Investment trusts: the professional picks 2015

GROWTH

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

Marwyn Value Investors (MVI) uses private-equity-style investing in both public and private markets. Its managers have an excellent track record of identifying industry-leading management teams to build and grow businesses. Marwyn Value Investors currently trades on a 17 per cent discount to net asset value (NAV), but investors have the opportunity to redeem their shares via a liquidation pool at NAV next year if they so wish, providing a margin of safety for their investment.

Nick Greenwood, manager of Miton Worldwide Growth Investment Trust (MWGT):

India Capital Growth's (IGC) current management team are the third incumbents in the trust's short but initially disastrous life (the trust launched in 2005). They had a tough time turning around the legacy portfolio and this is a classic example of when a trust's discount reflects the track record of the vehicle rather than that of the current managers, who have now comfortably outperformed the local mid-cap indices. As a result, the trust trades on a discount to NAV of more than 17 per cent.

India also has a more developed equity culture than most other emerging markets: it benefits from a market-friendly majority government focused on removing inefficiencies, which should feed through to earnings forecasts, a trend that will run for years rather than months. This is an ideal environment for traditional stockpickers such as the team at India Capital Growth.

Peter Hewitt, manager of F&C Managed Portfolio Trust (FMPG)*:

Henderson Opportunities Trust (HOT) has assets of about £99m, so it's small, but it's a good way to access the stockpicking skills of its manager, James Henderson, in an unconstrained way. Mr Henderson also runs Lowland Investment Company (LWI)*, although this has an income focus that has to be satisfied. Henderson Opportunities, by contrast, is focused on capital growth and capitalises on Mr Henderson's stockpicking abilities.

It is also one of the few funds other than Woodford Patient Capital Trust (WPCT) that focuses on university spinouts. And it holds shares in common with Woodford Patient Capital Trust, examples including 4D Pharma (DDDD), which is listed on the Alternative Investment Market (Aim), where Henderson Opportunities has about 9 per cent of its assets.

Henderson Opportunities is volatile and if markets fall it is likely to fall by more. This is one to lock away - a few years down the line you might have a tidy gain.

Peter Walls, manager of Unicorn Mastertrust (GB0031269367)*:

Concerns about the slowdown in China and US interest rates have weighed heavily on Asia Pacific investment trusts in recent months, including Aberdeen New Dawn (ABD), which trades at a discount to NAV of nearly 13 per cent. Some underlying stock market valuations have fallen to levels last seen at the end of the 1990s, suggesting that the region could be in for a hard landing. Discounts in the sector are wider than their recent averages despite increased share buyback activity. While further volatility cannot be ruled out, the region continues to offer exciting long-term growth potential, and trusts such as Aberdeen New Dawn offer exposure to high-quality companies with solid fundamentals.

INCOME

Richard Curling:

Carador Income Fund (CIFU) is managed by GSO/Blackstone and invests in secured loan portfolios through collateralised loan obligations (CLOs). After a period of relatively disappointing performance, it currently yields 13 per cent and trades at a 6 per cent discount to NAV. Investors also have the option of redeeming their shares at NAV in 2017.

Nick Greenwood:

Alpha Real Trust (ARTL) was originally an Indian property specialist; however, that market blew up during the global financial crisis before the cash raised at launch could be committed. Its management took advantage of its extreme undervaluation by acquiring 30 per cent of it, and have since increased their holding to around 45 per cent.

The trust changed its focus to high-yield property debt and during 2012 related assets such as the Freehold Ground Rent Fund and Property Investment Portfolio were rolled into it, with the assets acquired at NAV.

Cash has also been used to buy properties from distressed lenders such as Royal Bank of Scotland. Historically, the assets tended to carry high leverage, but the recovery in property values and banks' renewed lending appetite has transformed the trust's outlook. There is scope for revaluation and refinancing given today's low interest rate environment. Alpha Real Trust also tends to move to its own tune regardless of the general direction of global markets.

Alpha Real Trust's managers are clearly good at what they do and when sufficient loose holders have exited, the vehicle is likely to be taken private at a level closer to NAV, once a deal is struck with minority holders. In the meantime, the recently stated objective of steadily increasing the dividend should underpin the share price. The shares yield around 3 per cent and trade at a discount to NAV of 33 per cent.

Peter Hewitt

Perpetual Income & Growth Investment Trust (PLI)* is run by Mark Barnett and has a great record, with its dividends also growing well. Its yield of 3.5 per cent is in line with the market, but it grows faster than the market. It has low exposure to oil, gas and mining, but substantial investments in areas such as pharmaceuticals, financials, tobacco and telecoms. Tobacco may be unfashionable, but the cash-flow dynamic of these companies it good. Mr Barnett has a very clear idea of where he wants to be and what he wants to avoid.

Peter Walls

With low levels of dividend cover at some of the UK's largest income-paying companies, it's not the time to be too ambitious about yield. However, Law Debenture Corporation (LWDB)* yields 3.1 per cent and has healthy revenue reserves, which equate to almost two years' worth of dividends. While the shares ostensibly trade at a premium to NAV of 8.7 per cent, the conservative valuation placed on its Independent Fiduciary Services business implies that the shares actually offer superior value to many UK equity income trusts.

WEALTH PRESERVATION

Richard Curling

Sanditon Investment Trust (SIT) is a small investment trust that 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 hugely experienced managers, Tim Russell and Chris Rice, who used to work at Cazenove Capital. The interesting thing about this trust is that it owns 20 per cent of its management company, Sanditon Asset Management, which, if successful, will be worth a material amount to the investment trust, adding some nice upside potential.

