Investment trusts: Professional picks 2021

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)

Healthcare is probably one of the best long-term growth sectors given aging populations, rising wealth and advancing medical technology. BB Healthcare Trust is high conviction and run by an experienced team with a good performance record. Growth sectors such as healthcare have been overshadowed this year by more economically sensitive recovery value sectors, but I expect healthcare to come back into focus. This trust has a strong discount control mechanism which reduces the risk losing money due to discount widening and a decent yield of [2.5 per cent at the end of October]. BB Healthcare Trust represents one of the best long-term growth opportunities in the market.

Nick Greenwood, manager of Miton Global Opportunities (MIGO)

Geiger Counter (GCL)

Geiger Counter invests in the shares of companies involved in the exploration, development and production of uranium. Uranium stocks should benefit because nuclear power is regaining acceptance as it is carbon free. There has been little exploration since the nuclear power station accident at Fukushima in 2011 and the lead time for new mines is around seven years, so it is hard to come up with the uranium needed to supply demand. Countries are not retiring existing facilities. For example, France had planned to reduce the amount of power it generates from nuclear from 75 per cent to 50 per cent of its energy mix, but is now going to maintain nuclear at 75 per cent. And there is always demand from India and China, so a squeeze which should benefit the prices of uranium mining stocks.

Peter Hewitt, manager of BMO Managed Portfolio Trust Growth (BMPG) and Income (BMPI)

Fidelity Special Values (FSV)

We have held this UK equities trust for quite some time and been steadily buying more of it throughout the past year since the Covid-19 vaccine announcement in November 2020.

UK equities are attractive, with strong earnings growth in quite a few areas and valuations below their long-term averages. This asset has under performed since the Brexit vote in 2016, but now there is mergers and acquisitions activity and private equity is buying UK companies.

Fidelity Special Values’ manager, Alex Wright, is a very good stock picker and a contrarian with a value bias. And we think that we are entering a period in which the types of sectors and stocks he invests in will do better.

The trust holds names such as Halfords (HFD) and Inchcape (INCH), and house builders and banks. These are benefitting for reasons including pricing power and supply shortages, and if inflation and interest rates pick up, banks and financials could benefit.

Alex Wright capitalised on this.

The trust was is not cheap – it was trading at a small premium to NAV at the end of October – but we think it will deliver good returns. It is now one of BMO Managed Portfolio Trust’s top 10 holdings.

Peter Walls, manager of Unicorn Mastertrust (GB0031218018)

Allianz Technology Trust (ATT)

There can be little doubt that the Covid-19 pandemic has accelerated the digital transformation of practically all industries and that technology will play a key role in helping companies to become more efficient in the future. For much of 2021, this reasoning led to premium ratings and strong performance by specialist technology trusts, but the more recent market rotation into value and cyclical stocks has blown the froth off ratings. Having traded at premiums to NAV of up to 3 per cent earlier in the year, Allianz Technology Trust recently moved out to a 10 per cent discount to NAV. This was despite its managers negotiating the rotation relatively well by reducing holdings in some high growth companies that they believed would struggle to justify their valuations, and buying cyclicals in the semiconductor, hardware and travel sectors.

INCOME

Richard Curling

Digital 9 Infrastructure (DGI9)

Digital 9 Infrastructure invests in assets such datacentres, and subsea and land fibre optic networks. These assets provide key infrastructure for the digital world that we all take for granted. Internet usage and data consumption continues to grow rapidly so the demand for these types of assets is also increasing quickly. This investment trust is a pure play on digital infrastructure and targets a return of 10 per cent a year. It had a yield of about 5.6 per cent at the end of October and plans to pay twice yearly dividends.

Peter Hewitt

Secure Income REIT (SIR)

This trust was negatively impacted in 2020 but has started to recover quite strongly. It is a beneficiary of inflation as it has many long-term, index-linked leases.

Around 40 per cent of its assets are private hospitals which it leases to tenants such as Ramsay Healthcare, the fifth largest private hospital operator in the world. These provide a good rental income.

Secure Income REIT also holds assets with lots of recovery potential, for example, theme parks which it leases to Merlin Entertainments. That company is on a recovery track that we think will continue in 2022.

And another of its tenants, Travelodge Hotels, is now coming back to paying rent.

Secure Income REIT has a solid dividend yield [of 3.72 per cent at the end of October] which should increase next year. I think that this trust will offer significant capital growth too over the next year. 

