Investment trusts for your Isa

Growth

Alan Brierley, director-investment companies, Canaccord Genuity

Pantheon International Participations (PIN)

"Pantheon (an IC Top 100 Fund) gives investors a highly diversified exposure to global private equity. The management team can demonstrate significant depth of resource and a network of contacts, which give the trust a key competitive advantage. In line with most of the listed private equity sector the net asset value (NAV) total return has lagged equity markets in the past couple of years, but we expect NAV progression to gain momentum this year. This should be compounded by a further narrowing of the discount with the shares remaining fundamentally mispriced.

"The portfolio is mature and this is evidenced by cash proceeds of £500m in the past three years. Meanwhile, at the operational level the underlying portfolio is delivering superior revenue and earnings growth. Having focused on strengthening the balance sheet in the past couple of years, recent attention has switched to addressing the discount. The company has spent £68m on buying shares since August 2011 and it is encouraging to see this regarded as an investment rather than a cost."

Stephen Peters, investment analyst, Charles Stanley

EP Global Opportunities Trust (EPG)

"EP Global Opportunities Trust is a global, value based, long term investment trust run by Edinburgh Partners. Although it is not widely known it is a very good trust with a strong discount control mechanism. EP Global Opportunities could work as a great complement for investors who already own shares in (IC Top 100 Fund) Scottish Mortgage Investment Trust (SMT)."

Income

Charles Cade, head of investment companies research, Numis Securities

Schroder Oriental Income (SOI)

"Schroder Oriental Income provides exposure to Asian domestic growth and pays a fully covered yield of 4.5 per cent. Asian equities offer UK investors a way to diversify their sources of income away from UK equities, and have the potential to deliver strong earnings growth. This trust, for example, has delivered dividend growth of 7.5 per cent a year since launch in 2005.

"The portfolio is managed by Matthew Dobbs, a highly experienced fund manager who focuses on quality companies with strong balance sheets, cash flows and corporate governance, which can be purchased at attractive valuations. He is based in London, but draws on a large and experienced team of locally-based Schroders analysts.

"Mr Dobbs favours stable and high yielding industries such as telecoms, financials and real estate, whilst being wary of cyclical industries with lower earnings visibility such as technology and consumer discretionary.

"Asian markets suffered a correction in the second half of 2013 on the back of investor concerns about Chinese growth and tapering of the Quantitative Easing programme in the US. However, Matthew Dobbs believes that most Asian countries are in a solid financial condition and that the region's equity markets are cheap on a historic basis.

"Schroder Oriental Income has a good track record, having generated NAV returns of 11.3 per cent a year versus 9.7 per cent a year for the MSCI AC Pacific ex Japan Index (in Sterling). It typically trades at a premium to NAV, but is currently trading on a small discount of about 3.5 per cent which represents a value opportunity."

Monica Tepes, investment companies analyst, Cantor Fitzgerald

New City High Yield (NCYF)

"New City High Yield is a very strong proposition on a covered 6.5 per cent yield, with a track record of equity market beating returns, lower volatility and better capital preservation.

"The trust invests globally, primarily in high yielding fixed interest securities such as bonds, floating rate securities and convertibles. It has an attractive yield of 6.5 per cent, and has increased its dividend for the last seven years, which is also well covered. The trust also has significant revenue reserves.

"New City High Yield has made very strong total returns and outperformed the FTSE All-Share with better capital preservation and roughly double the yield. Its manager has an absolute return approach to investing and looks to increase income while not losing capital.

"New City High Yield's closed-end structure and relatively small size (it has net assets of about 162m) permit it to invest in securities that larger open-ended funds cannot access.

"For investors worried about holding a bond fund in a potentially rising interest rate environment, the portfolio has a degree of inflation protection via floating rate notes and non sterling exposure. The shorter duration of high yield bonds also makes the portfolio less sensitive to interest rate risk.

"New City High Yield trades on a premium to NAV but has consistently done so: the trust has been the second most consistently premium-rated out of all trusts, trading at a premium in over 96 per cent of trading days since 2008."

New City High Yield is also an IC Top 100 Fund

Wealth preservation

Alan Brierley, director-investment companies, Canaccord Genuity

Ruffer Investment Company (RICA)

"Ruffer has a simple investment objective: to deliver consistent returns and not lose money. Since launch, it has delivered an annualised NAV total return of 9.8 per cent although its relative fortunes have been inversely correlated with those of underlying equity markets. As such, it has lagged during the strong equity rallies of recent years although its defensive qualities are obvious if we enter a more turbulent period.

