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10 investment trusts for your Isa 2019

Leonora Walters sets out 10 investment trust suggestions for your Isa
February 28, 2019

Investment trusts are a good option for many different types of long-term Isa investor. You can invest as little as the cost of one share in a trust, so investors starting an Isa without much money to invest could buy a few shares in a broad global equity or multi-asset trust. Investment trusts also offer access to esoteric illiquid assets that private investors can’t access directly, such as property, private equity and infrastructure. These types of investment trusts can help to diversify large equity focused portfolios.

Below are 10 suggestions from investment trust analysts for growth, income, wealth preservation, diversification and a contrarian bet.

 

GROWTH

BlackRock Throgmorton Trust (THRG)

James Carthew, head of research at QuotedData, says: “BlackRock Throgmorton Trust is one of the best performing UK smaller companies funds. Its manager, Dan Whitestone, favours cash-generative, growing businesses with differentiated and defensive business models, and strong balance sheets. These growth companies fell out of favour with investors in January, and this and general negative sentiment towards the UK due to uncertainty over Brexit means that BlackRock Throgmorton's net asset value (NAV) has fallen over the past year.

“Growth stocks have recovered a little so far this year, but are still well off the levels they reached last summer. Against this backdrop, BlackRock Throgmorton may be a good investment to tuck away for the long term. The trust is trading on a discount to NAV of about 2.6 per cent.

“Mr Whitestone has the flexibility to go short on companies that he thinks face structural challenges (going short involves taking a bet on a security’s price falling). This is an investment strategy that can add value in falling markets. For example, during 2018, when UK stock markets fell in value, going short added 1.4 per cent to the trust’s returns. But the trust’s board has placed strict limits on the use of this strategy.

“Mr Whitestone thinks that markets are correcting rather than entering a bear phase. He has identified many companies with strong order books and the ability to grow despite mediocre economic growth. He also favours companies with a high proportion of overseas earnings, which benefit from sterling weakness. This allows them to be more competitive and, in some cases, increase their profit margins.”

 

Mid Wynd International Investment Trust (MWY)

Simon Elliott, head of research at Winterflood Securities, says: "Mid Wynd International Investment Trust is managed by Simon Edelsten, Alex Illingworth and Rosanna Burcheri of Artemis, who take a thematic approach to investing in companies around the world. Current themes include healthcare costs, online services, automation and tourism. Their emphasis is on high-quality companies on attractive valuations that have proven profitability and cash generation, and operate in areas with high barriers to entry.

“Since they were appointed managers nearly five years ago the trust has performed well. And Mid Wynd International's discount volatility is limited by its policy of aiming to maintain its share price within 2 per cent of its NAV.”

 

INCOME

Perpetual Income and Growth Investment Trust (PLI)

Mr Elliott says: "Perpetual Income and Growth has a strong long-term performance record, but has struggled over the past three years. This is because its manager, Mark Barnett, head of UK equities at Invesco, has an out-of-favour value investment style and has also experienced stock-specific disappointments. As a result, the trust has moved from a premium to a discount approaching 10 per cent.

"But given the value UK equities offer in general at present, we believe Perpetual Income and Growth Investment Trust presents a considerable value opportunity. It has a yield of over 4 per cent. And if the UK market bounces [up] due to greater certainty around the Brexit process, we would expect this trust to be one of the beneficiaries."

 

TwentyFour Select Monthly Income Fund (SMIF)

Ewan Lovett-Turner, director of investment companies research at Numis Securities, says: “TwentyFour Select Monthly Income is well-suited to investors seeking a high, monthly yield from a diversified debt portfolio. It focuses on securities with an 'illiquidity premium' that are not suitable for open-ended funds, and fuel its relatively high yield of 7.2 per cent. The trust aims to pay a monthly dividend of 0.5p, and a balancing dividend in October, as its policy is to distribute all its income for the year.

