Not having to worry about potential inflows and outflows of money means investment trusts, unlike open-ended funds, can take a long-term view on investments. This works well in Isas as their tax efficiency makes them a good wrapper in which to build up investments over the long term.
Not having to deal with inflows and outflows also means investment trusts can be better for investing in illiquid investments such as commercial property. So as well as using them for actively managed exposure to core areas, you could also use investment trusts to introduce alternative assets to your Isa to diversify it.
So below are 10 suggestions from investment trust analysts for growth, income, wealth preservation, diversification and contrarian opportunities.
GROWTH
11. Foreign & Colonial Investment Trust
Simon Elliott, head of research at Winterflood Securities, says: “For growth-orientated investors looking for well-managed exposure to global equities, I would suggest Foreign & Colonial Investment Trust. This is a one-stop global equities fund, and is diversified across a number of strategies, including regional and global equities funds, as well as private equity mandates.
“It has outperformed its benchmark with relatively low levels of volatility since the appointment of its current manager, Paul Niven of BMO Global Asset Management, in June 2014. The trust’s discount to net asset value (NAV) has narrowed in recent years and, given the attention it will receive this year as it is 150 years since its launch, it would not be a surprise to see this tighten further.”
12. Gresham House Strategic (GHS)
Monica Tepes, investment companies research director at finnCap, says: “Gresham House Strategic is a small-cap value-oriented fund. Value has underperformed growth over the past five years, and the valuation differential between large stocks with a market cap of £250m-plus and smaller, less liquid stocks is significant. Gresham House Strategic’s shares are also trading at a discount to NAV of around 28 per cent, giving an additional source of significant potential upside.
“Although the trust invests in listed smaller companies, its managers have successfully invested via a private-equity-style approach for over 15 years. They run a high-conviction portfolio, take significant stakes in companies and are highly engaged with the management teams of their holdings.
“They focus on value opportunities among quality companies – profitable, cash-generative companies with strong management teams, which are intrinsically undervalued and can benefit from strategic, operational or management initiatives. At the time of the trust’s interim results in November its holdings were on valuations nearly 35 per cent below those of the FTSE Small Cap index while having an overall net cash position.
“Gresham House Strategic’s largest holding, IMImobile (IMO), accounts for about 42 per cent of its assets and is a market leader in mobile communication software. This is a highly cash-generative company with very resilient cash flows and recurring revenues, so it could deliver solid growth with relatively low risk. Gresham House Strategic’s managers plan to eventually reduce their holding in IMImobile, which will make the trust more diversified and could help narrow its discount to NAV.”
INCOME
13. Schroder Oriental Income Fund (SOI)
Charles Cade, head of investment companies research at Numis Securities, says: “Schroder Oriental Income provides an attractive option for investors looking for yield from Asian equities. It pays a fully covered yield of about 3.7 per cent a year quarterly, and dividend growth has been strong since launch in 2005. The yield requirement means that there is significant exposure to more mature, higher-yielding markets, such as Australia, Hong Kong and Singapore – it is hard to find opportunities with sufficient yield in China, Korea and India.
“The trust’s manager, Matthew Dobbs, favours sectors with sustainable earnings, including real estate, strong banks and well-run industrials. Performance in 2017 lagged Asian market indices as the trust does not have exposure to the Chinese internet stocks that performed strongly. However, its long-term record is impressive, with an annualised NAV total return of 11.1 per cent over the past decade.”
14. TOC Property Backed Lending Trust (PBLT)
Ms Tepes says: “TOC Property Backed Lending Trust launched a year ago and targets a 7p dividend, as well as offering the prospect of capital growth. It invests in securities that match its return profile – high-coupon fixed-rate loans with an equity kicker – which is what gives the potential for capital growth. The loans are secured, predominantly on property and land in the UK mainly outside London. They finance development projects and their kicker is an equity share in the development company acquired at no cost – this is essentially a participation in the profits of the project without taking any equity risk.
“Although the coupons are high, typically 8 per cent to 10 per cent, the loans are to quality borrowers with solid track records. The high yields do not reflect the creditworthiness of the underlying borrowers but rather the dearth of development capital outside London. They also reflect the trust’s manager’s established position and reputation as a lender in this area, and its strong relationships with businesses in the north-east.
“Although TOC Property Backed Lending Trust is small with a market cap of about £25m, it has a clearly stated intention to grow and has been steadily issuing new equity. Due to its unique and very attractive return profile, performance to date and the fact it has started paying its target 7p dividend, I would expect it to grow significantly in the not too distant future.”
WEALTH PRESERVATION
15. Capital Gearing Trust (CGT)
Mr Cade says: “Capital Gearing Trust has a focus on preserving capital via a multi-asset approach. Its managers are concerned about equity valuations and believe there are growing inflationary pressures. As a result, the portfolio currently has a low allocation to equities of just 13 per cent, and 37 per cent of its assets are invested in index-linked government bonds.
