Investment trust analyst Elliott believes buying closed-ended funds on extreme premiums is a big risk; however, if the trust is the leader in its field, he says investors should not be put off by a figure in single digits.
"We are wary of trusts that are on premiums, whether it be 5, 7 or 10 per cent, though we are not averse to recommending one that is," he explained.
"Unlike some, we don’t see a premium as a sell-alert."
Here, Elliott highlights five top-rated trusts that he would recommend to investors, in spite of the fact they are trading on a premium to NAV.
Perpetual Income and Growth IT
Equity income is one of the most sought-after areas of investment at the moment, so it is of no surprise that many trusts in the IT UK Growth & Income sector are on premiums.
Elliott highlights FE Alpha Manager Mark Barnett’s Perpetual Income and Growth IT as one that definitely warrants the extra cost.
"This is one that has been on a premium for quite some time," said Elliott.
"It’s been extremely consistent and we have no problem recommending it."
FE Analytics data shows the trust is currently on a premium of 2.7 per cent, which is above average for the sector.
Performance of trust vs index over 10yrs
Source: FE Analytics
The Perpetual Income and Growth IT has comfortably outperformed its FTSE All Share benchmark over one, three, five and 10 years, with less volatility. Over 10 years it is up 266.29 per cent, beating the index by more than 100 percentage points.
Over three and five years the trust has returned 62.49 and 69.94 per cent respectively – in both cases around twice as much as the All Share.
Barnett (pictured above right) has headed up the £791m portfolio since 1999. The trust, which is currently yielding 3.7 per cent, has an ongoing charges figure of 1 per cent, not including performance fee. It is currently 19 per cent geared.
The manager currently has a bias towards defensive sectors, with significant overweights in healthcare and tobacco. It is a highly concentrated portfolio, with around 44 per cent of assets invested in the top-10 companies alone.
Standard Life UK Smaller Companies Trust
"This one is perhaps a bit more controversial – it’s on a premium, but in the recent past the [IT UK Smaller Companies] sector has been on a discount in the mid-teens," said Elliott.
"However, [manager] Harry Nimmo’s performance has been exemplary and we’re very happy to recommend it."
According to the AIC, the average trust in the IT UK Smaller Companies sector is on a discount of 14.2 per cent, but FE Alpha Manager Nimmo’s Standard Life trust is on a premium of 1.2 per cent.
Looking at its track record, it is easy to see why; according to FE data, it is the best-performing trust in its sector over five and 10 years, and second only to the BlackRock Smaller Companies IT over three.
Performance of trust vs benchmark over 10-yrs
| Name | 1yr returns (%) | 3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| Standard Life UK Smaller Companies Trust | 36.13 | 116.98 | 159.15 | 720.33 |
| NUMIS Ex Investment Companies |
23.77 | 65.52 | 70.29 | 321.72 |
Source: FE Analytics
The trust uses the Numis (ex ITs) index as its benchmark, which it has comfortably beaten over all time periods. It has been more volatile however, and tends to lose more in falling markets.
The manager uses the same stringent bottom-up approach in his trust as he does in his fund, and includes many of the same names in its top-10. Among the largest holdings are ASOS, Paddy Power and Hargreaves Lansdown.
At £181m, the trust is far smaller than its open-ended equivalent, meaning it has more flexibility to move down the market cap spectrum if the manager wishes.
Standard Life UK Smaller Companies IT is currently 9.9 per cent geared and has an ongoing charges figure of 1 per cent.
F&C Commercial Property
"This is on a premium of 5 per cent," said Elliott. "People have been very wary of commercial property and with good reason."
"However, this is one of the largest direct UK property trusts, at around £1bn. It has a good yield, currently at 6 per cent, and has a very high-quality property portfolio focused on London and the south east."
Richard Kirby’s trust has recovered strongly since the depths of the financial crisis and is now up 22.47 per cent since launch. It has returned 31.19 per cent over three years, beating every trust in its IT Property – Direct UK sector.
The trust, which is 18.4 per cent geared, has an ongoing charges figure of 1.26 per cent, excluding performance fee.
JP Morgan Global Emerging Markets Income Trust
Richard Titherington’s £282m trust is the only one in the IT Global Emerging Markets sector that is currently trading on a premium [1.8 per cent].
"As the name suggests, this one targets a yield," Elliott continued. "However, it has also outperformed many of the growth-focused trusts in the sector, which goes some way in justifying its premium."
Performance of trust since launch vs index
Source: FE Analytics
The JPM Emerging Markets Income IT has returned 34.88 per cent since its launch in July 2010, significantly outperforming its MSCI Emerging Markets benchmark, with less volatility.
Only one trust in its sector – Utilico Emerging Markets IT – has returned more, although it has been more volatile.
The trust is currently yielding 3.78 per cent. It has an ongoing charges figure of 1.21 per cent, excluding performance fee.
Telecoms, media & technology is currently Titherington’s biggest sector weighting, at 24.4 per cent.
The Biotech Growth Trust
Biotechnology has been one of the best-performing sectors in recent years, which The Biotech Growth trust has been a big beneficiary of; according to FE Analytics, it is up 110.36 per cent over three years, and 211.76 per cent over five.
"It’s on a pretty tight premium – about 1.4 per cent, which we’re happy with paying. The manager’s track record has been very strong, and it’s in a very specialist area," said Elliott.
The £203m trust has an ongoing charges figure of 1.29 per cent, excluding performance fee.
Managers Geoffrey Hsu and Richard Klemm are invested almost exclusively in US companies. They run a highly concentrated portfolio, with more than half of assets invested in the top-10 holdings.