while the manager highlights that valuations remain attractive. Given the polarisation of returns in the underlying universe and the binary nature of many investments, the managerial resource of the trust’s manager OrbiMed, with 80 highly experienced investment professionals, gives it a unique competitive advantage. Arguably market timing here is near impossible but over the next 10 years we would expect the sector to deliver superior returns, and for OrbiMed to be able to continue to generate alpha in this highly specialist sub-sector."
Dunedin Smaller Companies (DNDL)
Charles Tan, investment companies analyst, Cantor Fitzgerald says: "Although net asset value (NAV) returns lagged behind in 2014, performance is strong when viewed over five years or since inception. Therefore Dunedin Smaller Companies could rebound strongly as sentiment toward small-caps improves longer term. The trust has delivered a NAV total return of more than 121 per cent over five years. In comparison, its benchmark, the FTSE Small Cap (ex Investment Companies) index has returned 65 per cent, while the broader FTSE All-Share index has returned 94 per cent over the same period. Furthermore, the trust has moved from a small premium to NAV in February 2014, to the current 15 per cent discount.
The underperformance can be largely explained by the portfolio’s lack of exposure to the low-quality, low dividend names that have risen strongly in the past year.
A change in emphasis in November 2006 shifted Dunedin Smaller Companies towards an increased focus on income, and it has grown its dividend steadily since, at a rate in excess of inflation, in addition to consistently being the highest-yielding in its sector."
INCOME
Value & Income Trust (VIN)
Jason Hollands, managing director, Tilney Bestinvest, says: "Investors need to tread carefully when hunting out income generating investment companies as many are trading at thumping premiums in the current yield-starved environment. One that looks decent value is Value & Income Investment Trust. It invests in a combination of high yielding UK equities, typically small and mid-sized companies, and UK commercial property. The latter typically accounts for a quarter of the portfolio." The trust has a yield of 3.7 per cent and is trading at a 17 per cent discount to NAV.
Target Healthcare REIT (THRL)
Stephen Peters, investment analyst, Charles Stanley, says: "Target Healthcare REIT is a property fund that owns residential care homes around the UK, often ones that are focused on caring for residents that may require a higher level of care, for example, suffering from dementia. It’s a commercial property play as it owns the underlying assets, but it is also benefiting from the ageing population in the UK and the regulatory pressure for better care homes. Clearly there is income risk given pressure on state funding for residential care, but Target Healthcare’s managers are highly experienced and partner with strong operating companies around the UK. It targets a 6 per cent dividend yield paid quarterly."
The trust has a yield of 6 per cent and trades on a premium to NAV of 7 per cent.
WEALTH PRESERVATION
Ruffer Investment Trust (RICA)
Nick Sketch, senior investment director, Investec Wealth & Investment, says: "For wealth preservation, Ruffer Investment Trust [an IC Top 100 Fund] remains an obvious choice. It has about a third in bonds and two-thirds in equities, and a focus on not losing money over any realistic investment period. The bonds are mostly inflation-protected despite the low headline returns, and the equities are mostly solid large-cap names, though the team is finding better value in Japan than in the UK or US at the moment.
"I don’t expect Ruffer to make investors huge returns or deliver an exciting ride in the next few years, but that is just the point: there will be no style drift here and the excellent managers will carry on trying to deliver decent returns for modest absolute risk, which is just what many investors actually need."
Seneca Income & Growth (SIGT)
Mr Tan says: "Seneca Global Income & Growth (which was known as Midas Income and Growth Trust until October last year) has made strong progress in the three years since it adopted a revised investment mandate. Through its unique investment approach, which comprises a multi-asset strategy combined with direct stockpicking for the UK equity component, the trust has outperformed the FTSE All-Share index, notably, with half the volatility and a healthy 4.1 per cent dividend yield. Seneca Global Income & Growth is an underrated trust which represents a well-balanced, lower-risk way of accessing the global growth and income sector.
"The trust has, by some measure, the lowest NAV total return volatility in its Global Income & Growth sector, while its returns in absolute terms are marginally better than the UK equity market.
"Seneca Global Income & Growth has made strong progress in the three years since it adopted a revised investment mandate, and when viewed in terms of risk-adjusted performance ranks at the top of its sector peer group since the change of mandate in 2012. The discount to NAV has narrowed from around 15 per cent to the present 5 per cent, a reflection of the progress made since the mandate change. The relative strength and stability of NAV returns continues to support a further narrowing of the discount on which Seneca Global Income & Growth’s shares still trade."
DIVERSIFICATION
Blue Crest All Blue Fund (BABS)
Mr Sketch says: "The category of alternatives is a basket containing many very different types of investment, from commercial property or infrastructure, to highly geared hedge funds or gold bullion. Few of these will be natural core holdings, but many can act as useful diversifying holdings in an equity or bond-based portfolio.
"Good macro hedge funds offer a reasonable expectation of long-term returns higher than mainstream bonds with far fewer sharp losses over individual years than equities, and about a dozen have a Sterling-based share class quoted on the London Stock Exchange. BH Macro is the largest, but Blue Crest All Blue is just as well run and looks marginally more attractively priced today at a 4.65 per cent discount.
"As an alternative investment, it may not be an obvious choice compared to infrastructure, commercial property and the like, but it offers a low correlation with equity markets, fairly modest absolute risk and a strong probability of making more than 5 per cent in most calendar years."
Allianz Technology Trust (ATT)
Kieran Drake, research analyst, Winterflood Investment Trusts, says: "For investors seeking specialist exposure to the technology sector we are currently recommending [IC Top 100 Fund] Allianz Technology. This is a genuinely actively managed fund as reflected by its bias to mid-cap higher growth companies. It also benefits from an experienced and well-resourced management team, co-headed by Walter Price, who has been investing in technology companies for over 40 years. The team is based in San Francisco and, given the dynamic nature of the sector, this proximity provides a competitive advantage.
"The fund's size - it has a market cap of £146m - means it is less liquid than its peers. However, given the managers’ strong performance record and experience, this fund is well placed to benefit from the secular growth generated by the technology sector."
CONTRARIAN
BH Macro (BHMG)
Mr Brierley says: "BH Macro’s NAV total return was effectively flat last year and returns have now been anaemic for four out of the past five years. Some investors have begun to lose patience so the trust has moved to address a supply/demand imbalance and resultant derating by undertaking an active buyback programme. Nearly 15 per cent of shares have been repurchased since last February.
"We introduced BH Macro into our model portfolio at the beginning of 2008, and regardless of these anaemic returns, we continue to believe it has an important role to play in improving portfolio diversification. Its fortunes are inversely correlated with risk assets while the destruction of volatility by central banks has materially reduced the opportunity set. One day, we believe this will change. We have no idea when, but when it does it could be brutal."
Montanaro UK Smaller Companies (MTU)
Mr Peters says: "Montanaro UK Smaller Companies has performed poorly of late: its high quality style has really not been in favour in the past 18 months or so. But it’s on an 18 per cent discount, pays a dividend and has a very good track record.
"The manager changed last year but it was an internal replacement. Style goes in and out of favour over time but quality remains. Although Mr Montanaro himself is taking more of a back seat as the year progresses we think the trust is placed to do well."
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