It seems that 2015 was a year where active managers in the UK (largely) proved their worth as the index was battered by various macroeconomic headwinds. 
According to FE Analytics, for example, some 76 per cent of active funds in the IA UK All Companies and IA UK Equity Income sectors beat the FTSE All Share last year.
It was a similar story in the closed-ended space, with 71 per cent of trusts in the equivalent investment trust peer groups managing to beat the wider market during last year’s difficult conditions.
Performance of sectors versus index in 2015
Source: FE Analytics
With 2016 now well underway, though, which investment trusts are likely to outperform once again?
In this article, the team at Numis Securities gives its UK investment trusts recommendations for the year ahead, all of which are headed up by FE Alpha Managers.
First and foremost, Numis says that IT UK Equity Income sector still offers good value despite the fact that the sector as a whole is trading on a narrow 1 per cent discount to NAV and only eight of the peer group’s 26 members with a long enough track record are trading above their one-year discount average.
“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.
It points out that there are a number of well-managed portfolios in the sector that investors may wish to consider, such as Finsbury Growth & Income, Temple Bar and City of London IT.
Nevertheless, one of the firm’s standout favourites is Mark Barnett’s Edinburgh IT despite the fact it is trading on a 1.92 per cent premium having, on average, been on discount to NAV over one and three years.
“However, our key recommendations remain Edinburgh IT, which shares the same management team as Perpetual Income & Growth, but with a more competitive fee structure.”
Barnett took charge of the portfolio from star manager Neil Woodford in January 2014 and has put his own stamp on the trust by making it less concentrated and completely selling out of the likes of GlaxoSmithKline.
Over his tenure, Edinburgh IT has been the best performing portfolio in the IT UK Equity Income sector with gains of 31.55 per cent. As a point of comparison, the FTSE All Share has lost 0.03 per cent over that time.
Performance of trust versus sector and index over 10yrs
Source: FE Analytics
The trust, which has increased its dividend in each of the last 10 years, yields 3.4 per cent, is geared at 14 per cent and has ongoing charges of 0.61 per cent.
Francis Brooke & Troy Income & Growth
“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 said.
“The fund is differentiated by a conservative approach focused on quality companies, as well as by its zero discount policy implemented by buying back shares at a tight discount and issuing on a small premium (typically +/-2 per cent).”
Brooke needs little introduction among genuine income investors, given his open-ended Trojan Income fund is the only in its space to have never cut its dividend.
He took charge of the Troy Income & Growth trust in August 2009 and has implemented the same strategy, which revolves prioritising downside protection, dividend growth and dividend sustainability.
FE data shows the trust has more than doubled the FTSE All Share over that time and done so with half the maximum drawdown, which shows the most an investor would have lost if they had bought and sold at the worst possible times, thanks to its 8 per cent gain in 2011 when the European sovereign debt crisis crippled sentiment.
Performance of trust versus sector and index under Brooke
Source: FE Analytics
Like with the open-ended fund, Brooke has also grown Troy Income & Growth’s dividend in every year he has been at the helm.
Currently, the trust’s largest positions include Unilever, Royal Mail, Reynolds American and GlaxoSmithKline and the manager says he will maintaining a defensive portfolio for some time to come.
“Economic data has been mixed at best, crude oil has hit an 11-year low, and China has engaged in a renewed period of currency devaluation.”
“These events have created further equity market instability which could well be a taste of what is to come. In such an environment we believe low volatility, high quality equity income remains a compelling strategy.”
The trust has ongoing charges of 1.03 per cent and yields 3.4 per cent.
Alex Wright & Fidelity Special Values
Outside of equity income trusts, Numis says investors should consider growth portfolios which have a bias towards the lower end of the market cap spectrum.
This is in keeping with most market commentators’ view on UK equities, given small and mid-caps are receiving a boost from the improving economic backdrop and business-friendly government while most large-caps are dependent on international trade.
The broker says there are number of trusts that offer this kind of exposure such as Diverse Income, Lowland and Standard Life Equity Income but they have one favourite in particular.
“Of these funds, we would highlight Fidelity Special Values, which has had an outstanding track record since Alex Wright took over as portfolio manager in September 2012.”
Since Wright took charge of Fidelity Special Values from Sanjeev Shah in September 2012, the trust has returned 97.94 per cent putting it ahead of the IT UK All Companies and FTSE All Share by 44.52 percentage points and 74.08 percentage points respectively.
Performance of trust versus sector and index under Wright
Source: FE Analytics
The reason Numis likes the trust is due to the manager’s approach and the board’s shareholder friendly policies regarding the discount, which currently stands at 2.3 per cent.
“He looks for unloved stocks where the downside is limited and there is a catalyst for change,” Numis said.
“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. During 2015, the Board made a commitment to protect the discount in single figures through share buybacks.”
Wright’s top 10 holdings list includes Lloyds, BG Group and Royal Dutch Shell. The trust has gearing of 18 per cent and ongoing charges of 1.13 per cent.
