Investment trust tips
As the tax year draws to a close, most investors looking to put their Isa money into equities will choose a unit trust or an open ended investment company.
But they should also consider investment trusts. After a difficult start to the decade, investment trusts are now coming back into favour with investors – mainly because discounts, the difference between the price at which the shares trade and their true asset value, are narrowing, they are cheap and performance is improving.
Each investment trust has a set number of shares in issue. If demand is high, the share price rises, narrowing the discount. If a fund falls out of favour, the discount can widen. Where discounts have been too wide, predators have been lurking ready to pounce, which has prompted investment trust managers to take action.
Investment trusts are listed on the stock market and so the only purchasing costs are those usually related to buying shares, unlike a unit trust where the investor usually pays a 5% initial charge (unless they purchase through a fund supermarket). Management charges are also competitive, with the average charge working out at 0.5% a year compared to 1.5% you'd pay with a unit trust.
We asked a panel of investment experts what their investment trust choices would be for this tax year. The experts gave both a medium and high risk recommendation.
Mark Dampier, Head of Research, Hargreaves Lansdown
Artemis Alpha
The trust is run by John Dodd who is a founder member of Artemis and also runs the UK small cap OEIC. The fund's remit is extremely wide allowing it to invest in almost anything, and could probably be looked at as Artemis's best ideas fund. It had a poor 2006, with the UK small cap exposure centred on areas such as oil, gas and mining which generally had a poor year.
The fund has holdings in private equity, some of which have come to the market recently. The fund's largest holding is Artemis Investment Management itself, so this is the only way you can get exposure to the stock of one of the best investment management companies around.
This is Artemis's only investment trust and as such is something of a forgotten fund in its stable, but I think it deserves much more attention from investors.
Edinburgh Small Companies
The trust has been transformed since Standard Life Investments took over the mandate on 1 September 2003. This is very much a team approach with three other senior people within the small cap team. The fund is a solid core holding for UK small caps; it tends not to outperform massively in a bull market as it avoids blue-sky investments, but for that reason shouldn't blow up in investors' faces.
Standard Life have been transformed over the last few years into a true investment house. Perhaps analysts have been slow to realise this, which would account for the substantial discount on this trust. In fact, I believe Standard Life Investments are knocking on the door of Jupiter and even my other recommendation, Artemis.
Mick Gilligan, Director of Fund Research, Killik & Co
RIT Capital
It holds an eclectic mix of quoted equities, private equity situations and hedge funds. Long-term returns have been consistently strong and help to explain why the trust has typically traded at a premium. The recent move to a discount looks unjustified and represents an attractive buying opportunity.
Finsbury Emerging Biotechology
It is one to watch in my view. The lack of new drug pipeline among big pharmaceutical companies and the long lead time of bringing new product to market is forcing the larger companies in this space to buy pipeline as well as grow their own. Finsbury Emerging Biotechnology, which has a bias towards smaller biotechnology stocks is well placed to benefit from this trend. The fund's discount has widened recently, strengthening the buy case.
Tim Cockerill, Head of Research, Rowan & Co
Perpetual Income & Growth Investment Trust
The manager Mark Barnett takes a top down view of the economy to establish a framework within which he selects stocks. Unlike most managers he works on an absolute return basis and assesses stocks on their opportunities and risks; he won't over pay for stocks which is a key aspect of how he manages the trust, even if those stocks are high quality and the outlook good.
He has been defensively positioned over the past year but the UK economy has been more robust than expected, however his stocks selection has been good and the NAV performance has not suffered unduly, although the share price has lagged. The long term record is excellent and this trust is a perfect core holding for many portfolios.
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JPMorgan Fleming Japanese Smaller Companies
Just over a year ago Japanese smaller company stocks were roaring away and were one of the best performing asset classes, but it all came to an abrupt halt and the share price of JPMorgan Fleming Japanese Smaller Companies was hit hard.
The excessive froth in the Japanese smaller company market has now gone, whilst the Japanese economy has continued to make good progress. The latest set of GDP figures was very good, wages are increasing and the domestic economy looks strong.
Small companies in Japan are domestically focused and valuations are attractive. Add into the equation the fact that the yen is undervalued and you have a combination of factors that could drive small company prices in Japan higher and substantially higher.
The trust is managed by the very experienced David Mitchinson and is well diversified with over 100 stocks. It clearly isn't without risk but the upside potential seems considerably greater than the downside. The trust is trading close to NAV presently.
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