Investment trusts: Professional picks 2020

When choosing a fund such as an investment trust it is very important to do thorough research on it, evaluating aspects such as performance, cost and the discount or premium to net asset value (NAV). But it can also be useful to see where professional investors are putting their money. These well-resourced teams dedicate all their working time to picking good investments, and may have access to people and information that private investors don’t. So every year we ask four managers of funds of investment trusts for suggestions in four areas: growth, income, wealth preservation and diversification. We have also looked at how their investment trust picks from last year are performing.

GROWTH

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

BB Healthcare Trust (BBH) is a high conviction fund that invests in global healthcare equities. It is run by an experienced team and has had a good performance record since launch. Healthcare is an important and growing sector as rich western populations age and science advances. The trust offers an annual redemption option so investors don’t have to worry about the sector falling out of favour and the discount widening. It also commits to pay out 3.5 per cent of its NAV in dividends each year. So you have a high conviction portfolio in a growth sector, with a good yield and a strong discount control mechanism.

Nick Greenwood, manager of Miton Global Opportunities (MIGO)

VinaCapital Vietnam Opportunity Fund (VOF) invests in one of few nations that should record positive gross domestic product (GDP) growth this year, while Vietnam is also an enormous beneficiary of multinationals wanting to diversify their supply chains away from China. This country also has a young population which has been less affected by Covid-19.

The Vietnamese stock market was very popular with investors around 2005 and 2006, and many closed-ended funds focusing on this market launched. So the supply of funds focused on Vietnam is too big relative to demand and, as a result, VinaCapital Vietnam Opportunity Fund trades at a discount to NAV of over 20 per cent. But going forward [the Vietnam] story will be accepted and in the meantime VinaCapital Vietnam Opportunity Fund is buying back its own shares for cancellation [which can help to tighten a discount to NAV]. 

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

Monks Investment Trust (MNKS) is a big [with assets worth £2.64bn]. It is run by Baillie Gifford, which is well resourced and conducts lots of due diligence on investments. The open-ended fund that uses the same investment approach – Baillie Gifford Global Alpha Growth (GB00B61DJ021) – is closed to new investment [so this is the only way to access this strategy].

One of Monk's managers, Charles Plowden, is retiring at the end of April 2021, but he is one of three who currently run it. Spencer Adair will become lead manager and Malcolm MacColl will continue as deputy manager

Monks is more diverse than Scottish Mortgage Investment Trust (SMT), which Baillie Gifford also runs. For example, Tesla (US:TSLA) accounted for around 1.4 per cent of its assets at the end of September rather than 12 per cent as was the case with Scottish Mortgage. Monks also holds companies such as Amazon (US:AMZN) in smaller proportions, and has a greater number of holdings.

Because Monks is a more diversified and broad-based growth trust there is less stock-specific risk than with Scottish Mortgage Investment Trust, yet it still taps into Baillie Gifford's core skill of selecting companies that will be tomorrow's winners. 

Peter Walls, manager of Unicorn Mastertrust (GB0031218018)

Global economic growth should continue to improve in 2021 and the drive towards decarbonisation is expected to accelerate as countries strive to build back better. And whether alternative energy, electric vehicles or battery storage, the demand for a wide range of mined materials is forecast to grow strongly in the coming decades [benefiting] BlackRock World Mining Trust's (BRWM) underlying investments. These also have very strong balance sheets and strong cash generation, enabling this trust to pay a high dividend yield of more than 5 per cent.

INCOME

Richard Curling

Supermarket Income Reit (SUPR) is a real estate investment trust that owns the freehold to 45 supermarkets let to Tesco (TSCO), Sainsbury (SBRY), Waitrose and Morrison (MRW). These tend to be on long leases and have upward only index-linked rents. The trust’s shares yield 5.6 per cent, which I believe is very safe given strength of the tenants. And – importantly – its dividends should rise roughly in line with inflation given that the rents are index-linked. The 16-year average lease length gives good visibility on the income stream while the trust's gearing – debt – is sensible at a 42 per cent loan-to-value ratio (LTV). Over the medium term Supermarket Income Reit is targeting a total return of 7 to 10 per cent a year.

