Investment trusts such as Lowland, Personal Assets and Witan have been added to Winterflood’s model portfolio after moving to attractive discounts in the midst of the turbulent market environment.
In its latest update, the broker said: “We picked a fine year to start a model portfolio of investment trusts! Unsurprisingly we have lagged our self‐imposed benchmark of the WMA Balanced index so far this year, largely reflecting that investment trusts have seen their discounts widen out.”
“We believe that this is a result of volatile market conditions that have resulted in a fall in retail demand. This is not unique to investment trusts, as shown by the recent Investment Association data on net retail open‐ended fund flows, which is discussed elsewhere in this report.”
Against this backdrop, Winterflood says that “some compelling value plays” can now be seen in the investment trust space and has made a number of changes to its model portfolio, as we explore below.
UK equities – Lowland and Henderson Smaller Companies
The group has added the £332m Lowland trust to its model portfolios by trimming the weights of some other UK equity funds.
Performance of trusts vs index over 5yrs
Source: FE Analytics
“Lowland has a strong long‐term performance record, outperforming the FTSE All Share in net asset value [NAV] and share price terms over the last three and five years, and we rate the manager, James Henderson of Henderson Global Investors, highly,” Winterflood said
“However, the contrarian, value‐based investment approach can lead to periods of underperformance, as has been the case over the last six months when the NAV fell 2 per cent compared with a rise of 1 per cent for the FTSE All Share.”
According to the Association of Investment Companies, Lowland is currently trading on a 9.5 per cent discount to NAV. The broker argues that this level of discount represents a “significant value opportunity” and is expects the trust to deliver long-term outperformance from these levels.
Looking at another UK addition, Winterflood said: “In December last year, Henderson Smaller Companies reached its tightest discount level (3 per cent) in the last 20 years. Since then the discount has widened to its current level of 15 per cent.”
“While this is in line with the average discount over the last five years it is wider than both the fund’s three‐year and one‐year averages as well as the current peer group average. We have therefore decided to switch from Invesco Perpetual UK Smaller Companies, which is trading on a 4 per cent discount, into Henderson Smaller Companies.”
The £443 trust is managed by Neil Hermon, who has outperformed his Numis Smaller Companies benchmark in each of the 12 calendar years he has been at the helm aside from in 2008/09. The trust does tend to have a higher weighting to mid-caps than many of its peers with stocks such as Bellway appearing in its top 10, but also has a good track record in outperforming mid-cap funds as well as its smaller companies peers.
Global equities – Witan and Pantheon International
Winterflood says the Witan investment trust – which is a multi-manager portfolio comprising 12 external manager alongside direct securities – represents good value with its current discount of 7.3 per cent.
Performance of trusts vs index over 5yrs
Source: FE Analytics
“Witan has maintained a discount target of 10 per cent for a long period, and this has been effectively reinforced by buybacks. However, the fund has traded at a significantly tighter discount for the last few years and was on a premium for much of 2015,” it said.
“In our opinion, this reflected its strong, consistent performance record and its active retail following. We believe the recent derating is a function of the volatile market conditions this year and the subsequent drop in retail buying.”
The broker suggests that further discount risk is limited by the trust’s discount control mechanism while improved market conditions could prompt a return of retail demand and a potential rerating, which in Winterflood’s view means the current discount could be an attractive entry point to the trust.
Pantheon International, a trust that focuses on private equity, has also been add to the model portfolios alongside HgCapital and Standard Life European Private Equity.
“This is a fund we have recommended in the past and in our view it is one of the ‘best in class’ listed private equity funds. It benefits from a well‐resourced management team and provides very well managed, highly diversified exposure to the asset class. We would also expect the fund’s mature portfolio to continue to generate high levels of cash through disposals, typically at uplifts to carrying values,” Winterflood said.
The broker adds that the trust’s 28.8 per cent discount to NAV seems to “unjustifiably wide”, given its strong long-term track record and the strength of its balance sheet. Furthermore, the fund has bought back shares at similar discount levels in the past, which would cause it to narrow.
Alternatives - Personal Assets
With shares in the BACIT trust now trading at a premium, Winterflood has sought to avoid the potential for premium/discount volatility by switching into Sebastian Lyon’s Personal Assets, which has an absolute return mandate.
Performance of trust vs index over 5yrs
Source: FE Analytics
“It shares a high degree of commonality with the open‐ended Trojan fund, which has assets of £2.5bn and is soft‐closed. Discounts have already widened across the sector this year, however, Personal Assets’ well established zero discount policy alleviates discount risk and provides considerable liquidity in the secondary market,” the broker said.
“The fund’s significant exposure to cash (21 per cent at the end of January), US treasuries (18 per cent) and gold (10 per cent) means that it is likely to lag market rises. However, it should also continue to preserve capital in difficult markets and as such it remains a low volatility vehicle that we would expect to deliver attractive absolute returns over the long term.”
