Not having to worry about potential inflows and outflows of money means investment trusts, unlike open-ended funds, can take a long-term view on investments. This works well in Isas as their tax efficiency makes them a good wrapper in which to build up investments over the long term.
Not having to deal with inflows and outflows also means investment trusts can be better for investing in illiquid investments such as commercial property and private equity. So as well as using them for actively managed exposure to core areas, you could also use them to introduce some unusual assets to help diversify your portfolio.
Below are 10 suggestions from investment trust analysts for getting growth, income, wealth preservation, diversification and contrarian opportunities.
Kieran Drake, analyst at Winterflood, says: "Scottish Mortgage Investment Trust provides investors with exposure to an investment mindset that is differentiated from its peers by its emphasis on identifying the future direction of the world and positioning the portfolio accordingly. While this year may prove difficult, particularly given the potential actions of President Trump, we believe this trust will continue to generate growth in excess of global equity indices over the long term.
"Scottish Mortgage has always been positioned as a long-term growth fund and this can be seen throughout the portfolio. Outside the top 10, a significant portion of the holdings by number are invested in unquoted investments and there is the risk that some of these companies will fail to deliver on their promise. However, we are satisfied that the potential upside is considerable and so more than compensates for this."
Monica Tepes, director, investment companies research at Cantor Fitzgerald, says:
"Gabelli Value Plus + Trust is less well known despite being run by a prestigious US fund manager with a strong long-term record. It invests in US equities across the market cap spectrum and is run with a value-orientated bottom-up approach."
Its managers look to invest in stocks that trade at a significant discount to their private market valuation - the price they believe a strategic buyer would pay for the whole company - and where they can see one or more catalysts that should narrow that discount. Catalysts can include restructurings such as demergers and asset sales, operational improvements, regulatory/managerial changes, and mergers and acquisitions.
This approach has delivered since 1997, on average, better performance relative to the S&P 500 index in down quarters, while also keeping up in quarters when things are going up.
Not having to deal with inflows and outflows also means investment trusts can be better for investing in illiquid investments such as commercial property and private equity
Alan Brierley, director, investment companies team at Canaccord Genuity, says:
"Edinburgh Investment Trust is our core recommendation for investors looking for low-cost exposure to Mark Barnett. As we enter an era of lower returns, higher ongoing charges will have a much greater dilutive impact and accordingly an ongoing charge of just 0.61 per cent is highly attractive. [The other investment trusts managed by Mark Barnett]
"The portfolio is driven by high-conviction stock selection, with a focus on companies that can deliver sustainable revenue and earnings growth, free cash flow, and dividends without excessive financial leverage. The manager believes that these characteristics, when combined with relatively attractive valuations, should leave the portfolio well placed given challenges facing UK equities, including demanding valuation levels, a lack of underlying earnings growth, economic headwinds and political uncertainty."
Ms Tepes says: "This trust has a very strong track record: it has beaten the FTSE All-Share over the past five years, with much lower volatility and a higher yield. So you are getting an attractive yield of about 3.8 per cent, but also capital growth.
"Its managers take a multi-asset value approach, which means your capital and sources of income are diversified, and both should hold up better than equities in a market downturn.
Seneca Global Income & Growth's core allocations are to UK equities with a mid-cap bias, overseas equities, fixed income, property and alternative assets. In keeping with its value approach, its managers not only look for value investments within each asset class, but also tactically look to overweight asset classes they consider to be cheap and underweight ones they think are expensive."
Charles Cade, head of investment companies research at Numis Securities, says:
"RIT Capital Partners focuses on capital preservation in real terms through a global investment portfolio. The management team, led by Francesco Goedhuis, seeks to identify key macro themes and then construct a portfolio through a combination of high-conviction stocks - both listed and unquoted, as well as investing alongside specialist third-party managers. Since inception in 1988 this trust has delivered an attractive return profile, participating in much of the market upside, while limiting exposure to downside through active management of equity and currency exposure. This has resulted in net asset value (NAV) total returns compounding at 11.4 per cent a year - significantly ahead of global equity markets."
Mr Drake says: "Manager Sebastian Lyon's global macroeconomic views, and thoughts on bond and equity markets, are well reasoned and convincing. He has done a good job for the shareholders of Personal Assets and has never lost sight of the trust's objective, to "protect and increase, in that order, the value of shareholders' funds over the long term." This is demonstrated by the trust's performance through volatile periods such as the Brexit vote last year. Troy Asset Management, which has been investment adviser to Personal Assets since 2009, is focused on absolute returns and pays no heed to index weightings.