Nick Greenwood

Tufton Oceanic Assets (SHIP) owns a diversified fleet of secondhand commercial sea ships, such as tankers and container ships. It has bought a lot of boats that typically have a life of 25 years, and deliver cash flow and capital gains to investors. These vessels are typically halfway through their expected life of around 25 years. They are leased to multinationals on long-term contracts, which insulates the trust from short-term disruptions. The ships’ NAV would be worth something even if they can’t find cargo to transport [although this year] lack of storage space for crude oil led to demand for tankers. 

Tufton Oceanic Assets chucks out an enormous yield [of about 7.9 per cent].

Peter Hewitt

Law Debenture Corporation (LWDB) takes a value style investment approach and is on a discount of 8.3 per cent, even though it has a yield of 5.8 per cent and has been one of best performers in the UK Equity Income sector this year [as of 30 October].

Its dividend particularly is well placed [because it is partly funded by] its professional services business, which is very firmly on the growth track. This means that Law Debenture Corporation is not tied to investing in companies with high dividend yields, but can rather buy more growth companies.

It also had about 20 per cent of its assets invested overseas [at the end of September] helping to allay the worst of the UK dividend cuts. 

Although the UK market has been one of the worst performers recently it is quite attractively valued. If there is Brexit deal and a coronavirus vaccine some more value-orientated stocks may benefit. And in the meantime Law Debenture Corporation's board will at least maintain its dividend [at the same level as in 2019].

Peter Walls

With UK equities generally out of favour since the 2016 Brexit referendum, and significant dividend cuts and suspensions due to the Covid-19 pandemic, there are few havens for equity income seekers. But investment trusts such as Schroder Income Growth Fund (SCF) have the ability to smooth dividend payments [if necessary, using their revenue reserves], which is attractive to investors who require a predictable and hopefully growing income. Although some income trusts have decided to rebase their dividends, many intend to maintain their records [of increasing them annually].

Schroder Income Growth Fund is paying dividends worth 12.6p per share in respect of its last financial year, an increase of 1.6 per cent on the 12.4p it paid in the financial year before that. The trust has increased its dividend every year for 25 years. 

Wealth Preservation

Richard Curling

Capital Gearing Trust (CGT) is managed by a very experienced team with a great long-term record of preserving capital. They aim not just to preserve capital in nominal terms, but also its purchasing power – protect it from inflation and devaluation. This is very important in the current environment due to central bank money printing, which has increased the risk of inflation in the future.

Nick Greenwood

Life Settlement Assets (LSAA) aims to generate long-term returns for investors by supporting and managing whole and partial interests in life settlement policies issued by life insurance companies operating predominantly in the US. These will slowly mature over time and are diversified enough to provide a bit of an uplift to NAV every year. This will result in a solid rise in capital values and payments will gradually be made to shareholders.

Life settlement policies as an investment are largely uncorrelated with traditional capital markets.

Peter Hewitt

Personal Assets Trust (PNL) is a solid defensive trust, with 40 per cent of its assets in equities, 41 per cent in fixed income and 11 per cent in gold related investments [at the end of September]. The equity allocation includes some decent international companies such as Microsoft (US:MSFT) and [Google owner] Alphabet (US:GOOGL) – rather than, for example, UK-listed companies in potentially more volatile sectors. It has enough 'sensible' equities to hold – if not increase – its value.

So Personal Assets Trust is well placed to preserve value and, if inflation takes off, also well positioned.

Peter Walls

After consistently trading at a premium to NAV in recent years, the uncertain markets of 2020 have caused RIT Capital Partners' (RCP) shares to trade at a discount. This has prompted the trust's board to buy back its shares for the first time since 2013. RIT Capital Partners' portfolio performance during 2020 was in line with expectations – its NAV fared relatively well during the market correction and then recovered at a slower pace than equity markets. I would expect the trust's shares to return to trading around NAV in a more stable market environment. I also continue to like the family office characteristics of this trust.

