Investment trusts: Professional picks 2019

GROWTH

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

Oakley Capital Investments (OCI) is a private equity investment trust and this sector, where significant discounts persist, is one of the few areas of relative value among investment trusts. Oakley Capital Investments trades on one of the wider discounts to NAV (28 per cent as of 7 November) in spite of delivering some strong NAV performance recently. I expect the NAV performance to remain strong and the discount to narrow in due course.

Nick Greenwood, manager of Miton Global Opportunities (MIGO)

Artemis Alpha Trust (ATS) is an all-cap UK fund with the odd overseas holding. Its board has introduced a policy of doing a tender offer every three years, starting in 2021, for up to 25 per cent of its ordinary shares, unless it is trading at a premium to the estimated tender price. But at the moment it is on a discount to NAV of nearly 18 per cent, so it will have to do very well to avoid [the tender].

That said, there has recently been a market rotation out of growth into value and Artemis Alpha would benefit from a widening of the market to other areas. If Artemis Alpha does well its discount should narrow and its shareholders will have benefited from strong performance. And if performance is poor shareholders will get the opportunity to trade out nearer to par via the tender.

Peter Hewitt, manager of BMO Managed Portfolio Trust (BMPG)

HgCapital Trust (HGT) is a private equity investment trust and a major investor in the UK and Northern Europe tech sector. It has around 30 holdings so offers some diversification but it is also well focused.

Its managers at Hg have significant resource and expertise, and look to invest in businesses with specific models that will perform across the economic cycle. They specialise in investing in software and service companies with enterprise values of £50m to in excess of £1bn.

They have made some profitable realisations and at the end of August the trust had around 17 per cent of its assets in cash, but this will be invested selectively where opportunities arise.

The trust has performed very well and its NAV growth is among the best in its peer group, but it is rated more highly than most other private equity investment trusts [it was on a premium to NAV of 3.4 per cent as of 7 November].

It is also a good size with assets of £892m and a market cap of £994m.

Peter Walls, manager of Unicorn Mastertrust (GB0031218018)

Oakley Capital Investments was established in 2007 as a feeder fund into the Oakley Capital buyout funds, and has subsequently made direct co-investments into some of the companies its manager, Oakley Capital, invests in. The trust has a concentrated portfolio of about 15 mid-market growth companies in the consumer, education, and technology, media and telecoms sectors. [The progress of] investments such as Inspired, one of the leading global private schools groups, has been very encouraging.

Oakley Capital Investments trades on a very wide discount to NAV but its corporate governance has improved, for example, its board has indicated that it will not issue any more new shares at a discount to NAV. Its holding in Time Out had been a drag on performance but this has reversed with the roll-out of the Time Out Markets dining concept around the world.

LF Woodford Equity Income Fund (GB00BLRZQB71) had a large holding in Oakley Capital Investments, which was perceived as an overhang [because this fund had been selling its more esoteric holdings]. But its stake in Oakley Capital Investments has now been placed.

INCOME

Richard Curling

Target Healthcare REIT (THRL)

The alternative investment space is a good place to find high-quality, secure, long-term cash flows, which can fund reliable dividend streams. Target Healthcare REIT invests in modern, best-in-class care homes, which are let to professional operators on a long-term basis with upward-only inflation-linked leases. This results in the trust having a yield of nearly 6 per cent, which should broadly rise in line with inflation over time.

Nick Greenwood

Real Estate Investors (RLE) is a small property fund focused on Birmingham and the Midlands. It has a share price of about 55p and trades at a fairly wide discount to NAV. Its capital value has fallen, but it is offering a yield of nearly 7 per cent. It converted into a real estate investment trust (Reit) in January 2015, which means it must distribute the vast majority of its cash flow by way of dividends, and it has a progressive dividend policy. It paid out 1.875p in respect of the first half of 2019, up 7.1 per cent on the 1.75p it paid in respect of the first half of 2018. So while you wait for it to recover you receive a strong income that is completely covered.

Funds run by asset manager Invesco are selling their holdings in Real Estate Investors and, although this will depress its share price in the short term, it represents an opportunity for patient investors.

