However, the beauty of the investment trust world is that it is home to some highly differentiated strategies which are hard or impossible to replicate in the open-ended universe.
Here Cantor Fitzgerald analysts Monica Tepes and Charles Tan highlight three trusts they particularly like which investors often overlook. All are relatively small in size and offer a unique proposition.
Two look like coming back into favour after a poor year, meaning that investors could get the benefit of a closing discount too.
Schroder Asian Total Return
This £131m trust is the only way investors can access the strategy which the managers Robin Parbrook and King Fuei Lee implement on the soft-closed £2.2bn Schroder ISF Asian Total Return fund.
That fund, which has five FE crowns, has an outstanding track record since launch in November 2007, returning 137.75 per cent as the benchmark has made just 12.17 per cent.
Performance of fund vs benchmark since lunch
Source: FE Analytics
The fund has generated these returns with volatility below that of the benchmark, too, a function of the very particular strategy used by the managers.
They pick stocks on a bottom-up basis, with the relatively small size of the £131m trust meaning it can buy smaller companies as well. At times the fund has just 10 per cent overlap with the index, Tepes points out.
The managers then apply a macro overlay to hedge out the risk of exposure to the countries where they think the markets will lose money.
A proprietary in-house Schroders model is then used to produce three month trading signals and hedge the portfolio as a whole when appropriate.
It has been a tough time for the managers since taking over this closed-ended fund at the beginning of last year. In March the Asian market sold off heavily and the portfolio has struggled since.
Performance of trust vs sector and index since March 2013
Source: FE Analytics
However it is up ahead of the index in the year-to-date. The period of poor performance means the trust is now available on a discount of 6.5 per cent to NAV, which Tepes says is a good opportunity for long-term investors.
The trust has ongoing charges of 0.7 per cent inclusive of a performance fee.
City Natural Resources High Yield
The £94m City Natural Resources High Yield trust offers a 4 per cent yield on a 12.9 per cent discount.
It is another trust with a differentiated approach which Cantor analysts highlight as worth considering.
Analyst Charles Tan said: “City Natural Resources chooses to avoid the mainstream large-cap, industry majors found in many peers’ portfolios whilst pursuing its mandate to generate income and capital growth for shareholders.”
“Over the last decade, CYN has delivered a steadily increasing dividend, up over 10 per cent per annum on average and, in our view, the resultant smaller-cap bias gives CYN investors exposure to some unique holdings with potential to outperform.”
The trust invests in mining and resource equities and at the smaller end of the specturm, which explains it being out of favour in recent years.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
However, year-to-date the trust is up 15.22 per cent, ahead of both sector and index, and analyst Charles Tan says with mining valuations at trough levels there is huge potential upside.
Performance of trust vs sector and index in 2014
Source: FE Analytics
The trust is managed by Will Smith and Ian Francis, and has 33.8 per cent in oil and gas stocks, 16.7 per cent in gold-related stocks and 11.1 per cent in palm oil.
It has ongoing charges of 1.52 per cent.
BlackRock Hedge Selector
The £36m BlackRock Hedge Selector fund is even less well-known, despite being run by star manager Richard Placket with Ralph Cox.
“BlackRock Hedge Selector, at less than £40m market cap, is possibly the most under-appreciated investment company, in our view,” Tepes said.
“There are not many strategies, accessible via closed or open ended funds, which have better long-term track records.”
“The strategy’s returns – 13.7 per cent per annum – are not only among the best, but have been achieved with exceptionally low volatility and, even more impressively, in an uncorrelated manner, which hardly any other strategies offer.”
The fund is a small-cap focused hedge fund, which has been run in various forms since 2004. Over that time it has returned 350 per cent and the Numis Smaller Companies benchmark has made just 300 per cent.
The fund has a maximum loss of just 5.4 per cent over that time thanks to the long/short hedging utilised. It volatility of 6.1 per cent over its life also compares favourably with the 18.4 per cent of the FTSE All Share.
Tepes says it represents a simpler alternative to the funds of hedge funds Brevan Howard and BlueCrest All Blue. It has ongoing charges of 0.6 per cent.
