With heightened volatility and discounts close to all-time lows, it has been difficult to identify attractive investment opportunities in the investment trust sector in recent months.
My contrarian tendencies have led me to tilt the portfolio towards the market that is widely deemed to be the least favoured in the world, namely the Brexit and politically-challenged UK. I’ve been adding to positions in trusts with a more value-oriented style.
Here are five investment trusts I have been buying.
This ticks both of those boxes, with a portfolio invested exclusively in the UK and managers who are resolutely value investors. The trust’s most recent annual report sets out a range of valuation measures which demonstrate the relative merits of value stocks in general and smaller small companies in particular.
In terms of price to earnings ratios and other popular metrics, the undervaluation relative to large companies has rarely been so extreme. It is well worth a read.
Given the tendency for discounts to widen during periods of market stress, I worry about what I call discount downside risk, so it helps if some form of protection is in place.
A case in point is the Polar Capital Global Financials Trust, co-managed by Nick Brind, which I expect to be a beneficiary of gradually rising interest rates in developed markets, given its two-thirds exposure to the banking sector.
While the shares currently trade at only a modest discount to net asset value (NAV), and could be vulnerable to short-term discount widening, the fixed life of the trust means that investors will have the opportunity to get their money back at NAV in just over two years’ time.
I also like trusts that are active in buying back their shares for cancellation as this can reduce volatility and improve shareholder returns at the margin.
Continuing with the value theme, British Empire Trust, while not having an explicit discount control mechanism, is regularly active in the secondary market, such that the discount typically sits around the 10% level.
With the underlying portfolio of specialist funds themselves trading at a discount of around 25% at the moment, this double discount looks quite attractive.
This has been a long-term holding and once again falls into the value camp. Manager Alex Wright (above) is a true contrarian who has produced strong returns since his appointment in September 2012.
While most of the portfolio is invested in the UK, the trust has the flexibility to invest up to 20% overseas.
Recently quoted as saying ‘the market is wrong about all of my stocks’, the manager’s style has led to large overweight positions in financials and industrials, together with limited exposure to consumer goods.
Although the majority of Mastertrust’s investments are typically in fairly conventional investment trusts, I do like to take positions in more focused vehicles, be they single country funds or industry specialists in areas, such as biotechnology.
A recent acquisition was Riverstone Energy, which invests exclusively in the global energy industry, with the majority of its investments in the Permian, Eagle Ford and Western Canada basins, deemed to be some of the most attractive in North America.
After two years of negative performance by the S&P Oil & Gas E&P index in 2016 and 2017, the discount on Riverstone Energy has perhaps inevitably widened out and currently sits around the 20% level.
The macro environment for its activities has improved significantly however over the last two years, with coordinated global growth and an oil price around 50% higher than the lows of last summer. At the same time, productivity in the US shale oil industry has been soaring as new extraction techniques have been refined.
As an aside, I was intrigued by Blackstone’s $10 billion (£7.1 billion) purchase of BHP’s shale assets and wondered if more of the private equity sector’s dry powder might find its way into the industry. Either way, I see a much more favourable outlook for Riverstone Energy to grow and make attractive realisations over the coming years.