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A dozen investment trust picks for 2014

At the end of last year we asked four industry experts to pick three investment trusts they believed could excel in 2014.

Three trust picks from Simon Elliott, head of research, Winterflood Securities

Diverse Income Trust

‘Managed by Miton’s Gervais Williams, this is a multi-cap income trust that aims to deliver lower volatility than most comparative funds and the FTSE All Share. It has performed strongly since launch in April 2011 and the equivalent open-ended fund is now soft closed to new investors. Given the portfolio’s small cap bias, this trust should be complementary to most other UK equity income funds, which have a significant exposure to mega cap stocks.’

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RIT Capital Partners

‘Lord Rothschild has a significant personal stake in RIT and is involved in the management of its portfolio. The trust shares many of the attributes of a family office with an emphasis on long-term capital growth and capital preservation. The portfolio is highly diversified both by asset class and individual holding. RIT has a strong long-term performance record although more recently performance has been affected by its defensive positioning. This has seen its discount widen which, in my view, presents a value opportunity.’

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BlackRock World Mining

‘My high risk/high potential reward choice for 2014 is BlackRock World Mining*, managed by Evy Hambro and Catherine Raw. While its primary focus is on mainstream mining stocks, it has recently invested in royalty streams. The yield on the trust is already greater than 4% and there appears to be grounds for growth. For investors willing to take a contrarian view on an out-of-favour sector, we believe this investment trust is attractive. If sentiment towards the sector improves and the dividend continues to increase we believe its discount could tighten further.’

* BlackRock World Mining is a corporate broking client of Winterflood Securities.

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Three trust picks from Peter Walls, manager Unicorn Mastertrust fund

Aberforth Smaller Companies

‘There were some spectacular gains in smaller companies trusts’ NAVS last year and while a repeat performance is unlikely in 2014 there is still value to be had. For example, the historic P/E ratio for the portfolio of Aberforth Smaller Companies Trust (ASL) at around 13.1x still represents a significant discount relative to the wider UK market.

‘There was a surprisingly low level of M&A activity within the smaller companies market last year. But with confidence rebuilding, higher valuations and a resurgent IPO market, deal-making might well pick up from here and provide a further boost to ASL’s value driven process. The shares currently trade at a discount to NAV of around 10% and offer a yield of 2.2%.’

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Herald Investment Trust

‘While the mega US technology stories like Facebook and Twitter grabbed all the headlines in 2013, Herald Investment Trust (HRI) continued quietly to build upon its impressive long-term record which now stands at a NAV gain of more than 700% since launch in 1994.

‘Within Herald’s investment universe of companies in the areas of telecoms, multimedia and technology there has already been a pick-up in corporate activity in the US portfolio where half a dozen of the trust’s holdings received takeover approaches last year. In comparison to the mainstream technology trusts, which currently trade at around NAV, Herald sits at a discount of 13.7% at present.’

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Aberdeen Latin American Income

‘Emerging markets in general and Latin America in particular has proved to be a disappointment over the last three or so years. Investors have been beset by earnings downgrades, falling currencies, political upheaval and concerns about the implications of QE tapering.

‘But with valuations now standing at attractive discounts relative to developed markets, more competitive currencies and sentiment at a low ebb, contrarian investors may be tempted to look to increase their exposure next year. Aberdeen Latin American Income (ALAI) has seen its discount rating widen out to around 10% in recent weeks to leave the shares offering a yield of 5.4%.’

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Three trust picks from Rob Jones, alternative funds analyst, Liberum Capital

Assura Group

‘This best-in-class healthcare property company is an owner and developer of modern, purpose-built primary care facilities. It has 90% of rental income reimbursed either directly or indirectly by the NHS on average lease lengths of 15 years.

‘We like its covered dividend policy, real rental growth over the long-term and the fact that 20% of leases are RPI-linked or subject to fixed uplifts. There is significant latent demand from GPs for new premises (75% believe premises are not suitable for their future needs) and growing regulatory pressures now that the quality of premises is audited by the Care Quality Commission.

