Investment trusts: Professional picks 2017

GROWTH

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

Henderson Opportunities Trust (HOT)

“It is difficult in the investment trust sector because everything looks expensive and there is not a huge amount of value around. When choosing a trust you could look to what is run by good managers who add most value by outperforming, or where there is investment trust value in discount terms. One trust that ticks both boxes just now is Henderson Opportunities Trust (HOT), which has a good track record of delivering and is on a discount to NAV of over 14 per cent. It is a small trust and has made great long-term returns, but can be quite volatile.”

For example, in 2016 the trust underperformed the FTSE All-Share with a negative share price return, although still delivered a double-digit NAV return.

“I like Henderson Opportunities because its manager, James Henderson, has a great track record, and a 14 per cent discount to NAV in current conditions [of elevated ratings] is good.”

>Additional information such as insider knowledge is highly useful

Nick Greenwood, manager of Miton Global Opportunities (MIGO)

Aurora Investment Trust (ARR)

“This trust was taken over two years ago by Phoenix Asset Management. Its managers describe their style as "fundamentalist value", which involves building a highly concentrated portfolio of UK equities where they believe the market price has fallen to below 50 per cent of their estimate of the business's intrinsic value. It invests in areas including housebuilders, such as Bellway (BWY) and Redrow (RDW), and retailer Sports Direct (SPD) is also among its largest holdings.”

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

Monks Investment Trust (MNKS)

“Monks is managed by Baillie Gifford and is broad-based growth orientated. It is different to the other large growth trust Baillie Gifford manages, Scottish Mortgage Investment Trust (SMT) – the individual positions in Monks are not as large and while it has exposure to technology it is not to the same extent. It is slightly less risky than Scottish Mortgage.

"It leverages off Baillie Gifford's strong research resource and is run by the team that manages Baillie Gifford Global Alpha Growth (GB00B61DJ021) which has closed to new investments. So if you want exposure to this team, which has a great performance record, Monks is the way to access them.

“Monks is invested globally with over 40 per cent of its assets in the US, and it also has allocations to areas including Europe ex UK and Asia Pacific. It only has 6 per cent of its assets in the UK so is not beholden to what goes on here and the consequences of Brexit.

“I think its good performance can continue for a while. If markets go down this trust will be affected, but it is good for growth and will perform well if markets stay reasonably buoyant. Monks is trading close to par [it has experienced substantial discount tightening since its current managers took it over two-and-a-half years ago] so you could benefit from its asset value pushing on rather than discount tightening.”

Peter Walls, manager of Unicorn Mastertrust (GB0031218018)

Henderson Smaller Companies Investment Trust (HSL)

“All smaller companies investment trusts had a post-Brexit markdown in their assets and the whole Brexit situation continues to weigh heavily on their ratings. I also don't feel there is a great deal of interest in smaller companies at the moment, and the average discount on trusts in this sector is around 12 per cent, and Henderson Smaller Companies is wider at around 14 per cent despite the fact manager Neil Hermon has generated very strong returns since he started running the trust in 2002. So this trust is quite good value.

“There are times when smaller companies will underperform, but there is still good value so you are not overpaying for smaller companies – mergers and acquisitions activity is also likely to continue. Henderson Smaller Companies offers a good manager and a decent discount.”

INCOME

Richard Curling

Perpetual Income and Growth Investment Trust (PLI)

“It is really difficult because income investments are very expensive – they are overpriced because everyone is prepared to pay up for them. But a manager who has underperformed and on whose trust the discount has widened is Mark Barnett, who runs Perpetual Income and Growth - this has widened out to a discount of around 8 per cent. However, over the longer term Mr Barnett has a good record and he is a value investor so eventually should have his moment in the sun.”

Nick Greenwood

Funding Circle SME Income Fund (FCIF)

“The problems among yielding investments, when they come, will come from fixed income rather than equities, so I am concerned that certain types of alternative income funds will be among the most hurt. So I would favour a sector already very out of favour, such as peer-to-peer lending investment trusts, and would go for Funding Circle SME Income Fund.

“There is lots of competition for the peer-to-peer lenders that are making loans to US consumers, so their returns could be disappointing. But banks have genuinely retreated from lending to small businesses in the UK, and peer-to-peer lender Funding Circle also has the benefit of not having to fund a branch network.

