The broker reported that 83 per cent of its recommendations outperformed their indices during the first half, highlighting tightening discounts as well as strong net asset value (NAV) outperformance among its picks.
Indeed, many of the changes were switches from existing picks to new trusts based on value opportunities.
“We did not make any changes to our recommendations/model portfolio in the first six months of the year, reflecting the fact that most of our ideas were delivering,” it noted.
“However, following a mid‐year review we have decided to remove 10 funds from the list, while introducing five new names.
“This reflects our desire to ‘run’ a more concentrated list rather than change for change sake. The new names are mostly switches, where we believe that better value opportunities exist.
“In addition, after a strong first half of the year, we are happy to raise a little cash, although the portfolio still has a higher level of assets invested than its benchmark.”
Below, FE Trustnet examines the new additions to the model portfolio.
Global
The broker switched out of JP Morgan Global Growth & Income into Law Debenture investment trust managed by James Henderson of Henderson Global Investors.
It said the JP Morgan trust has seen its discount tighten considerably this year – moving from 6 per cent to 3 per cent – since a change in the dividend policy.
Meanwhile, the £679.3m Law Debenture trust, trading at a discount of 12 per cent, offered value relative to its peer group and long-term history, Winterflood explained.
The 2.9 per cent yield was also the second-highest in the IT Global sector, according to data from FE Analytics.
Performance of trust vs sector & benchmark YTD
Source: FE Analytics
The global equities fund targets long-term capital growth and steadily increasing income, aiming to outperform the FTSE All Share index.
It also has an investment trust and fiduciary services (IFS) valued at £89.9m, offering a range of services to corporate trusts, pension trusts and other corporate clients.
“Law Debenture is unique within the investment trust universe as a result of its subsidiary IFS business,” it noted.
“We believe that the fund benefits from the revenue that its subsidiary generates and allows its investment manager greater flexibility in stock selection.”
The trust has returned 74.17 per cent over the past five years, compared with a 98.76 per cent for the average sector fund. It carries an ongoing charges figure (OCF) of 0.45 per cent and is 6 per cent geared.
Japan
In Japan, Winterflood switched from Baillie Gifford Japan to Baillie Gifford Shin Nippon managed by Praveen Kumar, after just six months.
“We added Baillie Gifford Japan to our recommendation list at the start of this year on the basis that its manager, Sarah Whitley, had delivered strong long‐term performance,” the broker wrote.
“However, while we continue to believe the fund remains attractive, we think that investor interest in Japan is increasing and, as such, we are therefore switching our Japanese recommendation to Baillie Gifford Shin Nippon, which has been the stand‐out performer within the wider Japanese sector.”
During the first half of the year the Japan trust was up by 19.91 per cent compared with 20.57 per cent for Shin Nippon.
Performance of trusts over H1
Source: FE Analytics
According to Winterflood, the Shin Nippon fund benefits from the same experienced team and offers better prospects for long-term growth as a result of its small and mid‐cap focus.
“Neither of these funds are value opportunities, with both having tended to trade at NAV or a premium to NAV over recent years,” Winterflood explained.
“However, unlike the majority of their Japanese focused investment trust peers their shareholder registers are dominated by wealth managers and retail investors and we suspect that this should help them to maintain their premium ratings.”
The £285.8m, five FE Crown-rated Shin Nippon trust is the top perfuming strategy in the IT Japanese Smaller Companies sector over three and five years returning 113.28 per cent and 271.93 per cent respectively.
The fund is 12 per cent geared and is trading at a discount of 5.2 per cent, according to the Association of Investment Companies. It has an OCF of 0.96 per cent.
Asia
Within its Asia basket, Winterflood switched its recommendation from Fidelity Asian Values into Fidelity China Special Situations as it believed the latter offered a “materially better value opportunity” while trading at a 13 per cent discount.
The four crown-rated Fidelity China Special Situations has been managed by Dale Nicholls since 2014, when he replaced veteran investor Anthony Bolton.
The fund targets long-term capital growth through investment in securities issued by companies listed in China or Hong Kong or Chinese companies listed elsewhere.
Performance of trust vs sector & benchmark over H1
Source: FE Analytics
“In our opinion, the manager's strong performance record, the positioning of the portfolio towards China's 'new' economy, the deep resources of Fidelity, and the current discount make Fidelity China Special Situations an attractive option,” it noted.
The closed-ended fund has gearing of 25 per cent and has an OCF of 1.2 per cent.
Equity – Specialist
The broker also switched its recommendation in the specialist equities space from Worldwide Healthcare to The Biotech Growth Trust.
The £437.8m trust is managed by Richard Klemm and Geoffrey Hsu of specialist investment manager OrbiMed.
The trust aims for capital appreciation through investment in global equities, according to the latest factsheet, with 86.8 per cent of the portfolio is invested in North American stocks, with 10 per cent held in continental Europe and a further 1.9 per cent in the UK.
“The political rhetoric surrounding drug pricing that was often centre stage in the US presidential election has now somewhat died down, while valuations in the healthcare sector remain subdued,” Winterflood said.
“We believe that the secular growth prospects offered by the biotechnology sector are attractive and Biotech Growth Trust has a good track record within the sector.
“In addition, it is currently trading at the lower end of its discount range and appears to offer value relative to its peers. Downside discount risk is also mitigated by the directors’ commitment to maintain a 6 percent discount floor through share buybacks.”
The £437.8m trust is managed by Richard Klemm and Geoffrey Hsu of specialist investment manager OrbiMed.
During the first half of the year the trust returned 8.51 per cent. Over five years the fund has paid out 185.61 per cent to investors, slightly ahead of the average sector fund’s 181.68 per cent.
The Biotech Growth Trust is 10 per cent geared and has an OCF of 1.1 per cent.
Alternatives
While the other changes to the model portfolio have largely been switches where the broker believes better value exists, the last trust was a new addition to the portfolio.
The £2.9bn HICL Infrastructure fund has been added to the Winterflood’s alternatives bucket following a recent contraction of its premium, offering an “attractive entry point” for investors.
The trust reported flat performance during the first half of the year, but outperformed the sector average as the below chart shows.
Performance of trust vs sector over H1
Source: FE Analytics
The trust is managed by infrastructure and real estate specialist InfraRed Capital Partners, a UK-based manager with more than $9bn in AUM.
It aims to provide investors with long-term, stable income and to preserve capital with the potential for capital growth.
Its target market segments include public-private partnership project, regulated assets (like gas and electricity transmission or water utilities) and demand-based assets (such as student accommodation).
Winterflood noted: “HICL Infrastructure is the longest established and largest listed infrastructure fund, having launched in 2006 and with a current market cap that is close to £3bn.
“Arguably, it is the flagship fund in a sector that has seen tremendous growth during the low interest rate environment.”
The trust, which is not currently geared, has a portfolio of 115 infrastructure assets with a weighted average concession life of 32.1 years. It has an OCF of 1.06 per cent and a yield of 4.9 per cent.