“The trust invests in debt tranches of collateralised loan obligations, which have historically had very low default rates and offer a higher yield than corporate bonds with a similar rating. It also invests in debt issued by banks and insurance companies.

“At this point in the cycle the trust’s holdings have a short average interest rate duration of 2.8 years to protect against rising rates.

“TwentyFour Select Monthly Income is trading on a premium to NAV of about 2 per cent. It has a robust discount control mechanism whereby it offers shareholders the opportunity to exit up to 20 per cent of its share capital at a 2 per cent discount to NAV, four times a year.”

 

WEALTH PRESERVATION

RIT Capital Partners (RCP)

Mr Lovett-Turner says: “Since its inception in 1988, RIT Capital Partners has delivered an attractive return profile, participating in 75 per cent of market upside but only 39 per cent of market declines. This has resulted in the NAV total return compounding at 11 per cent a year, significantly ahead of MSCI AC World index, which has delivered annualised sterling total returns of 8.2 per cent.

“The trust is defensively positioned and has an emphasis on capital preservation. So, for example, net quoted equity exposure averaged [only] 47 per cent in 2018.

“RIT Capital Partners is different to [many] other investment trusts for reasons including its active management of both equity and currency exposure. Its managers seek to identify key macro themes, and invest in listed and unquoted stocks, as well as alongside specialist third-party managers.

“Its investments include long-only funds, hedge funds and a direct stock portfolio. The emphasis within the equity portfolio is increasingly on investments where value creation is driven by some identifiable catalyst or which are exposed to longer-term positive structural trends, notably the impact of new technologies and Asian consumer demand.

“However, the premium to NAV of around 14 per cent is a drawback for potential investors at [time of writing].”

 

Ruffer Investment Company (RICA)

Alan Brierley, director of the investment companies team at Canaccord Genuity, says: “Ruffer Investment Company’s focus is on delivering positive returns, regardless of how financial markets perform, and over 24 years its manager has only once lost more than 5 per cent year on year. This trust has an important role to play within a diversified portfolio and we expect its ability to preserve capital to have significant value in the next crisis. At some point, financial markets will again regard bad news as bad news, and when this happens there may be few safe harbours.

“Material exposure to index-linked bonds – 42.5 per cent of the trust’s assets [at the end of January] - reflects its managers’ view that ultimately an over-indebted western society will experience inflation well above nominal interest rates. Gold, which accounts for about 9 per cent of assets, has a role to play if currency debasement forms part of the inflationary solution. And options and illiquid strategies give protection against falling equity and bond markets.

“Equities [which account for about 36 per cent of assets] have a tilt towards Japan which offers cheap exposure to global economic growth and domestic reflation in Japan. This is one of the only economies that would benefit from rising inflation. The rest of the equity portfolio consists of special situations - interesting risk/reward trade-offs regardless of wider economic conditions - and beneficiaries of rising bond yields in the US, UK and Europe.”

 

DIVERSIFICATION

Henderson Alternative Strategies Trust (HAST)

Iain Scouller, managing director, investment funds – research at Stifel, says: "Henderson Alternative Strategies Trust is a multi-asset fund with exposure to hedge funds, credit and private equity that may be difficult to access directly, while only around half of it is in listed investments. The public equity portfolio includes funds focused on areas such as biotech and financial specialists.

“In the October 2018 market weakness the NAV held up reasonably well. At times of weak and volatile stock markets, this type of multi-asset strategy has a place in many portfolios.”

Henderson Alternative Strategies is trading on a sizeable discount to NAV of around 15 per cent.

 

John Laing Environmental Assets Group (JLEN)

Mr Carthew says: “We like investment trusts that invest in renewable energy infrastructure because they offer attractive and growing yields. These are supported by a high degree of government subsidy, which increases the predictability of their income, and rising power prices.

“If you can’t decide whether to back a trust focused on solar or wind infrastructure, why not opt for one that invests in both and offers further diversification with exposure to areas such as anaerobic digestion plants? This is what John Laing Environmental Assets Group does, and offers a yield of nearly 6 per cent. Two-thirds of its revenues are linked to inflation and it plans to grow its dividend.

