Look before you leap

The maxim "not to look to performance alone" when selecting an investment needs to be at the forefront of investment trust selection, at the moment.

Looking to sectors and the funds within them that dominate when taking the top ten funds based on annual performance-to-date, three sectors dominate: Property Direct UK courtesy of Invista Foundation Property Trust and ING UK Real Estate Investment Trust(IT); UK Smaller Companies due to the performance of Gartmore Growth Opportunities and Gartmore Fledging Trust plc Ord and UK Growth due to Strategic Equity Capital and Henderson Opportunities Trust. The latter two present a possible case in point, for investors to look to the investment story behind the returns.

"They are both mainly focused on mid to small cap stocks and small caps have outperformed larger caps and cyclicals and bombed out sectors have outperformed non cyclicals and more defensive sectors. That is the reason these two have done so well. If we have a difficult year next year and the valuation disparity between large and small caps narrows you could see these two lagging, " says Stephen Peters, investment trust specialist at Charles Stanley.

The property story could be similarly salutary. Last year, was a bad time for commercial property but as things became what Peters describes as "less worse", trusts such as Invista Foundation Property Trust and ING UK Real Estate Investment Trust (IT) were all sitting on massive discounts to their asset value.

"So one whiff of good news that the world isn’t actually going bust and the big shift in risk appetite was to these big discounted theoretically incredibly cheap funds that owned real assets. It is no surprise with hindsight these property trusts performed so well - in share price terms they have shot the lights out and in NAV terms, property and asset values have only recently started moving upwards," says Peters.

He adds: "The average UK property sector is now on a 10 per cent premium to NAV – at its low point it was at a 35 per cent discount so my argument is 2010 is probably going to be a steady as you go year for property funds." 

For fund managers it is the emerging markets and Asia which attracts for the future.

Laurie Petar, manager Jupiter Fund of Investment Trusts (IT) is focusing emerging markets generally and says in particular he has been building up Latin America and India.

Favoured trust would be Templeton Emerging as a liquid and good performance trust, Peters says if investors want to take emerging markets further they could look at BlackRock Latin American.

Peters said: "This has had a great run this year, is well managed and gives exposure to Brazil the fastest growing emerging market - the long term growth prospects from that market seem huge."

But Peters also highlights on a long-term basis Asia is still one to buy because of the poor growth prospects from the UK economy. For that purpose he suggests Aberdeen’s Edinburgh Dragon or Schroders Asia Pacific.

Peter Hewitt, fund manager of the F&C Managed Portfolio for capital performance would go for emerging markets but also suggests technology. "We like technology which has been out of favour over the last few years but we think in on the turn and will do better over the next one, two and three years," says Hewitt, highlighting the Polar Cap and RCN Technology Trust.

Hewitt holds Aberdeen Income, Schroder Oriental Income and Henderson Far East Income.

"I like the outlook for growth of income from that area but also pretty decent capital performance. Also the Genesis Emerging Markets Fund is not far behind Templeton Emerging Markets in being a good established play for what is inherently a far more volatile area," says Hewitt.