The team which manages it has done transformative deals and the trust has a strong balance sheet. All together, Secure Income REIT is a very interesting income story.

Nick Greenwood

Alpha Real Trust (ARTL)

Alpha Real Trust focuses on focuses real estate asset-backed lending, debt investments and high return investments in western Europe. It plans to invest the majority of its cash in secured senior or mezzanine debt and grow its diversified loan portfolio, and has sold many of its property holdings. It plans to pay a quarterly dividend and I expect its yield [2.4 per cent at the end of October] to become much higher. I also expect some capital growth as its price is around 165p per share but its net asset value is about 207p.

Peter Walls

Law Debenture Corporation (LWDB)

The unique characteristics of Law Debenture Corporation are reasonably well known in investment company circles. It offers an intriguing combination of an investment trust and a professional services business. The latter has been performing really well through the pandemic and much of its revenue benefits from being index-linked. It also appears to be quite conservatively valued compared to similar businesses. The investment trust portfolio, meanwhile, continues to enjoy a great deal of freedom to deliver a strong total return.

WEALTH PRESERVATION

Richard Curling

Capital Gearing Trust (CGT)

Capital Gearing Trust is managed by a very experienced team with a great long-term record of preserving capital. It aims to preserve capital in nominal terms as well as its purchasing power, that is, protect it from inflation and devaluation. This is all the more important at the moment with increased concern about inflation and its erosion of the real value of our wealth. There are a number of good wealth preservation trusts but I still prefer Capital Gearing because of its managers’ terrific long term track record and relatively low cost [with an ongoing charge of 0.58 per cent].

Nick Greenwood

Ground Rents Income Fund (GRIO)

There is a lot of potential bad news reflected in Ground Rent Income Fund’s price [75p at the end of October as oppose to a NAV of 103.5p]. The trust invests in UK long-dated ground rents, and the government has been considering reforming the residential leasehold sector since 2017, the timescale and outcome of which is uncertain.

However, any change is not likely to be retrospective so should not necessarily have a negative impact on this trust’s existing holdings. I imagine that this trust will eventually wind down but in the meantime it should pay some dividends, the value of which will probably not be much less than its NAV. Buying trusts on big discounts – 27.5 per cent in the case of Ground Rents Income at the end of October – can act as a buffer against downside risk.

Peter Hewitt

Ruffer Investment Company (RICA)

We have had big holding in Ruffer Investment Company for a long time and it is also very well placed for the next year. If inflation pressure and interest rates go up, and equity markets sell off, this trust is an all-weather portfolio that should give protection in a down market, and maybe even a bit of upside.

Its managers believe that the inflation genie is out of the bottle so hold assets such as index-linked bonds and gold. They like to hold real assets to offset inflation.

Ruffer Investment Company also has a bias to UK equities, which accounted for 22 per cent of its assets at the end of September. But its managers have reduced cyclical exposure in favour of ‘dull’ defensive companies such as GlaxoSmithKline (GSK) and Tesco (TSCO). Over 40 per cent of its assets overall are in equities with holdings also listed in Japan, Europe and North America.

Earlier this year they made an excursion into cryptocurrencies which they did very well, though this is not the reason why I’m suggesting this trust! But what it shows is that they have a wide perspective on where to invest and at the time they held them, they found them to be quite defensive.

Peter Walls

BH Macro (BHMG)

For those worrying about inflation or, worse still, stagflation and feeling risk averse when it comes to equities, BH Macro looks like an interesting option. The trust, a hedge fund, is an active trader predominantly in global fixed income and foreign exchange markets. Its strategy tends to work particularly well in falling markets. The trust’s historic performance has had a very low correlation to equities and bonds and, at the time of writing, its NAV total return over the previous five years was 60 per cent.

DIVERSIFICATION

Richard Curling

Gore Street Energy Storage Fund (GSF)

Gore Street invests in utility scale energy storage projects which use established battery technology. The current energy crisis has highlighted the crucial weakness of the intermittency of renewable energy generation. Energy storage funds such as Gore Street provide the critical link that enables renewables to work, by helping to bridge the gap between when electricity is generated, e.g when the wind blows and the sun shines, and when it is used. So Gore Street Energy Storage Fund is helping the transition to a low carbon society. This trust yielded 6 per cent [at the end of October] and should be relatively immune to the economic cycle and the vagaries of equity markets.