‘Assura trades on a 10% discount and offers a 4.9% 2014 estimated dividend yield which we see growing at c.10% p.a. while still maintaining over 100% dividend cover. We forecast a 21% 12-month total return.’

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Macau Property Opportunities

‘This vehicle is the only listed commercial real estate play on Macau’s booming gambling market which saw takings grow by 15% last year and is now over 7x larger by revenue than the Las Vegas Strip. The company offers exposure to premium residential schemes, as well as development assets which we believe will provide significant further NAV upside.

‘Sales of their most recent development The Fountainside will recommence shortly and over one third of the scheme has been pre-sold. We expect the company to pay a 6% dividend yield in March 2014 on completion of its Zhuhai property disposal which was agreed at a 42% premium to book value.

‘Macau Property Opportunities trades on a 21% discount to our 2014 forecast NAV and were the shares to continue to rerate to this level over 2014, this would offer investors a 29.5% total return.’

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JPMorgan Private Equity

‘JPMorgan Private Equity is a private equity fund of funds vehicle, investing in PE managers across the globe with a primary focus in Europe and the US. Shareholder returns have lagged the private equity fund-of-fund peers in recent years, but following a simplification of the company’s balance sheet with the repayment of its 2013 zero dividend preference shares and the adoption of a set of strategic initiatives which include the intention to return 50% of net portfolio distributions to shareholders, we believe the company is well positioned for a strong recovery in 2014.

‘We expect the current discount to NAV of 36% to narrow to the sector average of 22% over 2014 on the back of an improved sector macro outlook and stronger underlying NAV growth. Should this occur, the shares offer over 21% share price upside, even before accounting for NAV growth within the portfolio.’

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Three trust picks from Nick Sketch, senior investment director, Investec Wealth & Investment

City Merchants High Yield

‘My lower risk choice is City Merchants High Yield, which seems to have been forgotten in the rush for new fixed interest investment trusts. It invests in fixed interest, but this is no gilt fund – investors are lending money to Lloyds Bank, Aviva and the like, and often rank behind some other debts, so this is not a very low risk option.

‘Nevertheless, the solid income yield of 5.5% is attractive, the £130 million size makes the portfolio rather nimbler than the big unit trusts that also benefit from the management of Paul Read at Invesco, and the base fees are competitive with big strategic bond Oeics at 0.75% pa. While many other steady income-producers trade at premiums, including some with more exotic or less tried-and-tested approaches, City Merchants trades at a discount of about 2% and looks good value.’

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The European Investment Trust

‘Since 2010, Dale Robertson has managed this trust with a strong value bias, an approach that has been very out of fashion in Europe. Performance since then has been ahead of the index but well behind its growth-oriented peers. The portfolio has also been a bit less volatile than some peers and is sensibly spread.

‘Many investors still have very little in Europe, which looks understandable given the macro situation but ignores the large number of high quality companies that are still cheap merely because they are based in Europe. Others have only a modest holding, often with managers with a strong bias to Growth or Quality, and investors in either group should consider this investment trust.

‘Over an investment cycle, all of these styles can do well, but the broadly-defined value stocks look particularly interesting at the moment. Similar ‘value’ considerations also support this choice in other ways too – the base fees are low at 0.55% and the 12% discount looks generous.’

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Baker Steel Resources

‘Bargains are rarely found in fashionable areas, and Baker Steel, a small investment trust of unquoted mining stocks with dreadful share price performance so far, offers several good reasons for investors to ignore it. However, the managers are highly experienced and the share price trades at a discount of over 30% to a credible NAV, having halved in the last year.

‘We cannot know when the mining sector will start to perform. However, it can certainly be argued that prices of the top stocks are now discounting a very grim outlook, and smaller stocks have been hit, as usual, much harder still. Any decent recovery in the mining sector should improve both valuation and the chances of being listed or bought for the key portfolio holdings of Baker Steel, whether that recovery comes in six months or three years.

‘In addition, that recovery would probably see the discount narrow sharply. At current prices, switching some capital from say BHP or Black Rock World Mining to Baker Steel looks a good choice for those who can take a five-year view.’

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