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Numis: our New Year investment trust tips

Lindsell Train, Witan, Woodford Patient Capital and BlackRock Income Strategies loom large in Numis' annual investment trust review.

by Danielle Levy on Jan 12, 2017 at 00:01

Winners and losers

Numis Securities’ investment trusts analysts have reviewed the performance of their recommendations in 2016.

Looking back at a year dominated by the Brexit vote, Donald Trump’s election victory and a swing from defensive into economically-sensitive cyclical stocks, the team, led by Charles Cade, described their tips as a ‘mixed bag’.

Their winners included Monks (MNKS), Temple Bar (TMPL), Fidelity Special Values (FSV), North American Income (NAIT), JPMorgan US Smaller Companies (JUSC), alongside BlackRock World Mining (BRWM), which doubled after a long period of weak performance.

In Asia and emerging markets the broker highlighted Templeton Emerging Markets (TEM), Schroder AsiaPacific (SDP), Fidelity China Special Situations (FCSS), and VinaCapital Vietnam Opportunities (VOF) as strong performers.

Poor performers, however, included Edinburgh Worldwide (EWI), Edinburgh IT (EDIN), Aberforth Smaller Companies (ASL) and JPMorgan Japanese (JFJ).

Next: outlook and value

Outlook and value

As we begin 2017, Numis’ analysts are cautious on UK equities, even though multi-nationals stand to benefit from weaker sterling and there is potential for stronger global economic growth.

‘Inflationary pressures on costs will impact the margins of some businesses and uncertainty over the impact of a “hard” Brexit may impact both investment and M&A activity,’ Numis noted.

They are currently spotting value in UK mid and small company trusts alongside Asia and emerging markets funds due to the widening of discounts in 2016.

Next: Witan replaces Foreign & Colonial

Witan replaces Foreign & Colonial

Witan (WTAN) has gained a place on Numis’ recommended list, replacing Foreign & Colonial (FRCL). The swap isn’t like-for-like because Witan backs a selection of fund managers, while Foreign & Colonial invests primarily in global stocks.

The team feels positive about the changes that chief executive Andrew Bell has put in place since he was appointed in 2010, including the decision to stop allocating to index trackers. They also welcomed the board’s decision to repurchase the 15.8% stake held by Aviva at a 6.5% discount to ‘net asset value’, which equates to the trust’s total underlying assets.

‘We believe that Witan is an attractive way to gain diversified global equity exposure via a range of leading managers through a cost-effective vehicle with ongoing charges of 0.72% or 0.99% including performance fees,’ Numis said.

The team removed Foreign & Colonial, following a strong year which saw the trust’s share price rise by 33.8% and net asset value increase by 34.2%.

Next: BlackRock Income Strategies a ‘buy’

BlackRock Income Strategies a ‘buy’

BlackRock Income Strategies (BIST), formerly British Assets, had a difficult 2016, marked by a 16% share price fall and 5% NAV decline.

‘The fund faced a number of headwinds, including the need to deliver a high dividend payout at a time of falling long term rates, and the drag of expensive debt. In addition, a cut in the fund’s equity exposure in early 2016 was poorly timed with hindsight,’ Numis explained.

In late 2016, the board decided to sack BlackRock as manager, in favour of Aberdeen Asset Management. Mike Brooks and Tony Foster (pictured) of Aberdeen’s diversified multi-asset team will manage the trust, which will be renamed Aberdeen Diversified Income and Growth (ADIGT).

The trust is also set to merge with the Aberdeen UK Tracker Trust (AUKT). The board hopes this will increase the size of the trust, lower its cost ratio and improve the liquidity, or tradability, of its shares.

Numis welcomes these changes, alongside the planned tender offer for up to 20% of its NAV ahead of the merger. ‘The proposals provide a sensible solution for the problems of both funds. A key trigger has been the fact that Aviva is the largest shareholder in both companies: 13.3% in BIST and 24.7% in AUKT,’ Numis said.

Aviva’s stakes pose potential problems because the insurer is looking to sell out of the legacy stakes it inherited from AXA, after buying its Friends Life business.

On a discount to NAV of 12%, Numis believes that BIST offers value.

Next: ‘sell’ Lindsell Train

‘Sell’ Lindsell Train

Under manager Nick Train, Lindsell Train (LTI) has generated stellar returns over the years. Over three years, its share price is up 158.2% while its NAV returned 83.5%.

However, an investor shift out of ‘bond proxies’, defensive stocks that offer bond-like stable dividends, into cyclical stocks has hit the trust’s performance over the past three months. The trust’s popularity means that it has consistently traded at a high premium, which today stands at 56.3%. Numis describes this figure as ‘excessive’.

‘Shareholders face the potential for substantial losses if the premium starts to contract. We would recommend switching into one of the other defensive global investment companies or into Finsbury Growth (FGT), also managed by Nick Train, which has minimal discount volatility due to an active share buyback and issuance policy,’ analysts at Numis explained.

With this in mind, Numis has moved the trust to a sell rating.

Next: Capital Gearing protects capital

Capital Gearing protects capital

Like their rival Winterflood Securities, Numis highlights Capital Gearing Trust (CGT) as a top pick for investors looking for a defensive approach, adding it to their recommended list.

