It’s been a rollercoaster year for investors with a market crash in March, a lockdown of major economies, and massive stimulus from central banks and governments around the world.
As investors look towards 2021, Ryan Hughes, head of active portfolios at AJ Bell revealed four investment trusts for those who prefer closed-ended funds.
Based on different investor risk preferences, he gave cautious, balanced, adventurous, and income-seeking options.
Cautious – Personal Assets Investment Trust
For investors who prefer a cautious approach, Hughes suggested the same trust he recommended for 2020, the £1.3bn Personal Assets Investment Trust managed by Troy Asset Management’s Sebastian Lyon.
He said the defensive nature of the approach could be appealing for investors who are cautious over markets remaining at or close to all-time highs, and for those who fear inflation returning.
“Manager Sebastian Lyon takes a naturally cautious approach and has looked to build in some inflation-proofing with 10 per cent exposure to gold and a further 28 per cent in index-linked bonds,” he explained.
“Add in 40 per cent in high quality equities such as Microsoft, Diageo and Unilever that have the ability to compound returns and you end up with a very appealing portfolio, not just for cautious investors but all of those who want to add some diversification to their portfolio.”
He added: “The approach of ‘winning by not losing’ is one that is often forgotten by many investors.”
The trust’s focus on capital preservation resulted in a lower drawdown during March and has enabled it top quartile low annualised volatility.
Performance of trust vs sector & benchmark over 5yrs
Source: FE Analytics
The Personal Assets Trust has returned 40.48 per cent over the last five years, compared to 32.56 per cent from the average peer in the IT Flexible Investment sector and 29.84 per cent from the FTSE All Share benchmark.
The trust currently pays a 1.2 per cent dividend yield,
is currently trading at a 1 per cent premium to net asset value (NAV), is not geared, and has ongoing charges of 0.91 per cent, according to the Association of Investment Companies (AIC).
Balanced – Fidelity Special Values Investment Trust
For a balanced investor, Hughes highlighted the £811m Fidelity Special Values Investment Trust, managed by FE fundinfo Alpha Manager Alex Wright.
“The UK market is at an interesting inflection point as we run into 2021,” Hughes said. “It has lagged global markets for a number of years as the structure of the market with a large allocation to ‘old economies’ such as oil and a large financials weighting has hampered returns.”
With the conclusion of Brexit finally approaching, he said: “there is a chance that investors once again begin to look at UK equities and for that discount to close”.
He argued that this trust could be very well placed to capitalise on this with its focus on “solid but out of favour companies”.
“The burst of performance seen late this year when news of the vaccine was announced shows how much performance potential is in these stocks and this is helped by the 18 per cent gearing Wright has currently employed to take advantage of price weakness,” he explained.
“Another plus is the imminent cut of fees on the trust which should take circa 0.2 per cent off the ongoing charges come the New Year.”
Performance of trust vs sector & benchmark over 5yrs
Source: FE Analytics
The Fidelity Special Values trust has returned 31.5 per cent over the last five years, compared to 33.35 per cent from the average peer in the IT UK All Companies sector, and 29.84 per cent from the FTSE All Share.
The trust is trading at a 2.6 per cent premium to NAV, is 16 per cent geared. It has ongoing charges of 0.98 per cent, and currently yields a 2.4 per cent dividend.
Adventurous – Standard Life UK Smaller Companies Investment Trust
Hughes suggested that adventurous investors might like to consider the £647m Standard Life UK Smaller Companies Investment Trust run by Alpha Manager Harry Nimmo.
He said: “With a potential rebound in UK equities on the card, gaining exposure to some of the fastest growing companies in the UK could be a potential winner in 2021.
“The smaller companies team at Aberdeen Standard – led by the highly experienced Nimmo – is very strong and the trust has also recently appointed Abby Glennie as co-manager.”
Hughes explained that the closed ended structure is a good way to gain exposure to smaller companies, and that its £600m size allows it to look across the market cap spectrum.
“The approach has a strong preference for growth companies and is very comfortable looking away from the index, which is entirely appropriate in the smaller companies space,” he explained.
“With high active share, sensible costs and an outstanding track record, this trust is great example of the benefit of genuinely active management.”
The trust’s largest three holdings are in Kainos Group, Gamma Communications and Games Workshop, which make up almost 15 per cent of its portfolio.
Performance of trust vs sector & benchmark over 5yrs
Source: FE Analytics
The Standard Life UK Smaller Companies trust has returned 76.27 per cent over the last five years, compared to 47.64 per cent from the average peer in the IT UK Smaller Companies sector, and 41.18 per cent from the Numis Smaller Companies Plus AIM benchmark.
The trust is trading at a 2.6 per cent discount to NAV, has ongoing charges of 0.88 per cent. It is currently yielding 1.6 per cent dividend and is 2 per cent geared. On a five-year basis, its performance is top-quartile.
Income – City of London Investment Trust
For investors seeking income, Hughes recommended the £1.6bn City of London Investment Trust, managed by Job Curtis.
Whilst investing for income in 2020 turned out to be an unfortunate strategy because of the many companies cutting dividends due to the pandemic, Hughes said that with a vaccine being rolled out, there is hope for some normality and with that, some dividends.
“City of London has for many years been one of the standout UK equity income trusts with manager Job Curtis in place since 1991,” he said. “The trust has a track record of increasing its dividends every year for over 50 years and the board has committed that it intends for this to continue, making use of its income reserve.”
He added: “Even after the recent rally, the trust is yielding over 5 per cent with holdings in high-quality UK equities such as Unilever, Glaxo and Reckitt Benckiser.
“With fees at just 0.36 per cent per annum, this is a good option for investors either wanting to take an income or simply want exposure to UK equities and reinvest the income to generate future growth.”
Performance of trust vs sector & benchmark over 5yrs
Source: FE Analytics
The City of London Investment Trust has returned 19.38 per cent over the last five years, compared to 21.98 per cent from the average peer in the IT UK Equity Income sector, and 29.84 per cent from the FTSE All Share.
The trust currently yields a 5.2 per cent dividend, is 12 per cent geared and is trading at a 3.9 per cent premium to NAV. It has ongoing charges 0.36 per cent.