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View the video online at http://citywire.co.uk/money/video/a883560

Top Trusts: I'm down but not out as flight turns to fight

Gavin Lumsden sees opportunities galore as he waits to see if his investment trust portfolio recovers from its January meltdown.

Top Trusts: I'm down but not out as flight turns to fight

Citywire allocated me £10,000 in September 2014 to run an investment trust portfolio. This is the latest in a series of videos in which I chart my progress.

It's been a difficult few months and after making some changes in January I remain nervous but positive about my prospects.

While the stock market falls have been painful they have created many investment opportunities in investment trusts. I look at five based on data at the close of Wednesday 17 February.

Can't watch now? Read my script

Having reshuffled the Citywire Top Trusts portfolio three weeks ago I've been wondering if I bought and sold the right trusts and whether I should have taken advantage of some of the other many opportunities that have arisen from the stock market turbulence.

On the first point I’m feeling surprisingly chipper. Although the portfolio is lower than last time, it’s looking a lot better than it did a week ago!

The defensive Capital Gearing Trust has done what I wanted it to do – not lose money!

Though I wonder if I should switch the aggressive growth approach of Scottish Mortgage for the more measured style of its stable mate, Monks?

I got a real fright from seeing Henderson Smaller Companies had lost nearly all its post-election gains after an 18% slide in its share price this year.

However, I was reassured this week after talking to Mike Prentis of rival BlackRock Throgmorton trust. He’s confident the high quality smaller companies he invests will continue to do well and I assume Neil Hermon on Henderson Smaller Companies would say the same.

It chimes with what I’m hearing from other fund managers. While there’s plenty to worry about in China and the emerging markets are we really going into a recession?

For the time being I think not. I’m feeling less defensive and am looking for investment opportunities. So what else lies out there?

Every Friday on Citywire Money our Investment Trust Watch column looks at the ‘Z-scores’ of trusts to see which are cheap and which are expensive.

A Z-score is a measure analysts use to see whether an investment is trading outside its normal range. Roughly speaking a Z-score of 2 or above is expensive, while minus 2 or below is reckoned to be cheap.

At the close of markets on 17 February, excluding debt and peer-to-peer lending funds there were over 40 trusts with 12-month Z-scores below minus 2 according to Numis Securities – that’s unusually high with lots of property and private equity trusts standing at low valuations.

But here are some trusts investing in shares on the stock market that caught my eye.

Witan is a global fund that gets its exposure to different parts of the world through a panel of external fund managers. Chief executive Andrew Bell has done a good job and the shares rose to a premium above their net asset value over a year ago.

That premium has disappeared in the sell-off and the shares now trade 4% below NAV. That’s not a huge discount but it’s unusual in recent times so it gets a low Z-score of minus 3.5.

Aberdeen UK Tracker is an oddity. It’s the only investment trust that tracks the FTSE All Share. With the shares on an 8% discount that means you can buy the entire UK stock market cheap!

Keystone is one of four UK trusts run by Mark Barnett, the Citywire AAA-rated fund manager who succeeded Neil Woodford when he left Invesco Perpetual over a year ago. An above average 8% discount could be a chance to secure his talents.

Temple Bar is interesting because there is a debate right now as to whether the stock market turmoil signals a change in investment style from growth to value.

Value manager Alastair Mundy has had a terrible time in recent years but if you’re a contrarian and think his approach could come back in fashion then an 8% discount and a minus 3.1 Z-score is attractive. It also yields 3.6%.

Moving outside the UK: if I was looking for an alternative to Jupiter European Opportunities I’d be spoiled for choice with four rivals trading on significant discounts.

One word of caution: John Bennett, manager of Henderson European Focus, recently told analysts to ‘sell everything and hold cash’!

If you’re not as bearish as that there are also opportunities in emerging markets and technology trusts.

But if you’re looking at specialist trusts the one that really stands out right now is BlackRock World Mining.

The Evy Hambro managed trust has had a torrid time in the past five years, losing three quarters of its value in the commodities crash. It’s likely the dividend will be cut at some point as the shares yield 12%.

It’s bombed out but is it coming back? In the past month the shares have risen 10% as miners have rallied off twelve-and-a-half year lows. On a 16% discount and -2 Z-score it could represent a buying opportunity if you’re not squeamish about a fund that invests in companies that leave dirty big holes in the ground.

That’s it for now. If only there wasn't stamp duty to pay on new investments I would take advantage of more of these opportunities!

4 comments so far. Why not have your say?

dlp6666

Feb 19, 2016 at 14:20

With so many quality and tempting 'cheap' choices, Gavin, can you not persuade Citywire to allow you to 'gear up' and invest another £10k?!

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Law Man

Feb 19, 2016 at 18:17

Aberdeen UK Tracker IT [AUKT] has a discount to NAV of 6.47% and a TER of 0.32% (slightly high, but could be worse).

Yes, why is an index tracker at a discount? In theory it could get worse.

The DY will be slightly greater. In theory you could liquidate the assets and distribute to make a 6.92% gain, but the costs would reduce this.

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Maverick

Feb 21, 2016 at 12:57

Law Man - Your gain would be totally illusory. You buy and sell the share at the market price, which has nothing to do with Net Asset Value.

No-one has ever accepted my challenge to prove to me that there is any actual connection between an investment trust's net asset value and its share price. For every one that "proves" the assertion, there is another that disproves it.

The true value of anything is the price someone is prepared to pay for it. That applies to investment trust shares just as to houses, vintage cars and works of art.

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ben ski

Apr 28, 2016 at 17:35

I'll never understand why the likes of City Wire and Trustnet seem to steer clear of private equity investment trusts

I tell friends in the US the kind of listed PE options we have over here, and they can't believe we can access Harbourvest, Permira, CVC

With listed equity valuations where they are today (and an 8% discount on an IT is no excuse for not considering actual stock fundamentals) PE seems like a tilt worth having

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  • Witan (Ordinary Share)
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  • Temple Bar (Ordinary Share)
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  • Keystone (Ordinary Share)
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  • BlackRock World Mining Trust (Ordinary Share)
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  • Capital Gearing (Ordinary Share)
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  • Ruffer Investment Company (Ordinary Share)
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  • Henderson Smaller Companies (Ordinary Share)
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  • Scottish Mortgage (Ordinary Share)
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  • Monks (Ordinary Share)
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