The team at Winterflood compiled the list with a view to including trusts that it expects will see their share prices outperform their respective benchmarks over the medium term on a risk-adjusted total return basis. This may either be through a narrowing of the discount or through outperformance of the underlying portfolio.
“We retain our long-held belief that it is easier to predict discount moves than relative NAV performance and, for that reason, have a preference for investment trusts that offer some sort of value,” the analysts said.
“That said we are prepared to recommend funds that are trading on a premium where we believe that discount risk is relatively muted.”
Here we take a closer look at the Winterflood’s trust picks focusing on UK or global equities.
Winterflood recommends three global trusts: RIT Capital Partners, Scottish Mortgage and Edinburgh Worldwide.
First up is the £2bn RIT Capital Partners. The trust is closely associated with the Rothschild family, with Lord Jacob Rothschild – who has a significant personal holding – also its chairman. Its manager Ron Tabbouche has been at the helm since 2012.
An emphasis on longer term and uncorrelated returns as well as downside protection has made it less popular in recent years as markets rebounded from their post financial crisis lows.
Over three years it’s up 26.52 per cent, which is almost half the gain in the MSCI World index and the return of the IT Global sector average.
However, over the longer term it has rewarded investors. Since the beginning of FE Trustnet data – 1995 – it is up 786.07 per cent, more than double the sector and triple the index.
Performance of trust, sector and index since Aug 95
Source: FE Analytics
Tabbouche, who has revealed a small stake in rival Alliance Trust, holds a mixture of quoted and unquoted stakes in companies as well as government bonds, currencies and alternative assets.
His largest holding is Findlay Park American, making up 3.3 per cent of the portfolio and reflecting a bias toward North America, which accounts for 41 per cent of exposure in the trust.
The trust is on a discount of 2.8 per cent, is 21 per cent geared and has an OCF of 1.25 per cent as well as a performance fee which adds up to 1.26 per cent at the last measurement.
Next up is a similarly large trust – the £3bn Scottish Mortgage, which in contrast has very different focus largely playing two distinct themes: the rise of China and disruptive technology.
Top holdings in Scottish Mortgage include high growth names in tech and biotech such as Illumina, which makes up 8 per cent of the portfolio.
The company has featured in the trust for several years but has only recently been made its largest position. It dominates the market for gene-sequencing, which is set to explode as the price of personalised therapies for diseases such as cancer are expected to become ubiquitous.
It also holds Amazon, Baidu, Tencent, Alibaba and Facebook.
The trust also has a strong long-term track record and is up 241 per cent since its manager James Anderson took the helm in April 2000. By comparison the IT Global sector average since then is 149.98 per cent while the MSCI World is up 64.63 per cent.
The trust is on a premium of 2.6 per cent, is 14 per cent geared and has an OCF of 0.5 per cent.
The £231m Edinburgh Worldwide trust is the final global pick. Also a Baillie Gifford trust, it is on a 10.1 per cent discount and has been described as a ‘higher octane’ version of Scottish Mortgage.
It has a bad 2014, compared to its stablemate, following a change of direction in its mandate with a new management team headed by FE Alpha Manager Douglas Brodie with John MacDougall as his deputy.
Brodie’s approach at Edinburgh Worldwide also includes a greater focus on smaller companies with a market cap of less than $5bn with an eye to early stage exposure in high growth stories.
It has a clean OCF of 0.92 per cent. It is 9 per cent geared.
It is down 2.48 per cent since the pair took over, while the sector and index are up 9 and 18.25 per cent respectively.
In the UK, Winterflood favours Fidelity Special Values for pure UK growth exposure while tipping the Edinburgh Investment Trust and Lowland Trust for income and growth.
The £469m Fidelity Special Values trust, managed by FE Alpha Manager Alex Wright, is the best performer of the trio over the past three years, highlighting its growth potential although all the trusts are ahead of the FTSE All Share over this period.
Performance of trusts and indices over 3yrs
Source: FE Analytics
It also is on the largest discount – 8.7 per cent compared to Edinburgh and Lowland’s respective 0.7 and 3.2 per cent.
Wright has been manager since September 2012, so can’t take all the credit.
While Lowland has been headed up by FE Alpha Manager James Henderson since 1990, Edinburgh’s manager, FE Alpha Manager Mark Barnett, has only been in place since Neil Woodford left Invesco Perpetual almost a year ago and so also can only really be judged on short track record.
However, all three managers have significant experience across the other funds and trusts in which they have created some of the industry’s best track records.
The Edinburgh Investment Trust and Lowland Trust have a current yield of 3.56 and 2.88 per cent.
All three UK picks have a bias toward blue chip names, mostly with a global business. However, some more unusual stocks can be found with Lowland’s largest position in engineering firm Senior PLC and Fidelity Special Values’ second largest holding DCC.
Both Edinburgh and Lowland are geared 14 per cent and have respective OCFs of 0.68 and 0.59 per cent. With performance fees these come in at 0.88 and 1.1 per cent at the last measurement.
Winterflood also tips smaller companies trusts, despite the asset class having a difficult year.
They recommend the Invesco Perpetual UK Smaller Companies and Strategic Equity Capital trusts.
Invesco Perpetual UK Smaller Companies, which has been co-managed by Jonathan Brown and Richard Smith since 2002, has one of the best long term track records in its sector over 10 years. It held up well last year but drops to second quartile over three and five years.
Both trusts have made sector and index beating returns over one, three and five years with Strategic Equity Capital making an impressive 31 per cent over the last year despite a flat market for the Numis Smaller Companies index.
Performance of trusts, sector and index over 3yrs
Source: FE Analytics
Its manager Stuart Widdowson has top positons in names such as E2V Technologies, Tyman and Servelec. It is on a discount of 0.7 per cent and has an OCF of 1.45 per cent, rising to 1.77 per cent with its latest performance fee. It is not geared.
Invesco Perpetual UK Smaller Companies has an OCF of 0.84 and is not geared. It is also on a discount of 11.5 per cent.