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Winterflood's investment trust picks for 2018

Looking for investment opportunities for the new year? Here are Winterflood Securities' top investment trust tips for 2018.

This gallery summarises the changes made by Winterflood Securities in its annual review of investment trust recommendations.

2017 was a strong year for investment trust investors. Discounts tightened to historically low levels and the majority of funds outperformed their benchmarks. Winterflood's model portfolio was no exception: it delivered a 19% return during the year, outpacing the FTSE UK Private Investor Balanced index by 8%.

Of the 47 funds in Winterflood's portfolio, 72% performed better than their respective indices in share price terms.

While the narrowing of discounts represents a positive theme, it also creates challenges for investors because value is thin on the ground. This helps to explain why the Winterflood team reduced the number of trusts in the portfolio from 41 to 35 during the year.

The average discount in the portfolio is now 3.8%, compared with 5.5% at the start of 2017. Six of the names are trading on double-digit discounts, while 13 trade at a premium.

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This gallery summarises the changes made by Winterflood Securities in its annual review of investment trust recommendations.

2017 was a strong year for investment trust investors. Discounts tightened to historically low levels and the majority of funds outperformed their benchmarks. Winterflood's model portfolio was no exception: it delivered a 19% return during the year, outpacing the FTSE UK Private Investor Balanced index by 8%.

Of the 47 funds in Winterflood's portfolio, 72% performed better than their respective indices in share price terms.

While the narrowing of discounts represents a positive theme, it also creates challenges for investors because value is thin on the ground. This helps to explain why the Winterflood team reduced the number of trusts in the portfolio from 41 to 35 during the year.

The average discount in the portfolio is now 3.8%, compared with 5.5% at the start of 2017. Six of the names are trading on double-digit discounts, while 13 trade at a premium.

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Farewell to Finsbury

Although Winterflood’s team of analysts rate fund manager Nick Train ‘very highly’, they decided to switch the portfolio’s notional 5% holding in Finsbury Growth & Income (FGT), for which they act as the broker, into Troy Income & Growth (TIGT).

Winterflood said Troy offers a more diversified exposure to UK equities, as well as a higher yield of 3.2% compared to Finsbury’s 1.8%.

‘In addition, the risk of premium/discount volatility is alleviated by [Troy’s] well-established zero discount policy,’ the firm said.

Elsewhere in the UK equity sector, Winterflood sold out of a 5.1% position in Alex Wright’s Fidelity Special Values (FSV) and initiated a 2.8% holding in Aurora (ARR). The team was keen to gain exposure to Phoenix Asset Management’s contrarian investment approach. Phoenix took over the fund in 2016, and have delivered an impressive track record with an equivalent open-ended fund.

The team also switched out of River & Mercantile UK Micro Cap (RMMC), which is trading at a small premium of 1.3%, into Mercantile (MRC), for which Winterflood acts as the broker. The analyst said the latter offers better value, trading on a discount of nearly 9%. RMMC was the second best performing fund in the portfolio last year, up 59%. It was an impressive 38% ahead of its benchmark.

Other UK equity trusts held in the portfolio include Temple Bar (TMPL), BlackRock Smaller Companies (BRSC), Perpetual Income & Growth (PLI) and Woodford Patient Capital (WPCT).

Star manager Neil Woodford’s trust remains in the portfolio in spite of disappointing performance last year. It delivered a 6% over the past 12 months, while the FTSE All Share gained 13%.

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Foreign & Colonial added

Within the portfolio's international equities allocation, Winterflood switched out of Law Debenture (LWDB) into Foreign & Colonial (FRCL), describing the latter as an ‘attractive one-stop global equities savings product’.

‘On a current discount of 4.6%, we believe that downside discount risk is limited by its policy to protect a 7.5% discount,’ Winterflood said.

