Investment trusts: professional picks 2016

GROWTH

Richard Curling, manager of Jupiter Fund of Investment Trusts (GB00B6R1VR15)

Small- and mid-cap stocks have been left behind by the market this year as large companies with lots of overseas earnings have benefited from the fall in sterling. And within the small/mid-cap arena, Montanaro UK Smaller Companies Investment Trust (MTU) has been left behind, so trades on a discount to net asset value (NAV) of about 22 per cent - one of the widest in its sector.

This trust has suffered from poor performance recently, but is managed by a very experienced team at a specialist small-cap investment boutique. They focus on quality growth stocks and have a great long-term track record. I expect that they will return to form soon, which should also see the discount narrow.

Nick Greenwood, manager of Miton Global Opportunities (MIGO)

Aurora Investment Trust (ARR) was taken over by new managers at Phoenix Asset Management in January this year, [following years of poor performance under its previous managers]. The team describe their style as "fundamentalist value". This involves building a highly concentrated portfolio of UK equities where they believe the market price has fallen to below 50 per cent of Phoenix's estimate of the business' intrinsic value.

The trust's largest 10 positions account for about 82 per cent of NAV.

Phoenix's original offshore funds have returned 8.7 per cent (11.5 per cent gross) per annum since launch in 1998, but many UK-0based investors cannot put their money into these offshore funds.

Aurora Investment Trust's managers do not earn an annual management fee, but will be paid an annual performance fee, equal to one-third of the outperformance of the trust's NAV total return over the FTSE All-Share Total Return for each financial year.

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

Templeton Emerging Markets Investment Trust (TEM) is high risk, but I have recently bought a big position because I am quite impressed by its new manager, Carlos Hardenberg. Emerging markets are relatively cheap and now there is an element of stabilisation in China. The outlook for company profits in these regions is better, a number of which are well run with good balance sheets.

I didn't own this trust previously because its portfolio was dominated by energy, mining and bank shares, but Mr Hardenberg has cut exposure to these and the largest sector exposure is now IT, which accounts for over a quarter of assets, and consumer discretionary, which accounts for about a fifth.

He has also cut down China exposure and increased allocation to South Korea which is quite cheap, and Taiwan.

I feel that the trust is now run by a manager who is on top of things rather than a figurehead as in the past, and its focus on emerging markets equities means it is on the right side of the sterling trade.

Templeton Emerging Markets is trading on a discount to NAV of around 9.6 per cent, which enhances its attraction.

Peter Walls, manager of Unicorn Mastertrust (GB0031218018)

Monks Investment Trust (MNKS) ticks practically all the boxes for what a good global growth investment trust should be, with a competitively-priced charging structure, the modest use of gearing and a proven investment approach.

The portfolio is built from the bottom up by the Baillie Gifford Global Alpha team, which has successfully applied the same approach to managing open-ended funds since 2005. The team was appointed to Monks in March 2015, and following a portfolio restructuring performance has improved markedly with the NAV outperforming the tough to beat FTSE World Index over the past 12 months. Even so, the shares are trading at a discount which ought to narrow over time.

INCOME

Richard Curling

Chelverton Small Companies Dividend Trust (SDV) is a small trust with a great performance record run by an experienced team. Small-caps have been left behind by the market this year so this is an interesting time to look at this sector.

I am keen to avoid bond proxies, i.e. trusts that have a high income but limited prospects to grow it, as I think we are near a low in bond yields and there is a significant risk of an upward move which will hit many of those types of trusts. Likewise, following the downward shift in sterling, I do not necessarily think it is the right time for a sterling investor to be considering many of the excellent sources of overseas equity income.

The key points about Chelverton are that not only does it have a high initial yield, but also the prospect of growing the dividend. And it is invested in an area of the market - small and micro-caps - where there are not many other income-seekers.

Nick Greenwood

Establishment Trust (ET.) is a small Asian specialist that had done a solid job until the middle of 2013 since when which point the portfolio has struggled in performance terms. The trust largely runs the wealth of the Thornton family who hold around a half of the shares. Following the death of Richard Thornton in 2012, whose assets accounted for a large part of the fund at launch, the future of Establishment Trust is unclear.

The trust is also very small with assets of only £51m and is trading at a wide discount to NAV of more than 25 per cent due to poor liquidity [for reasons of size and lack of availability of shares]. But it is not a bad fund and pays good dividends [it has a yield of about 2.7 per cent], so it's a good way to get an income. It's a speculative option, as it is not clear what its future is, but shareholders could benefit from corporate change, and in the meantime it is paying out an attractive income.

Peter Hewitt

Murray International Trust (MYI) offers an attractive yield of about 4 per cent. Around 90 per cent of its assets are invested outside the UK with a substantial chunk in emerging markets.

Its manager Bruce Stout tends to pick very well financed, safe companies rather than highly risky ones, and I like his approach. He focuses on dividend yields, favouring companies in areas such as telecoms and consumer staples.

After a difficult three years, the trust's performance has come back and it is positioned on the right side of the currency trade.

Peter Walls

JPMorgan Global Emerging Markets Income Trust (JEMI) is perhaps not one for the faint-hearted, but for investors who already hold more conventional income or income growth investments it can provide additional diversification.

Emerging markets have started to reverse some of their multi-year underperformance relative to developed markets and sentiment appears to be improving. The shares offer a dividend yield of about 4 per cent although it should be noted that currency fluctuations can have a significant impact on the trust's earnings. Sterling's post-Brexit vote weakness has obviously been helpful, allowing JPMorgan Global Emerging Markets Income to maintain its dividend rate, despite the fact that dividends generally fell in emerging markets over the past year. Clearly one for the long term.