"We believe the portfolio remains attractively positioned for investors who share the manager's cautious mindset, while the well-executed zero discount policy alleviates discount risk and provides considerable liquidity in the secondary market."
Alan Brierley says: "BH Macro's portfolio diversification qualities were highlighted leading up to and during the financial crisis, when strong NAV gains represented significant outperformance of most asset classes. However, it has struggled in recent years.
"While central banks can continue to engineer an environment which has taken asset volatilities to historically low levels, opportunities for the manager will probably remain few and far between, and this remains the key risk we see.
"However, we see significant risks for the global macro environment, and these are increasing. If the authorities were to lose control, this could be the catalyst for some exceptional absolute and relative returns, and we could see the company recapture the relative underperformance of recent years in a short period of time. The fortunes of BH Macro have tended to be almost inversely correlated with risk assets and therefore we believe it has an important role to play in improving portfolio diversification."
Mr Drake says: "Standard Life Private Equity is making a number of changes to its investment policy, dividend policy and fee arrangements. The aggregate dividend for the latest financial year was 5.4p, but the intention is to increase this to 12p for the trust's current financial year.
"This trust's prospective yield of 4.4 per cent combined with the prospects for NAV growth driven by realisations is fundamentally attractive. Standard Life Private Equity Trust has continued to deliver strong results from its portfolio, despite a high cash level. We believe that this trust offers high-quality private equity exposure, with many of the underlying funds commanding prices around carrying value or even at a premium in the secondary market."
Alan Brierley says: "Law Debenture is unique, comprising a global investment trust and an independent fiduciary business. We like the value/contrarian philosophy [of its manager James Henderson], which is based on fundamental analysis, and this should leave the company well-placed if there is any rotation from growth/momentum stocks that have led markets in recent years. The manager looks to identify companies that can deliver long-term growth, whose shares trade at levels that do not reflect their long-term prospects.
"The long-term record is impressive relative to global open and closed-end funds, and its benchmark the FTSE All-Share index. Meanwhile, the fiduciary business facilitates a superior yield because it makes a key contribution to the revenue return. The aim is to increase the dividend over a period, if not every year, at a rate that is covered by earnings and that does not impact stock selection.
"We would highlight that a conservative allocation policy sees all expenses and interest costs charged to revenue, and the ongoing charge is just 0.45 per cent.
"These fundamental attractions are enhanced by its discount of around 9 per cent."
Charles Cade says: "Edinburgh Worldwide, managed by Baillie Gifford, focuses on early-stage global-growth stocks with a market-cap of under $5bn (£3.98bn).
"The trust is diversified with 90 holdings, but there is a significant bias to healthcare companies, particularly early-stage biotech. This exposure hurt performance in 2016, but there has been a strong start to 2017 and Douglas Brodie, who has managed the trust since January 2014, has a good long-term record with an equivalent open-ended fund - Baillie Gifford Global Discovery (GB0006059330).
"Edinburgh Worldwide trades at an 8 per cent discount to NAV and we see potential for this to narrow."
|Trust/benchmark||Discount/premium to NAV (%)||1 year share price return (%)||3 year cumulative share price return (%)||5 year cumulative share price return (%)||Yield (%)||Ongoing charge (%)|
|Scottish Mortgage Investment Trust||+1.5||44||67||173||0.9||0.45|
|Gabelli Value Plus+ Trust||-2.0||54||n/a||n/a||0.2||1.65|
|Edinburgh Investment Trust||-6.6||9||26||70||3.5||0.61|
|Seneca Global Income & Growth||+0.3||22||40||88||3.8||1.60|
|RIT Capital Partners||+5.1||22||52||66||1.7||1.34|
|Personal Assets Trust||+0.7||14||30||24||1.4||0.95|
|Standard Life Private Equity Trust||-12.3||57||60||152||1.8||2.33|
|Law Debenture Corporation||-8.6||29||12||70||2.9||0.45|
|FTSE World ex UK index||40||62||101|
|FTSE All-Share index||26||20||54|
|Global sector average||36||47||93|
|Flexible Investment sector average||24||28||40|
|UK Equity Income sector average||17||16||72|
|Private Equity - Fund of Funds average||43||71||138|
Source: Winterflood as at 24 February 2017, *AIC/Morningstar
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