Nick Greenwood

NB Private Equity Partners (NBPE)

A recent regulatory requirement for investors including wealth managers has been to include within their product literature costs relating to trusts they own in client portfolios. And this development has created pricing anomalies. There is concern about the methodology employed to calculate these costs: the legislation makes investment trusts look expensive, especially compared to open-ended funds which will not be compelled to comply with these regulations for another five years. This has triggered structural selling of trusts, particularly in sectors such as private equity that have been particularly harshly treated. An overhang of unwanted shares has developed as shareholders sell to reduce the figure that they need to declare. This explains why some trusts have drifted to wide discounts at a time when their portfolio performance has been exceptionally strong.

In the case of private equity investment trusts, they are dumping them at a sweet spot. The NAVs of these trusts are flying because lots of money is chasing unlisted investments. So we have built positions in afflicted trusts such as NB Private Equity Partners in anticipation of further NAV growth. This trust’s investments are getting to the point where it could sell them on and its NAV is rising fast, but it was trading at a discount [of 17.1 per cent at the end of October].

We expect that the glut of available shares will eventually find new owners allowing the discount to narrow at a time when these trusts’ NAVs continue to rise.

Peter Hewitt

Supermarket Income REIT (SUPR)

We have recently added Supermarket Income REIT, of which about 85 per cent of the assets are leases linked to retail price index or consumer price index inflation. 

It is run by an outstanding management team and focuses on sites that are let to omni channel retailers – ones which do online and click-and-collect retailing as well as operating physical stores. These sites, over three quarters of which by value are let to Tesco and J Sainsbury (SBRY), are particularly attractive.

As well as a dividend yield of 5 per cent, I think that Supermarket Income REIT could deliver some capital upside. Its assets could do better meaning that its share price [118p at the end of October] may be a bit on the conservative side.

Peter Walls

HarbourVest Global Private Equity (HVPE)

The definition of an alternative asset seems to constantly change with the times and, judging by the persistently wide discounts of listed private equity trusts, this is an alternative asset that too few investors appear to be interested in. This seems somewhat strange when historic returns have been so impressive and many large institutional portfolios commit up to a fifth of their assets to private market investment.

HarbourVest Global Private Equity had assets worth £2.49bn at the end of October, and is managed by Boston-based asset manager HarbourVest which has a strong record of investing in private companies over the past 35 years.

HarbourVest Global Private Equity aims to deliver material out performance of public markets over the long term, and since launch in 2007 its NAV has out paced FTSE All World Total Return Index by 4.1 per cent a year after costs. It is a great private markets solution which provides diversified and relatively lower risk exposure to high quality private companies, but still trades at a 20 per cent plus discount to NAV.

How last year’s picks performed

The best performer from last year’s picks over 12 months to 31 October was Tufton Oceanic Assets (SHIP), suggested by Nick Greenwood. It made a share price total return of 62.84 per cent. It invests in a diversified fleet of second hand commercial sea ships, such as tankers and container ships which are leased to multinational companies on long-term contracts. However, the trust doesn’t have a long record having only launched in 2017, so it remains to be seen how it holds up over the longer term.

The second best performer from 2020’s picks over the year to 31 October was VinaCapital Vietnam Opportunity Fund (VOF), also suggested by Nick Greenwood. It made a share price total return of 59.13 per cent. The trust invests in the shares of companies listed in Vietnam, as well as unquoted companies with a substantial majority of their assets, operations, revenues or income in or derived from Vietnam.

The worst performer over the 12 months to 31 October was Life Settlement Assets (LSAA), suggested by Nick Greenwood, which made a share price total return of -13.98 per cent. It 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. But its share price performance has picked up over the six months to 31 October with a total return of 8.86 per cent. The trust’s NAV increased 5.7 per cent over the first half of 2021, and it has acquired new portfolios and concluded litigation which resulted in the quality of its portfolio improving.

The next poorest performer, albeit with a positive share price total return of 11.87 per cent over the 12 months to 31 October, was Hipgnosis Songs Fund (SONG). This trust was suggested by Richard Curling, Peter Hewitt and Peter Walls. It owns the intellectual property rights and royalty income of songs and music, and is well diversified across genre and vintage. The trust’s returns are not correlated to equity markets so it will not necessarily keep up with those and funds which invest in them during periods when they rise strongly.

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. Trusts which invest in esoteric assets and emerging markets single country funds in particular can be prone to high levels of volatility, so a good year might be followed by a tougher period.