Discounts have tightened across the board in the investment trust universe, and analyst Simon Elliott says if investors see an opportunity to pick up a quality trust on the cheap, they may need to move quickly before the window closes again.In the first of the series, we reveal Winterflood’s trust swaps in the Global, UK Equity Income and European sectors.
Global
Removed: Witan
Added: British Empire Securities
Analyst Innes Urquhart says that although Winterflood continues to rate Witan highly, the fact that its discount has come in significantly over the last six months means it is not as good value as it once was. Instead he says the team prefers British Empire Securities, which has recently begun to deliver strong performance and is on a wider discount of 13.02 per cent.
“[Witan] has performed very strongly in share price terms over the last year as the discount has tightened from 10 to 2 per cent. With the discount now at historically narrow levels, we believe that there is greater value elsewhere,” Winterflood said.
British Empire is one of the only investment trusts where the analysts do see value.
“It is difficult at present to find value in the investment trust sector. Discounts are at historically narrow levels, with many funds trading on a premium or around NAV,” it said.
“British Empire is an exception, being one of the few large, liquid funds that is available on a mid-teens discount.”
“This rating reflects the fund’s recent performance record and the out-of-favour nature of its value approach. We believe this presents a considerable value opportunity, particularly when the underlying portfolio discount is considered.”
Although the trust has lagged behind its peers over the longer term, its performance has picked up over the last six months. It is now the best-performer in the sector over this period, although it still trails the MSCI World index.
Performance of trust vs sector and index over 6 months
Source: FE Analytics
Winterflood likes the long-term value-based track record of British Empire Securities. Its managers John Pennink and Joe Bauernfreund run a concentrated trust of 40 holdings and focus on identifying value opportunities among asset-backed companies.
UK Equity Income
Removed: Perpetual Income & Growth and Diverse Income Trust
Added: Edinburgh Investment Trust and Troy Income & Growth
In the UK Equity Income sector, Winterflood has swapped one Mark Barnett portfolio for another – the Perpetual Income & Growth trust for the Edinburgh Investment Trust, which Barnett took over from Neil Woodford earlier this year.
“We rate Mark Barnett highly and believe that concerns over the departure of Neil Woodford have been overplayed,” Winterflood said.
“While we believe that [Perpetual Income & Growth] allows him greater flexibility in investment, the current discount on Edinburgh IT is attractive, particularly given the yield pick-up.”
Winterflood likes the trust because it has a higher yield – 3.8 per cent compared with 3.1 per cent for the Perpetual trust – and because its discount has widened since Woodford’s departure. Edinburgh IT is now trading on a discount of 1.39 per cent.
Another positive point for the trust is that it lowered its management fee to 0.55 per cent earlier this year.
It has a strong long-term track record under Woodford. It is up 9.23 per cent since Barnett took over the portfolio in January this year, compared with just 3.89 per cent from the FTSE All Share.
Performance of trust vs sector and index since Jan
Source: FE Analytics
Winterflood has also decided to switch out of Miton’s five crown-rated Diverse Income trust in favour of the five crown-rated Troy Income & Growth trust, run by FE Alpha Manager Francis Brooke.
The analysts prefer a more cautious approach to UK income growth. The Diverse Income Trust has a small cap bias and is now trading on a wide premium of 5 per cent, so they have decided to swap it in favour of the Troy trust, which is trading on a narrow premium of 0.42 per cent.
“We believe that Troy Income & Growth offers a more defensive UK income growth play,” they said.
“While its performance is compared against the FTSE All Share, the portfolio is not constructed with reference to the index as the managers view risk in terms of absolute loss rather than relative to an index.”
Troy Income & Growth, a concentrated portfolio of around 40 stocks, has an objective of preserving capital as well as providing growth and income. The trust is yielding 3.4 per cent.
The portfolio is up 117.67 per cent since Brooke took the helm in 2009, compared with just 81.12 per cent from the FTSE All Share. The trust has also had a smoother ride than the sector and index over this period.
Performance of trust vs sector and index since 2009
Source: FE Analytics
European
Removed: European Investment Trust
Added: Jupiter European Opportunities
Another trust that has seen its discount narrow significantly in the last six months is Edinburgh Partners’ European Investment Trust. This figure fell to 6 per cent earlier this month. It has since widened back to its average of around 9 per cent.
However, Winterflood took the decision to swap it in favour of FE Alpha Manager Alexander Darwall’s Jupiter European Opportunities trust, which is trading near NAV.
“We believe that this represents an attractive entry point for a fund with a strong track record,” Winterflood said.
“Jupiter European Opportunities is managed by Alexander Darwall on an absolute return basis with a high conviction portfolio of around 35 European listed companies. The manager takes a long-term view and selects stocks on a bottom-up basis and pays little attention to benchmarks and market momentum.”
“As a result, there will be periods of underperformance, but we believe that over the longer term this fund is well placed to outperform.”
Winterflood points out the trust does have a high exposure to the UK relative to its peers, at 23 per cent. They suggest investors looking for exposure to Europe ex-UK should consider Darwall’s open-ended Jupiter European fund.
The trust does have a strong long-term track record, outperforming its peers and the FTSE World Europe ex UK index over the last three, five and 10 years.
However, it has been out-of-favour over the last 12 months and has lagged behind both measures.
The trust has gained 369.09 per cent over the last decade, which is more than double the gains of the index and 100 percentage points ahead of its peers in the IT Europe sector.
Performance of trust vs sector and index over 10 years
Source: FE Analytics
Jupiter European Opportunities has ongoing charges of 1.12 per cent.
