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10 investment trusts to enhance your Isa

We set out the experts' picks of the best investments trusts to hold in your Isa
March 4, 2016

There are many reasons to hold investment trusts in your Isa portfolio. Their structure can make them better suited than open-ended funds to 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. So as well as giving you actively managed exposure to core areas you can also introduce some unusual assets to your portfolio to diversify the mix.

Not having to worry about constant inflows and outflows of money also means investment trusts can take a long-term view on investments – alternative or otherwise. This works well in Isas as their tax efficiency makes them a good wrapper in which to build up investments over the long term.

Below are 10 investment trust recommendations from investment trust analysts focused on five strategies: growth, income, wealth preservation, diversification and contrarian.

GROWTH

11 Monks Investment Trust (MNKS)

Alan Brierley, director, investment companies team, at Canaccord Genuity, says:

"In March 2015 Monks' board moved to address a disappointing performance record by appointing Baillie Gifford's Global Alpha team to run the trust, with Charles Plowden as lead manager. This team has a clear investment philosophy, with a focus on long-term global equity growth, a patient approach, and bottom-up stock selection driving portfolio construction. The portfolio little resemblance to its benchmark, with active share typically over 90 per cent."

 

 

Active share, a measure of how actively a portfolio is managed, is the percentage of the portfolio that differs from its comparative index. Monks' active share is currently 93 per cent.

"Monks' re-rating is now underway, with the discount having narrowed from 14 per cent at the time of the change to around 11 per cent, and we expect to see further progress moving forward," adds Mr Brierley.

12 Aberdeen Asian Income Fund* (AAIF)

Monica Tepes, ‎director, investment companies research at Cantor Fitzgerald, says: "Aberdeen Asian Income actually ticks two boxes - growth and attractive income with a 5.7 per cent yield - but the income component does not make it less of a sound growth opportunity.

"The well-known Aberdeen approach to investing in quality companies has delivered strong outperformance since the trust's inception in 2005. Aberdeen's definition of a quality company is one with a higher return on equity and assets, and lower debt levels compared to the broader market.

"However, the strategy has struggled over the past two-and-a-half years, so this may well prove to be a very good entry point, especially as the portfolio has been outperforming in the year to date. Aberdeen Asian Income's shares, which have traded on a premium to net asset value (NAV) for about seven out of the 10 years since the trust's inception, are now on a 10.8 per cent discount, the widest in its history.

"The trust was on a discount over 2007-08 and 2015, and in 2016 to date. Aberdeen Asian Income is also a good size, with a £287m market cap."

INCOME

13 Perpetual Income & Growth Investment Trust* (PLI)

Tim Cockerill, investment director at Rowan Dartington, says: "Equity income trusts provide investors with a level of income ranging from about 2 per cent to 6 per cent, and the potential that this income will grow as the underlying dividends grow. As their underlying source of income is very diverse because of the number of companies they hold, the risk of a trust's dividend being cut is considerably reduced – although still possible.

Additional protection for the dividend comes in the form of reserves: income that has been accumulated for later distribution, usually at times when there are dividend cuts. This enables an investment company's dividend to be maintained during a shortfall.

A good UK equity income trust Perpetual Income & Growth, managed by Mark Barnett. This yields 3.8 per cent, is trading at a discount to NAV of about 3.9 per cent and has a long track record of delivering solid returns."

14 City of London Investment Trust* (CTY)

Gavin Haynes, managing director at Whitechurch Securities, says: "City of London Investment Trust is an excellent core holding for investing in UK dividend stocks. This is a mainstream UK income and growth trust managed by Job Curtis. The trust has an exceptional record of increasing dividend growth every year since 1967, as well as beating the FTSE All Share index over the short and long term."

WEALTH PRESERVATION

15 BH Global (BHGG)

Jason Hollands, managing director at Tilney Bestinvest, says: "BH Global is a London-listed, Guernsey domiciled investment company that invests principally in the Brevan Howard Multi-Strategy Master fund and other strategies managed by traders at Brevan Howard, a hedge fund manager. The multi-strategy approach covers a host of themes, including equities, credit, currency, interest rates and volatility trades, which collectively have exposure to up to 1,000 underlying positions."

This trust makes positive NAV and share price returns in most years helping to preserve shareholders capital, exceptions including 2012 when its share price fell -3.28 per cent, though its NAV made a positive return of 4.57 per cent.

16 RIT Capital Partners* (RCP)

Stephen Peters, investment analyst at Charles Stanley, says: "For wealth preservation I suggest RIT Capital. This is a large, liquid dividend payer which offers exposure to equities but also actively engages in wealth preservation given the nature of the family behind it."

This trust provides diversified exposure across a range of assets including hedge funds and private equity. It has made positive returns in most years, and even in bad years such as 2008 its share price fell 14.2 per cent – a lot less than the FTSE All-Share which went down nearly 30 per cent and FTSE World which fell 18.2 per cent.

