Discounts have been tightening across investment trust land over recent years due to an increasing appetite for risk among investors, more share buy-backs on the part of company boards and the impact of the Retail Distribution Review (RDR) – in fact trusts have never traded on narrower discounts than they are at the moment, according to the AIC.
While this means that certain trusts are now very expensive compared to their peers and history, there are still discount value opportunities to pick up.
Therefore in its half-yearly report, the team at Numis Securities has, sector by sector, gone through the list of trusts it now recommends as a sell or buy as a result of their current positioning and discounts.
In this article, we concentrate on five closed-ended funds headed up by notable FE Alpha Managers which Numis thinks investors should be buying, holding onto and, in certain circumstances, selling.
Buy Mark Barnett’s Edinburgh Investment Trust
We start off with the highly popular IT UK Equity Income sector, which has generally been hit by widening discounts over the past six months as a result of outflows from open-ended UK funds and concerns about the equity market in the build-up to the general election.
This had certainly been the case with Mark Barnett’s Edinburgh Investment Trust, which he took over from Neil Woodford in January last year. Though that trend has started reverse (it had traded on a 4.5 per cent discount a few months ago), its current discount is still 1.48 per cent compared to a three-year average premium.
Edinburgh has performed well under Barnett’s stewardship as the trust has more than doubled the returns of its average peer and the FTSE All Share since he has been in charge.
Performance of trust versus sector and index since Jan 2014
Source: FE Analytics
That performance, Barnett’s long-term track record, his highly disciplined process and its current discount have led Numis to recommend Edinburgh as a core trust for investors.
“The vast majority of equity income funds are trading close to asset value again, having briefly dipped to discounts ahead of the UK election. In our view, these ratings appear sustainable given the low return on cash and strong demand for income,” Numis said.
“However, our key recommendations remain Edinburgh IT, which shares the same management team as Perpetual Income & Growth, but with a more competitive fee structure.”
Edinburgh, which is similarly positioned to Barnett’s multi-billion open-ended funds with a high weighting to the pharmaceutical and tobacco industries, hasn’t cut its dividend in 40 years and currently yields 3.48 per cent. It is 12 per cent geared and has ongoing charges of 0.68 per cent, excluding a performance fee.
Sell Neil Woodford’s Woodford Patient Capital Trust
While Numis rates Barnett’s trust as a buy, it has moved his old boss’s newly launched Woodford Patient Capital Trust onto a sell rating.
At £800m, Woodford Patient Capital’s IPO in April was the largest in investment trust history as it was widely promoted to retail investors through notable platforms, but also proved popular with a number of wealth managers and institutions.
As its name suggests, Woodford Patient Capital is designed as a long-term investment and though the portfolio is likely to mirror the managers’ large-cap dominated CF Woodford Equity Income for the first 12 months or so, the future plan is to hold 75 per cent in early-stage and early-growth companies.
Despite those long-term themes, Numis says investors should already look to bank profits from the trust – which is up 14.5 per cent since launch – given it has already jumped onto 12.07 per cent premium to NAV.
“The rating of investment trust new issues is often supported by entering the FTSE All Share within a few months of IPO. This leads to substantial buying from index trackers and often results in a substantial premium to NAV,” Numis said.
“In our view, this typically represents an opportunity to take profits. At present, Woodford Patient Capital is in this situation, trading on a double-digit premium having recently been promoted to the FTSE 250 index.”
A similar statement was made by brokers at Stifel a few weeks ago. An analyst said: “Given the long-term ‘patient’ investment style, we think the shares have risen too far, too soon partly for technical index-joining reasons.”
Buy Alex Wright’s Fidelity Special Values PLC
Sticking with UK equities and another trust which Numis views as a buy is Alex Wright’s Fidelity Special Values Trust.
Like with Wright’s £2.8bn Special Situations open-ended fund, Special Values struggled in 2014 as the manager’s value/contrarian style and bias towards mid and small-caps fell out of favour.
Nevertheless, the trust has comfortably outperformed since he took over from Sanjeev Shah in September 2012 and even though its discount has narrowed to just 0.8 per cent, Numis says it is a core long-term buy.
Performance of trust versus sector and index since Sep 2012
Source: FE Analytics
“[Wright] looks for unloved stocks where the downside is limited and there is a catalyst for change. His investment approach has a strong contrarian flavour and he has little exposure to large-cap defensive stocks, such as tobacco, food/beverage and pharma, that are owned by many UK equity income funds,” Numis said.
“In addition, the board recently made a commitment to protect the discount in single figures through share buybacks. In our view, the fund remains well placed to deliver strong returns relative to the UK market.”
Fidelity Special Values, which counts the likes of HSBC, Lloyds and Icap as top 10 holdings, is highly geared at 20 per cent and has ongoing charges of 1.12 per cent.
Hold Terry Smith’s Fundsmith Emerging Equities Trust
Turing to emerging markets now and, though not as popular as Woodford Patient Capital, Terry Smith’s investment trust launch in June 2014 was highly anticipated within the industry.
The manager’s calibre (his open-ended Fundsmith Equity fund has been a top decile performer in the IA Global sector since its launch in November 2010), his high-conviction approach and focus on consumer goods companies meant the trust’s shares jumped onto an initially hefty 11 per cent premium.
However, as emerging markets have fallen out of favour with Chinese A shares’ bubble bursting and as concerns about a US rate rise have increased that premium has fallen back to 2 per cent. This means the trust is now significantly underperforming against its benchmark since launch.
Performance of trust versus sector and index since launch
Source: FE Analytics
While the team at Numis was very wary of its premium a few months ago, it says investors can afford to hold onto shares in Fundsmith Emerging Equities now the premium has fallen considerably. Therefore, it has removed its sell rating.
“Fundsmith Emerging Equities was an interesting addition to the universe last year, focusing solely on consumer stocks. However, we were recommending that investors took profits at the start of 2015, as we believed that the premium of 8 per cent was excessive, particularly given that the manager lacks a track record in emerging markets,” Numis said.
“This premium has contracted to 2 per cent, leading to an 8 per cent fall in share price in 2015 year to date.”
Fundsmith Emerging Equities has isn’t geared and has an annual management fee of 1.25 per cent.
Sell Nick Train’s Lindsell Train IT
The final trust on the list is headed-up by manager with a very similar approach to Terry Smith – namely Nick Train.
Train’s highly concentrated approach and focus on high quality businesses with strong franchises has worked phenomenally well over recent years with his CF Lindsell Train UK Equity fund and Finsbury Growth & Income Trust (which invest in UK equities) and his Lindsell Train IT have had a very similar performance profile.
It is a far more different offering though, as the trust’s largest holding is Lindsell Train itself (which accounts for 28 per cent of assets) and it also counts the group’s Japan fund and 2.5% consolidated loan stock as top 10 positions.
According to FE Analytics, the trust is the best performing portfolio in the IT Global sector and has comfortably beaten the MSCI AC World index over one, three, five and 10 years as a result of the fact it has outperformed in nine out of the last 10 calendar years.
Source: FE Analytics
The trust has regularly traded on a wide premium due to its small stature and sticky investor base, but given its current 25 per cent premium to NAV (along high valuations with some of Train’s largest holdings), Numis says now is the time to sell.
“Lindsell Train IT is trading on a premium of over 20 per cent and although it is a unique vehicle with a strong management team, we would recommend selling at these levels, potentially switching into the sister fund Finsbury Growth & Income that limits its premium through regular stock issuance.”