WEALTH PERSERVATION

Richard Curling

Sanditon Investment Trust (SIT) is a small trust which invests in pan-European equities, with the objective of delivering at least 2 per cent a year above inflation with a low correlation to equity markets. It is run by the hugely experienced Tim Russell and Chris Rice, formerly of Cazenove Capital.

This trust owns 20 per cent of its management company, Sanditon Asset Management, which, if successful, will be worth a material amount adding some nice upside potential.

Nick Greenwood

Sanditon Investment Trust was Sanditon Asset Management's first launch in 2014 and has a stake of about 20 per cent in its manager. It is difficult to judge whether Sanditon will succeed as a venture, at least until its funds pass their three-year anniversary - the minimum age which professional fund selectors will consider when allocating capital.

But the funds managed by the team at Sanditon are all scalable, meaning that the company has the scope to become a serious player. And should they succeed, the share stake that Sanditon Investment Trust holds in its manager would have significant value.

The cautious positioning of the trust's portfolio, meanwhile, chimes with my concerns on mainstream equities and its NAV held up during the last market sell-off, though it could lag in rising markets.

Peter Hewitt

Ruffer Investment Company (RICA) has around 44 per cent of its assets in index-linked bonds, and 7 per cent in gold and gold equities, which should provide some downside mitigation if things go really bad.

Other exposures include about 16 per cent in Japanese equities. Its managers pay lots of attention to balancing the portfolio so that one part of it is delivering performance while another part is preserving value.

The trust has succeeded in delivering a positive return in most years or only falling by a small amount.

Peter Walls

RIT Capital Partners (RCP) aims to provide healthy participation in rising markets and reasonable protection in falling ones, so that over the long term its NAV should compound at a higher rate than the markets. Perhaps the best illustration of this aim are the figures from its latest annual report which states: "Since your company's listing in 1988, we have participated in 76 per cent of the market upside but only 39 per cent of market declines. This has resulted in our NAV per share total return compounding at 11.4 per cent per annum; a meaningful outperformance of global equity markets."

RIT Capital Partners' shares often trade at a premium to NAV - over the past 12 months the average premium was about 4.5 per cent.

DIVERSIFICATION

Richard Curling

The private equity sector has been in the news recently due to the competitive bids for SVG Capital (SVI) which have also led to a narrowing of discounts on several other private equity trusts. Aberdeen Private Equity Fund (APEF) is a fund of funds, so is well diversified and trades on a wide discount to NAV - around 29 per cent at the time of writing - in spite of delivering some good performance since Aberdeen took over its management in 2009.

At its recent annual general meeting it was agreed to increase the dividend to 4p a year, reduce the management charges and introduce an annual continuation vote, all of which should help reduce the discount further.

Nick Greenwood

Macau Property Opportunities Fund (MPO) has a maturing portfolio of mainly residential properties in Macau, an autonomous region of China focused on gaming and gambling. Its current portfolio is a mix of prime residential and retail property assets, which were valued at US$393.7m as at 30 June 2016.

Despite the clamp down on corruption in mainland China depressing profits, six new casinos have either recently opened for business or are in the process of doing so. These operations will require thousands of extra employees so staff will have to be imported, leaving the local residential property market under supplied as Macau is already one of the most densely populated places in the world.

This is a classic arbitrage between perception and reality as this trust's discount of around 43 per cent reflects dire sentiment towards anything to do with Macau. But gross gaming revenues have registered an uplift for two consecutive months since August and the International Monetary Fund believes Macau's economy will return to growth in 2017.

UK investors also benefit from sterling's weakness against assets in foreign currencies.

The trust is in wind down, but its board is proposing that it continues until at least November 2018 to allow sufficient time to realise the full value of the properties in the portfolio. Shareholders will vote on whether to do this at the annual general meeting on 14 November.

Peter Hewitt

HgCapital Trust (HGT) is a private equity trust which invests directly in companies rather than other funds, largely in the UK and Europe. What I like is that it has areas of focus that it sticks to such as technology, media and telecoms (TMT), services and industrials.

Within TMT, the businesses its managers like include those involved with regulatory software, fintech, and those which supply products for small to medium enterprises. Its industrial exposure includes companies with strong national or international positions in a specific niche sector, with the opportunity to scale further, so it does not have much economic cycle sensitivity.

HgCapital is largely invested and should benefit from good realisations over the next year or two at least - it has a lot of momentum in its portfolio.

It trades on a discount to NAV of around 11 per cent which is tighter than most other private equity investment trusts, but its asset value growth should be strong. It is also large and liquid with a market cap of about £530m.

Peter Walls

Since the referendum it's been a torrid period for property funds, with a number of open-ended funds suspending investor redemptions over the summer and an easing in capital values which had risen strongly in the previous three years. TR Property Investment Trust (TRY) was not immune to the turn in sentiment and its discount to NAV moved out to more than 20 per cent at one stage.

The discount has since closed to around 14 per cent but remains wider than its 10-year average of 9 per cent. This seems harsh, especially when one considers that more than 60 per cent of the portfolio is invested in European property which appears to offer relatively attractive value in comparison to the UK.

Performance data: Morningstar as at 14 October 2016

Other data: Morningstar/Investors Chronicle as at 20 October 2016