By not being subject to inflows and outflows of investor capital, as an open ended fund is, they can buy less liquid assets and not worry about having to sell those assets to meet investors’ redemptions.
A close-ended structure also helps avoid the common problem of popular open-ended funds having to go further up the market cap scale due to large inflows.
Here, we look at four investment trusts Winterflood Securities’ Kieran Drake recommends for those with a long-term investment horizon of 10 years or more.
Scottish Mortgage
This trust, managed by James Anderson (pictured) with Tom Slater as deputy manager, has grown to be one of the largest in its IT Global sector with a market cap of £2.5bn. Drake says the managers take an unconstrained approach, giving it a growth-focused long-term strategy.
“Anderson’s philosophy that the opportunity in investing lies in making long-term decisions and ignoring short term noise is well reasoned,” he said.
“The fund is currently biased towards the technology and consumer sectors, with the managers willing to pay high valuations for companies that they believe have strong growth prospects,” he said.”
Anderson recently told FE Trustnet he was aiming to invest in the next generation of technology companies by buying equity before the company reaches a public stock market flotation.
This is made possible by the fund’s board allowing the managers to invest up to five per cent of its portfolio in unlisted companies.
Its largest holdings are mostly large technology companies including Amazon, Google, Apple, Baidu and Tencent.
“The emphasis on ‘disruptive’ companies with the potential for asymmetric returns is what really distinguishes Scottish Mortgage from the vast majority of its peers,” he said.
However he says the investment trust’s performance could be volatile, exacerbated by its gearing – currently at 10 per cent - due to holding these types of stocks.
The fund tends to perform better, relative to its sector, in upward markets. It recorded top quartile performance in all of the last 7 calendar years, except for 2008 and 2011 when it was bottom quartile.
“Despite this, we are confident that Scottish Mortgage is well placed to outperform over the long-term,” Drake said.
Over five years the fund has beaten the average return in its IT Global sector by almost 90 percentage points, returning 171.39 per cent. Its benchmark – the FTSE All World index – rose 88.16 per cent over the same period.
Performance of trust, sector and benchmark over 5 yrs
Source: FE Analytics
Drake says the fund’s strong performance has seen it re-rate. In the last twelve months it has traded on an average discount of 4 per cent but it is currently trading on a discount of 1.8 per cent.
RIT Capital Partners
This £2.9bn trust is closely associated with the Rothschild family, with Lord Rothschild – who has a significant personal holding – also its chairman. It has been managed by Ron Tabbouche since 2012.
Drake says the fund’s objective is to generate long-term capital growth.
“This is achieved by investing in a range of asset classes including quoted equity, unquoted investments, credit, government bonds and currency,” he said.
“Since Tabbouche joined in 2012 there have been a number of changes to the portfolio and investment process.”
“The investment team has also been reinforced while the portfolio has seen greater concentration both in terms of direct holdings and the number of external managers used.”
“This fund is differentiated from most of its global peers by its emphasis on top-down investment and it also provides access to a number of highly regarded external managers.”
The fund has returned 50.66 per cent over five years, more than 30 percentage points less than the average return in its IT Global sector.
Performance of trust, sector and benchmark over 5 yrs
Source: FE Analytics
The fund has recently lagged the stronger market conditions as a result of its defensive positioning, Drake says.
“This has seen the fund trade on a discount, which we believe provides an opportunity,” he added.
It is currently trading on a discount of 5.8 per cent.
Schroder UK Growth
This £338m fund has been managed by FE Alpha Manager Julie Dean since Schroder’s acquisition of Cazenove Capital in July 2013.
Drake says Dean adopts a differentiated investment approach, with a number of leading indicators used to determine turning points in the business cycle.
“This will result in the portfolio being tilted according to the manager’s outlook,” he said. “The rationale is that at turning points in economic and stock market cycles, business cycle factors tend to dominate returns and therefore more risk capital is committed to beta factors.”
“The fund will not invest in extreme value plays or riskier stocks where there is a possibility of significant falls and the business cycle approach increases the chances of the fund outperforming in different market conditions.”
Over five years the fund has returned 139.32 per cent, beating its IT UK All Companies sector average of 109.44 per cent and a rise in the FTSE All Share of 93.33 per cent.
Performance of trust, sector and benchmark over 5 yrs
Source: FE Analytics
However, since Dean’s appointment as manager, the trust has fallen short of the sector average by 3 percentage points after suffering sharp losses in March 2014. The fund is currently trading on a discount of 4.9 per cent.
JPM Global Emerging Markets Income
This £758.8m fund is co-managed by Richard Titherington and Omar Negyal. Drake says the fund offers an attractive level of income with a historic yield above 4 per cent.
“As well as its dividend, this fund has significant merit as an emerging markets equity fund,” he said.
“It provides investors with exposure to a portfolio with an emphasis on stable growth sectors and underweight positioning in more cyclical sectors such as materials.”
“We believe that this approach enables the fund to capture the growth in emerging markets whilst providing lower volatility exposure.”
The fund has outperformed its IT Global Emerging Market Equities sector average and its benchmark – the MSCI Emerging Markets index – since its launch in July 2010.
Performance of trust, sector and benchmark since 29 July 2010
Source: FE Analytics
It has returned 33.4 per cent over this period compared to a sector average return of 14.47 per cent and a rise in its benchmark of 6.94 per cent. The fund is currently trading on a premium of 3.5 per cent.