Nick Greenwood

Taliesin Property Fund's zero-dividend preference shares 2018 (TPFZ) are redeemable in a little under two years' time at 144p, compared with the current market price of 127p. The zeros also have first claim on the trust's assets, which leaves them extremely well covered. Zero-dividend preference shares (ZDPs) come with a defined life and do not pay a dividend. Instead, the return over the life of the shares arises from the increase in its value to maturity. This means they are taxed as capital gains rather than income.

Taliesin Property is a specialist in Berlin residential property and, despite this market playing catch-up in recent years, after the property slump of the 1990s, the open-market value of Taliesin's apartment blocks remain well below replacement cost. But given that 10-year bund yields have been as low as 0.7 per cent, there is a possibility that Germans might view property ownership as an alternative source of income.

Meanwhile, Taliesin's micro call of buying early 20th century apartment blocks close to the site of the Berlin Wall, on the east side, correctly anticipated local demand for this type of property. The first units sold have achieved a price of between €3,200 (£2,343) and €5,000 a square metre, which compares favourably with Taliesin's average carrying value of €1,760 a square metre.

Peter Hewitt

BACIT (BACT)* provides exposure to some very interesting hedge funds that make use of strategies such as shorting (betting on the price of shares falling). In a falling market, trusts such as Personal Assets (PNL)* and Ruffer (see below) might protect you better, but BACIT is still likely to go down a lot less than the broader equity market.

BACIT invests in funds where the investment manager provides investment capacity on a gross return basis, meaning it does pay fees. In turn, BACIT does not charge its investors fees but donates 1 per cent of NAV each year to charity - 50 per cent to The Institute of Cancer Research and 50 per cent to The BACIT Foundation. This is why some top hedge fund managers are willing to allow BACIT to invest in them on this basis.

Peter Walls

Ruffer Investment Company's (RICA)* August 2015 monthly report reminded us that at times of extreme stress the only thing that goes up is correlation. When financial market routs occur there are few hiding places other than cash, so recommendations in this category still come with downside risks. However, since launch in 2004 Ruffer Investment Company has outperformed the FTSE All-Share index with a good deal less volatility, and its NAV has only fallen in one calendar year since inception.

DIVERSIFICATION

Richard Curling

VPC Speciality Lending Investments (VSL) is one of the new breed of online lenders taking advantage of the gap in the market left by the banks after the financial crisis. It is well diversified with multiple platforms across geography, product and structure, and is managed by an experienced team. The trust is targeting an 8 per cent net dividend yield, which it will pay out via quarterly dividends, and a net total return of 10 per cent a year.

Peter Hewitt

The reason I like 3i Infrastructure (3IN) is because it is a traditional infrastructure investor, for example 20 per cent of its assets are in Anglian Water. Other investments include Elenia, which owns the second-largest electricity distribution network in Finland, and Cross London Trains, which procures and leases the rolling stock for the Thameslink passenger rail franchise.

It also has a number of public private partnership (PPP) investments that provide access to assets such as toll bridges and motorways.

The trust has made a great return this year because it completed the sale of its stake in Eversholt Rail Group, which was sold at a premium to 3i's purchase price, enabling the trust to pay a special dividend.

3i Infrastructure has a yield of about 4.6 per cent and will give you a different type of return as it is less sensitive to equities.

Nick Greenwood

Alternative Asset Opportunities (TLI) invests in US traded life endowments. It initially focused its portfolio on a small number of valuable policies taken out on the lives of wealthy individuals who statistically live longer. But the average age on the remaining policies is 91.3 years, and even the wealthy die eventually.

The portfolio can now be allowed to mature, leaving the NAV as a reasonable guide to what will eventually be returned to shareholders. Until recently, the board continued to extend life expectancies on the remaining policies, which significantly reduced stated NAV. But demand for second-hand policies is robust given the dearth of returns in a low interest rate world, and uplifts on maturities earlier this year have been substantial, suggesting that the methodology heavily discounts likely returns from the portfolio.

However, the trust is a pure dollar play which, has not been helpful post the Tories' surprise election victory in May.

Alternative Asset Opportunities trades on a discount to NAV of 7.5 per cent.

Peter Walls

Despite being one of the largest private equity fund of funds on the market, HarbourVest Global Private Equity (HVPE) has until recently had a relatively low profile. But in September it moved its share listing from the Specialist Fund Market to the main board of the London Stock Exchange, which makes it potentially eligible for index inclusion and buying interest from tracker funds. It remains to be seen whether this actually happens, but even so the prevailing discount of more than 23 per cent looks attractive given the trust's track record.

*IC Top 100 Fund

Performance of professionals' recommended investment trusts for 2015

Source: Morningstar & *AIC/Morningstar

Performance data as at 12 October 2015

How last year's professional picks performed

In last year's investment trust special issue of Investors Chronicle (IC: 24 October 2014) the same experts made recommendations. The best performer among these over the past year has been Electra Private Equity (ELTA) with a share price return of 38 per cent, well ahead of broad indices such as the FTSE All-Share and FTSE All World. Eight out of 15 of last year's suggestions beat the FTSE All-Share and FTSE All World indices over this time period.

Only one, Murray International (MYI), made a negative return.

However, investment trusts should be held for the long term - five years plus - so how these do over that time period and longer is more important. Of the investment trusts that have longer records the clear leader over five and 10 years is Biotech Growth Trust (BIOG). However, analysts are uncertain as to whether this sector can continue to do well after a fantastic 10-year run, and this trust has not appeared again in our list of suggestions.

Electra Private Equity was the second best performing trust over five and 10 years.

Performance of last year's recommendations

Source: Morningstar & *AIC/Morningstar

Performance data as at 12 October 2015

See also:

Top trusts

Two investment trust portfolios for income

Making better use of global trusts

Around the world in 8 investment trusts

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