DIVERSIFICATION

Richard Curling

Hipgnosis Songs Fund (SONG) owns the intellectual property rights and royalty income of songs and music. It has built a portfolio of 117 catalogues and 57,000 songs. This is well diversified across genre and vintage as it is spread over the past five decades. This includes over 2,500 songs that have reached a No.1 chart position, and 16 out of the top 20 most streamed songs of all time.

Music is becoming ever more profitable with the rise of streaming services such as Spotify (US:SPOT), which have made it easier to monetise music rights.

Hipgnosis Songs Fund’s portfolio is conservatively valued using a discount rate of 9 per cent and, as music copyright lasts for 75 years after the death of the artist, these are exceptionally long life assets.

The trust’s shares yield 4.3 per cent [at the end of October], so you get a good income and excellent opportunities for capital growth.  

Nick Greenwood

Phoenix Spree Deutschland (PSDL) trades at a discount to NAV [of nearly 30 per cent as of 5 November], but we think its NAV is higher. Although there is a rent freeze in Berlin, where this trust invests in property, the regional government has no right to do this so it may be rejected by the federal constitutional court. Something similar has already been rejected in Bavaria.

Phoenix Spree Deutschland has also been splitting and selling properties into the private market. There is a housing shortage in Berlin so asset values are going up quite sharply. And because bond yields are so low other institutions are happy to buy property yielding around 3 per cent.

Peter Hewitt

When Hipgnosis Songs Fund came to market two years ago, I thought that if it was to be successful the real story would be capital growth. And its latest results [to the end of March] showed capital growth coming through. If you add in the income it produces, it makes quite a tidy return.

Music streaming is steadily increasing and Hipgnosis Songs Fund's managers have an ability to get 'synch' deals for individual songs, for example, placing them in an advert, computer game or TV series, which maximises return.

Because it is now done digitally, the ability to collect royalties in a timely manner is much improved.

Hipgnosis Songs Fund offers prospects for both capital and income growth, neither of which are sensitive to the direction of equity markets. 

Peter Walls

Hipgnosis Songs Fund offers exposure to the revenue generated by songs and associated music intellectual property rights. The growth of music streaming accelerated in 2020 with platforms such as Spotify reporting strong growth in subscriptions. The trust's returns are uncorrelated with equity markets and the catalogues of songs have copyright protection of at least 70 years. Hipgnosis Songs Fund also has a yield of more than 4 per cent.

<Box out> 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 HgCapital Trust (HGT), suggested by Peter Hewitt. This is a private equity investment trust that focuses on unquoted software and service businesses mainly in the UK and Europe. It looks to invest in businesses that can perform well across the economic cycle. The trust also has a strong long-term performance record.

The next best performer with a share price total return of 17.5 per cent was Oakley Capital Investments (OCI)m which is also a private equity investment trust. This was suggested by both Richard Curling and Peter Walls. The trust invests in funds run by its manager Oakley Capital, which invest in digitally focused businesses in the technology, education and consumer sectors, mainly in western Europe. This trust also has a strong long-term performance record.

The trust with the worst share price performance over the year to 31 October was Duke Royalty (DUKE), suggested by Nick Greenwood. This trust provides capital to profitable businesses in exchange for rights to a small percentage of their future revenues. Although its share price return has been poor, its cash distributions from royalty partners over the year to 31 March were up 91 per cent on its previous year and the trust increased its dividend per share by 5 per cent to 2.95p.

The next worst performer was Real Estate Investors (RLE), with a share price total return over the year to 31 October of -42.67 per cent, also suggested by Mr Greenwood. This is a small property fund focused on commercial and residential property in Birmingham and the Midlands. Over its half year to 30 June, it reported an increase in revenue of 1.2 per cent. But due to uncertainties over the Covid-19 pandemic and the potential for the markets in which it operates to deteriorate, its board has reduced its quarterly dividend payments to 0.5p per share, although may make a larger distribution in respect of the final quarter.

But 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 – five years or preferably longer.