The outlook for 2015 is similarly subdued, with many investors pointing out that the above problems are expected to continue with the May general election creating the added risks of an in-out referendum on the EU if the Conservatives win or increased regulatory burdens on several sectors if Labour leads the next Government.
In their annual review of markets and the investment trust sector, analysts at Numis say it is easy to “sit on the fence” and predict another year of modest returns for UK equities, noting that 47 per cent of trust managers polled by the AIC expect the FTSE 100 to finish 2015 between 6,500 and 7,000.
“Our best guess for the FTSE 100 at the end of 2015 is 7,100 (up 8.1 per cent), although we have little conviction at a time when government/central bank policies appear to be the key driver of markets,” they wrote.
“We are more confident in predicting that it will not be a smooth ride in 2014 and see a risk that political developments could unnerve investors in the UK, particularly if it appears that a party or coalition with an ‘anti-business’ stance is likely to gain control.”
Offering an outlook on which UK-focused investment trusts it thinks look attractive at the start of the New Year, Numis highlights those with an equity income approach. Most equity income funds are trading at close to asset value, the broker notes, which appears sustainable in the short term given the low return on cash and retail buying prompted by the implementation of RDR.
Data from the AIC shows the average trust in its UK Equity Income sector is trading on a 1 per cent discount to NAV.
Giving a potential core holding, Numis says the City of London investment trust could be a good option for those wanting exposure to UK equities. The £878m trust has been managed by Job Curtis since January 1991 and focuses on dividend-paying large and mega cap stocks.
“We believe that the more mainstream investment approach adopted by City of London IT makes it well suited as a core holding for private client investors seeking UK equity income,” the analysts said.
City of London has outperformed its average peer over one, five and 10-year periods although it has underperformed over on a three-year view. Over 10 years, it’s returned 170.90 per cent compared with an average gain of 104.92 per cent in the peer group and a 106.16 per cent rise in the FTSE All Share.
Performance of fund vs sector and index over 10 years
Source: FE Analytics
Curtis’s largest sector weightings are to financials, consumer goods and consumer services, with its biggest holdings being Royal Dutch Shell, HSBC, British American Tobacco, GlaxoSmithKline and Vodafone.
City of London IT has ongoing charges of 0.44 per cent and is trading on a 1.1 per cent premium, according to the AIC. It is 8 per cent geared and has a 3.9 per cent dividend yield.
Numis is also positive on the Edinburgh Investment Trust, which has been headed by FE Alpha Manager Mark Barnett since Neil Woodford departed Invesco Perpetual to start his own asset management house. Last year, its annual fees were lowered from 0.6 per cent to 0.55 per cent and its performance fee was scrapped.
“We had been wary of recommending Edinburgh IT until the management arrangements were clear following the departure of Neil Woodford, but it now shares the same management team as Perpetual Income & Growth, but with a more competitive fee structure,” the broker’s note said.
Since Barnett was appointed to the portfolio in January 2014 it has returned 16.98 per cent, against a 3.60 per cent average rise in the sector and a move of just 3.25 per cent in its FTSE All Share benchmark. The bulk of those gains have come since October, as the graph below shows.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
Barnett has built a strong reputation at the helm of Perpetual Income & Growth, which has outperformed the All Share in every calendar year from 2008 onwards, and the five FE Crown-rated Invesco Perpetual UK Strategic Income open-ended fund.
Edinburgh IT is trading on a 0.9 per cent discount and has ongoing charges of 0.68 per cent. It yields 3.6 per cent and is 13 per cent geared.
“Another favoured fund is Troy Income & Growth, managed by Francis Brooke and Hugo Ure, which focuses on blue-chip UK listed companies with strong franchises and sustainable dividend growth,” Numis’ analysts added.
“The fund is differentiated by a conservative approach focused on quality companies, as well as by its zero discount policy implemented by buying back share at a tight discount and issuing on a small premium.”
Troy Income & Growth holds five FE Crowns and has returned 129.60 per cent since FE Alpha Manager Brooke took over the portfolio in August 2009. This compares with a 112.74 per cent average gain in the sector and a 80.01 per cent return in the All Share.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
The trust’s conservative approach meant it fared in 2014, returning 12.2 per cent in share price terms and 9.3 per cent in NAV terms.
The portfolio has no exposure to eurozone stocks or miners and only modest positions in energy, which helped it to hold up better than many of its peer as these areas were hit hard last year.
Troy Income & Growth is trading on a 0.1 per cent discount and has ongoing charges of 1.03 per cent. It yields 3.4 per cent and is not geared.