“Property is also a key theme, representing 17 per cent of net assets, principally through German residential companies and UK funds with long inflation-linked leases. Capital Gearing Trust also has investments in private equity, infrastructure and renewable energy funds, as well as zero-dividend preference shares.
“The trust has an experienced management team headed by Peter Spiller and Alistair Laing, and its long-term track record is exceptional, with positive NAV returns in every calendar year for the past 20 years-plus.
“The trust has a zero discount control policy, whereby it issues and buys back shares at a small premium or discount to minimise discount volatility.”
16. Seneca Global Income & Growth Trust (SIGT)
James Carthew, head of research at QuotedData, says: “For wealth preservation I suggest a trust from the Association of Investment Companies (AIC) Flexible Investment sector as these can adapt their asset allocation to suit anticipated market conditions.
“Ones I like include Seneca Global Income & Growth, which has been busy cutting its exposure to equity markets in preparation for a bear market, which its managers think might start in 2019. Its managers’ aim is for the trust to be meaningfully underweight equities as developed markets and economies reach their peak phase, during which equities traditionally show their poorest performance.
“Over a typical investment cycle, Seneca Global Income & Growth aims for a total return of at least the consumer prices index (CPI) plus 6 per cent a year, after costs, with low volatility. It also aims to grow its annual dividends at least in line with inflation. To achieve this, the trust’s managers put together a multi-asset portfolio that includes direct investments, mainly UK equities, and commitments to funds focused on overseas equities, fixed income and specialist assets. They use yield as the principal determinant of value when deciding on the tactical asset allocation and holding selection.”
DIVERSIFICATION
17. Aberdeen Diversified Income & Growth Trust (ADIG)
Mr Elliott says: “Investors looking for exposure to alternative asset classes should consider Aberdeen Diversified Income & Growth. This trust has a diversified multi-asset portfolio, with exposure to a wide range of assets including listed equity, private equity, farmland, infrastructure, loans, asset-backed securities, emerging markets debt, absolute return, insurance-linked securities and cash.
“The trust has been managed by Mike Brooks and Tony Foster since February 2017 and has a target return of Libor plus 5.5 per cent a year after fees over rolling five-year periods. It pays a quarterly dividend and, based on indicated dividends, is yielding just over 4 per cent.”
The trust had net gearing (debt) via a long-term debenture that was equivalent to 11.7 per cent of assets at the end of January.
18. BH Global (BHGG)
Alan Brierley, director of the investment companies research team at Canaccord Genuity, says: “Since the authorities moved to do-whatever-it-takes mode in 2011, Brevan Howard’s macro strategy has struggled as volatility has collapsed to historically low levels. Consequently, BH Global has had to take decisive action to address material supply/demand imbalances. Over the past five years BH Global has returned £484m so that its market capitalisation is now just over £280m.”
Last year BH Global only made a NAV total return of 1.7 per cent. However, over longer periods it has made better returns driven by its direct investment portfolio, which consists of a small number of trading books, giving its managers greater flexibility in asset allocation and opportunities outside their core trading areas.
CONTRARIAN
19. Murray International Trust (MYI)
Mr Brierley says: "Since Bruce Stout assumed managerial responsibility in June 2004, Murray International is ranked 12 out of a peer group of 104 UK-based global open- and closed-ended funds. However, recent years have been dominated by a highly challenging period between 2013 and 2015, and this has decimated the trust's five-year record.
"Portfolio construction is driven by stock selection and there is a material tilt towards emerging markets and away from developed markets, where the manager is gravely concerned about levels of debt. The trust has a yield of about 4 per cent and its board intends to maintain a progressive dividend, which will be underpinned by active use of revenue reserves."
20. Empiric Student Property (ESP)
Mr Carthew says: "Contrarian bets are inherently risky, but in September last year Empiric Student Property went from trading at a consistent premium to NAV to a material discount, currently about 19 per cent. The main problem was that it didn't have a strong enough grip on its overheads and was distributing far more in dividends than it was earning. Worries about rising interest rates and the impact that leaving the European Union will have on overseas student numbers also played a part.
However, Empiric Student Property's chief executive, Paul Hadaway, has since been ousted and the dividend has been cut to a more manageable level of 5p for the year ending 31 December 2018."
The trust expects the dividend for the year ending 31 December 2018 to be substantially covered by adjusted earnings and fully covered by the year ending 31 December 2019. It has a yield of about 6.7 per cent.
Mr Carthew adds: "Fears over interest rate rises may be overdone, while weak sterling is encouraging overseas students to come to the UK, with the government appearing to be backtracking on plans to deter them."
For the rest of our 50 Isa ideas and other associated Isa articles see below:
10 smart ways to boost your Isa
10 investment trusts for your Isa
The cheapest DIY platforms on which to hold your Isa