“This trust's share price could get carried down with some other income-focused funds as a result of interest rate rises and investors going back to conventional income sources, but Funding Circle has genuine revenue coming through.

“I would not pay a double-digit premium for an infrastructure fund, for example, despite these offering attractive yields – I am very nervous about such high ratings. But Funding Circle is on a lower premium of around 2.5 per cent, so I would say it is a defensive choice.”

Peter Hewitt

Jupiter Emerging & Frontier Income Trust (JEFI)

"This is slightly different and I think very well placed – I am quite optimistic on emerging markets, which have structural attractions and compelling valuations. I like the fact that this trust can invest up to 25 per cent of its assets in frontier markets, which seem risky but offer diversification - they don't have a lot of correlation with mainstream equity markets such as the US. The Jupiter team has lots of resource and lead manager Ross Teverson, who joined from Standard Life in 2014, has a good record.

“The trust is run in a benchmark-agnostic way – bottom-up stockpicking – and once fully invested its portfolio should comprise approximately 40 to 45 investments.

“It is different to some other emerging markets funds in that it targets higher-quality companies with better growth prospects. It will start paying a dividend next month and for 2018 should have a dividend yield of 4 per cent. It is also overseas focused so it should not be an issue if we have a good or bad Brexit or a UK recession."

Peter Walls

Edinburgh Investment Trust (EDIN)

"Edinburgh's manager, Mark Barnett, has had a few hiccups along the way recently, but I don't believe one bad year makes a bad manager," says Mr Walls. 

Edinburgh Investment Trust has been lagging the FTSE All Share index, albeit with double-digit NAV and share price returns over the last year. This was partly because it didn't have exposure to mining shares in its last financial year, a time when many of these recovered strongly. And it has had a significant overweight position in consumer staple sectors, such as tobacco, which have been weak.

A number of its larger portfolio positions have also been subject to stock-specific problems resulting in sharp falls in their share prices in recent months, including AstraZeneca (AZN), Capita (CPI), BT (BT.A), Next (NXT), Circassia (CIR) and a number of the peer-to-peer lending funds.

"But the discount has drifted out to over 7 per cent, which provides some scope for recovery and the trust also has a decent yield of 3.5 per cent," continues Mr Walls. "While maybe not an exciting fund, Edinburgh should prove to be a steady eddy."

WEALTH PRESERVATION

Richard Curling

Capital Gearing Trust (CGT)

"We like Capital Gearing Trust the most among wealth preservation funds, a difficult area where a lot of funds have not delivered consistently. But Capital Gearing Trust has a good track record of delivering positive returns [it has made positive NAV returns in each of the past 10 calendar years, including during the financial crisis in 2008 when it returned 5.76 per cent and its share price was not far behind on 4.72 per cent, a year when the FTSE All-Share fell nearly 30 per cent]. 

"Its managers, Peter Spiller and Alastair Laing, are particularly concerned about inflation and while nobody is really forecasting that it will take off massively, this trust will protect you."

Capital Gearing Trust has a third of its assets in index-linked bonds.

Nick Greenwood

Dunedin Enterprise Investment Trust (DNE)

"This investment company is in realisation, so the assets are being slowly sold off and the proceeds given back to shareholders. If things go badly and it loses some of the value of these, you may get more or less what you paid because it is trading at a discount to NAV of around 20 per cent. But I think it holds good businesses and investors will get back more than its current NAV. It holds some interesting businesses which may succeed and be sold for a higher amount than the carrying level, and the wind-down is progressing in an orderly fashion."

For example, the trust has recently sold its stake in Kee Safety, into which it made an investment of £6.3m in November 2013, but over the life of the investment a total of £18.8m will be received by Dunedin Enterprise, representing a 3.0 times return and an internal rate of return (IRR) of 35 per cent.

And last month it realised its investment in Alpha FMC following its listing on the Alternative Investment Market (Aim). The original cost of the investment in February 2016 was £8.1m and, over its life, a total of £16.7m will have been received by Dunedin Enterprise, representing a 2.1 times return and an IRR of 55 per cent.

The trust will hold a meeting on 16 November, after which which its board intends to announce a distribution to shareholders along with the quarterly trading update.