Peter Hewitt

Secure Income REIT (SIR) is run by a team led by Nick Leslau, a successful property entrepreneur over the past few decades. The trust buys assets with very long-term streams of income and, as of 30 June, had 164 real estate assets with a weighted average unexpired lease term of around 21.5 years. About 59 per cent of the rents it receives have upward-only retail price index (RPI) inflation-linked reviews and 41 per cent have fixed uplifts. This means Secure Income REIT's dividend income is likely to grow over the long term. It has a yield of about 3.9 per cent and paid a dividend of 7.9p a share in respect of the first half of this year, up 30.9 per cent on what it paid during the same period last year.

It has assets worth about £2.2bn, which include private hospitals, visitor attractions such as Alton Towers and Thorpe Park, 126 Travelodge hotels, and entertainment venues such as Manchester Arena.

This trust should provide a good secure long-term income, including in volatile and uncertain environments.

Peter Walls

Edinburgh Investment Trust (EDIN) is a large UK income growth investment trust with assets of about £1.3bn, managed by Mark Barnett of Invesco. The trust’s performance has suffered since the referendum on membership of the European Union (EU) in 2016 due to negative sentiment towards sterling and UK domestic-exposed companies. There have been additional headwinds because some of its holdings were also held by the Woodford funds.

But these headwinds should start to abate in the coming months and I still believe there is underlying value in its portfolio. So, arguably, Edinburgh trades on a very attractive discount to NAV (of 9.5 per cent as of 7 November). It has a dividend yield of 4.7 per cent and the dividend has now been increased for 13 years in a row.

Over 10 years, Edinburgh Investment Trust still comfortably outperforms the FTSE All-Share and FTSE 350 High Yield indices in both NAV and share price terms.

WEALTH PRESERVATION

Richard Curling

Capital Gearing Trust (CGT) is managed by an experienced team with a very good long-term track record of preserving capital. They do not just aim to preserve the absolute capital value [of the trust’s assets], but also look to preserve the purchasing power of that capital – protect it from inflation and devaluation.

Nick Greenwood

Dunedin Enterprise Investment Trust (DNE) is a private equity investment trust in liquidation – not something you might usually associate with wealth preservation. But there are aspects of this situation that have elements of protection, such as a wide discount to NAV [16 per cent as of 7 November] which offers a buffer. I also think its actual NAV is more than what is currently stated. It holds companies that other private equity houses would be likely to want to buy, and there is a lot of dry powder out there.

This is much more risky than your typical wealth preservation fund but there are elements of safety.

Peter Hewitt

Capital Gearing Trust has a great record [of making absolute returns] and manages to edge its asset value ahead. [It holds assets including] index-linked bonds, UK corporate bonds and some equities.

If you want to edge the value of your assets ahead with very little downside risk this fits the bill nicely.

Peter Walls

Seneca Global Income & Growth Trust (SIGT) takes a multi-asset approach, and invests in assets such as UK and overseas equities, fixed interest and specialist assets.

Over a typical cycle the trust aims for a total return of at least consumer price index inflation plus 6 per cent, after costs, with low volatility. It also aims to grow its dividend in line with inflation.

In 2016, the trust introduced a discount control mechanism, which has resulted in discount volatility being reduced to a minimum. Its NAV total returns over one and five years are a very healthy 10 per cent and 49 per cent [as of 7 November], respectively, so it beats most of its Flexible Investment sector peers. Its returns have been helped by holdings such as AJ Bell (AJB).

DIVERSIFICATION

Richard Curling

One of the most interesting alternative asset investment opportunities I’ve seen this year is Hipgnosis Songs Fund (SONG). This trust buys music intellectual property rights and has built a portfolio of 27 catalogues representing more than 6,000 songs, including more than 1,000 that have been at number one or two in the global charts. The rise of streaming services such as Spotify and Apple Music have made it easier to monetise music rights and, as music copyright lasts for 75 years after the death of an artist, these are long-life assets too. I believe that you will not only get a good income from this trust, but also the potential for significant capital gain over time.

Nick Greenwood

Duke Royalty (DUKE) provides capital to profitable businesses in exchange for rights to a small percentage of their future revenues. This model has worked very well in Canada, but people in the UK are less familiar with it.

Duke Royalty has a yield of 6.4 per cent and scope to increase its dividend going ahead. It paid out a dividend of 2.8p a share in respect of its last financial year, up 33 per cent on the 2.1p it paid the year before, and intends to focus on a  stable and increasing dividend yield in future years. Its current dividend is well covered by operating cash flow and Duke Royalty's board will continue to monitor its ability to make further increases to the quarterly payout as additional accretive capital is deployed.