“John Laing Environmental Assets Group is the most diversified renewables infrastructure investment trust. Renewable energy accounts for almost 30 per cent of the energy produced in the UK and, as costs fall, it is becoming increasingly competitive.

“John Laing Environmental Assets Group has recently bought anaerobic digestion plants, which turn biomass into biogas and biofertiliser. As this portion of its portfolio grows, the trust is becoming less sensitive to variations in power generation and prices. In September the trust issued shares priced at 102p each and is now trading on a share price of around 111p.”

 

CONTRARIAN

HICL Infrastructure Company (HICL)

HICL Infrastructure used to trade on double-digit premiums to NAV for reasons including its attractive level of income and yield, and exposure to what were perceived to be lower-risk infrastructure projects. But at the Labour party conference in September 2017, shadow chancellor John McDonnell pledged to “bring existing private finance initiative (PFI) contracts back in-house”, causing infrastructure investment trusts to de-rate as some of these invested in them. And in early 2018 the collapse of government contractor Carillion (CLLN), which provided facilities management for projects invested in by infrastructure trusts including HICL, also dented their share prices. This caused these trusts to fall to lower premiums and, in the case of HICL, at times a discount to NAV.

Since then these trusts’ shares prices have risen again and their ratings have increased. But HICL, on a premium to NAV of about 9.5 per cent [at time of writing], has still not gone back to the ratings it used to trade on. And although it is a higher-risk proposition than it used to be, it could still offer a number of benefits in the current market environment.

Mr Brierley says: “Philip Hammond stated in his UK Budget speech [last year] that the government will not enter into any new PFI contracts. However, we take some comfort from his comment that the current government will ‘honour existing contracts’. With regard to the Labour rhetoric and possibility of nationalisation, Ian Russell, chairman of HICL, commented that this ‘ignores the considerable benefits that private capital brings to the public sector in terms of ring-fenced capital maintenance budgets, private sector management expertise and resource, and the transfer of significant operational risk away from the public sector. More practically, nationalisation would be highly complex and come at a considerable cost to taxpayers.'

“[Meanwhile, there are] a number of alternatives [investment trusts] that we expect to deliver absolute returns even in a more challenging environment, such as HICL Infrastructure. It provides investors with well-managed, low-cost exposure to a diversified portfolio of infrastructure assets. The dividend yield is about 5 per cent and, importantly, dividends are underpinned by long-term, predictable cash flows. There is a high degree of inflation correlation and HICL has significant capital preservation qualities. These were demonstrated during the sell-off in markets in October 2018 and, given these, it has an important role to play in portfolio diversification.”

 

Woodford Patient Capital Trust (WPCT)

Iain Scouller says: “Unquoted investments [which account for 64 per cent of this trust’s assets] are now maturing. A number of investments have reached demonstrable milestones and the trust is on a discount to NAV of about 11 per cent.

“Woodford Patient Capital Trust should be viewed as a high-risk investment. It has a concentrated portfolio – around 58 per cent of its assets are in its 10 largest investments. And some holdings that have recently done an initial public offering (IPO), such as biopharmaceutical company Autolus Therapeutics (AUTL:NSQ), have seen sharp price swings.

“There is also a risk that when stock markets are weak valuation declines in comparable quoted companies and sectors will transmit through to the valuations of some unquoteds. However, this trust offers access to a primarily unquoted portfolio of specialist growth companies which it is not possible for most investors to access directly. So, on balance, we think those looking for exposure to early-stage growth companies, primarily in the healthcare and financial sectors, should look to accumulate.

“Woodford Patient Capital Trust also has low ongoing expenses of only 0.18 per cent and its managers have to deliver significant NAV performance to get paid any management fee. Given the NAV performance to date after almost four years since its IPO, there would need to be a significant increase in NAV before the performance fee becomes payable.”

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