Also, unlike most years, investors putting together their ISA this year are faced with a potentially tough backdrop as cash offers nothing in the current ultra-low rate environment and bonds are at historically high valuations.
As a result, Katy Thorneycroft, manager of the JP Morgan Elect Managed Growth Investment Trust, thinks that while it is a higher risk asset class, now is as good a time as any to buy equities.
“With political uncertainties and a continued low inflation, low interest rate environment, savers face a challenge in choosing where to put money to work,” Thorneycroft said.
“Cash is unattractive and bonds have been experiencing more risk than they have historically. Although equities are higher up the risk spectrum than bonds and cash, this risk can be reduced through diversification.”
The JP Morgan Elect Managed Growth Investment trust – which has outperformed both the IT Global sector and its 50/50 split FTSE All Share and FTSE World ex UK composite benchmark since Thorneycroft became co-manager in February 2006 – is a trust of trusts.
Performance of trust versus sector and composite benchmark since Sept 2006
Source: FE Analytics
Therefore, in this article the manager highlights three closed-ended funds she holds that she thinks will work well within a diversification-seeking investor’s portfolio.
Finsbury Growth & Income
First on the list is FE Alpha Manager Nick Train’s Finsbury Income & Growth Investment Trust, which has delivered stellar returns to shareholders over the years as a result of the manager’s high conviction approach and focus on quality companies.
“Where growth is uncertain, dividends play an increasingly important role,” Thorneycroft said.
“The Finsbury Growth & Income trust invests principally in UK listed companies and seeks to achieve capital and income growth in excess of its benchmark, the FTSE All Share index. With a fundamental approach to stock selection, it selects stable, cash-generative companies across all sectors that appear undervalued.”
Train, who also runs the top-performing CF Lindsell Train UK Equity fund, took charge of Finsbury Growth & Income in December 2000.
According to FE Analytics, it has been the third best performing portfolio in the IT UK Equity Income sector with returns of 336.97 per cent since then, beating its benchmark – the FTSE All Share – by 240 percentage points.
Performance of trust versus sector and index since Dec 2000
Source: FE Analytics
The trust has also been top decile and beaten the index over one, three, five and 10 years and outpaced its benchmark in nine out of the last 10 calendar years.
The portfolio, which yields 2 per cent and has grown its dividend by 5 per cent over the last five years, is a highly concentrated portfolio of just 25 stocks with Train’s top 10 accounting for a third of his overall assets.
His biggest bets are consumer staples such as Unilever and Diageo, while Schroders, Hargreaves Lansdown and London Stock Exchange also feature in his top 10 holdings.
The trust is geared at 4 per cent and is trading at a slight premium to NAV, though the board is renowned for its use of a discount control mechanism. The ongoing charges are 0.82 per cent.
Fidelity European Values
Thorneycroft also likes the Fidelity European Values trust, which has performed strongly since Samuel Morse took charge in January 2011. While the European economic situation is still uncertain, the manager thinks the region’s equity market offers investors good opportunities.
“In Europe, the ability of a diversified basket of equities to consistently generate higher dividend yields looks attractive when compared to the UK,” Thorneycroft said.
“Fidelity European Values offers valuable diversification across countries and exposure to sectors not widely represented in the UK. It seeks to achieve long-term growth by selecting companies with positive fundamentals and strong prospects for dividend growth.”
Since Morse has managed the trust, it has returned 67.87 per cent beating its average peer and its FTSE World Europe ex UK benchmark as the index has returned half as much over that time.
Performance of trust versus sector and index since Jan 2011
Source: FE Analytics
Fidelity European Values beat its sector and benchmark in 2011, 2012 and 2014 but underperformed in 2013. However, it has flourished in 2015 as a result of the ECB’s QE measures with returns of 7.45 per cent year to date.
Morse has the ability to take both long and short positions within his trust. His largest overweights, relative to the benchmark, include the likes of Italian bank Intesa Sanpaolo, German automotive Volkswagen and Danish pharmaceutical giant Novo Nordisk.
The trust is currently trading on a 6.93 per cent discount to NAV, which is narrower than its one and three-year discount, according to the AIC. It has 5 per cent gearing and ongoing charges of 0.94 per cent.
JP Morgan American
The final trust on the list is the JP Morgan American Investment Trust.
North America has been the leading light in recent years, not just in terms of global growth but also stock market returns as the S&P 500 has delivered a positive return in each of the last six calendar years. While that may put off some value investors, Thorneycroft says US equities still offer decent growth and prefers Garrett Fish and Eytan Shapiro’s offering for her exposure.
“In the United States, growth is expected to be modestly above trend, with contained inflation,” she said.
“Although stock valuations have risen over the past year, the economy looks set to benefit from lower oil prices. The JPM American Investment Trust aims to find high quality stocks in the core US market.”
“With a bias towards capital growth, it has delivered strong long-term returns versus the S&P 500 [in sterling terms]. Additionally, it could be a good time to buy, as it is currently trading at a slight discount to its net asset value.”
While the US is not viewed as a great hunting ground for active managers, Garrett and Shapiro’s JP Morgan American IT has returned 194.04 per cent over 10 years, beating the S&P 500 by close to 45 percentage points in the process.
Performance of trust versus sector and index over 10yrs
Source: FE Analytics
It has also outperformed the herd to beat its benchmark in eight out of the last 10 calendars – a feat which is unheard of in the open-ended North America sector.
The trust is overweight technology, healthcare and telecoms relative to the S&P 500 and the managers count the likes of Apple, Microsoft, Wells Fargo, Bank of American, Citigroup and Chevron as top 10 holdings.
JP Morgan American is currently trading on a 3.45 per cent discount to NAV, which is the widest it has been over the past 12 months. Data from the AIC shows the trust has, on average, traded on a premium to NAV over one and three years.
It is 10 per cent geared and on has ongoing charges, plus a performance fee, of 0.64 per cent.