Peter Hewitt

Hipgnosis Songs Fund is unrelated to equities or bonds, rather it invests in a portfolio of songs and the associated musical intellectual property rights. It is targeting a dividend yield of 5p a year which should grow steadily, but I think it will offer long-term capital growth too.

Its manager, Merck Mercuriadis, has managed various musical artists over the years.

The amount of royalties you get from streaming is small, but there is a rise in the volume of this as more listen. Digital revenues and streaming are also much easier to collect copyright income from. And it might get some songs placed in adverts, TV and film, providing another source of potential capital growth.

Peter Walls

You can still pick up trusts on good discounts to NAV in the AIC Private Equity sector, such as ICG Enterprise Trust (ICGT), which is trading on a discount to NAV of 18 per cent [as of 7 November].

This trust is focused on buyout deals in Europe and the US, and invests in in-house and third-party funds, and direct investments.

As at 31 July, 43 per cent of its assets were in high-conviction holdings selected by its manager, ICG, and they have made constant currency returns of 19 per cent a year, on average, over five years.

Some 57 per cent of the trust's assets were in private equity funds run by other managers and have delivered constant currency returns of 14 per cent a year, on average, over five years.

Its investments are conservatively valued and over five years its realisations have achieved a weighted average uplift to carrying value of 33 per cent.

Both the trust’s NAV and share price total returns have consistently outperformed the FTSE All-Share index over one, three, five and 10 years.

Suggested trusts' performance

Last year’s picks: one year in

The best performer from last year’s picks in share price terms over the 12 months to 31 October was Baker Steel Resources Trust (BSRT) with a share price total return of 29.41 per cent. This was suggested by Nick Greenwood because its managers focus on a few investments that should be able to see projects through to production, and they have a number of other projects in the pipeline. However, its NAV performance was not so strong over one year at 16.3 per cent and this trust invests in a very volatile asset – mining companies, some of which are unlisted – so its returns might not be so good every year. The trust’s past total returns have been very volatile, so it is really important that you have a high risk appetite and very long-term investment horizon if you invest in it.

The next best performer was Life Settlement Assets (LSAA) with a share price total return of 24.73 per cent. Mr Greenwood suggested this as a wealth preservation pick. The fund does not invest in equities or bonds, but rather second-hand life policies in the US, so is not correlated to equity markets. It shares also traded at a wide discount to NAV of over 25 per cent last year, which as of 11 November 2019 had tightened to 22.34 per cent, helped by share buybacks..

The trust with the worst share price performance was, perhaps not surprisingly, Woodford Patient Capital Trust (WPCT), which fell 57.39 per cent over the year to 31 October. This is partly because the trust’s underlying investments have overall not performed well, but also due to sentiment following problems with its sister fund, LF Woodford Equity Income (GB00BLRZQB71). The trust’s NAV total return fell 36.3 per cent over the year to 31 October, which while not good illustrates how the share price fall has been exacerbated by sentiment. See our articles in the funds section of the magazine and website for all the latest developments with the Woodford funds.

The trust with the next poorest share price total return was Edinburgh Investment Trust (EDIN), which fell 2.98 per cent, slightly worse than its NAV total return – a fall of 2.4 per cent. This trust, suggested by Peter Walls, has been hit because it holds UK companies with domestic exposure that have not performed well since the vote to leave the EU in 2016. It is also run by Mark Barnett, who became manager of the trust when Mr Woodford left in 2014 and invests via a similar style, although does not have large exposure to unquoted companies. But the association may have had a negative impact on its share price and Mr Walls has suggested it again, as he feels that sentiment could improve and that there is underlying value in its portfolio.

But ultimately you should not evaluate any of last year’s or this year’s suggestions according to what they have done over the past year – these are risk assets that you should not invest in unless you can leave your money in them for the long term. If you bought into one of these you should look to hold it for at least five years, and preferably longer. Reasons for selling before five years include a fundamental change to one of the trusts, for example, its manager leaves, or your circumstances change, meaning an allocation to this kind of asset is no longer appropriate for you.

For all the features in our Investment Trust special, click below:

Go global for income

Trusting in fast-growing unlisteds

IC investment trust income portfolios: 12 months on

Investment trusts: professional picks 2019

Around the world in 8 investment trusts

Plus: Win £5,000 to invest in an investment company