Mid Wynd International, Keystone and Securities Trust of Scotland are among the closed-ended funds that Kepler Trust Intelligence believes could deliver strong performance in 2019.
Each analyst chose a fund they believe will perform best – in price terms – over one year. However, the trust picks are not recommendations or advice on how to invest.
Below, FE Trustnet considers the Kepler trust picks in greater detail.
Securities Trust of Scotland
Kepler marketing & communications director Pascal Dowling has chosen the £160.7m Securities Trust of Scotland as his top pick for 2019.
Dowling highlighted the global equity income trust’s “strong, clear investment process” as well as its emphasis on proving the stability of investments.
The closed-ended fund has a highly experienced manager in Martin Currie’s Mark Whitehead, according to the Kepler director, and trades at a discount to net asset value (NAV) considerably wider than its comparable peers.
“Sarasin’s Whitehead joined Martin Currie two years ago and set about rebuilding the company’s approach to income,” said Dowling.
“He was put in charge of Securities Trust of Scotland at the same time and introduced a range of new features – including income from capital, limited use of derivatives and a progressive dividend policy.”
Since Whitehead joined the trust in May 2016, it has delivered a 26.1 per cent total return compared with a 31.63 per cent gain for its average IT Global Equity Income sector peer, as the below chart shows.
Performance of trust vs sector under manager
Source: FE Analytics
Dowling said the trust’s yield of 4 per cent makes it the best payer behind JPM Global Growth & Income and Murray International, albeit at a much more attractive buy-in price.
According to data from the Association of Investment Companies (AIC), the trust is currently trading at a discount to NAV of 7 per cent, is 13 per cent geared and has ongoing charges of 0.88 per cent.
Mid Wynd International
William Heathcoat Amory – who leads Kepler’s investment trust research team – chose Mid Wynd International as his top pick for 2019, a strategy he feels is appropriate for the current investment backdrop.
The trust, which aims to grow real wealth over time with lower volatility, is overseen by Artemis Fund Managers’ Rosanna Burcheri, Simon Edelsten and Alex Illingworth.
Heathcoat Amory said the trio have demonstrated their ability to protect capital on the downside while delivering long-term upside since taking over Mid Wynd International in May 2014.
When picking stocks, the managers seek out companies with secular growth tailwinds, little debt, low business risk and proven models of having managed themselves as low risk propositions. As such, they avoid companies such as oil companies, airlines and miners.
The falls in stock markets more recently have thrown up interesting opportunities for such companies, according to Heathcoat Amory.
Mid Wynd International has delivered a total return of 84.31 per cent under the managers compared with a 63.79 per cent gain for its average IT Global peer and a 61.19 per cent return for the MSCI AC World index benchmark.
Performance of trust vs sector & benchmark under managers
Source: FE Analytics
Discounts in the sector are relatively narrow on average, said Heathcoat Amory, and could widen if volatility continues. However, the trust is currently trading at a premium to NAV of 2.2 per cent.
“Mid Wynd’s board have demonstrated solid discount control and so on a price basis, in our view there is little additional risk from the discount widening out on a sustained basis,” he added.
The trust is not geared and has ongoing charges of 0.67 per cent.
Keystone Investment Trust
Investment trust analyst Thomas McMahon has drawn on the UK equity space for his 2019 pick, choosing the Keystone Investment Trust, managed by Invesco Perpetual’s James Goldstone.
“I think 2019 could be an interesting year for investors in UK equities,” he explained. “The market is bombed out, particularly companies facing the consumer, although the economy is doing pretty well.
“Whatever the result of the Brexit referendum there is likely to be a relief rally at some point as international investors come to realise that Brexit is not Armageddon.”
As such, Keystone could offer an interesting opportunity as it trades at a 10.7 per cent discount to NAV, said the analyst.
McMahon said Goldstone – who took over from FE Alpha Manager Mark Barnett in April 2017 – has tilted the portfolio to cheap domestic-facing stocks where he does not feel the fundamentals justify the share price falls.
“There are interesting diversifying plays in there too in gold miners and some fast-growing international stories such as [thread manufacturer] Coats, but the trust is positioned to do particularly well if sentiment improves towards the UK,” he added.
Under Goldstone, Keystone lost 4.71 per cent compared with a 1.41 per cent fall for the benchmark FTSE All Share index and a 0.28 per cent drop loss for the average IT UK All Companies fund.
Despite sitting alongside growth sector, the trust also yields 3.8 per cent due to its value focus. The trust is currently 15 per cent geared and has ongoing charges of 0.55 per cent.
TR European Growth
Analyst William Sobczak chose TR European Growth as his top pick for 2019, despite a “torrid time” for European small-cap strategies in 2018.
The trust generated a loss of 34.54 per cent last year, compared with a 20.05 per cent fall for the average IT European Smaller Companies trust and a 13.46 per cent drop in the EMIX Smaller European Companies benchmark, as the chart below shows.
Performance of trust vs sector & benchmark in 2018
Source: FE Analytics
Sobczak said there were several reasons that had caused investors to ‘run for the hills’ last year, including rate hikes by the Federal Reserve, political uncertainty and the US-China trade war.
However, the easing of these pressures in 2019 is likely to contribute to a better year for the strategy run by Janus Henderson Investors’ Ollie Beckett.
“The manager takes on a contrarian approach and believes that to truly outperform sometimes you need to look right whilst everyone else is looking left,” he said.
The trust is currently trading at a discount of 12.5 per cent to NAV, is 16 per cent geared and ongoing charges of 0.7 per cent. Ongoing charges rise to 0.92 per cent when a performance fee is added. (The trust charges a performance fee of 15 per cent of the positive difference between the average annual NAV total return and that of the benchmark, capped at 2 per cent.)
AVI Japan Opportunity Trust
Lastly, marketing manager Alice Rigby chose AVI Japan Opportunity Trust, a recently launched Japanese small-cap trust managed by veteran investor Joe Bauernfreund.
“As the new year looks set to be even more tumultuous than the last from a political and economic perspective, the relative immunity of Japan to outside events is becoming increasingly appealing to investors,” she said.
“A unique segment of the Japanese market is its smaller companies sector, which is currently populated by cash-rich businesses that are significantly undervalued because of a lack of analyst coverage.”
Bauernfreund is also manager of the better-known £746.9m British Empire trust, through which he has established a record of investing in Japanese companies for some time.
Rigby added: “The yield potential and secular tailwinds for the very specific asset class AVI Japan Opportunity Trust invests in seem particularly appealing in a year that is likely to be defined by upheaval and uncertainty in other developed markets.”
Since launch in October 2018, the trust has generated a loss of 1.48 per cent compared with a fall of 8.81 per cent for the average IT Japanese Smaller Companies trust.
The £76.4m trust trades at a premium of 4.8 per cent to NAV and is not geared.