The team ditched TR European Growth (TRG), for which it acts as broker, after its discount to net asset value (NAV) narrowed to 1.2% following a strong run of performance. As an alternative, it added a notional 1% position in Jupiter European Opportunities (JEO), which is trading on a 3% discount. TRG was the strongest performer in the portfolio in 2017, up 60% in share price terms.

Baillie Gifford Japan (BGFD) was also swapped for a 2% position in JPMorgan Japanese (JFJ). The decision was taken on valuation grounds, as the former currently trades at a 7% premium compared to JPM’s 9% discount.

Meanwhile, Fidelity China Special Situations (FCSS) was replaced with JPMorgan Asian (JAI). The team highlighted the latter's performance recovery following a management change.

Within emerging markets, Winterflood swapped BlackRock Frontiers (BRFI) for JPMorgan Emerging Markets (JMG), which joins Templeton Emerging Markets (TEM) on the list. All three are corporate clients of Winterflood.

Other trusts that feature in the portfolio include Monks (MNKS), Scottish Mortgage (SMT) and Fidelity Asian Values (FAS).

The model portfolio also holds Fidelity European Values (FEV), JPMorgan American (JAM), North American Income (NAIT), and Schroder Asian Total Return (ATR), which are all corporate clients of Winterflood.  

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HgCapital out

In the specialist sector there only one change was made to the porfolio. Private equity investment company HgCapital (HGT) was dropped in favour of ICG Enterprise (ICGT). The team was drawn to ICG's 13% discount, which compares to HgCapital’s 1% discount.

Winterflood highlighted ICG’s enviable 10-year track record. Up to the end of July, it grew NAV by 121%. This compares to a 77% rise by the FTSE All Share. The team expects to see further NAV growth this year.

The portfolio also holds a 2% position in Standard Life European Private Equity (SLPE), which Winterflood acts as the broker for.

The other specialist trusts held in the portfolio are Allianz Technology (ATT), BlackRock World Mining (BRWM), and Biotech Growth (BIOG), all of which are corporate clients.

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Backing a P2P turnaround

P2P Global Investments (P2P) had a tough 2017. It fell from a significant premium to NAV to a 16% discount on the back of concerns relating to some of its loans and expensive fees. Although recent performance has been disappointing, the Winterflood team initiated a notional position in the fund because they believe a turnaround is under way. Last year the portfolio was repositioned, with exposure to US and UK credit significantly reduced.

‘While it is still not particularly cheap, the fund’s fee structure has also been amended,’ Winterflood said.

‘Taking all this into account, and with its shares trading at a 16% discount to NAV and offering a prospective yield of 7.3%, we think that the fund now represents one of the debt sector’s more compelling value opportunities.’

To facilitate this investment, the team ‘sold’ its notional position in JPMorgan Global Convertibles Income (JGCI) - a corporate client – following a re-rating. This followed a change to its discount management policy.

Other bond positions include City Merchants High Yield (CMHY), CVC Credit Partners European Opportunities (CCPG), SQN Asset Finance (SQN) – all of which are corporate clients – alongside TwentyFour Income (TFIF).

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Impact Healthcare added

Impact Healthcare Reit (IHR), a real estate investment trust that invests in care homes, was added to the portfolio. The team pointed to its attractive inflation-linked yield of 5.9%.

‘In an environment where rental growth is more difficult to come by, we think this lease structure is attractive and that the portfolio should comfortably support the fund’s targeted dividend yield of 6%,’ said Winterflood.

F&C Commercial (FCPT), a corporate client, and TR Property (TRY) make up the remainder of the portfolio's property allocation, with the latter delivering outperformance of 41% in 2017.

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Alternatives

A reduction in the number of holdings in the alternatives sector saw Highbridge Multi Strategy (HMSF) and corporate client John Laing Environmental Assets (JLEN) removed from the portfolio.  

The team continues to back HICL Infrastructure (HICL), Capital Gearing (CGT), and Personal Assets (PNL), each representing a 3.3% holding.

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