However, the manager of the five crown-rated Unicorn Mastertrust says he has found one investment company that still offers value. Walls is a self-confessed contrarian investor and because of that tries not to hold or buy investment trusts that are trading on a premium.
However, given the fact that equities have had a very good run of late he says it is becoming increasingly difficult to find discount value from closed-ended funds, especially as the short-term direction of markets remains unclear.
"This is the trickiest market I have experienced," Walls said. "I haven’t got the foggiest idea what is going to happen."
"That is principally because the political risk is the highest I have ever experienced. We are all in the hands of the Fed and they have a very, very hard road ahead in terms of tapering. I can’t envisage a scenario where politicians can be successful without creating volatility."
"The VIX index [which measures implied volatility for the S&P 500] is at its lowest level for years and I think that attitude to risk can only go one way – I suspect we are due a correction."
"However, the UK GDP figures are getting better and you do get the feeling in general that things are getting better. The oil price and the fold price have traded off recently, which suggests the outlook is rosier, but then if you look at the valuations on the US market, they are looking expensive."
The manager has more than 25 years’ worth of experience of analysing investment companies, having launched his £10m Unicorn Mastertrust fund in December 2001. After a brief stint away from the group, he took charge of the portfolio again in September 2008.
According to FE Analytics, Unicorn Mastertrust is the third-best performing portfolio in the IMA Flexible Investment sector over 10 years, its returns of 158.94 per cent more than 65 percentage points ahead of the average fund.
Performance of fund vs sector over 10yrs
Source: FE Analytics
Walls’ fund also sits firmly in the top quartile over one, three and five years.
As Walls says, equity markets have been on a strong run of late.
The FTSE All Share, S&P 500 and the MSCI Europe ex UK indices have returned close to or more than 20 per cent since the start of the year.
Performance of indices year-to-date
Source: FE Analytics
However, market sceptics point to the lack of underlying earnings growth, the seemingly inevitable tapering of QE and the ongoing debt ceiling in Washington as reasons why investors should expect more volatility over the coming months.
As he is unsure over the immediate future of equity markets, Walls has started to build "defence blocks" into his fund to make sure he has all bases covered.
"We are trying to hedge our bets," he explained.
"That’s why we have bought Foreign & Colonial IT, even though it is not particularly exciting. The fact that I can buy it at a 10 per cent discount (and as they buy back shares if it goes past 10 per cent), then that should help us in more difficult conditions," he said.
"Also, in the meantime it should help as Jeremy Tigue has generated a bit of alpha in the past," he added.
Walls previously told FE Trustnet how difficult it has become to find trusts that are valued cheaply, although he did buy into Marwyn Value Investors earlier in the year.
The manager says he has found another genuine bargain in the investment trust sector.
"I actually have a new position, which is the private equity trust SVG Capital," Walls continued. "Although it has unlisted holdings, 58 per cent of its assets are listed. I got it at a 23 per cent discount and they are pretty good private equity managers who aren’t overly committed."
"The reason I liked it is that if I were to buy something that was 100 per cent listed, then it would be on a 3 or 4 per cent discount," he added.
Investors in SVG Capital have largely struggled over the long-term. For instance, over 10 years the trust has actually lost 15 per cent.
However, it has performed well as investor sentiment for risk has increased. Over the last 12 months it has returned 49.23 per cent while its benchmark – the FTSE 250 – is up 31.18 per cent.
Performance of trust vs index over 1yr
Source: FE Analytics
The manager says it isn’t for all investors, however, as it takes large stock-specific risks. Hugo Boss is SVG Capital’s largest individual holding, making up 25 per cent of the trust's £951m assets under management.
SVG Capital has a base fee of 0.5 per cent, though it also has a performance fee.
Walls say he bought the trust because of its current discount and its investment remit, both of which he believes will allow it to outperform over the long-term.
"If you look at the long-term comparable record, private equity has performed as well if not better than small caps. And, as we all know, small caps tend to do better than large caps over the long-run," he said.
"However, there have been regular net inflows into smaller caps and average discounts have come in, so there is a lack of value out there," he added.
Unicorn Mastertrust has an ongoing charges figure of 1.74 per cent and requires a minimum investment of £2,500.
