Miton UK MicroCap, CC Japan Income & Growth and Henderson International Income are three trusts that investors may be missing out on, according to Peel Hunt’s Anthony Leatham.
Markets have reached an interesting point, with some analysts suggesting that we are nearer the end of the market cycle than the beginning following a decade-long bull run.
Yet the ‘fear of missing out’ remains among investors who have seen others call the end of this run for years and not been right.
Therefore, it may be prudent to build a balanced portfolio that can both take advantage of the opportunities if the market continues to ride higher, while protecting on the downside in the event of an abrupt end to the cycle.
Below, Peel Hunt’s head of investment companies research highlights three investment trusts that balanced investors should consider adding to their portfolios, but may currently be ignoring.
Miton UK MicroCap Trust
First up is the Miton UK MicroCap Trust run by Gervais Williams and FE Alpha Manager Martin Turner.
Leatham said: “Miton UK MicroCap Trust’s investment philosophy is naturally biased towards value and recovery stocks, with resilient cash flows, strong management teams and balance sheets.
“They target companies under £150m market cap and currently have around 80 per cent invested in FTSE AIM stocks.”
Launched in April 2015, this £103m trust started out slowly, returning just 32.36 per cent versus the IT UK Smaller Companies average peer’s 63.05 per cent.
Performance of trust vs sector and benchmark since launch
Source: FE Analytics
The shares have fallen to a 4.7 per cent discount to net asset value (NAV), according to the Association of Investment Companies, although on a NAV basis alone it has returned 45 per cent since launch.
“Our analysis of performance behaviour shows low correlation to broader UK equity market indices and monthly NAV returns that capture 60 per cent of FTSE All Share market upside but have also defended particularly well against market drawdowns,” the analyst said.
“Miton UK MicroCap Trust offers investors differentiated UK equity exposure and strong diversification benefit in a portfolio context.”
The trust has no gearing and ongoing charges of 1.58 per cent.
CC Japan Income & Growth
Investors typically wait for funds and trusts to hit three-year track record before making a decision on whether to invest as it allows them to make an informed decision based on previous performance.
While this is understandable, those investors avoiding new strategies could miss out.
One such trust, according to Leatham, is the £203m CC Japan Income & Growth trust, launched in 2015.
The equity income trust has been a top performer, returning 73.48 per cent since inception, 14.83 and 26.96 percentage points ahead of the IT Japan sector and Topix benchmark respectively.
Performance of trust vs sector and benchmark since launch
Source: FE Analytics
The all-cap trust is managed by Richard Aston, who has spent 20 out of his 25-year career investing in Japanese equities and turned his attention to the Japanese dividend story in 2013, prior to launching the trust in 2015.
“For an equity income investor, Japan is probably not the first region that comes to mind for dividends, let alone dividend growth,” Leatham said.
However, in recent years, there has been a dramatic shift in corporate culture in Japan which is underpinning a structural improvement in shareholder returns, which he said is set to continue.
“Importantly, CC Japan Income & Growth’s sector mix differs significantly from a cross-section of other global and regional equity income funds,” the analyst noted.
“The yield on the trust is 2.2 per cent, the forecast dividend growth for the portfolio is 10 per cent and, so far in this reporting season, the manager has seen a number of dividend upside surprises for CC Japan Income & Growth’s holdings.”
The investment trust’s shares are on a 3.6 per cent premium to NAV. It is 16 per cent geared and has ongoing charges of 1.25 per cent, according to the AIC.
Henderson International Income
Not a trust that the firm has a formal recommendation on, but Leatham said Henderson International Income (HINT) is one that the team know and fits the brief of a trust that investors may be overlooking.
Run by Ben Lofthouse since its launch in 2011, the £286m investment trust adopts a valuation-aware approach with a focus on high free cash flows, dividend growth and sustainability.
“HINT’s global ex-UK mandate is unique in the sector and helps to mitigate the dividend concentration risk that is evident in the UK market, where the top 10 dividend-paying stocks in the index represent around 67 per cent of the total dividends paid by FTSE 100 companies – this compares with 6 per cent for the Janus Henderson Global Dividend index,” Leatham said.
The portfolio has around 30 per cent held in the US, 32 per cent in the eurozone with 23 per cent in financials, 13 per cent in technology and 13 per cent in energy.
Current investment themes include industry leaders, restructuring stories, and strong dividend growth.
Performance of trust vs sector and benchmark since launch
Source: FE Analytics
Since its launch, the trust has returned 101.47 per cent, beating its average peer but not the MSCI World ex UK index, as the below chart shows.
“Over the last three years, HINT has delivered 13 per cent annualised NAV total return and currently yields 3.2 per cent and the forecast dividend growth for the portfolio is 7 per cent,” the analyst said.
The trust is not geared and its shares trade broadly at par value to NAV. It has ongoing charges of 0.9 per cent and a yield of 3.2 per cent.