This is according to Peter Walls (pictured), manager of Unicorn Mastertrust, who says that taking advantage of volatility and its effect on investment trust discounts is a central pillar of his own strategy.
"People view volatility the wrong way," he commented. "You need some to identify themes and opportunities for the future." "Discounts tend to be most pronounced when you have movements in share prices and our overall process is very discount-orientated – we see them as an opportunity rather than a problem."
"We don’t like overpaying or holding trusts that are on a premium, unless the manager is excelling or its underlying holdings are still undervalued in some other way."
This focus on discounts dictates Walls’ entire investment approach in his fund of investment trusts.
"I look at things that have outperformed in NAV terms and will consider top-slicing or selling them completely and buying into those that have underperformed," he continued.
"This forces me to identify catalysts for change using a top-down and bottom-up approach – the top-down part involves producing macro forecasts and extensively reading the financial press to help us decide which area of the market to allocate assets to."
"Meanwhile, the bottom-up part involves analysing the style and modus operandi of prospective managers and looking at how they perform in falling and rising markets."
FE Alpha Manager Walls says that the structure of investment trusts forces him to be contrarian, which sets him apart from many other managers who unjustifiably refer to themselves in this way, "maybe because it is fashionable at the moment".
His contrarian approach is evident from the unpopular sectors he is overweight in at the moment. Unicorn Mastertrust has 24.9 per cent in small caps and 16.8 per cent in private equity, two investment trust sectors that have both suffered extreme volatility over the past 18 months.
Walls says he has good reason to be optimistic about these areas of the market. As he puts it: "The discounts on these sectors have narrowed in recent months but are still extremely large – they are around 15 per cent on small caps and 30 per cent on private equity."
"These are both areas that will experience heavy short-term volatility but this will be outweighed by their strong growth over the long-term."
The manager again praises the make-up of investment trusts for making it easier for him to access such specialised areas.
"With the closed-ended structure it lets you take a longer-term view and hold some businesses that you wouldn’t normally have considered – hidden gems that can add spice to a portfolio."
One potential blemish that Walls sees on the investment trust horizon is the Retail Distribution Review – although he says this is purely from a selfish point of view.
"Enough has already been said about RDR and the effect it will have on investment trusts, but it won’t be an overnight panacea."
"It will lower discounts over three to five years and when they all trade at NAV I won’t have a job to do."
"No, I don’t really think that," he laughed.
Performance of fund vs sector since Sep 2008
Source: FE Analytics
According to FE Analytics, Unicorn Mastertrust has delivered 43.98 per cent to investors since Walls took over in September 2008, almost double the 23.12 per cent returned by its IMA Flexible Investment sector over the period.