Peter Hewitt

Ruffer Investment Company (RICA)

“Ruffer Investment Company will give you some returns if markets continue to push on, but if they don't and pull back it will have an even better chance of preserving value. Its managers are very concerned with inflation – especially in the UK – and they noticed a year ago that it was picking up. And they think markets are overvalued and that debt – especially government debt – is too high in the developed world.

“They think interest rates will go up in the UK, but not by enough to choke off inflation because of levels of debt, so they have structured this trust’s portfolio accordingly.

“They hold long-dated index-linked bonds, so if inflation rises to 3.5 per cent, or even more, these will be a defence.

“They also have Japan equities: the macro-economic picture here is getting better and the companies are performing well, but the valuation of this market is below that of other developed markets. The trust’s equity allocation accounts for less than 50 per cent of assets, but it has a cyclical element. It should do well in a rising interest rate environment.

"Its managers spend a lot of time structuring the portfolio to do well in different scenarios and have done well on this."

Peter Walls

RIT Capital Partners (RCP)

“Wealth preservation funds will have a problem if markets continue to rise, but if you take a longer-term view then maybe you will have more of an ability to capture markets. Since its inception in 1988 RIT Capital Partners has participated in 75 per cent of market upside, but only 39 per cent of market declines. It won't preserve your wealth as much in the short term as some of its sector peers, but will capture more upside over the long term. It has outpaced more classic wealth preservers such as Capital Gearing Trust, Personal Assets Trust (PNL) and Ruffer Investment Company over three and five years, so in the long term you will get back more with this than some of the other wealth preservers.

“A downside to this trust, though, is that (at time of writing) it is trading on a premium to NAV of 7 per cent."

DIVERSIFICATION

Richard Curling

RM Secured Direct Lending (RMDL)

“A lot of alternative asset trusts are pretty overvalued because they are being priced off their dividend yield, and many are trading at a premium to NAV. And some are not as proven as I would feel comfortable with – we have not seen them perform through a full cycle.

“But RM Secured Direct Lending doesn't invest in peer-to-peer loans, like a number of trusts that have launched in recent years, but rather conventional business lending. It is run by some very thorough people – a credit asset manager with a focus on secured lending and debt investments – and invests in well collateralised and covenanted loans. The trust has a yield of about 4 per cent, which I think is safe."

The trust invests in loans predominantly secured against assets such as real estate, plant and machinery, and income streams such as account receivables. The loans are to UK small to medium-sized enterprises and mid-market corporates.

It aims to generate attractive and regular dividends through loans it has directly sourced or originated with a degree of inflation protection. It has 21 debt investments across 10 sectors. 

The trust, which launched in December last year, is targeting an annualised dividend yield of 4 per cent for this year, rising to a dividend yield of 6.5 per cent for the year to 31 December 2018.

Shareholders in the trust will have an opportunity to redeem their shares as its board intends to provide an exit at or near NAV before the company’s fourth annual general meeting, and every three years thereafter.

Nick Greenwood

Taliesin Property Fund (TPF)

“Taliesin Property Fund has permission to convert the bulk of the flats it owns into leasehold properties – something it is now hard to get. A backlash against the gentrification of Berlin has made obtaining these permissions difficult. And valuers are increasingly bringing into consideration whether a property has a permit to convert into their valuation process, which has driven a further sharp increase in Taliesin's NAV.

“In Berlin there is a gulf of difference in prices between property to rent and the private sector. The sale of apartments in privatised blocks is achieving prices approaching €5,000 a square metre, which compares favourably with Taliesin's average carrying value of €3,070 a square metre. The stated NAV reflects the valuation of apartments as yet unconverted from rental use. Therefore, in reality, Taliesin trades at a significant discount to the realisable value of its assets. 

“Berlin has a lot further to go – it is a major European capital and it's cheaper than, for example, Munich. And in 2017 Berlin seems to have benefited from concerns over the future role of London post Brexit. Market prices are now accelerating from an already healthy rate of progress.

“And the trust is handing cash back to shareholders from the proceeds of disposals.”

Peter Hewitt

Civitas Social Housing (CSH)

"Civitas Social Housing invests in specialist supported housing. It owns the properties, while housing associations provide the care for the residents. These properties are let on inflation adjusted long-term leases and occupancy agreements of typically 10 to 40 years, and the trust has a large diversified portfolio of properties across England and Wales. Its managers have a deep knowledge and understanding of the housing sector."