DIVERSIFICATION

17 International Public Partnerships (INPP)

Nick Sketch, senior investment director, Investec Wealth & Investment, says: "With equity markets reflecting quite correctly that there are a longer than usual list of possible risks for them today, and most bonds offering ultra-low yields, looking for a third part to a portfolio is probably now more necessary than ever.

Today may not be as good an entry point as we have seen occasionally in the past, but the Infrastructure sector is still worth a look if you are taking a genuinely long-term view. International Public Partnerships is a sensible core holding in this area, offering a robust and probably gently increasing income yield of about 4.6 per cent from projects like schools and police stations, plus the new London super-sewer."

International Public Partnerships invests in more than 100 public infrastructure projects developed under the private finance initiative (PFI), public private partnerships (PPP) and similar methods. Most of these are in the UK, with assets in other countries such as Belgium, Germany and Australia.

The trust trades on a premium to NAV of 8.4 per cent.

18 NextEnergy Solar Fund (NESF)

Ms Tepes says: "For diversification I would go for NextEnergy Solar Fund. This pays an attractive and inflation-linked dividend of 6.25p, earned through the sale of electricity generated by solar farms. This is equivalent to a 6.7 per cent yield on the share price (at time of writing).

The variability of the underlying cash flows which make up the portfolio returns is mainly down to three factors:

■ the level of solar irradiation, completely independent of economic or market conditions;

■ the level of inflation as around 40 per cent of its revenues are Retail Price Index inflation-linked; and

■ the electricity price which determines around 60 per cent of its revenues.

So the biggest and most volatile factor here is the electricity price, but this has historically exhibited very little correlation with most asset classes, including equities, bonds and property.

The trust's investment manager, NextEnergy Capital, is also the hands-on operational manager of the assets. NextEnergy Capital has deep expertise in this area and has demonstrated the additional value that can be generated by maximising operational performance.

The trust is also a good size with a market cap of about £224m, while its dividend is well covered."

CONTRARIAN

19 BlackRock World Mining Trust (BRWM)

Mr Brierley says: "All of the relative gains of the commodity super cycle have been wiped out in five traumatic years. The Euromoney Global Mining index has underperformed the MSCI AC World Index by 81 per cent, while BlackRock World Mining Trust's share price was 81 per cent off its 2011 high. Although there has been a stabilisation in the relative performance the company now faces an uphill struggle to rebuild credibility. Having been critical of the trust's modest fee reduction in March 2015, a later further reduction to 0.8 per cent of gross assets was a welcome development.

BlackRock World Mining Trust yields 11.4 per cent but there are concerns about the sustainability of its dividend. The trust's board says given the widespread challenges facing the mining sector, the sustainability of dividends at the underlying stock level is being closely monitored to determine appropriate dividend payments by the trust in future.

"While the slowdown in the global economy and ongoing developments in China are significant headwinds, we wonder just how much bad news has already been discounted in the past five years," continues Mr Brierley. "For some time, we have struggled to reconcile the collapse in the commodity sector with a global economy that is supposed to be in recovery mode, and we do fear this may be the canary in the coalmine. But for those prepared to take a long-term view, BlackRock World Mining's shares have appeal for the contrarian investor."

20 Fidelity Asian Values (FAS)

Mr Peters says: "Asia is massively out of favour and I like Fidelity Asian Values run by Nitin Bajaj. This trust mainly invests in Asian smaller companies, which are in an unloved sector and region. The trust is also on an attractive discount to NAV."

Fidelity Asian Values is on a discount to NAV of 14.2 per cent (at time of writing). The trust also changed its manager to Nitin Bajaj last year, who has a strong six-year track record of managing money. If Mr Bajaj makes a success of running the trust and sentiment on Asia improves, the discount to NAV could come in.

*IC Top 100 Fund

Investment trust performance

Investment trust Discount/premium to NAV (%)Yield (%)1 year share price return (%)3 year cumulative share price return (%)5 year cumulative share price return (%)Ongoing charge (%)*
Monks-12.41-516180.58
Aberdeen Asian Income Fund-10.25.7-21-24201.25
Perpetual Income & Growth Investment Trust-3.93.3-535801.23
City of London Investment Trust-1.94.5-917510.42
BH Global -8.10-45n/a1.18
RIT Capital Partners -22238321.25
International Public Partnerships +11.54.5729581.23
NextEnergy Solar Fund -6.86.8-6n/an/a1.59
BlackRock World Mining Trust -16.711.4-39-62-711.40
Fidelity Asian Values -13.90.8-220291.42
FTSE All Share-11725
FTSE World ex UK-22749
MSCI AC Asia ex Japan-11-312
Euromoney Global Mining Index-33-55-68

Source: Winterflood as at 25 February 2016

*Association of Investment Companies using Morningstar