Investment trusts have become increasingly popular with investors recently, due to a variety of factors as greater appetite for risk among investors and the increased usage of share buy-backs by boards. 
What’s more, trust managers have the added benefit of being able to gear up during rising markets and they don’t have to cope with inflows and outflows. As a result, it’s often the case that trusts outperform their open-ended peers over the long term.
Neil Jones (pictured), investment manager at Hargreave Hale, believes there is a wealth of benefits that the closed-ended vehicles have to offer, and is currently swaying more towards investment trusts rather than unit trusts because of the value for money they offer.
With this in mind, Jones gives FE Trustnet his top three trust picks for a diversified portfolio.
Lowland Investment Company
Managed by FE Alpha Manager James Henderson for more than 25 years, Lowland Investment Company aims to grow both capital and income over the medium- to long-term while also providing an above-average return.
The trust has indeed performed well, achieving a particularly strong top-decile return over five years of 159.81 per cent and outperforming its peer average in the IT UK Equity Income sector by 70.59 percentage points, as well as comfortably doubling the return of its FTSE All Share benchmark over the same time frame.
Performance of trust vs benchmark and sector over 5yrs
Source: FE Analytics
“I like the Lowland Investment Company trust - the discounts had gone out on income trusts but they’ve come in a bit now. We were starting to pick [the trust] up when it was at a 10 per cent discount which to us looked quite attractive,” Jones said.
Near the end of 2014, the trust’s discounts began widening, reaching lows of more than 9 per cent at the end of April this year. Since May, however, the trust’s discount has been tightening, jumping to a small premium twice this month.
Currently, the £439m fund is trading at a 0.7 per cent discount.
“It’s quite mid-cap focused and, if you buy his fund, you won’t get the benchmark, you don’t just get HSBC, Glaxo, BP, and AstraZeneca. He’s happy to make a stand and take a call rather than just tracking the benchmark,” Jones explained.
“[Henderson] has been running the trust for years and years so he’s experienced and reliable. He also gives a lot of domestic-focused shares, so we like him for UK exposure.”
Currently, the trust holds blue chips such as Royal Dutch Shell, BP and GKN in its top 10 holdings. While Lowland Investment Company typically allocates around half of its portfolio to constituents of the FTSE 100 index for stability and income, it also holds small- and mid-caps to maximise growth potential.
As a result, the trust’s alpha ratio, which measures a fund’s over- or under-performance in comparison to its benchmark, is second-quartile over five years.
Henderson also uses gearing to increase returns and is currently geared at 14 per cent. While gearing typically means the trust will deliver a strong performance in rising markets, it may also hinder performance in weaker market conditions.
Lowland Investment Company has an ongoing charge of 0.59 per cent as well as a performance fee of 15 per cent if the trust outperforms its FTSE All Share benchmark by more than 10 per cent.
The trust currently yields 2.9 per cent.
Healthcare stocks have performed particularly well over the longer term, with the FTSE All Share Health Care index outperforming the FTSE All Share by 11.01 percentage points over 10 years.
Performance of indices over 10yrs
Source: FE Analytics
Healthcare is also a sector that Jones is particularly keen on, and believes that Frostrow Capital’s Worldwide Healthcare trust is a great way to reap the benefits of its success.
“It’s got a fantastic track record and has very research-led management team – they tend to be scientists rather than fund managers so they can properly get to grips with what products people are producing and developing, rather than just looking at a company’s P/E [price/earnings ratio],” he said.
“The team really look at what the product is rather than what the company is, and that makes for a terrific fund.”
The sector specialist trust, which is £985m in size, has been managed by Samuel D Isaly and Sven H Borho since 1995.
While it has been third-quartile for performance over three and five years and bottom-quartile over 10 years, it is important to remember the trust is one of just four within the IT Biotechnology and Healthcare sector, and it has still managed to significantly outperform its MSCI World/Healthcare benchmark over these time periods.
The trust’s performance is even more impressive over the longer term, returning a stellar 2,339.76 per cent since launch and outperforming its sector average and benchmark by 779.61 and 1,614.36 percentage points respectively.
Performance of trust vs benchmark and sector since launch
Source: FE Analytics
Currently, the trust has a 69.1 per cent weighting in large-cap stocks and the rest in small-caps. As to be expected in a healthcare investment vehicle, its largest regional weighting is in the US at 66.2 per cent. This is followed by Europe at 17.6 per cent, Asia at 8.4 per cent and global emerging markets at 7.8 per cent.
Worldwide Healthcare’s discount has been tightening over the last couple of years but it is currently trading on a discount of 2.6 per cent. The trust is geared at 11 per cent and has ongoing charges of 1.01 per cent – though it also has a performance fee.
Ecofin Water & Power Opportunities
Utilities stocks hasn’t exactly been flavour of the month and Jones shares a similar sentiment, as he believes the sector will struggle when interest rates rise.
Despite this, he particularly likes the Ecofin Water & Power Opportunities trust, which is £293m in size and is managed by Bernard Lambilliotte.
“I know I said I’m cautious on utilities but this is a global utility fund - it’s got a very well-established management team that are specialists in the sector,” Jones explained.
“There are two attractions from my side – one is the 20.9 per cent discount, so you’re protecting against some of the downside. The second attraction is that the sector might become a bit more in vogue and there is the potential to close that discount.”
“The trust has the potential for capital growth and it’s got a 5 per cent yield as well. I think that looks attractive.”
The trust is one of just three in the IT Utilities sector so, like Worldwide Healthcare, quartiles don’t provide an accurate representation of the trust’s performance.
The trust also doesn’t have a benchmark as the trust’s objective is to achieve a high dividend yield and preserve capital, as well as provide long term growth.
However, it has outperformed the FTSE All World Utilities index over three, five and 10 years, despite losing 13.48 over the last year and underperforming the index by 18.31 percentage points.
Performance of trust vs sector and index over 5yrs
Source: FE Analytics
Ecofin Water & Power Opportunities is geared at 30 per cent and yields 5.1 per cent. As of October last year, the trust no longer charges a performance fee.