"The portfolio has significant exposure to index-linked securities which will protect against inflation.

"Equities represent around half of the portfolio, with a material bias towards Japan. The manager acknowledges that there is money to be made in this market but it comes with considerable risk, namely the ability to get out before the next man."

Nick Sketch, senior investment director, Investec Wealth & Investment

City Merchants High Yield (CMHY)

"Wealth preservation is difficult right now because interest rates on cash and gilts are so low, leading even risk-averse investors to ask what they want to avoid most. A defensive multi-asset approach is still most likely to deliver real value preservation over the next five or 10 years, but this approach will not necessarily deliver cash plus returns over the next year or two.

"And while gilts may be very unattractive that is not the case with every single investment in the fixed interest sector. Fixed interest investment trusts like City Merchants High Yield offer decent returns and a good income.

"This trust lends money to institutions such as Lloyds Bank (LLOY) and Aviva (AV.), and as these loans often rank behind other debts this is not a very low risk option.

"Nevertheless, the solid income yield of 5.5 per cent is attractive and the £136m size makes the portfolio more nimble than the big open-ended funds its manager, Paul Read at Invesco, also runs. City Merchants High Yield's base fees are also competitive compared with big open-ended strategic bond funds (the trust has an ongoing charge of 0.83 per cent).

Read more on strategic bond funds

"While many other steady income producing trusts trade at high premia to NAV, City Merchants High Yield trades at a slight premium of about 1.7 per cent and looks good value."

Diversification

Charles Cade, head of investment companies research, Numis Securities

Monks (MNKS)

"Monks is an attractive vehicle for investors seeking diversified exposure to global equities. The trust is managed by Gerald Smith of Baillie Gifford and is unconstrained by index weightings. It has a bias to growth companies with the 'potential to deliver superior operational performance' and the largest holdings include IP Group (IPO), Sky Deutschland and Harley Davidson.

"The discount to NAV of 11 per cent is relatively wide in relation to the average for the global growth peer group of 6 per cent. We believe that this reflects dull performance over the past few years at a time when markets have been driven by the search for yield rather than long term growth potential.

"However, Baillie Gifford has taken steps to address the underperformance including the appointment of Tom Walsh as deputy manager, and changes to the stock selection process. This has involved reducing the number of holdings and cutting exposure earlier if investment themes do not play out as expected, for example gold miners.

Read our interview with Tom Walsh

"We regard the manager highly and performance has improved over the past 12 months, with the NAV up 12.6 per cent versus a rise of 8.1 per cent for the MSCI All World index."

Nick Sketch, senior investment director, Investec Wealth & Investment

Bluecrest All Blue Fund (BABS)

"An investment trust which would make sense as a diversifying holding, particularly in an Isa alongside your core of high quality equity investments, would be one which doesn't rise and fall with stock market indices. Options include quoted hedge funds with low equity sensitivity such as Bluecrest All Blue Fund."

Contrarian bet

Stephen Peters, investment analyst, Charles Stanley

Blackrock World Mining Trust (BRWM)

"Commodities could make a good contrarian option. Evy Hambro, manager of (IC Top 100 Fund) Blackrock World Mining Trust, is unsurprisingly positive about the future for the asset class. He's positive on the changes going on in the sector at the moment, and the trust is, while not at a discount, looking to grow its income distribution through its royalty and loan arrangements with mining companies. So you get the benefit of being in the mining sector via a large and liquid trust, plus a dividend yield that is currently over 4 per cent."

See our recent update on Blackrock World Mining Trust

Monica Tepes, investment companies analyst, Cantor Fitzgerald

Personal Assets Trust (PNL)

"The current manager, Sebastian Lyon of Troy Asset Management, does not have a purposely contrarian style. His style is absolute return and currently the views being played out in the portfolio are contrarian, with low equity exposure (43 per cent in companies with resilient earnings characteristics), significant allocation to gold (11 per cent) and inflation-linked government securities (22 per cent).

"This approach has delivered very strong risk adjusted returns with good capital preservation over the longer term but has underperformed significantly over the last two to three years as markets have been powering ahead.

"Personal Assets Trust has a zero-discount policy in place and its shares trade consistently around par."

Investment trusts for your Isa

Source: Morningstar

Performance data as at 26 February 2014