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Seeking investment trusts via a mildly contrarian approach

The past year has seen substantial change in the investment landscape, and while this brings new challenges, it also throws up new opportunities. This is certainly the case in the investment trust sector, an area that Peter Walls, manager of IC Top 100 Fund Unicorn Mastertrust (GB0031218018), invests in via "a mildly contrarian approach".

He thinks trusts that invest according to a value style could do well.

"Growth managers have had a very good period until quite recently, and we will have to see whether growth style will come back into vogue - particularly in a rising interest rate environment," he says. "So it is probably time to look at some of the value type funds, for example, Aberforth Smaller Companies Trust (ASL), as one might expect continued mergers and acquisitions activity to have an impact on its portfolio. This trust has a holding in e2v technologies (E2V) [which is being acquired by Teledyne Technologies] and there may be more of that sort of activity taking place."

And Mr Walls thinks that UK smaller companies investment trusts in general look like good value.

"UK smaller companies' discounts to net asset value (NAV) have widened quite appreciably over the past 12 months, running out from on average 6 per cent to about 14 per cent, so I think there's definitely some value there for long-term investors," he explains. "With UK smaller companies, obviously Brexit continues to weigh on sentiment."

Other areas where he sees value include Europe-focused investment trusts and emerging markets.

"The rationale for those wider discounts is pretty easy to explain at the moment - we've got political uncertainty regarding Europe looking ahead to the elections [in France, Germany and the Netherlands], he explains.

"Regarding emerging markets, we've seen protectionist rhetoric from Donald Trump which has led to some concerns about the future performance of these regions. But in the case of emerging markets I find it quite difficult to rationalise why sentiment should be quite so poor. While I can understand the rhetoric from the US, I wonder if a massive infrastructure spend and fiscal stimulus in the US is not going to need vast amounts of raw materials and commodities, which generally tend to come from emerging markets close by. In the past we've seen quite strong correlation between commodities indices and those of emerging markets, but that relationship has broken so I think there might be opportunities there."

Listen to our full interview with Peter Walls here

Recent additions to Unicorn Mastertrust's portfolio to take advantage of widened discounts include Polar Capital Global Financials Trust (PCFT), which aims to capture the potential recovery in financials.

"I like Polar Capital Global Financials' management team and took the opportunity to top up when Deutsche Bank (Ger:DBKX.N) was deemed to be in trouble and the trust's discount widened out quite a bit," says Mr Walls. "This trust didn't hold Deutsche and I also concluded that this bank wasn't an Armageddon situation, so Polar Capital Global Financials' discount was quite attractive at that stage.

"With the election of Donald Trump financial markets, particularly in the US, have perked up and banks are incredibly sensitive to rising interest rates. We saw a rise in US interest rates [at the end of last year] and a lot of commentators have pushed up their expectations for more rises. That can have a profound impact on bank profits so it's a little bit like the recovery we've seen in the commodities and mining sectors: these have been unloved for many years so I think the reaction over time could be quite impressive.

"With Polar Capital Global Financials, I'm also encouraged that you have the opportunity to get your money back at asset value in 2020 (the trust has a fixed life which expires then), so I don't think there's any great discount downside risk in that particular holding."

He also added UK equities trust Artemis Alpha (ATS), which at the time was trading on a discount of more than 25 per cent. "It had a disappointing period impacted by the falling oil price due to a lot of exposure to junior Alternative Investment Market (Aim)-traded oil companies, and one or two unfortunate investments in unquoteds that didn't go according to plan," says Mr Walls. "But the portfolio is being restructured and fits much more with my thinking now so, although it would have been nice to have seen the bounce in some of those oil exploration stocks come through in the performance, I'm quite happy with the way it looks."

But he also thinks a lot of areas look overpriced. "You don't have to look too far to find areas that seem overvalued by historic standards," says Mr Walls. "These include US equities, consumer staples, bond-proxy type investments, utilities and some of the technology unicorns which are valued on multiples of sales rather than multiples of profits.

"But I can't really tell whether or not they are going to become more expensive in the coming year, and I'm not really sure whether I can point in the direction of too many trusts that look outrageously overvalued, although as a general rule of thumb if a premium rating builds into double digits I tend to get quite wary - regardless of the recent track record. You've got to keep a wary eye on premiums and make sure a premium is justified, and if not, take profits.

"Ultimately, the most important thing is the price you pay, and by implication, that might have something to do with the discount to NAV. The investment style of the manager and the make up of the underlying assets are key factors, but there are many other considerations to take into account including who are your fellow shareholders, is there a potential share overhang and are there shareholders that have more aggressive arbitrage-minded intentions?

"So, really, it's a question of marrying my top-down asset allocation views to a bottom-up trust selection process. But it would be nice to buy the best managers at the cheapest price every time around."

UNICORN MASTERTRUST (GB0031218018)

PRICE394.96pMEAN RETURN10.43%
IA SECTORFlexible InvestmentSHARPE RATIO1.2
FUND TYPE Open Ended Investment CompanySTANDARD DEVIATION7.89%
FUND SIZE£41mONGOING CHARGE0.87%
No OF HOLDINGS52*YIELD0.92%
SET UP DATE31-Dec-01MORE DETAILShttp://www.unicornam.com/
MANAGER START DATE31/12/2001*

Source: Morningstar, *Unicorn Asset Management.

Performance

 1 year total return (%) 3 year cumulative total return (%) 5 year cumulative total return (%)
Unicorn Mastertrust 21.1934.70100.67
IA Flexible Investment sector average 17.0723.0353.99
MSCI AC World Index NR GBP34.7050.9797.67

Source: Morningstar as at 6 January 2017

Foreign & Colonial Investment Trust3.4
Standard Life European Private Equity Trust3.2
Fidelity Asian Values3.2
Blackrock World Mining Trust2.8
Polar Capital Global Financials Trust2.80
Herald Investment Trust2.60
Better Capital PCC2.60
Caledonia Investments2.6
TR Property Investment Trust 2.6
British Empire Trust2.5

Sector breakdown (%)

Equity investment instruments89.1
Cash10.9

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By Leonora Walters,
11 January 2017

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