While investors pay a great deal of attention to the more mainstream asset classes, specialist areas of the market are often missed due to their niche appeal and wide-ranging funds.
Last week FE Trustnet highlighted four open-ended funds in the IMA Specialist sector that might have been overlooked by investors. Now we turned our attention to the AIC’s specialist sectors to see what niche options are available there.
The AIC has 15 specialist peer groups, covering areas such as biotechnology, natural resources, forestry and debt. There are some 62 investment trusts housed within these sectors.
In the article below, we look at four specialist trusts that have won three or more FE Crowns for their performance, although it must be noted that past returns are no guide to the future. All but one are trading on discounts.
Biotech Growth
This £396m trust, which holds three FE Crowns, is managed by OrbiMed’s Richard Klemm and Geoffrey Hsu. It has returned 486.29 per cent over the seven years of the last market cycle and outperformed by the average fund in its sector and its Nasdaq Biotech benchmark, as the graph below shows.
Performance of trust vs sector and benchmark over 7yrs
Source: FE Analytics
However, this has come with annualised volatility of 22.13 per cent over the same period. While this is less than the 24.08 per cent volatility seen in the benchmark, it does make Biotech Growth the most volatile member of its three-strong peer group.
Last week, FE Trustnet looked at the strong performance of biotech stocks over recent years and found that analysts expect a rise in volatility and more muted returns from the sector in the future. But some analysts argue that the trust may be well placed to ride this out.
Simon Elliott, research analyst at Winterflood, said: “Biotech Growth remains a highly impressive investment trust, not only providing exposure to a fascinating asset class and a secular growth story, but also due to the nature of its investment management team.”
“OrbiMed is a well resourced and experienced firm that only invests in the healthcare sector. In our opinion its expertise provides a significant advantage in a specialist asset class and goes some way to alleviate the considerable risk involved in investing in biotechnology companies.”
Biotech Growth is currently trading on a 4.93 per cent discount. It has ongoing charges of 1.22 per cent plus a performance fee and is 8 per cent geared.
Premier Energy & Water
Claire Long and James Smith’s £75.6m Premier Energy & Water Trust sits in the AIC’s Specialist Utilities sector and holds four FE Crowns. Long joined the fund in April 2011 while Smith joined in June 2012.
Over the past seven years it has underperformed its two main rivals, Ecofin Water & Power Opportunities and Utilico. However, performance has strengthened over the past three years with the trust’s 102.56 per cent total return outpacing the gains seen in its peers.
Performance of trust vs sector over 3yrs
Source: FE Analytics
Earlier this year, Smith told FE Trustnet that the utilities sector is one of the few that can protect investors from rising interest rates, despite its members commonly being seen as defensive, ‘bond-proxy’ stocks.
“It is complete and utter nonsense, which seems to be spread around by non-specialist investment managers, that utilities somehow equal bonds,” he said. “I see that a lot of managers are avoiding utilities and looking for other companies in preparation for rising interest rates. However, utilities are actually less-sensitive to interest rates than the large majority of other sectors.”
According to the manager, factors such as utilities’ cash flows being shorter than the average duration of the market and regulatory breaks that allow them to pass on the higher rates on borrowing and rises in inflation to consumers protects them in a rising rate environment.
Premier Energy & Water trades on a 7.88 per cent discount.
Jupiter Green Investment
Charlie Thomas’ £37.8m investment trust has won five FE Crowns thanks to its strong performance relative to its peers over recent years.
The fund has made a total return of 70.08 per cent over five years, outperforming the 5.32 per cent average gain in the IT Environmental sector by an impressive margin. Over three years it is up 73.55 per cent, against a peer group average of 31.356 per cent.
Performance of trust vs sector over 3yrs
Source: FE Analytics
Thomas also manages the open-ended Jupiter Ecology fund. Since launch Jupiter Green Investment has underperformed the open-ended fund by some 20 percentage points but over the past five years the trust’s 70 per cent return has been well above Jupiter Ecology’s 47.75 per cent gain.
The trust invests in companies that provide “environmental solutions”. Its most recent factsheet shows its top holding was transportation products and services firm Wabtec, followed by foods and pet products company Cranswick and architectural services business Stantec.
Jupiter Green Investment has ongoing charges of 1.71 per cent plus a performance fee and is not geared. It is trading on a 3.61 per cent discount.
GCP Infrastructure Investments
Sitting in the IT Infrastructure sector, this trust is the only one that focuses on primarily on investments in infrastructure debt. It holds four FE Crowns.
The trust is effectively a fixed interest portfolio as it provides debt for long-dated infrastructure projects which have UK governmental support.
Since launching in July 2010, the trust has returned 49.80 per cent against an average return in the IT Infrastructure sector of 45.51 per cent. It has also outperformed over three years but lagged slightly over one year.
Performance of trust vs sector over 3yrs
Source: FE Analytics
Speaking recently to FE Trustnet, the fund’s lead partner Stephen Ellis argued that it is one of the few portfolio’s that can protect investors from both inflation and deflation.
Although infrastructure inflation-beating properties are well known, Ellis pointed out that the trust’s focus on debt could serve it well in a deflationary environment.
He explained: “That is because as we are a fixed rate debt provider, our income would not suffer if RPI were to fall or even go negative.”
Given the popularity of infrastructure in recent years, GCP Infrastructure Investments is trading on a 12.86 per cent premium. It has ongoing charges of 1.50 per cent and no gearing.