‘Management team, Peter Spiller and Alastair Lang, have an exceptional record of protecting capital over the long term,’ the report noted.

As half of the portfolio is invested in overseas assets, the trust has benefited from sterling weakness. Numis adds that the introduction of a zero-discount control policy has improved trading liquidity and reduced share price volatility. The trust’s NAV rose by 13.1% in 2016.

Next: warming to Woodford Patient Capital

Warming to Woodford Patient Capital

Numis has removed its ‘trading sell’ recommendation for Woodford Patient Capital Trust (WPCT), managed by star fund manager Neil Woodford, following what it described as a ‘dull year’ in 2016.

Nevertheless, the team suspects that negative times could still lie ahead.

‘We remain concerned that the fund’s discount, currently 5%, could widen further if NAV performance remains dull and/or there is negative publicity over portfolio holdings,’ the report said.

Next: US & Japan picks

US & Japan picks

In the US, Numis has replaced North American Income with JPMorgan American (JAM) on its recommended list.

The move follows a strong 2016, which saw North American Income’s (NAIT) share price increase by 63.9% and NAV rise by 59%.

Numis highlights JPMorgan American’s experienced management team and low ongoing charges ratio as attractions for adding the trust.

Meanwhile, for investors looking for exposure to Japan, Numis recommends Baillie Gifford Japan (BGFD) as a core buy. ‘We have long favoured this fund due to its strong long-term track-record of outperformance from a focus on mid-cap growth stocks,’ Numis noted.

Next: time to buy TR Property

Time to buy TR Property

TR Property (TRY) has also been added to Numis’ recommended list, another overlap with Winterflood’s annual review.

‘The mandate to invest primarily in listed property equities is unique in the investment companies sector and we rate the lead manager, Marcus Phayre-Mudge, highly,’ explained analysts at the group.

Meanwhile in the technology space, Numis has replaced Herald (HRI) with Polar Capital Technology (PCT). This decision was taken because the team like Polar Capital manager Ben Rogoff’s focus on themes driving future growth, rather than incumbents.

They have removed Herald because they cannot see a clear catalyst for the trust’s 17.8% discount to NAV to narrow.

Next: Numis’ other recommendations

Numis’ other recommendations

The trusts already on Numis’s recommended list and not removed in its annual review are:

  • Global equity: Monks (MNKS) & Caledonia (CLDN)
  • Global defensive: RIT Capital Partners (RCP)
  • Global small company: Edinburgh Worldwide (EWI), a client of Numis's corporate brokers
  • UK large company: Edinburgh IT (EDIN), Fidelity Special Values (FSV), Temple Bar (TMPL), Troy Income & Growth (TIGT), another corporate broking client
  • UK mid & small cap: Aberforth Smaller Companies (ASL), Henderson Smaller Companies (HSL), also a corporate broking client
  • Europe: Fidelity Special Values (FEV), JPMorgan European Smaller Companies (JESC)
  • North America: JPMorgan US Smaller Companies (JUSC), a corporate broking client
  • Japan: JPMorgan Japanese (JFJ)
  • Global emerging markets: Templeton Emerging (TEM) & Schroder AsiaPacific (SDP), a corporate broking client
  • China: Fidelity China Special Situations (FCSS)
  • India: JPMorgan Indian (JII)
  • Vietnam: VinaCapital Vietnam Opportunity (VOF), a corporate broking client
  • Life Sciences: Worldwide Healthcare (WWH)
  • Mining: BlackRock World Mining (BRWM).

More about this:

Look up the investment trusts

  • Monks (Ordinary Share)
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  • Temple Bar (Ordinary Share)
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  • Fidelity Special Values (Ordinary Share)
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  • North American Income Trust (Ordinary Share)
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  • JPMorgan US Smaller Companies (Ordinary Share)
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  • BlackRock World Mining Trust (Ordinary Share)
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  • Templeton Emerging Markets UK (Ordinary Share)
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  • Schroder Asia Pacific (Ordinary Share)
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  • VinaCapital Vietnam Opp Fund (Ordinary Share)
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  • Edinburgh Worldwide (Ordinary Share)
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  • Edinburgh Investment (Ordinary Share)
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  • Aberforth Smaller Companies (Ordinary Share)
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  • JPMorgan Japanese (Ordinary Share)
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  • Witan (Ordinary Share)
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  • Foreign & Colonial Investment Trust (Ordinary Share)
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  • BlackRock Income Strategies (Ordinary Share)
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  • Aberdeen UK Tracker (Ordinary Share)
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  • Lindsell Train (Ordinary Share)
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  • Capital Gearing (Ordinary Share)
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  • Woodford Patient Capital Trust (Ordinary Share)
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  • JPMorgan American (Ordinary Share)
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  • Baillie Gifford Japan (Ordinary Share)
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  • TR Property (Ordinary Share)
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  • Herald (Ordinary Share)
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  • Polar Capital Technology (Ordinary Share)
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Look up the fund managers

  • Mike Brooks
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  • Tony Foster
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