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IT Focus: Expensive debt holds Woodford trust back

We round up what analysts are saying about cheap mining trusts and the HICL, Better Capital, Biotech Growth and Edinburgh investment trusts.

by Caelainn Barr on Nov 29, 2012 at 09:00

Biotech Growth remains a ‘core recommendation’ for Winterflood

The Biotech Growth trust has consistently outperformed the Nasdaq Biotech index over the past five years and is still trading at a discount of 3%.

It invests in biotechnology opportunities and its top holdings are Gilead Sciences, Amgen and Alexion Pharmaceuticals.

The trust has given share price total returns of 58% over the past year and 168% over the past five years, ahead of the Nasdaq index total returns of 39% and 122% in the same time period.

Simon Elliott, head of research at Winterflood, added: ‘Biotechnology is a niche sector where stock specific returns can be extremely volatile and consequently we believe that a specialist manager like Orbimed is able to add real value. Biotech Growth Trust has an excellent performance record and whilst stock specific risk in the sector is high, we would argue that the fund's diversified portfolio mitigates an element of this.

‘The relative attractiveness of current biotech sector valuations as well as prospective M&A and ongoing product development could also mean significant upside to what is an attractive secular growth story and the fund remains one of our core recommendations.’

City Natural Resources and BlackRock World Mining are ‘cheap’

Concerns about global growth have hit resources stocks and trusts are also suffering. The average discount in the commodity trust sector is 21% and analysts believe the volatility could offer some bargains.

Tom Tuite Dalton, analyst at Oriel Securities, said: ‘On a purely numeric basis, the so-called ‘cheap’ trusts comprise City Natural Resources and BlackRock World Mining, both of which have delivered excellent long term returns, but have suffered shorter term as commodity prices have declined. City Natural Resources currently trades on a 20% discount and BlackRock World Mining on a 15% discount.’

City Natural Resources trust is managed by Will Smith and Ian Francis and has investments in mining and resources equities and bonds including New Britain Palm Oil and First Quantum Minerals. It has given share price total returns of 19% over the past five years, to outperform the HSBC Global Mining benchmark total returns of -5%. However, over the past year it has made a loss in share price total returns terms of -19% to underperform the benchmark total returns of -8%.

The BlackRock World Mining trust is managed by Evy Hambro and Catherine Raw with investments in mining equities, bonds and physical metals. Its top holdings are BHP Billiton, Rio Tinto and Glencore bonds. However, it has generated a negative total return of -2% for shareholders over the past five years and -2% over the past year, to underperform the HSBC Global Mining index of -9% and 5% in the same time periods.

HICL invests £106 million in last six months

Infrastructure investment trusts are proving ever popular with average yields of 4.8% despite their shares trading at an average premium of 7.6% above net asset value (NAV).

HICL, which deals in public-private partnership contracts, invested £106 million over the last six months as its portfolio increased 12.6% in value in the same period.

The trust now has 75 infrastructure holdings and is considering investments in renewable energy and a toll-road.

Louisa Symington-Mills, analyst at Jeffries, commented: ‘The dividend payout of 3.425p for the interim period remains well covered by portfolio cashflows, and the board remains committed to the target distribution of 7p per share for the financial year end March 2013.’

Shareholders in HICL have enjoyed total returns of 47% over the past five years and 14% over the past year.

‘Significant upside’ for Better Capital I

Better Capital I was launched in 2009 and is the only investment trust in the battered private equity sector to trade at a premium, and a chunky one at that of 11%, compared to the average discount in the sector of 20%.

The trust’s net asset value (NAV) increased 7.5% in the six months to 30 September, boosted by the increased valuations of its investments in stationery wholesaler group Spicers, aerospace supplier Gardner and luxury boat maker Fairline whilst Readers Digest dragged on performance.

Charles Cade, analyst at Numis, commented: ‘The problems facing Reader's Digest have been flagged for some time, and the write-down was more than offset by the valuation uplifts elsewhere. Gardner and Spicers, in particular, continue to perform strongly and it is encouraging that Fund I will make its first distribution in Q1 next year.

‘The share price of fund I has performed strongly since launch, but has been flat over the past six months as a result of a lack of newsflow. The increase in NAV is positive, but we believe that a realisation will be needed to drive the share price significantly higher. In the medium term, however, we continue to believe that there is significant upside.’

Better Capital I has delivered a total return of 33% to shareholders in the past year, whilst the NAV of its portfolio increased 20%. The one-year share price performance beat the total return of both the FTSE All Share (18%) and the FTSE Small Cap exluding investment trusts (31%).

Expensive debt raises bar for Edinburgh Investment trust

The Edinburgh investment trust managed by Neil Woodford has been deemed ‘expensive’ by analysts at Killik & Co, at a 1.8% premium, with concerns about the trust’s debt.

The investment trust has 21% gearing, which gives it the potential to use up to £200 million from its loan facility to boost its activities in the stock market. However, it pays a high interest rate on the debt which can eat into returns for investors.

Mick Gilligan, head of research at Killik & Co, says: ‘The strong NAV performance since Woodford came on board, driven by good relative momentum from consumer defensive sectors, has helped maintain the trust’s rating at premium levels.

‘Around £200 million of the £1.2 billion of gross assets is provided in the form of debenture stock with interest rates of 11.50% to 2014 and 7.75% to 2022. This high fixed cost raises the fund’s performance hurdle. In the short term, we prefer BlackRock Income & Growth on a 6% discount.’

Edinburgh has generated a 23% total return for shareholders in the past five years, and 16% over the past year. By contrast the BlackRock Income & Growth trust has given a negative total return of -1% over five years but has bounced back with a 20% total return over the past year. Meanwhile The FTSE All Share has given total returns of 16% and 18% over the same periods.

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