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Investment-Trust recommendations Our top tips

Created:
16 February 2007

As well as picking out some of the top funds, this selection is also designed to highlight the diversity that can be found within the investment trust sector.

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Global generalist Scottish Mortgage is ideal as a core holding, with a total expense ratio of just 0.5 per cent - which is lower than most passively-managed index-tracker funds, and actively-managed open-ended funds, which typically suffer from management charges of 1.6 per cent. Another of our picks, British Empire, is a global specialist whose portfolio bears little relation to global stock-market indices and whose performance is far superior.

Meanwhile, JP Morgan Emerging Markets and Merrill Lynch New Energy demonstrate the benefits of the closed-ended structure, which allows their managers to take long-term views in risky sectors and ignore short-term volatility to deliver strong growth.

Of course, there are plenty of well-managed trusts in other sectors, which you can use in your portfolio, as well as, or instead of, open-ended funds. There may even be opportunities to switch between investment trusts and open-ended funds to take full advantage of discount movements - for example, to seek value when discounts are wide, or lock-in profits when they have narrowed.

Scottish Mortgage (4/5 stars)

While several global growth trusts have performed radical changes of tack - such as switching to multi-manager structures, or adopting multi-asset strategies - Scottish Mortgage has got on with the job of providing investors with a sensible core holding, by offering worldwide equity exposure.

This has resulted in strong outperformance, with 75 per cent net asset value (NAV) growth over the past three years, compared with the 65 per cent sector average. The fund's equal benchmark indices, the FTSE All-Share and FTSE Worldex UK, have returned 66 and 46 per cent, respectively.

The £1.53bn trust is managed by James Anderson of Baillie Gifford. Under his guidance, the investment strategy has evolved from a regional portfolio approach to a global 'best ideas' style. A large companies bias means the trust should perform roughly in line with global markets, and Mr Anderson's increased stock-picking conviction has shrunk the portfolio to a fairly concentrated 80 or so holdings, which could boost long-term returns. The trust offers value on a 13 per cent discount, compared with the 9 per cent sector average.

British Empire Securities & General (4/5 stars)

The global specialist sector offers funds with more spice than the global growth sector, as managers disregard benchmarks in their attempt to outperform. This means that these funds could suffer periods of underperformance, although it also helps managers focus on delivering absolute returns in all market conditions - whereas core equity holdings are bound to fall during market downturns.

As a long-standing global-specialist trust, British Empire has an excellent track record, both under former manager John Walton and now his protégé John Pennink, who took over in November 2002. In the past five years, the £711m fund has delivered a 145 per cent NAV gain, outperforming the 93 per cent sector average, the FTSE All-Share's 56 per cent rise and the FTSE World's 30 per cent growth. The trust's strategy is to seek out investments that trade at discounts to their NAVs, including other trusts. Mr Pennink's value-driven quest for under-researched situations has resulted in a European bias and a low weighting in the US. He is cautious, though, and holds 10 per cent of the portfolio in cash at the moment. Although it often trades at a premium, British Empire currently stands on a 6 per cent discount, which is wider than the 3 per cent sector average.

JP Morgan Emerging Markets (5/5 stars)

Investment trusts are ideal for long-term exposure to emerging markets because their closed-ended structure allows managers to ride out periods of market volatility without having to sell holdings in falling markets to pay-off sellers (which open-ended funds have to do). And JP Morgan Emerging Markets leads the small emerging-markets sector, with 151 per cent NAV growth over three years, compared with the 124 per cent sector average and the MSCI Emerging Markets Free index's 100 per cent rise.

The £416m trust has been managed by Austin Forey since August 1991, and his experience is backed-up by JP Morgan's team of approximately 40 global analysts. Since 2004, there has been less emphasis on macroeconomic views and more on stock picking.

Although Mr Forey does not expect emerging market share prices to rise as fast as they have done recently, he does not think valuations are overstretched and he expects earnings growth to drive returns. One per cent of the portfolio is held in cash and the 7 per cent discount is average for the sector.

Merrill Lynch New Energy Technology (4/5 stars)

The closed-ended structure is ideal for a volatile area, such as alternative energy. In fact, there are no open-ended alternative energy funds and ML New Energy is the only pure investment trust play (although Impax Environmental Markets offers diversified exposure to green technologies).

The trust was launched in October 2000 - an inauspicious moment, as technology share prices were crashing and remained out of favour until the bear market was over. However, performance has improved - not only because of general market sentiment - but also because of long-term drivers, such as increasing demand for finite fossil fuels, concerns about security of supply, and growing government pressure to reduce carbon emissions to combat global warming. In the past three years, the trust's NAV has risen by 111 per cent to £128m.

Managers Robin Batchelor and Poppy Buxton have broadened their portfolio from 40 to 70 companies as their investment opportunities have expanded. Two-thirds of their holdings are now profitable and the largest weightings are to wind, solar and biofuel companies.

The trust currently trades on a 1 per cent premium, reflecting recent positive newsflow, although 6 per cent of its assets are held in cash.

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