Around 85 per cent of the rental income paid to the trust will be directly paid by government or local authorities, and the social housing sector has never suffered a credit loss. Civitas aims to distribute more than 90 per cent of its income in the form of a quarterly dividend, and is targeting a total dividend of 5p a share for 2018.

"While it is not a high-growth fund it is quite secure – its returns are not related to what is going on in bond and equity markets. It also is not highly leveraged so I think is relatively safe.

“Most of what it raised at its initial public offering in November last year has been invested, and it is now doing a C share issue for another £350m. Even if it doesn't raise all of that and gets, say, £100m, it will still be a sizeable investment company in a new sector which I think is quite interesting."

Peter Walls

BH Global (BHGG)

“Although alternative asset funds are a big segment of the investment trust market, one area that has been in decline for several years is listed hedge funds, and I would expect the number of them to dwindle further. One that hasn't been particularly rewarding is BH Global, which has often traded at a discount to NAV of 10 per cent-plus over the past year.

“But its board has been quite forthright in expressing its concerns on the discount to BH Macro’s  managers and has been more active in buying back shares. It has also scrapped the trust's old hedge fund style fee so that its ongoing charge should fall."

Earlier this year the trust halved its management fee from 2 per cent of NAV to 1 per cent, a  reduction that should result in an annual saving of approximately $4.5m.

“If we get choppy markets BH Global should perform well and offers the potential to be a safer investment in more difficult markets, meaning its discount could tighten. This is a trust at a discount of about 9 per cent with a portfolio that you don't expect to produce shocks like some alternative asset funds."

BH Global invests in Brevan Howard Multi-Strategy Master Fund, a Cayman Islands domiciled hedge fund which invests in other hedge funds and has direct allocations to traders at BH Investment Managers.

Trust performance

How last year's picks performed

The best performer of last year's picks over the past 12 months was Chelverton Small Companies Dividend Trust (SDV), suggested by Richard Curling, which made a share price return of 45 per cent and NAV return of 34 per cent.

This trust aims to deliver a high and growing income through investments in UK listed small-cap companies capitalised at less than £500m, but has also delivered good total returns.

The next best performing trust over the past year was Monks, with a share price return of 38 per cent, which is also one of this year's suggestions.

Overall last year's selections had a good year, with 11 out of 15 beating both the FTSE All-Share and FTSE All World indices in share price terms, although only six beat these indices in NAV terms.

The trust that delivered the least was Sanditon Investment Trust (SIT) with share price and NAV returns of -13 per cent and -8.5 per cent. The trust has not done well due to its cautious positioning, and admits in its latest quarterly report that: "It is clear that our portfolio shape of long value/short growth and long defensive assets over cyclicals is not working at the moment, but we are not ready to throw in the towel given central bankers' more hawkish tone coming through. With investors continuing to chase growth and paying high multiples for it (particularly cyclically adjusted), we remain convinced with debt levels so high around the world that it will not take much tightening to shake the very high levels of investor complacency exhibited by record low levels of volatility."

The trust aims for an absolute return in excess of 2 per cent over the rate of inflation, measured by the retail prices index excluding mortgage interest payments (RPIX), and to provide low correlation with leading UK and European equity indices. This was one of the reasons why Mr Curling and Mr Greenwood suggested it for a wealth preservation option in 2016, and it did make a positive NAV return of 5.2 per cent in that calendar year.

Of course with all our suggestions, as with any other risk assets, you need to hold and assess them over the long term. So looking at the five-year numbers, Chelverton Small Companies Dividend was again the champion, with a share price return of 238 per cent and NAV return of 187 per cent. It was followed by TR Property with a share price return of 155 per cent and NAV return of 121.5 per cent.

Performance of last year's recommendations

A world of wealth

Trade the globe with investment trusts

Asia Trusts are the secret to bargain growth

Asia Pacific ex-Japan investment trusts offer growth at a discount

Two portfolios for income

We check in with our two investment trust income portfolios to see which one has paid the most, which has performed the best and what changes have been made. Kate Beioley reports.

Around the world in eight investment trusts

It’s time to grab your passport and your carpet bag and build a geographically diversified portfolio with Algy Hall.

‘No deal’ upside

John Baron explains why the UK market looks good value regardless of a trade deal with the EU