For more than 20 years, I’ve been a keen advocate of including investment trusts within a portfolio.
They provide access to specialist strategies and asset class opportunities that open-ended funds cannot provide. The managers can take a truly long-term view, with no pressure to raise funds to meet redemptions.
The discount takes the strain and this can present another opportunity for tactical purchases by contrarian investors.
Investment trusts can invest in instruments too illiquid for open-ended funds, often in specialist sectors such as infrastructure and debt.
At EQ Investors we recently participated in the C-share offer of SQN Asset Finance Income (SQNX), a trust that leases business critical equipment to companies over a seven- to ten-year period. Due to the fixed term of the leases, a permanent capital pool is required to buy the assets and then lease the equipment to the companies.
Worldwide Healthcare Trust (WWH) is a thematic equity trust investing in the global healthcare sector with huge potential for growth, as well as one that can make a positive impact to people around the world. The trust’s management team, Orbimed Advisors, has more than 25 years’ experience investing in healthcare, indeed a quarter of their staff are doctors who hold medical research PhDs.
Another trust we favour is the TwentyFour Income Fund (TFIF), managed by bond manager Ben Hayward. This trust invests in securities that do not offer enough liquidity for their open-ended strategies, including very small issues that trade irregularly and as such have very attractive liquidity premiums priced in.
In practice, we rarely try and time the market. However, tactical opportunities can often present themselves with investment trusts. We can benefit from any disconnect between the current net asset value (NAV) and share price through active participation in the secondary market. This may occur due to a sector or trust being out of favour, or action from the trust itself, such as a share buy-back.
A prime example of this is lmpax Environmental Markets (IEM), a perennial favourite of ours. The trust has been actively buying back shares in the secondary market in order to control its discount, with a 10% target. Cancelling these shares will boost the NAV per share.
While this has the obvious impact of reducing the number of shares outstanding, we take pride in being able to differentiate ourselves at EQ, by investing in the smaller, more specialist trusts. Wealth managers with larger assets under management are finding it harder to participate in this market because of their liquidity requirements.
Another example of a recent tactical buy opportunity is much larger in size and more vanilla. Temple Bar (TMPL), managed by Alistair Mundy, follows lnvestec’s UK equity contrarian approach to value investing and had been out of favour since the beginning of 2015.
This sentiment pushed the discount out to an attractive level, and while the strategy is also available as an open-ended fund, we opted for the trust, benefiting from the pro-growth market reaction in the last quarter of 2016, which closed the discount from about 10% to 3% while also profiting from NAV performance.
Investment trusts have been overshadowed by their open-ended and unit trust counterparts for years. But with a number of high-profile launches recently and platform coverage increasing, the future looks brighter.
John Spiers is chief executive officer of London-based wealth manager EQ Investors