Alternative investment trusts focusing on natural resources and small-caps have been the most popular with our readers since the August sell-off dubbed Black Monday, according to research by FE Trustnet.
It has been almost a month since markets plunged in August in the most extreme fashion since the 2008 financial crisis off the back of a global panic from investors and traders that China was in for a mammoth crisis.
More than a third of the value of its domestic ‘A’ shares market was lost in the month prior to 24 August [Black Monday] following on from further falls since June after it rallied nearly 200 per cent in one year, but data showed growth was flagging in the economy.
Since Black Monday, confidence in global equity markets has somewhat recovered with both the FTSE All Share and S&P 500 up. Gold has also fallen alongside the broader fixed income market, as shown in the graph below.
Performance of indices since Black Monday
Source: FE Analytics
Investment trusts were of course hit alongside their open-ended counterparts but, unlike them, they were are able to leverage their portfolios by ‘gearing’ and could thereby maximise their bargain hunting in a sell-off as Job Curtis, manager of the City of London IT did, borrowing £13m to buy back into the FTSE 100.
Looking at the trusts that were most popular with our readers over the past month however, it is the more unusual trusts that have been most popular with investors.
City Natural Resources High Yield
The £94m City Natural Resources High Yield trust offers up a 6.7 per cent yield and is currently trading on a whopping 20.1 per cent discount.
Charles Tan, analyst at Cantor Fitzgerald says it is highly differentiated and has a good track record of growing its dividend.
“The managers of City Natural Resources choose to avoid the mainstream large-cap, industry majors found in many peers’ portfolios in their bid to generate income and capital growth for investors.”
“Over the years, City Natural Resources has delivered a steadily increasing dividend - up around 10 per cent per annum on average - and, in our view, the resultant smaller-cap bias gives investors exposure to some eclectic assets with significant potential to outperform.”
The trust has holdings in mining and natural resource equities, a highly out of favour area at the moment which partly explains its fall in value of almost 60 per cent over the past three years.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
A widely held belief is that we are currently at the end of the so-called commodity ‘super-cycle’ and the addition of slowing emerging market growth, most notably in China leading to less demand over the coming years and decades.
The trust is managed by Will Smith, Rob Crayfourd and Ian Francis, and has 27.3 per cent in oil and gas stocks, 15.6 per cent in gold-related stocks 14.5 per cent in industrials.
It has an ongoing charges figure (OCF) of 1.7 per cent. It has 26 per cent gearing.
Strategic Equity Capital
Second most popular is this small cap specialist trust whose parent company GVQ is now wholly owned by another IT, the Rothschild Investment Trust, and has been since January, with RIT owning 17 per cent of the shares of the trust.
While the £134m portfolio is invested in small-cap equities, the management team say “private equity techniques” are used in the stock selection process.
It has done very well over the past one, three and five years being the best performer over all these time periods in the IT UK Smaller Companies sector, both in terms of price and total return.
However it should be noted that it is currently on a five per cent premium, having shed its wide discount of 25 per cent three years ago gradually.
Performance of trust, sector and index over five years
Source: FE Analytics
Analysts at Winterflood Securities tipped it as a trust to watch in 2015 at the start of the year, saying while it carries high stock specific risk, the management have a unique and sustainable style to differentiate it from its peers.
“We like the manager's well considered investment approach, which applies private equity techniques to public markets,” the analysts said.
“The team at GVO IM also actively engages with management teams to bring about change and improve corporate governance. However, they prefer to do so discretely and believe that aggressive activism can be counterproductive.”
“The investment team is supported by an 'Industrial Advisory Panel', which consists of five individuals with complementary skills and M&A experience, including Sir Clive Thompson.”
The Winterflood team also say that they think its premium is sustainable.
The trust has an OCF of 1.33 but also charges a performance fee which bumped fees up to 1.65 per cent at the last measure.