Baillie Gifford Shin Nippon, 3i Infrastructure and Syncona are three investment trusts that investors should consider despite trading on chucky premiums, according to analysts.
In today’s investment climate you won’t see many investment trusts trading at a large premium to net asset value (NAV) as many boards of directors are making more of an effort to keep trusts’ shares trading in a narrower range to NAV.
They will do this by issuing shares when their trust is trading at a significant premium and buy them back when it trades at a large discount.
However, there are some closed-ended funds out there being traded at much higher prices than the worth of their underlying assets and below, fund experts tell FE Trustnet which trusts they would recommend despite having to pay a big premium.
Tony Yousefian, head of investment trust research at FundCalibre, admitted that the frugal part of him is not one to pay more for something than it’s worth, however if he were to pick a closed-ended fund trading on a sizeable premium it would be the five FE Crown-rated Baillie Gifford Shin Nippon.
He said: “There are situations where there is a premium to be paid for the manager and that sort of premium tends to last longer. The Baillie Gifford Shin Nippon happens to be one of those.”
The trust has been managed by Praveen Kumar since December 2015 and has been trading on a premium since the end of 2016.
It peaked in April this year when the trust traded at 14 per cent more than its NAV although this has recently come back down to a premium of 3.9 per cent to date, according to data from the Association of Investment Companies (AIC).
Yousefian said: “Whilst the asset class has been in favour, the largest contributing factor to this persistent premium is the quality of the manager.
“This is a Japanese small-cap portfolio and by Praveen’s own admission they invest in smaller companies where other managers fear to tread.”
Indeed, the portfolio consists of between 40-75 attractively valued smaller companies that offer good growth prospects over 3-5 years.
The trust looks for innovative business models and companies that disrupt traditional Japanese practices or market opportunities.
Performance of trust vs sector and benchmark during manager’s tenure
Source: FE Analytics
FundCalibre’s Yousefian said that the quality of manager Kumar is reflected in the performance of the fund.
During Kumar’s tenure, the fund has returned 124.76 per cent, which is more than its average IT Japanese Smaller Companies peer and the MSCI Japan Small Cap index while also beating the average IA Japanese Smaller Companies fund, which saw 77.21 per cent over the period.
AIC data shows Baillie Gifford Shin Nippon has ongoing charges of 0.89 per cent and uses 9 per cent gearing.
Numis Securities head of investment companies Charles Cade, like FundCalibre’s Yousefian, said he was cautious of buying trusts that trade on big premiums as they are “rarely sustainable over the long term and premium erosion can lead to disappointing shareholder returns, even if NAV growth remains respectable”.
However, the five FE Crown-rated Syncona is one trust that he highlighted as interesting, despite currently trading on a 50.5 per cent premium.
The closed-ended fund was formed at the end of 2016 through a merger between the Battle Against Cancer Investment Trust (BACIT) and the life sciences division of the Wellcome Trust.
Since this date, the fund has returned 89.89 per cent compared to its average IT Biotechnology & Healthcare peer, which rose 26.29 per cent.
Performance of trust vs sector since launch
Source: FE Analytics
Numis’ Cade said the trust, which is led by Martin Murphy, “benefits from an experienced and well-resourced management team”.
It aims to create a focused portfolio of between 12-15 companies that are global leaders in life sciences.
Cade said: “At present, the portfolio includes 8 companies, and it has established a leading global presence in cell therapy and gene therapy, two of the most innovative areas of healthcare.
“Two holdings have recently listed on Nasdaq (Autolus and Nightstar), whilst Blue Earth is now profitable following strong sales of its prostate cancer imaging agent in the US.”
He added that a number of the companies in the portfolio are entering key clinical trials over the next 12 months, which could further push up the asset value of the company.
Alongside these companies, the trust invests in long-only and alternative investment funds, which provide support to the existing companies in the portfolio and enable the trust to take a long-term approach.
Cade said: “The business benefits from a unique long-term funding model, with excess capital invested through a number of leading equity and hedge fund managers, mostly on a fee-free basis (thereby avoiding cash drag for investors).”
Syncona is suitable for charitable investors and donates 0.3 per cent of its NAV to a range of charities each year. It has ongoing charges including a performance fee of 1.58 per cent.
Finally, Winterflood Investment Trusts head of research Simon Elliott said the only fund he is currently recommending that is trading on a sizeable premium is 3i Infrastructure.
The trust, which holds five FE Crowns, is currently trading on a 7.8 per cent premium to its NAV and Elliott said one reason he likes the fund is because it has a strong track record.
Indeed, 3i Infrastructure has performed strongly in recent years, producing the best total return in the IT Infrastructure sector over one, three and five years.
Its one-year performance is particularly notable, with its average peer losing 0.40 per cent, while the fund increased 14.86 per cent.
It must be noted that within this period, 3i Infrastructure sold its stakes in both Elenia and Anglia Water, which were estimated to have generated gross proceeds of more than £1.1bn.
Performance of trust vs sector over 1yr
Source: FE Analytics
The trust has a yield of 3.9 per cent and its ability to grow its dividends is another aspect Winterflood’s Elliott likes.
He said: “The dividend target for its financial year to 31 March 2019 represented a 10 per cent increase on the previous year.”
The final reason he recommended 3i Infrastructure is because the fund has a quality investment portfolio, including top holdings Valorem SA, TCR, AWG, Infinis Energy and Oystercatcher.
In all, Elliott said that the fund’s chunky premium is justified by it defensive stable income and potential for capital growth.
3i Infrastructure has a performance fee of 5.17 per cent alongside ongoing charges of 1.83 per cent, according to the AIC.